Banking Law

A year after it was shut down by Congress, the practice of builders paying non-profit consumer advocacy groups to funnel down payments in the form of "gifts" to buyers of homes from those same builders (buyers who financed the rest of the purchase price with an FHA-insured loan), a practice nicknamed "DAP" or "SFDP" (seller-funded down payment) has been revealed to be what the FHA and its bosses at HUD always claimed it was: an unmitigated disaster for the FHA. According to Brian Collins of National Mortgage News today (in a story we were unable to find in the main stream media), borrowers of such loans have been defaulting in droves.

The latest FHA actuarial report calculates the damage SFDP inflicted on the FHA Mutual Mortgage Insurance Fund in startling detail. If the government had never endorsed SFDP loans, the economic value of the MMIF would be $13.2 billion as of September 30 ? instead of $3.6 billion ? a difference of almost $10 billion. In other words, FHA would be in stronger financial shape today.

DAP was demonstrably disastrous long before this latest report. More than two years ago, the late Tanta of Calculated Risk blog fame analyzed the bad effects of the practice in a fashion that even members of Congress could understand. Of course, when consumer advocacy groups and home builders exert pressure on Congress, the facts can be ignored. Nevertheless, even Congress eventually got it right, after HUD failed to follow the Administrative Procedures Act.

On the bright side, the FHA report notes that at least DAP won't continue to drag down FHA on loans closed after the practice was finally banned. While that may be small comfort in light of the continued bleak economic outlook, at least the FHA won't be forced to choke down the type of bilge water that was generated by DAP. For that, the American taxpayers should consider themselves lucky.