by Alice Alvey

If you like to know the key players and policy makers (and those who give waivers and absolution for government loans) then you should have attended the MBA Government Housing Finance conference at the end of May in D.C. This annual event has proven to be a highly informative event for anyone managing operations involved in government loans.

This year’s event included sessions with the HOC directors, specialized products such as reverse mortgages and rehab loans and State Housing Finance Agency  (HFA i.e.: MSHDA) products that pair with FHA loans.  The session on the HFA’s was packed as everyone could see this resource as a solution if the downpayment assistance programs are eliminated.

The frank and heated debate over the proposed rule to eliminate Nehemiah and Ameridream style down payment assistance programs was the last session of the event and no one left early, not even the reporters. On the panel were representatives from Nehemiah, Ameridream, HUD and the consulting firm hired to conduct a study of the DAP program.

The CEO of Nehemiah was passionate in his crusade to sell us all on the need to keep funding alive for those where not born into the “lucky gene pool” where gifts can come from family. Both Ameridream and Nehemiah were visibly stressed in trying to maintain their composure on the subject while at the same time, sitting next to those who had made the case against the DAP’s.

The Ameridream representative focused on the politics of it all and claims that every attempt they have made to work with HUD to discuss how the programs can work together has been ignored.

The consulting firm representative and the  HUD statistician could only quote their facts and findings that delinquency rates are significantly higher with DAP funding, in a very broad sense, and that was enough for the powers that be to say the loophole should be closed.

During the session, I asked HUD if they had tracked the percentage of DAP loan delinquencies that were approved in TOTAL versus manually underwritten, and they had not. This was a surprise to the audience because it seems to be the most obvious place to start to define the actual contributory risks in the delinquent loans.

At MU we have worked with several lenders who experienced delinquency problems with DAP loans and we found many times that the ‘Refer’ loans were not analyzed with the proper balance of risk and it was the ‘Refers’ that had caused the problem. After the session I spoke with the head of credit policy at a national lender and she stated that their DAP delinquencies were definitely in the ‘Accept/Approve’ loans and they felt TOTAL was too lenient and the ultimate culprit. Her company maintained tight rules that a ‘Refer’ loan with a DAP could NOT ever exceed a 43% debt ratio (not even a 44%) and this simple strategy seemed to be enough to mitigate the problem for manually underwritten loans at their shop. She admitted that using AVM’s and excruciating value analysis with all DAP’s must be working as well. Another lender mentioned they have been including the DAP money in the 6% maximum seller contribution calculation to further cushion the risk, even though FHA does not require this.

It seems so straight forward to issue polices that properly balance the DAP risks with the credit and income risk instead of complete elimination of the program. However, there were no signs from HUD of any room for a compromise.

The comment period for the proposed rule to eliminate the DAP’s will expire on July 10^th, 2007. If another flood of comments can be created, just like the last time this was presented in 1999, then we may have some breathing room. Can we as an industry defend that we will manage the risk better, watch the values more closely, add no layers of risk and promise HUD we’ll get the delinquency rates on these loans to a reasonable level?  HUD doesn’t have the stomach or the budget for it. The FHA program has always been ‘budget positive’; contributing to the federal budget. The current projected increased delinquency levels for 2008 will put HUD in a negative budget position for the first time in its history. Closing the DAP gap is their idea of a solution to slow the delinquencies.

There are very strong opinions on both sides of this debate and this conference was the perfect forum to find out how other lenders are dealing with the issue and preparing for the change.  The investment for the lenders who attended will be paid back many times over through better underwriting, new products and new connections. Mark your calendars for the end of May 2008 and in the mean time, attend the MMLA Leadership Conference to hear more!