The Washington Post recently featured the story of a lending abuse practice which the Federal Housing Administration shut down mere days before the current financial panic caused a freeze-up in credit markets.
This mortgage procedure was just one of many loan gimmicks which the housing industry, government, and banks cooked up to push out mortgages to people, most of whom didn’t have a prayer of honoring their obligations.
Here’s how it worked: Until October 1, when the FHA dismantled the program, home buyers could purchase FHA-insured homes by taking advantage of a chancy procedure known as a seller-funded down payment.
Writing for the Washington Post, Dina ElBoghdady describes it this way: “Under this arrangement, the FHA allowed charities to provide down-payment money to buyers. The sellers then reimbursed the charities and paid an administrative fee for the service.” The result was yet another class of brittle loans to otherwise unqualified buyers. These loans contributed to the current flood of “foreclosures that crippled the housing market and damaged the economy at large.”
According to ElBoghdady, the FHA sought to rid itself of the seller-funded down payment program because people who get such loans “go into foreclosure at nearly three times the rate of those who do not.”
This funding method was used by home builders and promoted by their mortgage representatives who pushed these predatory loans onto “first-time home buyers, minorities and single parents.”
Keep an eye out for the building industry and its lobbyists, as they could try to reinstate similar programs through modification of the recently enacted $700 billion Emergency Economic Stabilization Act.
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