PART 1: A DOLLAR AND A... HOUSING NIGHTMARE
CAPE CORAL, Fla. — All it takes is $1 down to buy a brand-new $150,000 home in this foreclosure-wracked community, thanks to two government programs that guarantee loans for buyers who want a house but can’t scrape together enough cash to cover closing costs, let alone a standard down payment.
The dollar-and-a-dream offer makes good sense for builder Adams Homes — it pockets the full purchase price, regardless of whether the cash-strapped buyer continues making payments.
That’s because all the risk in this very risky transaction lies with the federal government.
As this type of deal — which combines a mortgage for 96.5 percent of the purchase price backed by the Federal Housing Authority with a smaller federally insured loan covering some or all of the down payment and closing costs — rapidly gains traction in states like Florida, Indiana and Texas, many real estate experts are sounding the alarm.
“This is a recipe for a new, massive wave of foreclosures,” warned Jack McCabe, founder of Miami-based McCabe Research and Consulting. “That’s what got us in this problem in the first place, giving 100 percent financing and not requiring the homeowner to have any skin in the game.”
Any dollar-down buyers in Cape Coral face the prospect of being immediately underwater. One of the Adams homes is a $154,000 four-bedroom ranch with plush cream carpeting and a three-car garage. That price is roughly double what neighboring lived-in homes, many foreclosed and unoccupied, are currently fetching. One nearby house sold for just $25,000.
The package of government-backed mortgages used by Adams Homes buyers enables irresponsible behavior all around, say some experts.
“These [programs] are terrible,” said University of Texas-Dallas economics professor Stan Leibowitz, a leading researcher on the transactions. “Allowing people into homes with zero down leads to much higher defaults than average. Government budgets are in bad enough shape that they cannot afford to be subsidizing homes that are likely to go into default, costing taxpayers more money.”
Already, the results are showing up on the government books. If a buyer signs on the dotted line for the Cape Coral ranch, the two mortgages used to finance the deal both will be fully insured by the federal government. The primary mortgage is insured by the FHA — for decades, a niche agency focusing on low-income buyers that has recently undergone a vast expansion into the largest mortgage insurer in the country. The second mortgage from local housing authorities, like the one in Cape Coral, are generally insured by either Ginnie Mae, Fannie Mae or Freddie Mac.
For the agency taking on the lion’s share of the risk, the losses are already adding up. Last year, the FHA lost $7.6 billion paying out a steadily ballooning number of claims related to foreclosures — that was up from $2.7 billion in 2008.
Prior to the real estate collapse, sellers often funded down payments in overheated markets — but mortgages of this sort produced claim rates almost three times higher than other loans insured by the FHA. As a result, the federal government outlawed seller-funded down payments in 2008.
But 100 percent financing is being revived by “down payment assistance” programs offered by local and state governments — including Lee County, Fla., which is helping out Adams Homes buyers. In essence, localities are stepping up to sponsor second mortgages, so that buyers can buy with little or no money down.
The end result: When a four-bedroom house sells for double the cost of a neighboring property, nobody on any side of complex transaction stands to lose much from a near-term default, except for the FHA.
***
Adams Homes is a family-owned company that operates in seven Southeastern states, including Florida.
Cinder-block shells stenciled with the company’s name and number — and lawn signs saying the structures can be custom finished for just a $1,000 deposit — dot the north side of Cape Coral, one of hardest-hit towns in the nation after the real-estate bubble popped.
Today, Adams Homes owes $654,324 in back taxes for 813 properties throughout the county, said Lee County Tax Collector Tammy Harrison. Adams did not respond to a request for comment.
Buyers interviewed by The Daily said they bought using FHA-insured mortgages covering 96.5 percent of the purchase price.
“We looked at foreclosures, but bought this one because it’s brand new. New appliances, stainless steel, new carpet,” said Anishka Barionette, leaning on her doorway, baby in arms. Barionette and her husband paid $139,000 for their tan ranch-style home using an FHA-insured mortgage, and Adams Homes covered some
of the closing costs. Although the couple looked at foreclosed properties in the same neighborhood that would have cost half as much, they expressed no regrets. “I’m glad we went with this, because a lot of [the foreclosures] were trashed,” she said.
“Why not get a new home if you can get a new home?” asked Colette Waugh, a realtor with Adams Homes.
But the Barionettes didn’t get a deal quite as good as the dollar-down one — that became possible only with a new program Lee County began offering last year.
To facilitate sales to buyers who lacked even enough savings to cover closing costs and the tiny down payment required under FHA — less than $5,000 for the Barionettes’ home — the Housing Finance Authority of Lee County resumed an old program this year to dole out $20 million worth of zero-interest, second mortgages. But this time, they upped the loans to 5 percent of the mortgage value, versus the traditional 3 percent.
The program enabled Adams Homes’ new dollar-down deal. Now, if the buyer qualifies, the entire cost of the home can be financed through the two mortgages, which leaves a little extra money toward closing costs. Adams pays any additional closing costs, and gives the buyer a $999 rebate on their $1,000 deposit.
Buyers must meet normal mortgage underwriting requirements, including having a good credit score. Proponents of these second-mortgage programs say they help buyers compete with all-cash investors who don’t plan to live at the home they’re buying.
For its part, the FHA does require an independent appraisal of the property. But that doesn't answer critics' concerns.
“It does at least beg the question of, are these people going to be able to manage their finances in the long run to hang on to their properties?” asked Rick Sharga, senior vice president of RealtyTrac.
Waugh said three buyers have closed under the deal since it was first advertised in November, and more have signed contracts. Six houses are still offered for a dollar down.
The neighborhoods where they are located are rife with foreclosed and vacant properties. Brand-new homes that once went for $350,000 at the peak of the market are now being sold by the banks for $75,000.
Asked why a government agency is financing deal for homes that cost twice as much as their neighbors, Phil Burnett, independent counsel for the local housing finance authority, said, “You can’t build a house for the price some of the homes are selling for.”
PART 2: THE LITTLE LOAN THAT MAKES IT ALL POSSIBLE
CAPE CORAL, Fla. — A Federal Housing Authority-backed main mortgage covers nearly 97 percent of the purchase price of dollar-down houses being sold by a builder in this Gulf Coast community. But it is a much smaller, second mortgage that makes the deal possible — and possibly too easy.
That small loan covers the down payment and much of the closing costs for a builder’s properties — meaning that the buyer can effectively purchase a home without actually putting in any cash. This second mortgage is afforded by the county government, which sponsors the loan as part of a “down-payment assistance” program.
Many local and state government programs like the one offered through Lee County have ramped up their lending activity since the real estate crash, after which new rules were passed to lower the risk on mortgages. Traditional banks started requiring a 20 percent down payment, and seller-funded down-payment assistance programs were outlawed. Those new rules shut many buyers out.
“They can make the mortgage payment, because in some cases they’re paying the same or more in rent. But it’s the down payment that they’re having trouble getting together,” said Cecka Green, spokeswoman for the Florida Housing Finance Corporation, which has no affiliation with the Lee County authority.
Lack of savings should be a red flag to these government entities, said Dominic M. Calabro, president of the watchdog group Florida TaxWatch. He said the down-payment assistance programs “give preference to the people who are least able to responsibly manage and care for the home they’re given.”
Buyers who are living paycheck to paycheck are less likely to save money toward big-ticket home ownership expenses like painting, landscaping, weatherization and emergency repairs, and are more likely to fall into foreclosure if they lose their job or become ill.
The effects of owners stretched too thin is visible in Cape Coral, where even many of the occupied houses have no landscaping and tattered facades.
After seller-financed down payments were outlawed in 2008, relatives mostly stepped in to fill the gap. Family members funded 25 percent of down payments in 2010 compared with 12 percent in 2008, according to the FHA. Only 1.4 percent of down payments for mortgages insured by the FHA came from local government entities, a slight uptick from years prior, according to a recent report.
But the state housing finance agencies have far higher figures.
“We’ve certainly seen an increase in demand for our down-payment assistance, and I’m sure that most states would agree,” said Eric Pike, director of the program for the Texas Department of Housing and Community Affairs.
For example, between 2007 and 2010, the share of mortgages issued by a state housing finance authority that included a second mortgage to cover the down payment leaped from 52 percent to 97 percent in Florida; from 13.8 percent to 91.2 percent in Texas; and from 25 percent to 45 percent in Indiana.
Ultimately, all of the mortgages backed by the FHA, and many of the mortgages backed by local and state housing finance authorities are insured by entities that would need a taxpayer bailout if the number of claims submitted end up depleting their reserve funds. Last year, the FHA lost $7.6 billion in claims related to foreclosures, up from $2.7 billion in 2008.
After the local lender bundles the mortgages, they’re sold to investors as mortgage-backed securities. When a home is foreclosed on, the investors via a bank known as the “servicer” submits a claim to government-backed entities — FHA, Ginnie Mae, Fannie Mae or Freddie Mac — for all of the money lost in the deal.
“We shouldn’t be [backing these mortgages], but the truth of the matter is that in this dire marketplace, many areas are stuck,” explained Jack McCabe, founder of Miami-based McCabe Research and Consulting. “If there wasn’t government financing, there wouldn’t be any loans available at all because banks, despite their public relations, are still not making conventional loans in distressed markets, which Cape Coral is at the time.”
“The government as a whole has been very critical of the mortgage industry for putting people into loans who didn’t have the financial wherewithal to handle home ownership,” said Rick Sharga, senior vice president of RealtyTrac. “It would be mind-boggling if the same government officials who were that critical of the mortgage industry are making the same mistake.”
CAPE CORAL, Fla. — All it takes is $1 down to buy a brand-new $150,000 home in this foreclosure-wracked community, thanks to two government programs that guarantee loans for buyers who want a house but can’t scrape together enough cash to cover closing costs, let alone a standard down payment.
The dollar-and-a-dream offer makes good sense for builder Adams Homes — it pockets the full purchase price, regardless of whether the cash-strapped buyer continues making payments.
That’s because all the risk in this very risky transaction lies with the federal government.
As this type of deal — which combines a mortgage for 96.5 percent of the purchase price backed by the Federal Housing Authority with a smaller federally insured loan covering some or all of the down payment and closing costs — rapidly gains traction in states like Florida, Indiana and Texas, many real estate experts are sounding the alarm.
“This is a recipe for a new, massive wave of foreclosures,” warned Jack McCabe, founder of Miami-based McCabe Research and Consulting. “That’s what got us in this problem in the first place, giving 100 percent financing and not requiring the homeowner to have any skin in the game.”
Any dollar-down buyers in Cape Coral face the prospect of being immediately underwater. One of the Adams homes is a $154,000 four-bedroom ranch with plush cream carpeting and a three-car garage. That price is roughly double what neighboring lived-in homes, many foreclosed and unoccupied, are currently fetching. One nearby house sold for just $25,000.
The package of government-backed mortgages used by Adams Homes buyers enables irresponsible behavior all around, say some experts.
“These [programs] are terrible,” said University of Texas-Dallas economics professor Stan Leibowitz, a leading researcher on the transactions. “Allowing people into homes with zero down leads to much higher defaults than average. Government budgets are in bad enough shape that they cannot afford to be subsidizing homes that are likely to go into default, costing taxpayers more money.”
Already, the results are showing up on the government books. If a buyer signs on the dotted line for the Cape Coral ranch, the two mortgages used to finance the deal both will be fully insured by the federal government. The primary mortgage is insured by the FHA — for decades, a niche agency focusing on low-income buyers that has recently undergone a vast expansion into the largest mortgage insurer in the country. The second mortgage from local housing authorities, like the one in Cape Coral, are generally insured by either Ginnie Mae, Fannie Mae or Freddie Mac.
For the agency taking on the lion’s share of the risk, the losses are already adding up. Last year, the FHA lost $7.6 billion paying out a steadily ballooning number of claims related to foreclosures — that was up from $2.7 billion in 2008.
Prior to the real estate collapse, sellers often funded down payments in overheated markets — but mortgages of this sort produced claim rates almost three times higher than other loans insured by the FHA. As a result, the federal government outlawed seller-funded down payments in 2008.
But 100 percent financing is being revived by “down payment assistance” programs offered by local and state governments — including Lee County, Fla., which is helping out Adams Homes buyers. In essence, localities are stepping up to sponsor second mortgages, so that buyers can buy with little or no money down.
The end result: When a four-bedroom house sells for double the cost of a neighboring property, nobody on any side of complex transaction stands to lose much from a near-term default, except for the FHA.
***
Adams Homes is a family-owned company that operates in seven Southeastern states, including Florida.
Cinder-block shells stenciled with the company’s name and number — and lawn signs saying the structures can be custom finished for just a $1,000 deposit — dot the north side of Cape Coral, one of hardest-hit towns in the nation after the real-estate bubble popped.
Today, Adams Homes owes $654,324 in back taxes for 813 properties throughout the county, said Lee County Tax Collector Tammy Harrison. Adams did not respond to a request for comment.
Buyers interviewed by The Daily said they bought using FHA-insured mortgages covering 96.5 percent of the purchase price.
“We looked at foreclosures, but bought this one because it’s brand new. New appliances, stainless steel, new carpet,” said Anishka Barionette, leaning on her doorway, baby in arms. Barionette and her husband paid $139,000 for their tan ranch-style home using an FHA-insured mortgage, and Adams Homes covered some
of the closing costs. Although the couple looked at foreclosed properties in the same neighborhood that would have cost half as much, they expressed no regrets. “I’m glad we went with this, because a lot of [the foreclosures] were trashed,” she said.
“Why not get a new home if you can get a new home?” asked Colette Waugh, a realtor with Adams Homes.
But the Barionettes didn’t get a deal quite as good as the dollar-down one — that became possible only with a new program Lee County began offering last year.
To facilitate sales to buyers who lacked even enough savings to cover closing costs and the tiny down payment required under FHA — less than $5,000 for the Barionettes’ home — the Housing Finance Authority of Lee County resumed an old program this year to dole out $20 million worth of zero-interest, second mortgages. But this time, they upped the loans to 5 percent of the mortgage value, versus the traditional 3 percent.
The program enabled Adams Homes’ new dollar-down deal. Now, if the buyer qualifies, the entire cost of the home can be financed through the two mortgages, which leaves a little extra money toward closing costs. Adams pays any additional closing costs, and gives the buyer a $999 rebate on their $1,000 deposit.
Buyers must meet normal mortgage underwriting requirements, including having a good credit score. Proponents of these second-mortgage programs say they help buyers compete with all-cash investors who don’t plan to live at the home they’re buying.
For its part, the FHA does require an independent appraisal of the property. But that doesn't answer critics' concerns.
“It does at least beg the question of, are these people going to be able to manage their finances in the long run to hang on to their properties?” asked Rick Sharga, senior vice president of RealtyTrac.
Waugh said three buyers have closed under the deal since it was first advertised in November, and more have signed contracts. Six houses are still offered for a dollar down.
The neighborhoods where they are located are rife with foreclosed and vacant properties. Brand-new homes that once went for $350,000 at the peak of the market are now being sold by the banks for $75,000.
Asked why a government agency is financing deal for homes that cost twice as much as their neighbors, Phil Burnett, independent counsel for the local housing finance authority, said, “You can’t build a house for the price some of the homes are selling for.”
PART 2: THE LITTLE LOAN THAT MAKES IT ALL POSSIBLE
CAPE CORAL, Fla. — A Federal Housing Authority-backed main mortgage covers nearly 97 percent of the purchase price of dollar-down houses being sold by a builder in this Gulf Coast community. But it is a much smaller, second mortgage that makes the deal possible — and possibly too easy.
That small loan covers the down payment and much of the closing costs for a builder’s properties — meaning that the buyer can effectively purchase a home without actually putting in any cash. This second mortgage is afforded by the county government, which sponsors the loan as part of a “down-payment assistance” program.
Many local and state government programs like the one offered through Lee County have ramped up their lending activity since the real estate crash, after which new rules were passed to lower the risk on mortgages. Traditional banks started requiring a 20 percent down payment, and seller-funded down-payment assistance programs were outlawed. Those new rules shut many buyers out.
“They can make the mortgage payment, because in some cases they’re paying the same or more in rent. But it’s the down payment that they’re having trouble getting together,” said Cecka Green, spokeswoman for the Florida Housing Finance Corporation, which has no affiliation with the Lee County authority.
Lack of savings should be a red flag to these government entities, said Dominic M. Calabro, president of the watchdog group Florida TaxWatch. He said the down-payment assistance programs “give preference to the people who are least able to responsibly manage and care for the home they’re given.”
Buyers who are living paycheck to paycheck are less likely to save money toward big-ticket home ownership expenses like painting, landscaping, weatherization and emergency repairs, and are more likely to fall into foreclosure if they lose their job or become ill.
The effects of owners stretched too thin is visible in Cape Coral, where even many of the occupied houses have no landscaping and tattered facades.
After seller-financed down payments were outlawed in 2008, relatives mostly stepped in to fill the gap. Family members funded 25 percent of down payments in 2010 compared with 12 percent in 2008, according to the FHA. Only 1.4 percent of down payments for mortgages insured by the FHA came from local government entities, a slight uptick from years prior, according to a recent report.
But the state housing finance agencies have far higher figures.
“We’ve certainly seen an increase in demand for our down-payment assistance, and I’m sure that most states would agree,” said Eric Pike, director of the program for the Texas Department of Housing and Community Affairs.
For example, between 2007 and 2010, the share of mortgages issued by a state housing finance authority that included a second mortgage to cover the down payment leaped from 52 percent to 97 percent in Florida; from 13.8 percent to 91.2 percent in Texas; and from 25 percent to 45 percent in Indiana.
Ultimately, all of the mortgages backed by the FHA, and many of the mortgages backed by local and state housing finance authorities are insured by entities that would need a taxpayer bailout if the number of claims submitted end up depleting their reserve funds. Last year, the FHA lost $7.6 billion in claims related to foreclosures, up from $2.7 billion in 2008.
After the local lender bundles the mortgages, they’re sold to investors as mortgage-backed securities. When a home is foreclosed on, the investors via a bank known as the “servicer” submits a claim to government-backed entities — FHA, Ginnie Mae, Fannie Mae or Freddie Mac — for all of the money lost in the deal.
“We shouldn’t be [backing these mortgages], but the truth of the matter is that in this dire marketplace, many areas are stuck,” explained Jack McCabe, founder of Miami-based McCabe Research and Consulting. “If there wasn’t government financing, there wouldn’t be any loans available at all because banks, despite their public relations, are still not making conventional loans in distressed markets, which Cape Coral is at the time.”
“The government as a whole has been very critical of the mortgage industry for putting people into loans who didn’t have the financial wherewithal to handle home ownership,” said Rick Sharga, senior vice president of RealtyTrac. “It would be mind-boggling if the same government officials who were that critical of the mortgage industry are making the same mistake.”
