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whippm
Dud?


Joined: 19 Dec 2008
Posts: 4

Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Fri Dec 19, 2008 11:54 pm Reply with quoteBack to top

Incorrect Data Analysis Used To Discredit Seller Funded Down Payment Assistance

A recent letter from Senator Diane Feinstein to a constituent, who had asked the Senator to support down payment assistance, is an illustration of how the Senate has been influenced by the misleading data analysis HUD has put forth about Seller Funded Down Payment Assistance (SFDPA). In her letter, the Senator states:

Foreclosure rates for seller-funded down payment assistance loans have been found to be three times higher than other FHA loans.
This oft-quoted statistic, highlighted above, was put forth by HUD in their rationalization of a proposed rule banning down payment assistance. HUD stated that “to-date claim rates ... exceed three times those of borrower-funded purchase loans. . ..” and cited the data in Table 5 of that proposed rule to support this statement.

The conclusions HUD draws from Table 5 suffer from the same defect all of HUD’s conclusions suffer from—HUD assumes that if two things are somehow correlated, that one is causing the other.

The important point is that HUD’s analysis vastly overstates the effect of SFDPA on foreclosure by pretending that it is the only factor that could affect foreclosures. The Senate should be aware of the flaw in this approach. It is not a well-considered policy to ban SFDPA when all of the statistics supporting such a ban are terribly flawed. It is also a mistake to deny needed assistance to borrowers and the market in general when, even if a proper analysis shows the use of SFDPA does impose additional risk, that risk can so easily be mitigated by imposing a few underwriting standards, such as minimum FICO, Debt/Income ratio, etc.

Table 5 can be reproduced using a standard data analysis tool called a regression. Regressions are used to establish the relationship between variables, and can be used to help determine how one variable relates to another. Regressions are widely used by the federal government to analyze programs. For example, the Office of Federal Contract Compliance Programs (OFCCP) is now aggressively using regression as a tool with which they audit contractors.

Table 5 data is reproduced using a simple linear regression relating only two variables: (1) foreclosure and (2) source of down payment. The problem with Table 5 then, and with almost all of HUD’s tables and analysis, is that it is only valid if the only factor for foreclosures is the source of down payment. This is clearly not the case. There are several important variables that factor into a person’s likelihood of foreclosure. A simple regression clearly supports this. The correlation coefficient, or “R2”, of HUD’s model is only .0067 (R2 of 1 being a perfect explanation of the data by the model and 0 being no explanation). So clearly the model HUD chose provides a poor explanation of the relationship between down payment assistance and foreclosures.

When we use the same model that produces Table 5 data for fiscal year 2006, and then add other variables from the data HUD has made public on its website, we observe that the effect of the down payment assistance source on foreclosures declines by over 68%--with the difference between borrower paid down payment assistance and SFDPA falling from 2.18 in HUD’s model to just 1.49. But the R2 value is still very low at .0147, which tells us that our model does not provide a comprehensive explanation of the relationship between foreclosures and the use of SFDPA.

When we us a non-linear regression, which is simply another model for regressions, we observe that the effect of the down payment assistance source on foreclosure declines by over 100% from HUD’s model--with the difference between borrower paid down payment assistance and SFDPA falling from 2.18 in HUD’s model to just 1.06. More importantly the R2 , or how well the model explains the relationship between the variables, increases by over 1400% to .0947, indicating a much better fit of the data. This tells us that not only did HUD fail to account for several important variables, but they likely did not use the best regression model either.

Because there are several other variables that should be accounted for, accounting for this variables will likely show the effect of SFDPA on foreclosures to be even less. These variables would include: co-borrower’s information, collections owed, amount of closing costs, employment, income, debt, monthly payment, bankruptcy, if the borrower is a first-time homebuyer, interest rate, FICO score (not just FICO category), etc.

Matrix Global Advisors recently released a study of the impact of SFDPA on foreclosures (Alex-Brill Report). They performed regressions where they tried to take into account other variables and did not select data from high foreclosure areas as HUD did. The result is that SFDPA was shown to have 1/6 the impact on foreclosures that HUD was touting—for the very reasons discussed above. It is likely that when we get full data from HUD and can account for more of the variables, we will be able to find a more accurate relationship between SFDPA and foreclosure. By all indications, this data will show that the overall risk to FHA has not increased appreciably, but that the riskier loans that were always a part of FHA’s portfolio have self-selected towards SFDPA.
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whippm
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Joined: 19 Dec 2008
Posts: 4

Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Fri Dec 19, 2008 11:58 pm Reply with quoteBack to top

Please someone explain exactly what about SFDPA is a scam. And please don't trot out that IRS report--they were asked by HUD to attack the industry and have no credibility outside of tax issues.

There is nothing about SFDPA that is not fully understood by all parties BEFORE a closing takes place--there is full disclosure before, during, and after the transaction.
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whippm
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Joined: 19 Dec 2008
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Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Sat Dec 20, 2008 12:07 am Reply with quoteBack to top

I appreciate Impolde's interest in protecting the taxpayer. But I believe there is a very cogent argument that preserving DPA is protecting the taxpayer. As discussed above, there does NOT seem to be a cause and affect relationship between SFDPA and foreclosures, but there is a cause and affect between lack of buyers in the market and foreclosures. Consider the following:


 The real estate meltdown we are experiencing has caused consumers to loose confidence, which has cost people jobs and lower pay because consumers are spending less. By eliminating SFDPA, the housing market dips, consumer confidence dips, employment dips, and foreclosures increase—not in taxpayer’s best interests.

 Lower/less income means less tax revenue and, therefore, there will be a need to raise taxes—not in taxpayer’s best interest.

 Even if we assume that SFDPA will cause HUD to be less profitable, or even require a billion or two of taxpayer help—a conclusion I would strongly suggest is in error —this would still be far cheaper than the bailouts that we have paid for so far and the ones we will likely have to pay for if the buyers who rely on SFDPA are taken out of the market—not in taxpayer’s best interests.

 If you don’t find particularly convincing the arguments that lack of down payment does not appear to be a significant contributor to foreclosure, then consider the following: If the market prices for homes fall because SFPDA buyers can’t participate (taking SFDPA buyers out the market (less demand) means prices have to lower to a market clearing price), all of those who became homeowners in the last few years will find their mortgage underwater and will walk away from their homes in droves—not in taxpayer’s best interests.

So, as far as the taxpayer’s bests interests—preserving SFDPA is by far the lesser of the evils at this point. Bailouts and stimulus plans costs taxpayers money, while SFDPA takes thousands of homes off of the market every month and around 94% of these homebuyers are successful—meaning that for every 100 homes you are taking off the market with new purchase money, thereby providing these sellers with an exit and lowering the incidence of foreclosure, only 6 will end up back on the market because of seller distress. That seems like a win-win scenario.
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Robin
Sentinel


Joined: 30 Aug 2007
Posts: 3416
Location: Loveland, OH

Re: HR 6694
PostPosted: Sun Dec 21, 2008 10:36 pm Reply with quoteBack to top

phillips65020 wrote:
Property values are not inflated if the seller is truly giving up 3.5% of his/her profit.

If it's 100% financing you want to get rid of... ask for HUD to shut down RD. What's the difference? RD is a 100% financing program.


Fact of the matter is... you have too many brokers dictating content & value to appraisers. AMCs would be a step in the right direction to stop broker influence on appraisers & their reports.

Good underwriting and good appraisal reports make 100% loans to responsible borrowers worth our time & effort.


AMC's are exactly the wrong answer via a knee-jerk reaction to a perceived problem in a small fraction - the fact that most AMC's are owned and/or controlled by lenders should give you cause for pause right there. No lender, title company, insurer or brokerage should have an influential interest in AMC's, yet many do - am I the only person who sees the conflict of interest there? The appraisers get paid less, are pressured more and it just exacerbates the problem. To blame brokers for being the sole source of pressure on appraisers to inflate or deflate values is deceptive. One must also take into account the roles of Realtors performing BPO's (that's a conflict IMHO) and the general disengenuation of the mortgage industry for Appraisal as a whole when it is, in fact, the most genuine, professional and disinterested arm of the industry by its very nature.

Something is VERY WRONG with our way of thinking if we absorb the third-party services we've long claimed to be "disinterested third-party services" and suddenly claim they're mandatory use when in fact they are owned and controlled by the lenders that benefit therefrom.
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Appraisal Police
Cherry Bomb


Joined: 08 Jun 2007
Posts: 101

Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Sun Dec 21, 2008 11:36 pm Reply with quoteBack to top

Quote:
AMC's are exactly the wrong answer via a knee-jerk reaction to a perceived problem in a small fraction - the fact that most AMC's are owned and/or controlled by lenders should give you cause for pause right there. No lender, title company, insurer or brokerage should have an influential interest in AMC's, yet many do - am I the only person who sees the conflict of interest there? The appraisers get paid less, are pressured more and it just exacerbates the problem. To blame brokers for being the sole source of pressure on appraisers to inflate or deflate values is deceptive. One must also take into account the roles of Realtors performing BPO's (that's a conflict IMHO) and the general disengenuation of the mortgage industry for Appraisal as a whole when it is, in fact, the most genuine, professional and disinterested arm of the industry by its very nature.

Something is VERY WRONG with our way of thinking if we absorb the third-party services we've long claimed to be "disinterested third-party services" and suddenly claim they're mandatory use when in fact they are owned and controlled by the lenders that benefit therefrom.


Exactly.

Back in the day FHA insulated appraisers from lenders/brokers by assigning appraisals by rotation. Lenders/Brokers never knew who the appraiser would be in advance.

IF FHA was serious about appraiser pressure they would go back to this process.

AMC's are usually lender owned and pressure appraisers. Independent AMC's routinely pressure appraisers to look the other way on repairs, REO's etc. in order to placate the lender who is their bread and butter.

AMC appraisers are rarely seasoned veterans and often succumb to low fees and AMC pressure.

Personally, if the lender wants to do the damn loan they should just make the loan and forego the appraisal.
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mahalo guy
Demolition Man


Joined: 28 Jun 2008
Posts: 2082
Location: Honolulu

Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Sun Dec 21, 2008 11:42 pm Reply with quoteBack to top

I've been wondering for years why the FHA does not go back to a blind rotation. It works so well for the VA. Seems to me it would be a very simple solution to a complex problem.

With Direct Endorsment, all the pieces are already in place.

If it's a $$ issue with HUD, they could just make it a pay to play.



Appraisal Police wrote:
Quote:
AMC's are exactly the wrong answer via a knee-jerk reaction to a perceived problem in a small fraction - the fact that most AMC's are owned and/or controlled by lenders should give you cause for pause right there. No lender, title company, insurer or brokerage should have an influential interest in AMC's, yet many do - am I the only person who sees the conflict of interest there? The appraisers get paid less, are pressured more and it just exacerbates the problem. To blame brokers for being the sole source of pressure on appraisers to inflate or deflate values is deceptive. One must also take into account the roles of Realtors performing BPO's (that's a conflict IMHO) and the general disengenuation of the mortgage industry for Appraisal as a whole when it is, in fact, the most genuine, professional and disinterested arm of the industry by its very nature.

Something is VERY WRONG with our way of thinking if we absorb the third-party services we've long claimed to be "disinterested third-party services" and suddenly claim they're mandatory use when in fact they are owned and controlled by the lenders that benefit therefrom.


Exactly.

Back in the day FHA insulated appraisers from lenders/brokers by assigning appraisals by rotation. Lenders/Brokers never knew who the appraiser would be in advance.

IF FHA was serious about appraiser pressure they would go back to this process.

AMC's are usually lender owned and pressure appraisers. Independent AMC's routinely pressure appraisers to look the other way on repairs, REO's etc. in order to placate the lender who is their bread and butter.

AMC appraisers are rarely seasoned veterans and often succumb to low fees and AMC pressure.

Personally, if the lender wants to do the damn loan they should just make the loan and forego the appraisal.
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Aaron
A-Bomb


Joined: 24 Jan 2007
Posts: 824
Location: Atlanta, GA

Re: Discussion on ML-Implode Statement On H.R. 6694 And FHA "Se
PostPosted: Mon Dec 22, 2008 6:08 am Reply with quoteBack to top

I've read the "HUD's faulty reasoning" report.

It was hugely unconvincing. Basically they use some poorly-presented mathematical black-boxes to postulate an alternative model that makes a case for "hidden variables", which seem to reduce (but not eliminate) the deleterious effects of SFDPA.

We can debate mathematical models all day, but at the end of that day, you have to just look at the REALITY you are modelling and ask "what makes the most sense"? And anyone with half a brain can tell you that putting people in a house with no skin in the game is always and everywhere a bad idea.

SFDPA entirely within a family (if such at thing is common at all) would likely NOT fall within that category -- the familial relations would represent that vested interest of the borrower. That's not so bad.

But then again, SFDPA isn't really needed to have relatives help you out with a home sale -- they can always give the buyer the downpayment money!

So let's not kid ourselves. The only reason this issue refuses to die is because there's a lot of pressure (especially from builders, Realtors, and "poverty populist" Congresspersons) to get broke people into houses (that is, with effectively 100% financing).

If this is allowed to continue in a major way, in a down market with borrowers starting out underwater (and then quite often losing their jobs), it is really going to be ugly. This program was probably a bust in good times (only question is by how much); it is going to be a mushroom cloud in bad times.

Careful what you wish for, America...
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phillips65020
Dud?


Joined: 16 Oct 2008
Posts: 6

Re: HR 6694
PostPosted: Mon Dec 22, 2008 3:47 pm Reply with quoteBack to top

Robin wrote:
phillips65020 wrote:
Property values are not inflated if the seller is truly giving up 3.5% of his/her profit.

If it's 100% financing you want to get rid of... ask for HUD to shut down RD. What's the difference? RD is a 100% financing program.


Fact of the matter is... you have too many brokers dictating content & value to appraisers. AMCs would be a step in the right direction to stop broker influence on appraisers & their reports.

Good underwriting and good appraisal reports make 100% loans to responsible borrowers worth our time & effort.


AMC's are exactly the wrong answer via a knee-jerk reaction to a perceived problem in a small fraction - the fact that most AMC's are owned and/or controlled by lenders should give you cause for pause right there. No lender, title company, insurer or brokerage should have an influential interest in AMC's, yet many do - am I the only person who sees the conflict of interest there? The appraisers get paid less, are pressured more and it just exacerbates the problem. To blame brokers for being the sole source of pressure on appraisers to inflate or deflate values is deceptive. One must also take into account the roles of Realtors performing BPO's (that's a conflict IMHO) and the general disengenuation of the mortgage industry for Appraisal as a whole when it is, in fact, the most genuine, professional and disinterested arm of the industry by its very nature.

Something is VERY WRONG with our way of thinking if we absorb the third-party services we've long claimed to be "disinterested third-party services" and suddenly claim they're mandatory use when in fact they are owned and controlled by the lenders that benefit therefrom.



I live & breath this on the front line as a loan officer for the past 22 years. I see what happens & what I explained is exactly what happens. I have worked for Countrywide and Wells Fargo & assure you there is no pressure on appraisers to do anything but what's right.

Those 2 AMC pick every report apart to make certain values are not being inflated.

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RCN
Dud?


Joined: 23 Dec 2008
Posts: 1

Call It What It Is
PostPosted: Tue Dec 23, 2008 1:21 pm Reply with quoteBack to top

For those of you arguing for SFDPA, please make a rational argument for 100% financing, because that is what it is. If you believe anyone within specified debt to income ratio's should get a home without any money down, fine, make that argument. Before you make your argument, lets agree on a few things.

1. It is an arms length transaction with a purchase price at fair market value.
2. That in any given market a seller is upside down without a minimum equity of 5%
3. The buyer will obtain a loan backed by FHA and if the buyer defaults the US government is the one holding the paper.

This is a BEST case scenario. This example does not have unscrupulous lenders or biased appraisers which we all know are out there.

OK, now make your argument. If your argument is that convincing, open a mortgage company and make a fortune with this great loan product instead of asking the American taxpayer to carry the risk.

Come on folks, I have been in this business for 15 years and my business without a doubt would pick up if the SFDPA's came back. I have seen them enable good people to obtain a home and I have seen them enable good people to go into bankruptcy.
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Lisa11
Flash in the pan


Joined: 14 Jan 2009
Posts: 26

hi
PostPosted: Tue Mar 31, 2009 10:12 am Reply with quoteBack to top

Artificial price inflation is another result. With all that, and foreclosures too, there is no earthly reason to revive down payment assistance programs, and the industry is just looking to make more sales commissions.

Lisa11
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