ML-Implode Blog Warns of “FHA Subprime”

LAS VEGAS--(BUSINESS WIRE)--The Mortgage Lender Implode-O-Meter ("ML-Implode"), a prominent blog and independent econo-journalism source has issued a statement warning of the consequences of a lending practice known as seller-funded downpayment assistance ("SFDPA") loans at the Federal Housing Administration (FHA). The site asserts the practice is risky to the health of the housing market and highly abusive to the taxpaying public.

See the statement at: http://ml-implode.com/article/SFDPA_statement-wire/01.html.

FHA provides taxpayer-funded insurance to lenders on mortgage loans, which normally require a statutory 3.5% downpayment. The SFDPA loan arrangement allows sellers to more easily move real estate and helps buyers to get into the properties with "no-money-down." This is achieved by (typically) marking up the price to cover the downpayment, then channeling the money from the seller through one or more intermediaries (organized by the SFDPA administrator) to the borrower. The borrower then uses this "gift" for a downpayment as if it were their own money.

The loans are pitched by the SFDPA companies as “charitable contributions.” Companies arranging SFDPA loans included Nehemiah, Ameridream, and Global Direct Sales ("Grant America"), among others.

The SFDPA practice was completely banned by the July 2008 housing bill, effective October 1st. However, new legislation (HR 6694) is pending to re-enable this form of lending. Bill sponsors claim the loosened rules will help first-time home buyers and the housing market. SFDPA companies, builders, and Realtors have launched a major PR and lobbying campaign to generate support for HR 6694.

The ML-Implode statement warns of the risks of creating large amounts of new loans with a negative equity position, which are much more likely to default. It also draws alarming parallels between SFDPA loans (particularly as provided in HR 6694) and zero-down subprime lending.

ML-Implode warns that such lending is likely to cause even more damage to the economy than in the recent past, given the current environment of generally-falling home prices. While SFDPA loans may appear to help slow the decline, the site argues they will likely lead to a larger crash in the near future, as the underwater borrowers will default and foreclose at high rates.

The ML-Implode statement comes on the heels of a BusinessWeek article which exposed a dramatic increase in abuse of Federal Housing Administration (FHA) loans by desperate loan originators. The FHA's insurance fund recently fell by nearly 40%, and the agency is now operating at a loss to taxpayers for the first time in its 74-year history.

The Mortgage Lender Implode-O-Meter is perhaps the best known "blog" on the credit crisis, as it correctly called the housing collapse and burst of the credit bubble at the end of 2006 by drawing attention to "imploding" mortgage lending companies. The site became particularly popular for those inside that industry, to keep tabs on the developing situation in real time. Traffic to the site at times reaches 300,000-500,000 visits a day, and it has recorded over 36 million visits since its launch at the end of 2006.