JAMES DOUGHERTY
‘Gray zone’

The passage of the Federal Housing Administration Downpayment Simplification Act of 2002 was a significant step toward improving the housing crisis in America and a giant leap toward helping low-income borrowers, according to mortgage professionals in Massachusetts. But the new rules do pose potential problems for brokers.

The act, signed by President Bush this month and scheduled to go into effect at the beginning of 2003, makes permanent an efficient and more effective mortgage down payment program for low-income borrowers.

The probationary program, originally designed by the FHA in 1998 and later tested in Alaska and Hawaii, was used to determine down payments for low- to moderate-income borrowers and is scheduled to expire at the end of 2002.

The simplification of the act, according to Nathan Bilotta, managing partner of Sherwood Mortgage in Leominster, is all in how the calculations are done.

The original and complex calculation had a borrower putting 5 percent down on the first $25,000 borrowed, 3 percent on second $25,000 borrowed and another 5 percent on the remaining loan amount.

With the new act in place, a borrower is required to put down at least 3 percent of the total acquisition cost, which includes a down payment and closing costs, of the home being purchased.

For example, with a $100,000 purchase price and $2,000 in closing costs making a total acquisition cost of $102,000, the cash put into the transaction by the borrower is required to be 3 percent of the $102,000 total, or $3,060, which Bilotta says is a win-win situation for consumers and lenders in Massachusetts.

“[The act] saves money because … it makes the lenders a little less hesitant because it’s not the same amount of work as it used to be,” said Bilotta of the 3 percent-down program. “For consumers, this program allows them to put less money down, and it makes the calculation simpler in seller concessions.”

The housing bill amends the National Housing Act to permanently simplify the down payment requirements for FHA-insured mortgages for single-family homeowners, repeals the 50 percent increase in the Ginnie Mae guarantee that was scheduled to take effect in 2004, and will require the U.S. Department of Housing and Urban Development to index multifamily mortgage limits each year to the consumer price index.

But besides the economic benefits to the consumer, there are incentives for the lender, according to Bilotta, who said lenders are going to be more apt to direct low- to moderate-income borrowers toward the FHA’s simplified program because it is “less time-consuming” and has a lower margin of error with due to the new calculations.

However, some industry officials have chosen to remain neutral on the legislation and are still uncertain how it will affect transactions in the Massachusetts mortgage industry.

Because mortgage brokers often are simply referring customers to the lender with whom they ultimately will conduct business, this type of legislation can be deceiving, according to James Dougherty, president of the Massachusetts Mortgage Association.

The definition of “client” is what causes gray zones in the FHA regulation, he said.

When the MMA was started in 1980s, it focused its efforts on the specialty of mortgage origination through third parties in the real estate industry. The MMA has worked to bring about legislation that focuses on consumer protection while protecting the business environment that permits mortgage companies to continue to deliver solid, saleable loans to the mortgage servicing industry.

‘More Compassion’

According to Dougherty, the gray area between the industry and the consumer has caused members of the MMA to tread lightly regarding the new FHA down payment regulation.

“Whenever you have to provide information that lays out other costs, premiums, rates, etc., and whenever the law requires that you provide this information, it implies you have this fiduciary relationship with your client,” said Dougherty. “The danger is that if you have an ongoing pattern where you have supplied certain pieces of information and consumers find out you have not provided all the information they are seeking – you have entered into a gray zone.”

According to Dougherty, mortgage brokers do not have a “client relationship with the people [applying for loans] per se, and you don’t have the mandatory fiduciary obligation where you are advocating for the strongest possible decision [as a fiduciary agent for the client].”

While Bilotta said he believes the passage of the federal legislation will certainly help the housing crisis on a state level, especially in Massachusetts, Dougherty said there is a sense that the issues proposed by the FHA will need clarification in a larger sense down the road.

In accordance with the FHA, homebuyers in a high tax bracket are not eligible for the guarantees provided in the Downpayment Simplification Act. Instead, the FHA program is designed to create more potential homebuyers because the FHA allows a smaller down payment and “is much more forgiving on credit,” said Bilotta

Bilotta said FHA loans allow more of the low- to moderate-income homeowners to enter the housing market, and this in turn frees up rental market units while also allowing people to become multifamily homeowners sooner.

The FHA is the only loan program that allows 3 percent down payment for single- to four-family homes. Owners are allowed to use rental income from other units to put toward qualifying for a loan and “history has shown [FHA borrowers have] a little more compassion on the rental side of things, which leads to a better class of landlords,” said Bilotta.

“There are more homes to be sold because there are more eligible buyers in the market,” said Bilotta. “The FHA buyer is someone who is moving out of apartment and looking to move into home – it’s a loan program for the common people.”