FHA Program Linked to High Colorado Foreclosure Rate
An illuminating
article in the Denver Post connects the dots between
Colorado’s high foreclosure rate and an FHA program gone awry:
“Created to extend the dream of homeownership to first-time buyers, the so-called FHA gift program instead has led to rampant foreclosures. Nearly 6,000 FHA loans have wound up in foreclosure in Colorado in the past two years, and during that time the program allowed more than 25 percent of FHA buyers to use gifts as down payments.”
The article recounts several stories of homeowners who paid just a few hundred dollars to buy their home, using a loophole in the program to obtain the 3 percent required down payment from the sellers — by way of a nonprofit agency. The purchase price of the home was raised to cover the “gift” shelled out by the seller, and appraisals were fudged to allow the buyer to take out a loan that covered the inflated sales price along with most of the closing costs.
The phenomenon of buyers overextending themselves financially just to get into a home is not a phenomenon unique to this loan program or Colorado. It’s not uncommon here in California for buyers to submit an offer above the asking price, with the contingency that the sellers will cover an inflated amount in closing costs for the buyer. That allows the buyer, who is likely taking out a 100 percent loan, to actually receive an ample cash payment at the close of escrow. These types of creative purchase agreements might leave the buyer unscathed in a rapidly appreciating market, but they’re an invitation for foreclosure in a cooling or even normal market.