A loophole that allowed home sellers to pay for down payments on government-backed loans is set to close in October, promising more trouble for the ailing housing industry. The withdrawals will be more acute for the firms that leaned heavily on the practice. Seller-financed loans accounted for one-third of Lennar's second quarter sales, one-quarter of Centex (nyse: CTX - news - people ) sales and a fifth of Ryland homes sold during the period. The scheme allowed builders and lenders to slip homebuyers the modest 3 percent down-payment required by the Federal Housing Administration through a non-profit conduit while securing an iron-clad government guarantee to be paid back should the borrower default. And default they do. Seller-funded loans are three times as likely to not be paid off. While many builders and lenders have been promoting last-time-ever down-payment assistance sales bonanzas, few will go on record to discuss what the end of the practice will mean for their business. None of the three firms listed above would comment on the matter except Marshall Ames, a vice-president at Lennar (nyse: LEN - news - people ), who said, “In normal times we don’t make projections and in time like this with the world moving so quick, we wouldn’t want to comment.” The new down payment ban adds to an already long list of problems in the industry. “I see a lot of headwinds in the fourth quarter,” said Ivy Zelman a home building industry analyst at Zelman & Associates. “There are a tremendous number of builders facing bankruptcy. Builders are running out of cash and they aren’t selling enough homes to make their payments and banks are cutting them off.”
Zelman said many of her industry sources reluctantly admit that the FHA-backed sales crutch ought to be eliminated: “They know it’s a major near-term negative, but in the long-term it’s better because you’re not lending to people who shouldn’t be homeowners,” she said. “We’re just putting more risk into the market because DPA (down-payment assisted) borrowers are more likely to default.” FHA officials estimate that each mortgage of this type represents a $6000 loss due to the higher default rate and risk-blind pricing. Fronting the money doesn’t cost the seller a dime – a government survey proved that homes sold with this sleight of hand assessed for 3 percent more than when homebuyers who put a little skin in the game. While many of the bigger builders were heavy into greasing sales transactions with seller-funded government loans, some exercised restraint. In the second quarter, KB Homes and NVR only spotted the down payment on 3 and 2 percent of sales respectively and Toll Brothers (nyse: TOL - news - people ) and MDC reported that they hadn’t had any of those types of sales at all. Nevertheless, these firms will still feel the impact of the October rule change, says Alan Ratner, an analyst at Zelman’s firm. “Similar to the subprime crash that affected all builders and price points in the housing market due to the “food chain” qualities of the housing market, even those builders that did not use DPA will be negatively impacted as it will impact buyers in the existing home market and work its way up to higher price points,” Ratner said. “At the most, it will prevent those builders who did not use DPA from continuing to lose share as other builders will not able to utilize the vehicle to take market share.”
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