Smart Borrower Blog

Controversy In The Mortgage Market

Jan 19th, 2008 @ 4:51 PM by Alden Smith

It seems every where we turn, we see lenders being dinged for their participation in the sub prime rat race.   There is talk of “liar” and “no doc” paperwork, of “teaser” loans, unethical lenders and the whole smelly ball of wax.   It is no wonder then, when you read about Continental Home Loans. The Melville-based company is working hard to promote mortgages for the paltry sum of $1K down, and it seems that they are doing business.

The company is using a loophole that allows sellers to funnel down payments to FHA-qualified buyers through nonprofits.   Fine and dandy, I think, but there are certainly some worries here, especially from the FHA.   FHA insiders are concerned that homes will be sold to buyers who just can’t pay.   And why not?   If you can only scrape together $1K for a home, you don’t appear to be in any position to buy.

It works like this - participating sellers agree to pay the 2.25 percent to 3 percent minimum down payment required by the FHA and also pay fees outside traditional closing costs, such as bills for attorneys and the appraisal.   This allows the buyer to get into the home for a minimum down payment, and the seller has the relief of getting out from under the home they are selling.

When both parties go to the closing table, the seller sends 5 percent of the sales price to the Nehemiah Corp. of America, a Wisconsin-based community development agency that Continental uses, and the Nehemiah Corp. then “grants” that money to the buyer for the down payment. The seller will pay everything over the 5%, and then gives the Nehemiah Corp. a $500 donation for doing business with them. In this fashion, the deal is closed and everyone is happy.

The FHA, of course, is not happy with this arrangement, and has made attempts to close the loophole with little success.   The Nehemiah Corp. has sued the FHA to insure that the loophole remains on the books.

This is a good deal for anyone wanting to get into a home but has little in savings.   You have to wonder, though, just how well a buyer will do with this plan.   The mortgage payments will be considerable y higher, and puts pressure on the new owner to perform.   This is one of those things that bears watching.   If it works, great.   If not, a lot of folks at FHA will say “I told ya so.”