As expected, the omnibus housing bill was passed by the house yesterday.  There's all sorts of housing related fine print in this bill, but here are what we see as the key provisions:

FHA seller-funded downpayment assistance programs (wherein the seller of a property makes a donation to a non-profit, and then this same non-profit gives this money to the buyer for their down payment) have been on Death Watch for years.  HUD and FHA have tried to eliminate them at various points, only to be stopped by legal challenges from the assistance providers themselves.

Looks like these programs will finally be killed, as reported by the Washington Post:

The fate of these seller-funded down-payment-assistance programs has been in limbo for weeks. The Senate version of the housing bill would have banned them. The House version would not. Negotiators crafting a compromise bill have agreed to the Senate's position, which also is supported by the Bush administration.

"We're going to yield to the Senate on that," said Rep. Barney Frank (D-Mass.)

The root of the problem with these programs is, and has always been simple: 

• They default at a higher rate.
• They have, at face value, been a legal end-run on FHA guidelines which requires borrowers to bring 3% of their own funds to the table. 
• Also, in practice, the sellers aren't really paying anything, the sales price was simply inflated to cover the cost, and the buyers wind up with a larger loan.

Now, the use of these programs was perfectly OK, and many very good homebuyers used them to great advantage, so none of this should be taken as an indictment of a homeowner that used seller funded assistance to buy a home. (full disclosure, a handful of our personal clients used such programs over the years.  Mortgage bankers are not to judge, only approve or deny a loan based on the allowable programs and guidelines.)

BUT as is often the case, a program that may be good for an individual family, may be a disaster when writ large across the entire spectrum of FHA borrowers (who skew toward lower credit quality in the first place.) And speaking of disasters writ large:

...seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the [FHA]

The FHA's solvency is at risk, and for them to execute their new role as the backstop for the home lending universe (a mission they did not ask for, but are going to get out of this credit crunch, sure as the world) these programs need to go away, and should have a long time ago. The taxpayers are the ultimate bagholders here.

No word yet on when the ban will take effect, but in all likelihood they will still be available for the balance of 2008.  More on this as it develops.

In the meantime, if you are an aspiring homeowner, start saving, because the last true Zero Down option is having it's epitaph chiseled. 

That letter you get from your home equity lender breaking up with you:

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Dear Homeowner,

The time has come to reconsider the nature of our relationship.  This is really hard, so please don't start crying or anything until you get to the end.  We know the timing is really bad, what with the trip we planned and all.

This has been building for while, and we can't hold it in any longer.  Maybe it's you, or maybe it's us, but we just aren't attracted to you anymore, and these feelings get stronger every month.  It's all very hard to explain, but it's like something has come between us, and we just feel EXPOSED. This is no way to have a healthy relationship. We have to make a change. We have to end things.

Not that we don't love you - we've gotten a lot out of this relationship, and grown together over the years.  And don't for a minute think we haven't appreciated your timely payments, often scented with the sweet perfume of extra principal reduction.  It has really been a great ride - cars, boats, the little things to tide you over when the going was tough - and we certainly wouldn't be who we are today without you.

No no no, it's nothing you've done - it's just, you see, a lot has changed since those glorious, heady days when we first got together.  Remember those? 

Anyway. We are doing this for you as much as for us, but if it does offer some small bit of comfort, if our feelings change in the future, we'll definitely take you back.

Formerly Yours,

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Or it might read substantially like this letter received by thousands of Citibank customers who recently had their Home Equity Loans unceremoniously suspended, via Caveat Emptor (click to biggify):

Back in November of 2007, Fannie and Freddie (the two GSE's, or "Agencies" under whose guidelines some 70% of mortgages are underwritten) announced additional fees which would be tacked onto mortgages for borrowers with credit scores below 680 as of March 1st.  We reported on this here.

Since then, credit markets have deteriorated further, so the 'Agencies' are hiking these fees, or pricing "hits," across the board. By June 1st (though many lenders will implement these fees well in advance of that date) even borrowers with FICO scores over 700 - once considered rarefied air - will start feeling the pain.  See the chart below from Fannie Mae. See the Announcement from Fannie here [PDF!]