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'Nothing down' is still a lure

August 24, 2008|Annette Haddad

Desperate Southern California home builders are in full liquidation mode, as signs dotting the back roads of Hemet attest.

To a small degree it may be working -- a report from industry research firm Metrostudy says finished vacant inventory of new homes declined in the second quarter. Still, the supply of vacant developed lots stands at a 10-year high.

Yet it is curious to see that some builders are still resorting to the no-money-down lure. D.R. Horton, which specializes in entry-level housing, and Lennar Corp. have been quite brazen in their campaigns. But there's a good reason: The big builders have relied on such incentive -- known as down-payment assistance -- to boost sales through the housing boom and now bust.

In Horton's case, 21% of loans made through its mortgage arm in the second quarter were with seller-funded down-payment assistance. Typically, these loans, which are backed by the Federal Housing Administration, involve a nonprofit group that gives a 3% down payment to the buyer. The group is then reimbursed by the seller-builder.

But the clock is ticking. When the new federal housing law goes into effect in October builders will be banned from using these down-payment "charities" -- much to their chagrin.

Donald Tomnitz, Horton's chief executive, derided this aspect of the housing law in a conference call with analysts this month, saying the DPA programs are something his industry "so vitally needs."

Maybe so. But during the boom, new-home buyers were among the biggest category of borrowers using subprime, 100% financing. They now are reportedly suffering the consequences, i.e., foreclosures, at an alarming rate.

-- Annette Haddad

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