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No down payment? Still no problem -- at least for now

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Desperate Southern California home builders are in full liquidation mode, as signs dotting the backroads 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.

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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 these incentives -- 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 bill 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 housing bill on a conference call with analysts earlier this month, saying the DPA programs are something his industry ‘so vitally needs.’

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

-- Annette Haddad

Top photo: Road sign along Sanderson Avenue in Hemet

Second image: Lennar ad

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Questions? Comments? Email: annette.haddad@latimes.com

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