Aaron Krowne at Implode-O-Meter has asked me to help stop the Seller Funded Down Payment Assistance (SFDPA) scam.

Barry Ritholtz at the Big Picture, Dr. Housing Bubble, Patrick.Net, Blown Mortgage and the Mess That Greenspan Made have already written about this scam, so I am risking the dreaded "piling on" penalty but here goes.

In a Statement On "Seller-Funded Downpayment Assistance" Loans Aaron writes:

In SFDPA, a third party arranges for the seller to make a "donation" to the buyer (through the third party) equal to the FHA mandatory 3.5% downpayment, which is then used for the purpose of the downpayment, in direct violation of HUD policy. This means that the buyer does not make a true downpayment born of personal sacrifice, undermining its purpose. In the end, this is the same sort of "100% financed" lending that was a major contributor to the collapse.

In specific:

The home price is typically inflated. As a consequence, the borrower is likely to immediately start out with negative equity. Negative equity has been found to be the leading cause of foreclosure

The FHA has found that SFDPA results in losses running at a rate of 2-3 times normal FHA loans

SFDPA is a breeding ground for "straw buyer" fraud, which is now known to have been rampant amongst failed loan categories (especially subprime). SFDPA "legitimizes" the markup-and-downpayment-launder process which is central to most straw buyer scams.

I agree with Aaron's conclusions.

Furthermore, If HR 600 passes, seller-funded downpayment FHA loans are likely to be abused to an unprecedented level in what is less of an attempt to boost the housing market than a money grab by the real estate complex and the seller-funded laundering companies at taxpayers' expense.

Finally, loopholes are likely to be abused by banks to dump massive amounts of REOs at marked-up values, as Aaron points out in Misleading LA Times Article Distorts SFDPA Program.

Aaron has a Campaign To kill HR 600 with links for how people can help by contacting Congress to voice their opinion on this monstrosity.

Aaron writes "This bill is small enough that we have a real chance of rallying enough support to stop it. However, it will be outsized in terms of its damaging impact if it passes."

Those interested in stopping this ridiculous bill from passing can follow the above link and take appropriate action.