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HUD is at it again. Another assault on home ownership is under way and your comments against this proposal are needed to ensure that homeownership for many isn't just a dream.
So many will be harmed by implementation of this rule: buyers, sellers, real estate agents, escrow/closing/title agents, appraisers, home inspectors, pest inspectors, mortgage professionals, and all the other industries ancillary to every single real estate transfer.
The HUD press release from January 20, 2012 states the following in the next to last paragraph:
"In a separate Federal Register notice to be published soon, the FHA will propose to reduce the maximum allowable seller concession from its current level to one more in line with industry norms. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value."
First point, industry norms. The information below shows just what the industry rules are on seller concessions.
- VA: 4% generally, but technically no limit. Verbatim from the VA website: "The seller can pay for some closing costs. (Under our rules a seller’s “concessions” can’t exceed 4% of the loan. But only some types of costs fall under this 4% rule. Examples are: payment of pre-paid closing costs, VA funding fee, payoff of credit balances or judgments for the veteran, and funds for temporary “buydowns.” Payment of discount points is not subject to the 4% limit.)" The VA website link to this verbiage.
- USDA: 6% general rule, but there technically is no limit. Verbatim from the USDA website: "No maximum seller concessions or gift amounts - Purposes are limited". The USDA website link to this verbiage.
- Conventional: 3%, 6%, or 9%, depending on down payment. Down payments of less than 10% = 3% seller concessions; down payments of at least 10% but less than 25% - 6% seller concessions; down payments of at least 25% = 9% seller concessions.
- 203K: same as FHA 203B, 6%. But this amount stands to be decreased in concert with this proposal to reduce FHA seller concessions. The impact on 203K renovation loans will be dramatic with the inventory of distressed and neglected properties on the market. 203K is a great program, but the closing costs on 203Ks are slightly higher due to the inspections required for the renovations being completed. (HUD never gives any consideration to the 203K program as evidenced by the 2010 GFE rules that make GFEs on 203Ks harder to complete.)
Second point, inflate appraisal value. This is an interesting topic for HUD to raise given the May 2009 implementation of HVCC (Home Valuation Code of Conduct, AKA blind appraisal process) and the HUD mandate to follow HVCC shortly after 2009. Has anyone seen an inflated appraisal value since HVCC was required on all FHA loans? I cannot say that I ever have seen an inflated value come back on an FHA loan, and especially not since the appraisal process blind. All MLS platforms require that seller concessions be reported on all MLS sales. Appraisers have rules that require that seller concessions be reported for all comparable sales used on the URAR. And appraisers must comment whether seller concessions are within normal ranges or not. And appraisers must deduct on the URAR seller concessions deemed not within normal ranges (concession of 10,000 may not be normal, but 4,000 may be, so 6,000 would be deducted as excessive in this example). With these rules, is there a real risk of "creating incentives to inflate appraised value"? 
Is HUD now going a little Seinfeld-esque, with the Soup Nazi yelling "NO HOUSE FOR YOU!". Sure seems like it to me!
No, not every buyer needs 6% seller concessions, but reducing seller concessions today will be harmful tomorrow and in the many years ahead of us. Comparing to today, do you think closing costs will be lower, the same, or higher in three years? How many increases have you seen over the years to the various parts that make up closing costs: homeowners insurance, real estate taxes, deed and mortgage recordation costs, transfer taxes, appraisal fees, lender fees, title insurance costs, closing/escrow fees, and all the rest? Just in the last few months, I've seen lender fees and appraisal fees increase. In the last few years, insurance, taxes, and recordation costs have seen increases. Even if 3% seller concessions is "enough" for now, will be be "enough" in three years? I know my gasoline, food and electricity costs have risen each year, and that has cut into my ability to put extra away in my rainy day fund. And the same is happening to every single buyer today.
Buyers: Are you ready to wait another several months to be able to save more money to cover your closing costs (that the seller can otherwise pay today) if this rule is implemented?
Sellers: Are you ready to shave a small percentage off of your potential buyer pool?
Realtors: Are you ready to shave a small percentage of your closings off each year?
Appraisers: Are you ready to shave a small percentage of your report orders off each year?
Title Agents: Are you ready to shave a small percentage of your closings off each year?
Home Inspectors: Are you ready to shave a small percentage of your inspections off each year?
Pest Inspectors: Are you ready to shave a small percentage of your inspections off each year?
Mortgage Professionals: Are you ready to shave a small percentage of your loan closings off each year?
I know that I do not want anything else to harm our collective industry or paint buyers and sellers into an even smaller corner, especially not a misguided proposal such as this!
PLEASE, please, please weigh in and post your comments to this proposed HUD rule change to the FHA loan program. The time to sit idle is surely not now and surely not on this issue. Comment period closes March 26, 2012.
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