Homebuilders mourn loss of free down payments

By Helen Chernikoff - Analysis

NEW YORK (Reuters) - On the surface, a U.S. housing law passed in July that provides first-time home buyers with a tax credit looks like a boon for builders.

But even as the law will give to the industry, it will also take away, eliminating a long-standing incentive where builders enticed buyers into purchasing homes by providing the down payment on mortgages insured by the government.

Known as "seller-funded down payment assistance," builders could pay up to 6 percent of a home's sale price. But from October 1, the law will ban this practice because mortgages secured with assisted down payments have expected foreclosure rates up to three times higher than other loans, Housing and Urban Development (HUD) spokesman Lemar Wooley said.

The ban is a near-term negative for the industry, since it will shrink the pool of potential buyers, raise cancellation rates and weigh on already-depressed builders' shares -- their index .DJUSHB sits 75 percent off its lifetime high.

The chief executive of the largest U.S. home builder, D.R. Horton Inc (DHI.N), said he "got suicidal" over the ban.

"I'm absolutely shocked by it. And I'm upset by it," Horton CEO Don Tomnitz told analysts on a recent call. "To take 10 percent, 20 percent, 30 percent of the buyers out of the home buying decision, at a point in the economy that they did, it's absolutely ludicrous."

While the new law contains a $7,500 tax credit for first-time buyers, that will not offset the ban on down payment assistance, which had no such restrictions, National Association of Home Builders (NAHB) CEO Jerry Howard said.

The credit, which benefits buyers at tax time, is also not as intuitive as an up-front gift, one portfolio manager said.

"It's still an incentive, it's just not as good an incentive," said Todd Lowenstein, whose HighMark Value Momentum Fund owns 181,000 shares of Pulte Homes Inc (PHM.N).

What's more, builders had come to rely increasingly on down payment assistance as the credit crunch forced more buyers into the very government mortgages affected by the ban, Morningstar analyst Eric Landry said.

A BIG CHUNK

Assisted down payments secure about a third of the Federal Housing Authority's portfolio today, up from 18 percent five years ago, HUD's Wooley said.

In reducing the number of potential buyers, whether or not they could afford down payments, the ban "could cause another leg down" for builders by depressing home prices further and forcing them to write off the value of more land, JP Morgan analyst Michael Rehaut said on a conference call for clients.

It could mean share price declines of another 10 percent to 20 percent over the next three to four quarters, Rehaut said.

Also, cancellation rates could rise because agreements to buy homes struck before October 1 could see any assistance invalidated by a routine credit recheck after that date, said Bill Renner, NAHB's director of single-family finance.