Some aspiring homeowners spend years saving enough for a down payment. Not Tongela English. The 31-year-old single mother, a sorter for the Postal Service in Columbus, Ohio, got into a new $148,000 three-bedroom house even though she had scant savings.
What she had was a referral to Nehemiah Corp., a not-for-profit group that was willing to provide her with a $4,400 down payment, no strings attached. “I thought there had to be a catch,” English said recently in the dining room of her new split-level in a subdivision called Williams Creek, the smell of paint still in the air. “They just gave me the money.”
It wasn’t Nehemiah’s money, though. It was a home builder’s. After Nehemiah made a down-payment gift to English, the builder gave Nehemiah a gift of the same amount. In effect, the builder itself was paying the down payment.
That sort of thing didn’t used to happen, for a good reason: Buyers who have none of their own money in a house — nor even any money from a close relative — were considered default risks. Lenders weren’t interested in making such loans. And the Federal Housing Administration, a mortgage guarantor that often deals with first-time buyers, in most cases wasn’t interested in guaranteeing the loans.
But a few years ago, the FHA, after intense internal debate, changed its attitude. Accepting Nehemiah’s program, the agency agreed to guarantee loans in which home buyers got a down-payment gift that was ultimately paid for by the seller.
Now such deals are proliferating. According to a trade association, roughly 17,000 Americans per month buy homes with down payments from “gifting” groups, which turn around and collect contributions covering the gifts from the sellers. That amounts to 3 percent of U.S. home buyers, enough to extend the housing boom in some regions and to affect market dynamics for all involved, from buyers to builders to lenders.
The mission of Nehemiah, founded by a clergyman, is to make homeownership possible for people whose lack of ready cash shuts them out. The group’s current president, Scott Syphax, says: “What we do is good for America.”
To others, it has many flaws. Critics call it an end-run around sound lending policy, a possible force for housing-price inflation, and a way for home builders to plump up their own sales at what could turn out to be the expense of taxpayers.
A recent audit by the Department of Housing and Urban Development’s inspector general suggested that mortgages made through the gift programs carry default rates far above average. If so, they add stress to the mortgage-banking system at a time when foreclosures are already at record levels. Barbara Allen, a housing analyst at the New York investment bank of Natexis Bleichroeder Inc., says, “I don’t care how laudable it is, you’re letting people into homes with no money at risk,” increasing the chance the loans will blow up. Nehemiah disputes the results of the federal audit.
Other critics worry about the programs’ possible upward pressure on housing prices, because home sellers sometimes jack up the price to offset the expense of the gifts. Gifting organizations concede such price-boosting goes on occasionally but say they discourage it.
The price increases — coupled with the fact that many current sales couldn’t be made without the gift programs — suggest that the programs tend to buoy both the overall housing market and the sales of some builders. About 38 percent of Denver-area sales by KB Home have been made with down-payment grants this year, says Charles Konkus, director of a Nehemiah lookalike called Partners in Charity, based in East Dundee, Ill. KB won’t comment on that. Konkus says it’s clear “gifting programs are sustaining home sales” in Denver.
Nehemiah was the brainchild of Don Harris, a real estate attorney and minister at a mostly African-American Baptist church in Sacramento, Calif. He was looking for a way to bring homeownership to residents who didn’t have the money for a down payment nor a well-heeled relative who could provide it. Although programs have existed to let people buy without down payments — even a program from mortgage buyer Freddie Mac — many require impeccable credit. For people who didn’t quite meet that test, Harris came up with the idea of a pool to provide down payments and in some cases closing costs.
For funding, he began working with home builders, which were eager to participate in a program that could stimulate sales and bring them good press as well. Nehemiah also needed to win over lenders. They couldn’t expect to sell a mortgage to Fannie Mae or Freddie Mac for which the home seller had provided the entire down payment. . Fannie and Freddie, the dominant buyers of home loans, generally don’t buy those loans because of the default risk. But Harris figured lenders would get on board if the FHA accepted Nehemiah’s plan.
The FHA worried about the default risk and also the possibility that sellers who gave down-payment money might boost their prices to recover it. If they did, this could mean the homes were selling at inflated prices, so that the FHA couldn’t recoup the full loan amount in the event of a foreclosure. After vigorous debate, the FHA finally agreed in 1998 to guarantee the mortgages. Since then, Nehemiah says, it has provided down-payment gifts to about 130,000 home buyers in more than 5,000 cities.
Here’s how it works. If a would-be buyer is short of down-payment funds, either the builder, a lender or a real estate agent will tell the buyer about Nehemiah’s program. Nehemiah then simply gives the buyer the down-payment money — later collecting a contribution of the same amount from the home builder. It also collects a small fee from the seller, part of which it donates to a charity, often one involved in community development. The builder doesn’t get a tax deduction. Nehemiah says this is because the contribution is considered a “cost of sale,” just like any other cost a seller has in moving the product.
Some individual sellers use the program, especially when they’re having trouble finding a buyer. In conjunction with their real estate agent or a lender, they’ll steer a cash-short buyer to Nehemiah or a similar group. Like builders, the individual seller later gives the nonprofit a contribution to cover the gift.
Nehemiah, although started with a minority focus, works with families of all races and also all income levels — although the FHA’s mortgage limits, ranging from $144,000 to $261,000, tend to keep anyone from buying a palace through the program. And while Fannie Mae and Freddie Mac don’t buy the loans, a secondary market for the mortgages does exist, provided by Ginnie Mae, the Government National Mortgage Association.
“We create an opportunity for all sides of the equation to win without spending any public money,” says Syphax, a former Eli Lilly & Co. executive who took over management of Nehemiah last year. Among imitators it has spawned are Ameridream Charity Inc. of Gaithersburg, Md.; Neighborhood Gold of Provo, Utah; and Partners in Charity, in East Dundee.
A big user is KB Home, the Los Angeles builder formerly known as Kaufman & Broad. KB joined with Partners in Charity 11 months ago to make down-payment grants available in all 12 of its entry-level communities in the Denver area. They range from $3,000 to $7,000. FHA-guaranteed loans generally require just a 3 percent down payment.
Partners in Charity’s Konkus expects KB to make about 1,500 contributions to his group this year. That would represent down payments on about 6 percent of the big builder’s national sales. KB, which also works with other gifting groups, declined to comment on his estimate.
KB’s median selling price in the Denver area is up from a year ago even as its number of homes sold has slipped 15 percent. KB says that prices are up because it is “evolving into offering more high-end homes for move-up buyers.”
Denver-area appraisers say they’re seeing signs that down-payment gifts are pushing up prices.
When an individual seller uses a gift program, a real estate listing agent will sometimes raise an asking price already recorded. “More often than not, if we’re talking a 6 percent contribution on a $100,000 purchase price, what the seller will try to do is increase the purchase price from $100,000 to $106,000,” says Michael Jones, a real estate agent for Century 21 Joe Walker & Assoc. in a Columbus suburb.
Gifting organizations, while acknowledging that such price boosting goes on, call it uncommon and say they discourage it. “We have rejected deals where we hear about price inflation. We think it’s an unethical practice,” says Syphax of Nehemiah. His organization last year asked HUD to implement new rules to prevent such inflation. Gifting companies are pushing for stricter controls through the Homeownership Alliance of Nonprofit Downpayment Providers, the trade group that estimates the programs are used by 17,000 home buyers a month.
Recent default worries have done nothing to still controversy over the programs within federal housing agencies. In 1999, HUD proposed to bar its FHA unit from guaranteeing mortgages when down payments came ultimately from the seller. The proposed rule said that although the FHA had tried to prevent this situation, “some charitable organizations have been able to circumvent these restrictions in various ways, including the establishment of a fund that provides the `gift’ to the home buyer.” Nehemiah urged homeowners whom it had helped to write to HUD opposing the rule, and many did. It ultimately wasn’t adopted.
Then this September, the HUD inspector general released an audit that zeroed in on 2,261 mortgages in four cities on which Nehemiah had provided the down payment. It found 19.39 percent of them to be in default, defined as 90 days late. That compared with 9.7 percent for other FHA-guaranteed loans in those cities — and a nationwide 90-day delinquency rate on all mortgages of just 0.78 percent.
The report concluded that mortgages made with programs such as Nehemiah’s were contributing to loan losses at the FHA, and that “allowing these programs to continue represents an increased risk to the FHA insurance fund.” The FHA says it continues to evaluate the wisdom of the programs.
Gifting organizations dispute the audit, citing the relatively small number of loans it checked. Nehemiah says its own research has found that default rates on its gift loans are actually lower than those on other FHA-guaranteed loans.
