For the second time in eight years, the government is trying to kick the legs out from under a popular program that has helped nearly 600,000 low-income families become homeowners.
Under a controversial proposed rule put out for comment last month, the Department of Housing and Urban Development would prevent sellers or anyone else who stands to profit from the transaction from donating funds to organizations that funnel money to buyers who don’t have enough cash for a down payment.
That would all but gut programs run by the Nehemiah Corp. in Sacramento, Calif., and AmeriDream in Gaithersburg, Md., and dozens of others that take donations from willing sellers and then make donations to needy buyers. Nehemiah and AmeriDream have been the go-between in more than 100,000 such transactions each.
Down-payment gift assistance, or DPA, on federally insured mortgages has grown from an experiment by Nehemiah in 1997 to a big part of the Federal Housing Administration’s loan volume. In fiscal 2006, the government says one-third of FHA loans were made possible because someone gave borrowers some or all of the required 3 percent down payment.
But the FHA says borrowers who receive the boost are two to three times riskier than those who don’t and that loss rates on such loans are 3 points higher.
Government officials usually don’t comment on proposed rules — the comment period on this one ends July 11 — but at a recent forum on government-backed mortgages, Judith May said the FHA’s mutual mortgage insurance fund would go into the red in fiscal 2008 if the DPA isn’t curtailed.
The FHA insurance fund has made money every year since its inception in 1934 despite a foreclosure rate that is always above the industry average.
The Department of Housing and Urban Development is on record in projecting that the fund could go negative in fiscal 2008. But this is the first time it has put the blame largely on a single program. May, director of the Office of Evaluation in HUD’s Office of Finance and Budget, said an independent actuarial review of DPA projects a “much higher claims rate.”
HUD tried to rein in down-payment assistant providers in 1999, but a proposal was pulled two years later. The government has never said why it yanked the plan, but providers maintain it was because the comments HUD received overwhelmingly supported the program.
This time, HUD has on its side not only statistics that show how much more risky borrowers who need gift money from sources other than family members or churches are but also an Internal Revenue Service ruling last year that said funneling funds from sellers to buyers through “self-serving, circular-financing arrangements” is not a charitable operation under section 501(c)(3). HUD allows only gifts from charities.
In a typical scheme, the IRS revenue ruling said, there is a direct correlation between the amount of assistance provided to the buyers and the payment from the seller — the seller pays only if the sale closes and the middleman provider charges an additional fee for its services.
Moreover, the IRS confirmed what HUD had suspected all along, that buyers tend to raise their sales prices to cover the cost of their gift, thereby “corrupting the purchase process.”
Unlike true gifts, which would reduce the amount financed by buyers, DPA results in higher mortgage payments to the detriment of the buyer and, if the buyer should fail to make his payments, to the detriment of the FHA, the IRS said.
The FHA has always tried to restrict down-payment funding derived from contributions by the seller. But some charities have circumvented the rules.
“There is a clear quid pro quo” between the buyer’s purchase and the seller’s “contribution,” HUD says.
As you might expect, down-payment assistance providers aren’t going away without a fight. Ann Ashburn, president of AmeriDream, is organizing a write-in campaign, asking those with a stake in the program to comment to HUD.
She is calling for HUD to withdraw the rule and for lawmakers to hold hearings. “A policy issue as complex, as significant and as far-reaching … deserves the benefit of open public debate and the full light of congressional hearings,” Ashburn says.
Nehemiah President Scott Syphax urges “Amend it; don’t end it.”
Admitting that DPA has shortcomings, Syphax implored the FHA to fix it. “We have been asking HUD for years for regulations to address these weaknesses, and it has been totally unresponsive,” he says.
At last month’s conference, the Nehemiah executive challenged the FHA to name any other program that has helped so many low-income buyers without government subsidy. HUD says it can fill the void by no longer requiring down payments. Legislation that would permit the agency to underwrite 100 percent mortgages is making its way through Congress. But AmeriDream’s Ashburn points out there is “no guarantee” lawmakers will approve the controversial plan.
Noting opposition to 100 percent FHA financing in the Senate, Ashburn says that HUD is holding the DPA program hostage to gain backing for no-down-payment FHA loans.
Ashburn and Syphax also dispute FHA claim rates on down-payment-assisted loans, saying they are inflated. But even if they are on target, she says that means “94 percent” of those who need the help are successful.
What the FHA is doing, Syphax says, is akin to pulling the plug on a drug because one of five users eventually died.
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You may write to Lew Sichelman c/o Chicago Tribune, Real Estate, 435 N. Michigan Ave., 4th floor, Chicago IL 60611. Or e-mail him at realestate@tribune.com. Answers will be supplied only through the newspaper.
