by Lew Sichelman
The Department of Housing and Urban Development has stuck to its guns regarding seller-funded downpayment assistance on Federal Housing Administration-insured mortgages.
But practically before the ink was dry last week on a final rule prohibiting anyone except family members, employers, government entities or true charitable organizations from giving would-be buyers money to cover the 3 percent downpayment required on FHA loans, the two largest DPA providers filed separate suits in federal court seeking to overturn the controversial regulation.
Scott Syphax, president of the Nehemiah Corp. in Sacramento, called the edict "outrageous," saying it removes practically the only "lifeline" left for working families to achieve ownership.
"Privately funded downpayment assistance programs have helped over 600,000 families become home owners and have been credited not only for helping people buy homes, but also stabilizing neighborhoods and cities and creating stronger families," he said.
AmeriDream of Gaithersburg, Md., another major DPA provider, expressed "great confidence" that HUD will be overturned in court.
The Mortgage Bankers Association and the U.S. Conference of Mayors also cried foul.
"MBA believes that downpayment assistance can play an important role in supporting FHA's mission," said Steve O'Connor, Senior Vice President of Public Policy. And Trenton, N.J., Mayor Douglas Palmer, president of the USCM, said the rule "has essentially pushed the dream of home ownership beyond the grasp of countless American families."
Nevertheless, unless the court or Congress goes against HUD -- the House-passed FHA reform bill sets new standards for DPA providers but the Senate Finance Committee's version prohibits such assistance -- the prohibition that bans anyone who has a stake in the transaction from providing buyers with cash for a downpayment takes effect Nov. 1.
As of that date, according to FHA Commissioner Brian Montgomery, seller-assisted downpayments can no longer be part of a sales contract.
Until then, at least, AmeriDream said on its website that it will be "business as usual." Nehemiah said that under a 1998 settlement resolving litigation with HUD, it has a six-month exemption from the rule, starting with the Oct. 1 publication date.
"Nehemiah will continue to provide families in need with important downpayment assistance and lead the fight against HUD's rule," Syphax said.
HUD's Montgomery talked to reporters during an unusual conference call set up by his office. "We wanted to give you folks a little advance notice," he said at the outset -- that non-profits can still provide downpayment assistance in the form of a gift "so long as they don't collect 'donations' from sellers."
And therein lies the rub, the FHA Commissioner said, for in most cases, there is "a clear quid pro quo" between the purchase of a house and the seller's "contribution."
The so-called gift often functions as an incentive to buy the house, the FHA contends, but the gift is ultimately paid for by the buyer through a higher mortgage amount because sellers tend to raise their asking prices to cover the amount they are giving away.
Montgomery said in that in the current slow housing market, sellers are "more willing than ever to participate" in these programs, even though they "circumvent our restrictions," and buyers "are often unaware that the gift is something they end up paying for and not a gift at all."
The FHA also maintains that loans to those who rely on seller-funded don't perform nearly as well as they should. Indeed, the agency says they are almost two and a half times more likely to fail than other FHA-insured mortgages.
Noting that no other insurer of or investor in mortgages takes on this kind of risk, the FHA Commissioner said the rule will not only put a stop to a practice that often causes the most vulnerable home buyers from losing their homes, but also will "prevent any more of these poorly-performing loans from entering our portfolio and impacting the soundness of the insurance fund."
Last year, the Internal Revenue Service ruled that the "self-serving, circular financing arrangements" HUD is trying to stop are not charitable operations. And last week, Montgomery said: "We want to get square with the IRS."
The IRS has said it planned to review the 501(c)3 status of these companies, but it reportedly has reviewed less than a half-dozen programs to date.
In an interview, Syphax of Nehemiah said it is "short-sighted" of HUD "to cut off 40 percent of its market at a time options for lower income Americans have all but dried up."
He also indicated that appraisers should be identifying instances where buyers are inflating prices to cover their gifts and adjusting their valuations accordingly.
"It is disingenuous to attempt to label the downpayment assistance environment as any different from the general marketplace," he said. "The problem (with appraisals) is no different nor any more significant than the problem in the overall mortgage market."
Nehemiah has been trying to push HUD for a decade into regulating the DPA sector more tightly. "But we've been rebuffed without exception every single time," Syphax said.
Published: October 3, 2007
https://realtytimes.com/rtcpages/20071003_sellerassist.htm
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