On July 9th the HUD inspector general released a report that a local lender was in violation of HUD rules. The violations stem from use of the popular Maricopa County Home in 5 program and other down payment assistance programs. The 63 page document outlined several complaints from HUD regarding how the Home in 5 program does not meet FHAs requirments and recommendations for discipline against this lender. The lender is appealing and US Bank, the master servicer on the Home in 5 program as well as the Maricopa County IDA are operating on business as usual basis until the appeal is heard. Here are the major points of the complaint:
1. Buyer's are paying premium pricing in exchange for the down payment assistance
The Inspector General's findings were that the interest rate set by the IDA was higher than a typical FHA loan. Additionally the program fees were higher and in HUDs view unreasonable. The program uses these fees to allow for continuous funding for the down payment grants which...
2. Per the inspector general the use of fees to fund future program incentives such as DPA is prohibited
There is some question as to whether the down payment grants offered by the IDAs are eligiblie under FHA's gift rules. They determined that the higher interest rates and additional fees were aiken to repayment of the gift.
So why is the lender being punished for following a county IDA's program guidelines? Good question, this is HUD's answer to that; "This condition occurred because (the lender) did not do its due diligence, relied on development authorities’ program guidelines, and assumed downpayment assistance eligibility based on the reputation of the participating master servicer."
Per the report the IG is suggesting fines for the lender as well as reimbursment of fees. The IG feels that the lender put these borrowers at a disadvantage and put FHA at risk with higher monthly payments due to the higher interest rates. However, any reasonable individual can see that the debt to income ratio limits on the Home in 5 program fall well within what is allowable for FHA financing. The notion that the loss risk to FHA is higher based on the interest rate the program demands is a stretch. The other issue is that the IG isn't taking into account is the fact that the overwhelming majority of buyers that use this program do so because they are unable to save for a down payment with skyrocketing rental prices. Forcing them to do so puts them at a much larger financial disadvantage than paying a half a point higher interest rate in exchange for down payment assistance. Imagine if a buyer that had to save $7,000 to purchase a home in their neighborhood under a normal FHA program. If it takes that buyer 2 years to do so who is to say they won't pay a higher interest rate then than they would if they used the Home in 5 program now? Interest rates are on the rise and so are home values. What would be interesting to see is the number of loans in default that originated on the Home in 5 program.
Where it does get hairy for the lender and the IDA is two fold. 1) The fees were not customary or reasonable. The $85 transfer tax fee to US Bank is actually not allowed by FHA. 2) The gifts from the IDA are not FHA eligible. Their basic argument is that through the premium rates and additional fees the gifts are in essence being paid back to the IDAs/Banks that provide the funding. FHA's gift fund requirements do state that their can be no direct or implied repayment of the gift if it is to be eligible as a down payment source for FHA financing.
What Does This Mean for DPA in AZ?
It could mean a number of things. It could mean that the Home in 5 program must be dismantled compeltely. It could mean changes to the Home in 5 program are required. What is certain is that the Home in 5 program won't remain exactly as-is, even if the lender wins its appeal. Down payment assistance for FHA programs will likely be limited to what we've seen from neighborhood housing, etc. The likeliness that a DPA with continuous funding remains available is slim. We'll probably start seeing lower income limits as well. Either way this isn't resovled so stay tuned!
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