A preliminary round of applause is in order for a federal government report that has identified new risks associated with down-payment-assistance programs. Yet much more is needed in the way of government investigation and regulation of these programs, which help otherwise unqualified home buyers purchase a home with the aid of a charitable “gift” that funds a portion of their down payment or closing costs.
The General Accounting Office report found that homes purchased with a “gift” from a down-payment-assistance program were appraised at and sold for prices that were 2-3 percent higher than the prices of comparable homes sold to buyers who did not receive such assistance. The report also found a 76 percent increase in foreclosures on Federal Housing Administration-insured mortgages obtained with charitable down-payment assistance and said the FHA has ignored $1.8 billion in potential losses by not accounting for the heightened risk of foreclosure on those mortgages.
Those findings suggest that down-payment-assistance plans aren’t always the charitable good deeds that their proponents insist they are. Foreclosure is one of life’s most painful financial and emotional experiences, and it isn’t “charitable” to help a family or individual who can’t afford a home to buy one at an inflated price only to lose it to foreclosure. Home buyers who receive such “gifts” yet are unable to keep their home are victims, not beneficiaries, of this supposedly charitable bounty.
The Nehemiah Corp., the nation’s oldest down-payment-assistance provider, has supported the argument that more rules, regulations and oversight are necessary and long overdue. The organization a year ago unveiled a code of conduct based on its own best practices that expressly prohibits inflated home sales prices “based upon the buyer’s receipt of down-payment assistance.” Other providers should adopt this code until more regulations with teeth are promulgated, implemented and enforced.
Here are some suggestions:
In light of the GAO report, a moratorium should be placed on FHA-insured mortgages for home buyers who receive a down payment “gift” in order to help protect the FHA mortgage program from the current increased risk of foreclosure on such mortgages. The moratorium could be lifted once mortgage experts have analyzed the outstanding and foreclosed gift-assisted mortgages, identified the factors that contributed to the higher foreclosure rate and figured out how to apply those factors as underwriting criteria on such mortgages.
Down-payment assistance providers say they’ve educated prospective home buyers about their responsibilities, but who has educated lenders, mortgage brokers and appraisers about these programs? State laws already regulate mortgage providers and appraisers and prohibit inflated valuations in home sales transactions, but lenders and appraisers also should be required to understand the increased risk of foreclosure and any other perils associated with these mortgages. Other state-level requirements and penalties are perhaps also necessary to prohibit inflated valuations in such cases.
The Internal Revenue Service should conduct a thorough investigation of sellers who may have taken fraudulent income tax deductions for “charitable” contributions to down-payment-assistance organizations. Program operators claim they inform sellers that such “donations” aren’t tax deductible, but the nonprofit status of these organizations could suggest otherwise to some taxpayers. Tax accountants may be equally in the dark and in need of more information.
The IRS needs to ask and answer this question: Sans an illegal tax deduction or an inflated sales price for their home, what motivates sellers to donate money to these programs? The IRS also should review whether the organizations that operate these programs truly meet the required criteria for their nonprofit tax-exempt status.
Down-payment-assistance programs are touted as charitable efforts that help people buy homes. But when concerns about these programs seem to outweigh their successes, it’s reasonable to question whether they are the best way to help those in need of such assistance. There is no shortage of credible housing-related organizations that could put home sellers’ genuine charitable contributions to good use. Some down-payment-assistance providers make donations to such organizations and lend money to community groups for neighborhood revitalization projects. Those are good works, but the down payment assistance programs deserve a much closer examination.
Marcie Geffner is a real estate reporter in Los Angeles.
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