Buyers & Sellers, Buying & Selling, Contributor Article

The lowdown on downpayment programs

Alleged scheme said to push loan defaults higher

I don’t know about you, but I found the recent published reports that Beazer Homes USA Inc. will pay as much as $53 million to settle mortgage fraud charges relating to its own buyers particularly disturbing.

According to news reports, Beazer allegedly ignored income requirements so as to make loans to unqualified buyers. As one could have predicted, these loans blew up.

But to make matters worse, Beazer allegedly attempted to hide from the Federal Housing Administration (FHA) excess default rates on their loans, and, according to prosecutors, charged homebuyers interest "discount points" at closing but kept the money and didn’t reduce the interest rates on loans.

However, the alleged "Sleazer" tactic that particularly bothered me was a kind of Scrooge-like downpayment assistance plan: Beazer offices allegedly provided cash gifts to homebuyers so they could make a minimum down payment, but then added an equivalent amount of the gift price on top of the purchase price of the home.

Downpayment assistance plans have traditionally been touted as a good way to enable low- and moderate-income families to make home purchases, especially in regard to FHA-insured loans. The programs were the veritable backbone of most charities involved with getting more Americans to become homeowners.

Then it all truly went askew and today many downpayment assistance plans are not to be trusted.

MortgageFraudBlog is an interesting Web site for those with a morbid eye for news, as it runs in perpetual motion all the breaking stories on mortgage fraud. On a typical day you might see headlines such as "Lawsuit Filed Against Mortgage Loan Modification Company," or "Five Indicted in Michigan Mortgage Fraud Scheme," or "Metropolitan MoneyStore Conspirator Sentenced."

MortgageFraudBlog is put together by attorney Rachel Dollar. I checked in with her about Beazer’s alleged fairytale lending schemes.

"This was a different story than we usually carry on our Web site," she noted, "Usually it’s about indictments of employees of financial service companies, but in this case the frauds were perpetrated against the borrowers, more so than the lender."

Although in the end the lender gets screwed when the borrowers go under. As Dollar pointed out, the U.S. Housing and Urban Development Department did a study of the default rates in loans that used downpayment assistance programs and discovered defaults were much more prevalent when downpayment assistance programs were permitted to be involved.

The other thing she noted is that a lot of the practices, such as the misuse of downpayment assistance plans, were prevalent in the industry. …CONTINUED