Friends in high places

Who is this dashing gent, and why does he seem to make a habit of collecting pictures of himself in the company of America's politcal elite? To find out, click "continue reading Friends in high places."

Why, it's Scott Syphax, president and CEO of Nehemiah Corporation of America, which claims to be the nation's oldest and largest downpayment assistance provider. In these pictures from the company's Web site, Syphax is seen posing with Speaker of the House Rep. Nancy Pelosi, President Bush, his brother Jeb, and former HUD Secretary (and now Republican Florida senator) Mel Martinez.

Nehemiah needs all the political clout Syphax can muster these days, because at the moment, the company appears to be living on borrowed time. HUD has banned seller-funded downpayment assistance payments on FHA-backed loans, saying that when developers or other home sellers are allowed to chip in for the downpayment, home prices are inflated and the likelihood of foreclosure more than doubles.

Nehemiah says it can continue to offer seller-funded downpayment assistance on FHA-backed loans for six months under the terms of a 1998 settlement with HUD. Nehemia and another company, AmeriDream, have also filed suit to block the rule change (see Inman News story).

This week, Syphax enlisted the Rev. Al Sharpton in a battle for hearts and minds outside the courtroom. At a Washington D.C. press conference, Sharpton portrayed seller-funded downpayment assistance as something of a godsend for minorities.

"With increasingly few opportunities as it is for those most in need of assistance, I'm shocked that HUD is in favor of cutting the few remaining avenues that enable these families to get into homes," Sharpton said in a press release.

Sharpton -- who once appeared in television commercials for LoanMax, a lender which reportedly charged up to 300 percent interest on auto loans -- slammed Sen. Chris Dodd, D-Conn., claiming Dodd is too busy running for president to stop the Bush administration from not only doing away with seller-funded down-payment assistance, but implementing risk-based pricing on FHA loan insurance which Sharpton claims amounts to redlining (see video of Sharpton's press conference, below).

Risk-based pricing is part of FHA modernization legislation that would also eliminate (in the House version of the bill) the current 3 percent down payment requirement on FHA-backed loans or lower it to 1.5 percent (in the current version of the Senate bill backed by Dodd), making the issue of downpayment assistance somewhat moot. A Dodd spokesman, responding to Sharpton's criticism of the senator, told Reuters that the FHA modernization legislation supported by Dodd, S 2338, will expand access to FHA loans. It would also prohibit seller-funded downpayment assistance.

Risk-based pricing, which HUD plans to introduce Jan. 1, would supposedly allow FHA to serve borrowers who would not previously have qualified because of their credit scores by charging them higher, "risk-based" premiums. There's some dispute over how much more FHA should be allowed to charge for insuring higher-risk borrowers, and House Democrats like Rep. Barney Frank and Rep. Maxine Waters, D-Calif., agree with Sharpton that if carried too far, risk-based pricing is a bad idea. The FHA modernization bill passed by the House on Sept. 18 -- HR 1852, The Expanding American Homeownership Act of 2007 --  would refund "unearned" premiums charged borrowers with low FICO scores if they make loan payments for more than five years.

A great place to educate yourself about seller-funded downpayment assistance, if you are so inclined, is on the Web page created for a hearing the Subcommittee on Housing and Community Opportunity held in June. Archived there is the testimony of Nehemiah, AmeriDream and other supporters of seller funded-downpayment assistance, as well as critics like the GAO and HUD's Office of the Inspector General.

HUD maintains that unlike gifts from family members or government agencies -- which the department does not seek to ban -- seller-funded contributions increase the sales price of the home and result in higher mortgage payments.

"The core problem with these programs is that they disrupt the natural negotiations between buyers and sellers in a way that results in inflated sales prices and, thus, higher mortgage amounts,"  Margaret Burns, the director of HUD's Office of Single Family Housing Program Development, told the subcommittee. "Seller-funded downpayment assistance programs flourish in weak real estate markets where sellers are less likely to get full asking prices for their homes. These programs help them sell at a higher price than they would otherwise get. As such, the property overvaluation associated with these programs occurs in markets that are least able to accommodate pricing variations."

Down-payment assistance on FHA loans really took off during the housing boom, rising from 1.7 percent of FHA-insured single-family mortgage in 2000 to 33.2 percent in the first quarter of 2007.

According to HUD, the claim rate on FHA-insured loans endorsed in 2001 was 15.8 percent for mortgages with seller-funded down-payment assistance, compared to 7.1 percent for loans with down-payment assistance from relatives, public agencies and employers.

Sharpton and other defenders of seller-funded downpayment assistance say the practice has helped far more people than it's harmed, and advocate a "mend it don't end it" approach.

Although Waters and Rep. Gary Miller, R-Calif., reportedly advocate salvaging seller-funded downpayment assistance, the issue seems to have pretty much fallen off most lawmaker's radar screens. Hence Thursday's press conference (which went virtually unnoticed).

Congress now seems determined to close the door on the risky lending practices that fueled the housing boom -- even if the cow has already left the barn and, as some in the industry say, restrictive laws will only worsen the credit crunch.

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