Downpayment assistance should be ended, not mended
Perspective: Circular 'donations' and 'gifts' don't benefit real estate
By Marcie Geffner, Monday, April 7, 2008.Bookmarking Sites
When all else fails, why not sue the federal government?
That's the card Nehemiah Corp. and AmeriDream have played, perhaps to defend their very existence as two of the largest downpayment assistance organizations in the United States. Yet while these organizations and their 180-plus brethren have helped many people buy a home, their business model has been suspect since the start and today's weakened housing markets would be better off without their inflationary intervention.
Downpayment assistance programs funnel "donations" from builders and home sellers to buyers, who use the "gifts" as all or part of their downpayment. The amount of money at stake isn't nominal: AmeriDream alone has given more than $726 million, in chunks of $3,600 on average, to more than 200,000 home buyers since 1999, according to the lawsuit.
The issue is important because these programs have become a staple of home loans backed by the Federal Housing Administration. The percentage of FHA loans that involved such aid increased from just 1.7 percent in 2000 to more than 33 percent in early 2007.
The FHA has quantified a significantly higher risk of default on these loans. In 2001, nearly 16 percent of FHA loans that involved seller-funded downpayment assistance resulted in mortgage insurance claims. The claims rate for FHA loans without such assistance was just 7 percent. The FHA has estimated that in the future, 23 percent of the downpayment-assisted FHA loans eventually will result in claims compared with just 11 percent of FHA loans without such assistance.
The FHA proposed new restrictions on nonprofit downpayment assistance, but a federal judge blocked the proposal due to a rule-making technicality. The lawsuit claims that FHA's effort to tighten up the rules would be unconstitutional because it would discriminate against minority, low-income and single-parent home buyers, who are the chief recipients of downpayment assistance.
Government agencies have repeatedly called attention to problems associated with these programs. A March 2005 report commissioned by HUD found these programs led to underwriting problems and increased the borrower's effective cost of homeownership. A November 2005 report by the U.S. Government Accountability Office came to similar conclusions. A May 2006 IRS ruling clarified that many of the programs didn't even qualify as tax-exempt organizations.
The stark disparities in FHA default rates suggest that while seller-funded downpayment assistance may help borrowers buy a home, such aid doesn't support their ability to own that home. In effect, these "gifts" differ little from a teaser rate on an adjustable-rate mortgage. Misuse of downpayment assistance programs was even implicated in a foreclosure scandal that rocked a North Carolina community developed by Beazer Homes. This sort of dubious assistance doesn't truly benefit disadvantaged people if they aren't able to afford to own the home they've bought.
The problem is that downpayment assistance is a circular transaction even though the "gift" is processed by a third-party, which also collects a fee from the seller in addition to the "donation." Skeptics might question the appropriateness of using those fees to fund a lawsuit against appropriate and necessary government regulation of these schemes.
The ideal solution would be to ban these programs because the risks to lenders, mortgage insurers and borrowers outweigh the supposed benefits. Unfortunately, political realities, vested interests and the misguided lawsuit may make an outright ban difficult or impossible to achieve.
If a compromise proves the only palatable outcome of the rule-making dispute, these elements should be front and center:
● additional reporting requirements and intense regulatory scrutiny of downpayment assistance providers,
● an IRS form that would require sellers to acknowledge that a downpayment "donation" is not tax-deductible,
● IRS audit and enforcement of the non-deductibility of these "donations,"
● risk-based pricing on FHA loans that involve seller-funded downpayment assistance,
● full disclosure of the source and amount of such assistance to lenders and appraisers, and
● a ban on seller and buyer downpayment assistance participation through the same organization in the same transaction.
The last item would mean that a home seller who felt an urge or obligation to be charitable would still be able to make a "donation" to a downpayment assistance organization, and a home buyer who needed downpayment assistance would still be able to apply for a "gift" from such a group, but the seller and buyer wouldn't be allowed to participate through the same organization or an "affiliated" program. If these organizations survived such an arm's-length requirement, their claims would be much more believable.
Marcie Geffner is a freelance real estate reporter in Los Angeles.
Copyright 2008. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
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Submitted by Pamela Mackenzie on April 7, 2008 - 1:43pm.
When I bought my home in 1997, I was 6 years out of bankruptcy, a single mom, with a 10% downpayment. My father had died and left me that money. My ex-husband was in a nursing home with early-onset Alzheimers.
I was by all accounts a bad credit risk.
Still, I was able to get an FHA mortgage, and the mortgage bank who gave me the loan told me to have my seller pay 4 points for me. What that did was allow me to finance a little bit of my downpayment so that I'd have money to repair the roof, which I did the following year.
About 4 years later, I learned about the Nehemiah program for the first time. By then, I didn't need it, but I knew there were many people out there in bad financial straits, as I had been, and they didn't have a father who left them an inheritance. It seemed to me that the Nehemiah program was a good idea to help those people finance their downpayment on a conventional loan, the way my seller had helped me by paying four points. I thought it was a great idea.
I still think it's a great idea. Maybe the people who get Nehemiah or AmeriDream loans should be required to have credit counseling. And maybe there should be a limit on what percentage of their downpayment could be granted in these programs. But in my economy in NJ, it's sometimes impossible to save enough money for a downpayment.
This is a path to homeownership worth exploring.
Submitted by Dennis Ceizyk Sr on April 7, 2008 - 2:22pm.
What am I missing ?
US agriculture committees have preserved direct payments, countercyclical payments and loan deficiency payments that subsidize the five big commodity crops — corn, wheat, rice, soybeans and cotton — to the tune of $42 billion over five years
The US government has managed to add a $5 billion “permanent disaster” program to help farmers in the High Plains struggling to grow crops in a drought-prone region that, as the chronic need for disaster aid suggests, might not be the best place to grow crops
Don't even go to energy !
Gosh ..I guess "subsidizing" down payments for 33% of FHA home buyers, 23% of whom may go into default, really is a big number! Let's shut the door on the minority, low-income and single-parent home buyers and make more money available for congressional earmarks. Thanks for putting the issue in perspective, Marcie
Submitted by Jonathan Myers on April 7, 2008 - 2:30pm.
I don't see where you're going with this. The VA program offers 100% LTV - no money down for the buyer. That program has been very successful, so I'm not sure why you have a problem with the FHA 3% DPA.
Are you suggesting that the FHA should employ 100% financing? If that's the case, I agree and the FHA should employ risk-based financing based on the applicant's FICO score and other factors - not the down payment percentage. Whether you have a small percentage invested is a red herring.
Submitted by Al Rodenburg on April 7, 2008 - 3:24pm.
3% down payment assistance is "inflationary"? I doubt it. It's nice to write an article about how terrible the DPA entities are, but I've seen and heard of Many folks helped by these programs.
Personally, I've only done a few FHA loans in my 13 years in the business (my forte was Alt-A) - but I can see their value and plan on doing a lot more.
I don't "get" what is "terrible" about a seller contributing 3%. Last time I looked this was a democratic republic where there are still some freedoms left.
If it is a "win-win" situation, it seems like a good deal for everyone.
Now if the DPA exceeds 3%, then ...
p.s. I think you'll find the underwriting criteria a little more stringent now than in 2000, too - so, my guess is that you will see the claim rates pretty even between those who get 3% DPA from the seller and those who are more fortunate and have a relative that can help out.
Submitted by Mindy Allen on April 7, 2008 - 6:23pm.
#1. How is down payment assistance any different from the vast number of real estate agents & companies offering "rewards" and incentives? Basically bribing a buyer with down payment assistance of their own which has become extremely common in down markets?
and:
#2.Those in default were a good enough risk for FHA to lend money to begin with so who was really at fault? The DPA companies that assisted them in getting the down payment which is a large one time upfront fee or the lender that determined them a good risk to carry the monthly payment which eventually they couldn't afford and is the reason they are being foreclosed on now?
Submitted by David Tanner on April 7, 2008 - 8:19pm.
Marcie,
As I understand it the worst case projection is that 23% of the people that get DPA will default on their loan. Doesn't that mean that 77% of the people receiving DPA will successfully own a home they otherwise would have not been able to purchase? Do you think that is inappropriate?
Good housing is appropriate for everyone, not just the people with thousands of dollars in the bank. Many times the only way to get started is to receive DPA. Isn't this the group of people FHA was designed to assist? Sure some will fail. But the losses are paid from the insurance premiums thay pay into the program. So there really are no losses to the taxpayers. Sounds like a win-win to me.
Submitted by Heather Barr on April 7, 2008 - 8:37pm.
I agree, risk based pricing would be a good idea for FHA DPAs. But the rest of your article made me cringe.
First, several of the reforms you call for are already in place, at least in metro Phoenix where I work as a Realtor. Here, appraisers and lenders get contract copies and they know exactly who’s getting and giving what. Second, DPA homebuyers are given a Good Faith Estimate and a HUD-1 settlement statement so they know exactly how much their 30year fixed-rate mortgage payments are going to be, so your assertion that these programs are little better than teaser rates on ARMs is absolutely false.
You’ve called for increased auditing of the DPA programs but also want buyers and sellers to use different DPA programs. Do you realize how complicated it would make the auditing paper trail if sellers contributed X to Nehemiah and buyers received a grant gift of Y from AmeriDream? Insert any company name you want, it’s still a huge, messy paper trail and a recipe for behind the scenes shenanigans.
Finally, your article calls for increased IRS involvement in reminding sellers their gift isn’t tax deductible. How exactly does that benefit the current soft housing market?
As a previous commenter in New Jersey noted, sometimes it’s near impossible to save the required 3% to 5% of the average home purchase price. If first timers can’t buy into the market and eventually become move-up buyers, pretty soon the entire housing market grinds to a halt. DPAs need to stay.
Submitted by Kenneth Cody on April 15, 2008 - 5:41pm.
Marcie, I have done probably 250+ Nehemiah transactions over the last 6 years and I can honestly say that only in a handful did I suspect that the sales price was inflated. Why? Common sense. Compare the 3% DPA to 6% sellers concessions offered every day on many transactions. I have never heard anyone criticize the 6% as a cause of over-appraisal. In both cases the seller helps the buyer out of their own pocket, but the 3% DPA is only half as much so it would appear to be half the problem. Surely if 3% causes the problems you claim, then you would be against the larger 6% seller concessions as well right? I have educated myself about this issue over the years because it has been a valuable tool for me. No offense, but your knowledge on this topic is a mile wide, but only and inch deep. Are reporter supposed to gather facts and tell both side of the story. I read in my recent Nehemiah Newsletter that they have surpassed 250,000 transactions for more than one billion dollars in gifts. All this and not one penny of goverment money was used to make this happen. The folks at Nehemiah are heroes to many and you should educate yourself more before your next article on this topic. You sound like a HUD mouthpiece.
Submitted by MJ Robinson on April 21, 2008 - 8:49pm.
I have a client that is currently using the Nehemiah DPA Program, and it has allowed her to save $8000 she would have spent towards her downpayment. Thanks to Nehemiah, she is able to take a portion of that savings and pay off a personal loan which has an extremely high interest rate of 25%. This is one less monthly expense she will have to juggle with her new mortgage. In addition, she will save roughly $4600 in interest payments over the life of the personal loan. In this case, it seems like Nehemiah has decreased the borrower's effective cost of homeownership, instead of the other way around.
Sounds like another Nehemiah success story to me.
Submitted by David Stahl on May 8, 2008 - 5:46pm.
I can certainly appreciate all of the commentary both positive and negative regarding the downpayment assistance programs. As a Mortgage Broker, I have helped hundreds of families purchase homes with a 3% DPA and seller contributions up to 6% in closing costs. I do agree that it may cause some inflationary pressure on the market area. These programs are not just used for the low income borrowers, I have used them for nurses and physicians also. This is a great program!
I would love to see the statistics on the number of MI claims caused by allowing a buyer to qualify for an FHA loan with bankruptsy or forclosure in their credit history. Keep in mind FHA does allow for these with minimal seasoning, 2 years for bankruptsy and only 3 years for a foreclosure.
I believe that we can skew the numbers any way that we want to support our arguments. At the end of the day all of us will continue to provide loan programs and downpayment assistance programs that fit the needs of our buyers/borrowers as long as they fit into the guidelines of what the banks and/or FHA and VA will allow. It must say something about our government and the agencies associated that they will allow these programs.