Nonprofit groups such as AmeriDream and Nehemiah Corp. of America seem to offer great deals, giving “gifts” to consumers covering the down payments on their government-backed mortgages. But a new government report warns that these gifts may do more harm than good.
Homes bought with seller-funded nonprofit help cost 2 percent to 3 percent more and are twice as likely to go into default, according to a November report by the Government Accountability Office, the investigative arm of Congress.
Groups like Nehemiah and AmeriDream provide down payment “gifts” to individuals who meet the Federal Housing Authority’s qualifications for a mortgage, but lack the cash to make a down payment or pay closing costs to buy a home.
The “gifts” typically range from 2 percent to 5 percent of the purchase price, and home buyers aren’t required to repay the money.
While such practices sound good for consumers, concerns about their advisability have dogged the programs, which have been under examination by the U.S. Department of Housing and Urban Development for the past several years.
“FHA-insured loans with down-payment assistance have higher delinquency and claim rates than do similar loans without such assistance,” the GAO report said.
Foreclosure claims to the FHA insurance fund have increased by 76 percent on mortgages with financial help involving charities, the report said.
An analysis of loans settled in March 2005 indicates that homes sold with nonprofit assistance “were appraised and sold for about 2 or 3 percentage points more” than comparable homes without the assistance, the report said.
Also, the report claims that the FHA, by not accounting for the risk of down-payment assistance, has understated potential losses by at least $1.8 billion.
The report calls on HUD to direct the FHA Commissioner to implement additional controls to manage the risks associated with loans involving down-payment assistance. “Such controls could involve considering the presence and source of down-payment assistance when underwriting loans,” the report said.
The CEO of Nehemiah, one of the major providers of down-payment help, said he agreed with the call for greater controls.
“We not only agree, we have been advocating the imposition of additional regulations for over seven years,” said Scott Syphax, Nehemiah’s president and CEO.
Syphax cited the Nehemiah Code of Conduct his company adopted in November 2004. The code, which the company asked the industry as a whole to adopt, includes practices such as expressly prohibiting parties from increasing the sale price of a home, directly or indirectly, based upon the buyer’s receiving down-payment assistance.
Syphax and others in the industry, estimated at $400 million to more than $700 million, say Nehemiah was the first charitable organization to give down-payment help. The CEO said his company and the model it pioneered have helped to put “over half a million families” into home ownership in the last decade. His company currently has a portfolio of 200,000 loans, he said.
Syphax said he disagrees with the methodologies used in the studies relied upon by the GAO report. “The reports they cite with regard to default rates as provided by the Inspector General’s report are just wrong,” he claimed.
“Nehemiah commissioned a report by Experian in 2002 at HUD’s request. For the time period the Inspector General’s report covered, Experian’s analysis says our default rates were actually lower than HUD’s default rates,” Syphax said.
Syphax said his firm doesn’t just exist to provide down-payment assistance. Nehemiah also gives loans to community nonprofit groups, including churches, “to rebuild or to revitalize distressed communities.” His company also provides home-ownership education to consumers, he said.
AmeriDream, another down-payment-help nonprofit mentioned in the report, also provides education to consumers, according to Ann Ashburn, the company’s president and CEO.
“AmeriDream does home buying education online and in the community in both Spanish and English,” Ashburn said. “It’s a free service.”
Ashburn said of the report, “It’s false to try to equate delinquencies and foreclosures with only one aspect of a loan. This is a population that has a higher default rate than conventional loans.”
Frances Flynn Thorsen, a Pennsylvania Realtor who has worked with down-payment-assisted FHA loans, agreed with Ashburn’s last point. “You see this (higher default rates) with all subprime financing,” the Realtor said.
Thorsen said of the report, “Possibly the system does need some tweaking. I think there are some issues with this, yes. But I don’t think it’s a looming problem.”
Consumer advocate Mildred Wilkins, president of Home Ownership Matters, a consumer education and foreclosure-counseling site, disagreed. Wilkins has crusaded about the dangers of such practices for four years.
“The amount of properties that are financed over their actual value is higher than the 2 or 3 percent referenced in the report. It’s more like 5 or 10 percent,” Wilkins said. “If you take advantage of this service you are almost always likely to pay more for your home.”
The consumer advocate pointed to the increased number of defaults and foreclosures associated with down-payment assistance in the report. “The question is: Is that consumer ready to be a homeowner? Can they make the payments?” Wilkins asked.
“The challenge is no longer whether we can get people into a house,” Wilkins said, citing new loan products such as interest-only loans that have become available in recent years. “The challenge is, can they keep the houses?”
Syphax responded: “Look, the reason we want the regulations is at the end of the day we want people to be successful.”
According to Wilkins, “The kicker is that it (down-payment assistance) is widely used with new construction and has an arrangement with the builder or the seller that you will donate to us the amount of the down payment plus the administration fee. The builder or seller say, ‘OK, but we are not going to cut into our profits; we are going to add it to what the consumer pays.'”
The consumer advocate charged, “The reason it is so popular is that it does help consumers get into houses they could not otherwise get into and it also helps the seller sell products they might not otherwise be able to sell.”
Syphax said not all the houses he works with are new. “Our portfolio is about 50-50 between new housing and resellers,” the CEO said.
Wilkins agreed with the recommendations in the report, adding that she felt all the nonprofits that have sprung up for the purpose of providing nonprofit funding should be disapproved for providing such assistance.
“I do believe that down payment assistance is a good thing. But it should come from your credit union or your local church or some similar source, with requirements for buyer education, requirements that the consumers have to put in their own money and reside in the property at a fixed interest rate,” Wilkins said.
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