A new ruling denying home seller-funded down-payment-assistance organizations tax-exempt status is a good idea or a threat to home buyers, depending on whom you talk to.

The Internal Revenue Service ruled May 4 that such organizations do not qualify as tax-exempt charities. The programs, such as those at Nehemiah Corp.

A new ruling denying home seller-funded down-payment-assistance organizations tax-exempt status is a good idea or a threat to home buyers, depending on whom you talk to.

The Internal Revenue Service ruled May 4 that such organizations do not qualify as tax-exempt charities. The programs, such as those at Nehemiah Corp. and AmeriDream, provide cash assistance to home buyers who can’t afford down payments and closing costs.

Typically, the gifts range from 2 percent to 5 percent of the purchase price, and home buyers aren’t required to repay the money.

These programs have been credited with helping to boost home-ownership rates, but have come under fire after government-issued reports found that such programs have led to underwriting problems and have increased the cost of home ownership.

Such programs can qualify as tax-exempt charitable and educational organizations under Internal Revenue Code section 501(c)(3) when properly structured and operated. In its May 4 ruling, the IRS makes it clear that seller-funded programs are not charities because they do not meet the code requirements.

“We helped about 18,000 individuals and families become homeowners in 2005. We have helped 175,000 homeowners since AmeriDream was founded in 1999,” said Ann Ashburn, president and CEO of Gaithersburg, Md.-based AmeriDream. “It (the ruling) could make it impossible for us to continue to make those gifts.”

Or, AmeriDream’s president said, the ruling might require the organization to request funding.

“Last year we put out $75 million. So the question is, is the government willing to continue home ownership and fund it at a cost of $75 million a year for AmeriDream? If you take the entire industry, it’s over $500 million dollars annually, half a billion dollars annually that nonprofits put into the economy to continue home ownership,” Ashburn said.

Nehemiah Corp. of America, a down-payment-assistance organization launched in 2000, said in May that it was studying and evaluating the new IRS ruling. “We are disappointed that a program that has been granted tax-exempt status for more than nine years and has served hundreds of thousands of Americans would have this tax exemption arbitrarily threatened in this fashion. We intend to contest the IRS opinion,” the company said in a statement.

The Nehemiah program has provided more than $825 million in gift funds to more than 212,000 families in 8,500 cities nationwide, the organization said. Also, the Nehemiah Community Reinvestment Fund has generated more than $57 million in investment and lending capital, and funded projects have a total development cost of more than $550 million.

“It is important to note that Nehemiah has not been sanctioned in any way by any regulatory agency and that Nehemiah continues to serve home buyers by delivering world-class down-payment assistance through the reputable Nehemiah Program,” the organization said.

Addressing the background behind the IRS ruling, “There has been a tremendous effort to introduce a whole new segment of American society to home ownership,” Mark Dotzour, chief economist at Texas A&M University’s Real Estate Center, said. Dotzour said there used to be three barriers of entry for home ownership: lack of income, lack of down payment, and lack of quality credit rating.

“To attack the issue of home ownership and increase home ownership among minorities, creative loan programs have been offered in the last few years to allow people to buy homes,” Dotzour said. “These down-payment-assistance programs were one way to address the barrier of not having a down payment.”

If a down-payment-assistance organization is legitimate, more power to them, the economist said. But if a program isn’t legitimate, the IRS is doing the right thing by helping to ensure it won’t take advantage of consumers, in Dotzour’s opinion.

“I would welcome this move by the IRS as an opportunity to continue to scrutinize the industry to protect both consumers and lending institutions,” Dotzour said.

The Department of Housing and Urban Development refused to comment directly on the IRS ruling. However, a spokesman supplied a statement from the government agency on the topic of seller-funded down-payment-assistance programs.

The agency said, “HUD recognizes that loans with down-payment assistance from seller-funded nonprofit gift providers do not perform as well as loans to borrowers with no such assistance,” in a statement.

Instead, HUD suggested that borrowers might benefit from financing through its Federal Housing Administration.

“The types of home buyers who rely on down-payment assistance could be well served by financing through the Federal Housing Administration (FHA). HUD recently proposed legislation that would make FHA financing more available to borrowers who have riskier financial profiles or have little cash for a down payment,” the agency said.

“The legislation, introduced in the House of Representatives April 6, would provide safer, more affordable financing options for this type of borrower, as opposed to mortgage products that are risky and more costly,” HUD said.

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Send tips or a Letter to the Editor to janis@inman.com or call (510) 658-9252, ext. 140.

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