Two nonprofits that are among the largest facilitators of seller-funded down-payment assistance on FHA loans have filed suit to block a rule change that would bring an end to the practice.
The companies — AmeriDream and Nehemiah Corp. of America — say the rule change will have a disproportionate impact on minorities, low-income and single-parent families who rely on the down-payment-assistance programs they provide.
The Department of Housing and Urban Development, which proposed the rule change in May, maintains that seller-funded down-payment assistance artificially inflates home prices and more than doubles the odds that a loan will end up in default.
“We want to stop this practice that often causes the most vulnerable of home buyers to go into default, and, in many cases, lose their home,” said Federal Housing Commissioner Brian Montgomery.
HUD doesn’t want any more of the poorly performing loans in its portfolio, Montgomery said, because of their potential impact on the soundness of the Federal Housing Administration (FHA) insurance fund.
FHA’s independent actuaries have estimated that the ultimate claim rate over the life of 30-year fixed-rate purchase loans endorsed in 2008 would be about 23 percent for those with seller-funded down-payment assistance, compared with 11 percent without.
“The difference between these rates represents the difference between acceptable and unacceptable levels of risk to the FHA insurance fund,” HUD said in publishing a final version of the proposed rule in Monday’s Federal Register.
The rule, to take effect Oct. 31, would not prohibit all forms of down-payment assistance on FHA-backed loans — only those in which home builders, sellers or others who stand to profit from a home sale provide assistance.
HUD said the claim rate on FHA-insured loans endorsed in 2001 was 15.8 percent for mortgages with seller-funded down-payment assistance, compared with 7.1 percent for loans with down-payment assistance from relatives, public agencies and employers.
In its complaint seeking to block implementation of the new rule, AmeriDream said HUD has allowed seller-funded down-payment assistance for nearly a decade. Since 1999, AmeriDream has provided more than $726 million in down-payment assistance on more than 200,000 home purchases, the complaint said. An average of $3,600 in assistance was provided to individuals and families with a median income of $49,700, or about 74 percent of the national area median income for the period, AmeriDream said.
HUD’s proposal to tighten the rules would be unconstitutional, AmeriDream argued in its complaint, “irrationally discriminating among groups of low- and moderate-income home buyers.” A disproportionate number of home buyers who rely on seller-funded down-payment assistance are minorities, legal immigrants, female-headed households and single parents, the complaint said.
Nehemiah officials said a 1998 settlement with HUD gives them an additional six months before they must comply with the new rule, which the company is also challenging in a lawsuit.
In a statement, HUD General Counsel Robert Couch said the department will “vigorously defend any lawsuit.”
Montgomery said HUD already has restrictions against seller-funded down-payment assistance in place, which nonprofits like AmeriDream and Nehemiah have circumvented by establishing funds that provide so-called “gifts” to home buyers.
The nonprofit that provides the gift is reimbursed by the seller through a charitable donation — in some cases a service fee is also paid — which usually comes out of the proceeds of the sale of the house, he said.
“This represents a clear quid pro quo between the home buyer’s purchase of the property and the seller’s ‘contribution’ or payment to the charitable organization,” Montgomery said.
During the housing boom, the percentage of FHA loans involving down-payment assistance from nonprofit groups rose from 1.7 percent in 2000 to 33.2 percent in the first quarter of 2007.
But with Congress considering passing an FHA modernization bill that would eliminate the 3 percent down-payment requirement on FHA-backed loans, the proposed tightening of the rules could become moot, AmeriDream said in its complaint.
The complaint chastised HUD for failing to recognize more than 14,000 comments against tightening the rules, compared with less than 100 in support.
Commenting on the proposal in August, the Mortgage Bankers Association warned that eliminating seller-funded down-payment assistance could reduce FHA loan volume by 30 to 50 percent.