A bill that would allow the continued use of seller-funded down-payment assistance on FHA-backed loans now has the support of the National Association of Realtors and is headed to a full House vote after passing muster with a key congressional committee.
The Department of Housing and Urban Development has sought to end the use of seller-funded gifts — which are typically provided by home builders through nonprofits like Nehemiah Corp. and AmeriDream — saying they artificially inflate home prices and that loans that rely on them are more likely to end up in default. HUD has said losses on loans that rely on seller-funded gifts threaten to put its insurance fund in the red.
A sweeping housing bill that became law July 30, HR 3221 would bar FHA from recognizing seller-funded gifts as a valid source of funding for down payments beginning Oct. 1. If the ban takes effect, FHA would still allow down-payment assistance from family members, employers and nonprofits not funded by sellers.
In an attempt to "mend, not end" the use of seller-funded down-payment assistance, HR 6694 would tie its use to borrowers’ credit scores.
Those with credit scores of 680 or more could continue relying on seller-funded gifts for FHA-backed loans and would be treated like other borrowers. Those with scores between 620 and 680 could use the gifts, but could pay higher FHA insurance premiums. The gifts would be off-limits for borrowers with scores below 620 until at least mid-2009, when the Secretary of Housing would be permitted to expand the program if it could be done without requiring taxpayers to subsidize FHA’s insurance fund.
The National Association of Realtors, which had supported HUD’s attempts to shut down seller-funded down-payment assistance programs, has endorsed the reforms proposed in HR 6694.
"NAR understands the concerns of critics of seller-funded down-payment assistance programs that these programs foster home-price inflation, increased delinquency and foreclosure risks, and potential negative impacts to the FHA Fund and taxpayers," the group said Monday in a letter lawmakers. But the proposed changes in HR 6694 "will mitigate the risk to the FHA fund by limiting such programs to less risky borrowers, and requiring those who do pose a greater risk to pay a higher premium."
NAR said borrowers who participate in seller-funded down-payment assistance programs should be required to receive home-ownership counseling. In its current form, HR 6694 would require anyone offering seller-funded down-payment assistance to make financial counseling available to borrowers, but would not require borrowers to accept.
The bill was approved by the House Financial Services Committee on Tuesday but faces votes before the full House and Senate. The chairman of the influential committee, Rep. Barney Frank, D-Mass., has said he thinks the Bush administration will support HR 6694, because it would allow FHA to continue using risk-based pricing for borrowers with low FICO scores, even if they are not relying on seller-funded gifts (see Inman News story).
However, the risk-based pricing that would be allowed under HR 6694 is more limited than the system HUD implemented for all FHA loan guarantees on July 14. Under that pricing system, borrowers with good credit pay upfront premiums of as little as 1.25 percent, while borrowers considered higher-risk pay as much as 2.25 percent.
Opponents of risk-based pricing questioned its fairness, and inserted a one-year moratorium on its use into HR 3221. The moratorium begins Oct. 1, and HUD has announced that in returning to a "one size fits all" pricing system it will increase upfront premiums to 1.75 percent, compared with 1.5 percent before risk-based pricing was implemented in July (see story).
As amended Tuesday by the bill’s sponsor, Al Green, D-Texas, HR 6694 would allow FHA to continue to employ a form of risk-based pricing for borrowers who are not relying on seller-funded gifts — but only if they have credit scores below 600. Green said the amendment was intended to clarify language in the bill that had previously specified only that FHA could employ risk-based premium pricing for any borrowers "with lower credit or FICO scores."
The risk-based pricing system introduced by HUD in July created a matrix of 18 different borrower classifications, using six ranges of credit scores and three ranges of loan-to-value ratios. That system allows not only for increased premiums for those with the lowest credit scores and highest loan-to-value ratios, but discounts for the borrowers judged to present the least risk.
A HUD spokesman told the Wall Street Journal that the department has "deep reservations" about HR 6694 in its current form.
Although Frank has said he expects the bill will be approved by the House, it could face tougher sailing in the Senate, where language banning the use of seller-funded gifts was inserted into HR 3221.
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