FHA Down Payment Rule To Ban Seller Financing
Saturday, September 29, 2007
The Federal Housing Administration will prohibit borrowers from using seller-financed down payment assistance programs that have helped hundreds of thousands of people buy homes but have come under the scrutiny of federal authorities.
Such programs allow home sellers to give money to charities, which in turn assist buyers with their down payments. The sellers pay the charities a service fee, but often recoup the money by charging a higher price for the homes, usually 2 or 3 percent more, or an amount equal to the down payment, according to a 2005 study by the Government Accountability Office.
In a conference call with reporters, Federal Housing Commissioner Brian Montgomery said the FHA will publish its new rule in the Federal Register on Monday. The rule, which is little changed from a preliminary version put out for comment in May, will go into effect 30 days after publication.
"These contributions often function as an incentive to purchase the home," Montgomery said. "But these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the 'gift' is something they end up paying for and is not a 'gift' at all."
Almost 200 charities nationwide -- one of the largest is AmeriDream in Gaithersburg -- have participated in such arrangements. But the Internal Revenue Service and other government entities have raised concerns, particularly after the GAO study found that borrowers receiving assistance from the charities were more than twice as likely to default or become delinquent than other FHA borrowers were.
In a ruling last year, the IRS went so far as to call the seller-financed programs "scams," accusing the charities of inflating home prices.
"Down payment assistance programs administered by charities have unfortunately been an area where my investigations and the IRS have found a great deal of abuse," said Sen. Charles E. Grassley (R-Iowa), who has pushed for changes.
Ann Ashburn, president of AmeriDream, criticized the FHA rule and said there is no evidence that down payment programs raise prices.
The housing market has deteriorated so much that home prices cannot be inflated, she said. "At the end of the day, the buyer has the ultimate say."
Borrowers with FHA-insured loans will still be able to get down payment assistance from family, employers, governmental entities or charitable organizations. But Ashburn said seller-financed down payment assistance has accounted for 30 to 50 percent of FHA purchase loans in recent years. The new rule, she said, would keep low-income borrowers from buying homes and further weaken the housing market.
"The rule does discriminate between the haves and the have-nots," she said. "People who have money from mom and dad or have money on their own are still okay . . . but people who have no access to any sources -- those are the have-nots -- that group is now going to be discriminated against."
The Mortgage Bankers Association also blasted the ruling. The programs provide "important assistance to cash-strapped borrowers," said Steve O'Connor, the association's senior vice president of public policy.
"While there is a need for stronger quality control measures, we shouldn't throw the baby out with the bathwater and end the program," he said.
Others called the ruling prudent.
"Given the poor performance of these loans, we can understand why . . . [the FHA] took the steps they did to shut it down," said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.