HUD Sued Over Rule Banning Down-Payment Help

Two nonprofit organizations have sued the Department of Housing and Urban Development in an attempt to overturn an agency decision that bans seller-financed down-payment assistance to some low- and moderate-income home buyers.

Gaithersburg's AmeriDream and Sacramento's Nehemiah Corp. of America, two of the largest providers of such assistance, are seeking injunctions to block the rule, which applies to borrowers whose loans are insured by the Federal Housing Administration. The rule was published in the Federal Register yesterday and is to go into effect Oct. 31.

Under the programs, home sellers give cash to the charities, which then help borrowers with their down payments. The sellers pay the charities a service fee but often recoup the money by adding 2 or 3 percent or an amount equal to the down payment, according to a 2005 study by the Government Accountability Office. FHA rules would otherwise require borrowers to make a down payment with their own cash or with gifts, as from relatives.

On Friday, FHA Commissioner Brian D. Montgomery, in announcing that the rule would be published, said such an arrangement "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."

He also noted that 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.

"We will vigorously defend any lawsuit," HUD General Counsel Robert Couch said through a spokesman. The FHA is part of HUD.

AmeriDream filed its lawsuit in the U.S. District Court for the District of Columbia. Nehemiah filed its suit on Sunday at the U.S. District Court for the Eastern District of California. The suits called the rule "arbitrary," "capricious" and contrary to the FHA's mission of insuring mortgages for those who can't get conventional loans.

"The program is helping many minority, first-time, low-income, single-parent home buyers," said Ann Ashburn, AmeriDream's chief executive.

Scott Syphax, Nehemiah's chief executive, said the rule could push such people to other types of no-down-payment loans, which have also come under scrutiny recently because of a spike in delinquencies and foreclosures. Or it could simply keep people from buying homes at a time when the housing market is weak, placing a burden on the economy, Ashburn and Syphax said.

"The rule was an outrageously bad piece of public policy coming at exactly the wrong time in the economy and for low-income borrowers," Syphax said.

Nehemiah has more time than AmeriDream to fight the decision. An April 1998 settlement between Nehemiah and HUD regarding the practice grants the company six months before the rule goes into effect.