Builders this week applauded two recent court decisions backing the use of seller-funded down-payment assistance programs. The programs are often used by builders to help first-time home buyers with the 3 percent down payment required for an FHA-backed mortgage. They've become especially important since the subprime market meltdown and the virtual disappearance of 100 percent financing.

Last fall, the Department of Housing and Urban Development (HUD) announced that it was eliminating the use of the programs, effective Oct. 31, 2007. Multiple lawsuits were filed against HUD and HUD Secretary Alphonso Jackson by organizations offering the assistance, including Sacramento, Calif.-based Nehemiah Corp. of America  and Gaithersburg, Md.-based AmeriDream.

Federal judges in both cases ruled in the last two weeks in favor of the organizations (PDF). The rulings said HUD had violated federal policy-making rules in its decision to eliminate the use of the programs, and ordered HUD not to implement the ban. The judges sent the matter back to HUD for further action consistent with their decisions.

In the California case filed by Nehemiah Corp., the court also disqualified HUD Secretary Alphonso Jackson from participating in future rule-making about the programs, citing an impermissible bias against the programs. The judge's ruling was based on comments attributed to Jackson in news reports that indicated HUD would ban the programs regardless of what anyone said during the public comment period preceding the enactment of the rule.

Scott C. Syphax, president and CEO, Nehemiah Corp. of America, told BUILDER that the organization felt "vindicated" by the court's ruling. He says he hopes to work with HUD to address its concerns about the default rate of FHA borrowers who use seller-funded down-payment assistance programs, and HUD's belief that the programs inflate the sale price of homes purchased with them.

"The thing we've always sought is a cooperative relationship with HUD to help create sustainable successful ownership," Syphax says. "We hope that in wiping the slate clean, HUD would welcome a dialog to work together on what should be our mutual goal."

Lemar Wooley, spokesperson for HUD, confirmed this week that HUD continues to permit the use of seller-funded down-payment assistance for FHA-backed loans. The department has no comment at this time on the suits, he says.

Jeffrey Burton, president of American Dream Development in Junction City, Kan., says the programs got a bad name because of "corrupt practices by a few builders who artificially raised home prices or placed homes into a negative appreciation ratio to appraisal value. "A good seller-funded down-payment assistance program is invaluable," he says, "for helping borderline buyers secure a home loan."

They're more honest, he says, than an incentive program, which is margin-leveraged and may not reflect the true cost of the granite countertop or floor treatment advertised as a free upgrade. "The home buyer gets a better deal when you offer $5,000 in down-payment assistance," he says, "because it's a dollar-per-dollar value based on an independent appraisal."

Kim Shelpman, CEO of Melbourne, Fla.-based Holiday Builders, came to home building via a long career in the mortgage industry and says that when she first heard that the programs were being eliminated, she assumed it would be "very difficult for HUD to get rid of them," but says she understands the department's concerns with the programs and the potential for abuse.

"The program doesn't work unless the house appraises for a significant amount above the contract amount," she says. "There has to be equity built in." With the amount of scrutiny built in to today's mortgage underwriting, seller-funded down-payment assistance should work well.

The court decision is "a win-win for us as a builder," she says, "especially in the entry-level arena. It really provides an entry-level buyer with the ability to come in with minimal out-of-pocket expenses. Especially with the credit crunch, it's impossible to find 100 percent financing."

The court decision is good news for qualified families "who work hard all their lives and just need some extra support toward their down payment or closing costs," says Kym Baker, vice president of sales at South Bend, Ind.-based Weiss Homes. The court decision will help buyers stay positive, she says, "knowing there is help out here in this challenging economy to allow everyone at least an opportunity to purchase a home."

John Laing Homes in Newport Beach, Calif., has offered buyers down-payment assistance through Nehemiah Corp. in the past and is looking to incorporate that offering more in its advertising and point-of-sale strategy, says Patrick Higgins, senior vice president of sales and marketing.

"We need to present a compelling reason for people to buy and provide them with an option to buy," Higgins says. "Down-payment assistance, coupled with the increase of FHA loan limits, is wonderful."

Credit-worthy borrowers with steady income-but little money saved for a down payment-are an untapped piece of the home buying market, Higgins says. "We don't think they're anymore of a credit risk because they haven't had the ability to save," he says. "Programs like Nehemiah are a wonderful option."

John Laing Homes currently is developing training for its sales associates and loan officers to be able to explain the program to consumers "so they have a higher degree of confidence in it and not think it's a gimmick."

Learn more about markets featured in this article: Los Angeles, CA.