This Halloween there will be more tricks than treats for wannabe first-time home buyers with little or no down-payment money. On Oct. 31, HUD will exclude private down-payment assistance programs from participating in the FHA mortgage program, effectively snuffing out the dream of homeownership for many.
The heads of HUD claim the business models of many of these down-payment assistance entities contribute to rising home prices and increasing foreclosure rates on government-backed mortgages. The organizations help prospective home buyers lacking down-payment money by "gifting" them the funds; the home sellers repay the organizations, with an additional fee. With this system in place, home sellers, be they builders or otherwise, often raise the home's price to cover the cost of down-payment assistance. And because many of the home buyers taking advantage of these programs are low- to moderate-income, they can find themselves very quickly in homes they can't afford.
"It's painted to be helping homeowners get into houses," Kenneth Donohue, HUD's inspector general, told Bloomberg.com. "But it is circumventing good business practices, and you bet it has resulted in foreclosures."
FHA research shows that in 2006, more than 100,000 people used down-payment assistance programs to buy homes; the percentage of foreclosures on those homes is more than double that of other FHA-sponsored loans.
However, down-payment assistance organizations like California-based Nehemiah and Maryland-based AmeriDream vehemently oppose the ban. They argue that since the conception of down-payment assistance programs in 1997, more than 600,000 homeowners have benefited. Both have filed lawsuits against HUD to overturn the new rule.
Calling the ban "arbitrary and capricious," Nehemiah president and CEO Scott Syphax says, "This rule couldn't happen at a worse time." With fallout from the subprime mortgage crisis crippling Alt-A lending, many buyers, most notably first-time home buyers, are finding themselves without sources of financing.
Arguing against claims that organizations such as Nehemiah are enablers of high-risk lending practices, Syphax notes that the average Nehemiah gift is roughly $4,000 per family, and 90% of the gifts distributed are on government-insured FHA loans. Moreover, "Contrary to popular belief, the vast majority [of gift recipients] purchase resale housing, not new housing," Syphax says. Nehemiah has made 230,000 gifts totaling $919 million since its inception in 1997.
This is the second time HUD has attempted to ban the programs; the organization proposed a similar ban in 1999 but withdrew it in 2001 following industry opposition.
Syphax says similar opposition is alive today. Already, 15,000 letters of opposition have been submitted to HUD, so many in fact that it crashed the housing authority's Web site. "A majority of the letters came from lower-income people," Syphax adds.