Downpayment Gift Money

This could spell trouble for many who qualify for FHA loans who need the 2.25% downpayment assistance.

Washington Report: Downpayment Gift
by Kenneth R. Harney

It's an issue that's been festering for years, and last week it blew up again: The Bush administration relaunched its campaign to ban “downpayment gift” programs where home sellers make contributions to nonprofit groups that then funnel most of the money to purchasers.

At a National Press Club luncheon, FHA commissioner Brian Montgomery said such programs - which effectively cut downpayments to zero and may artificially inflate sales prices - rack up three times the number of foreclosures and insurance claim losses compared with loans where buyers come up with their own downpayments.

Montgomery noted that “no private mortgage insurance companies back these loans,” and the FHA insurance funds no longer can tolerate their high foreclosure rates. One of every three FHA loans in recent years has carried some form of downpayment gift, often facilitated by large, politically influential nonprofit corporations.

The heads of the two largest downpayment gift providers -- AmeriDream Inc. and Nehemiah Corp. of America -- immediately denounced the proposed ban. Ann Ashburn, president of AmeriDream, which has arranged more than 250,000 gift-assisted loans, said “over 100,000” buyers would be kept out of home ownership in the coming months if HUD gets its way.
Scott Syphax, president and CEO of Nehemiah, said “HUD has the temerity” to relaunch its efforts to ban downpayment gifts despite two federal decisions that blocked the agency's previous regulatory proposal -- issued last October. The court decisions primarily faulted HUD on federal administrative procedural grounds, rather than dealing with the substance of the regulation.

The Congressional Black Caucus, the National Urban League, and the Congressional Hispanic Caucus all have opposed the agency's earlier efforts.

Despite opposition in Congress, however, HUD argues that it has a statutory responsibility to safeguard the integrity of FHA's reserve funds, which it says are being depleted by insurance claims on seller gift-assisted loans that default and must be foreclosed.

Montgomery has warned Congress that the FHA insurance funds, which currently are solvent, will require direct appropriations next year if the losses from the downpayment assistance programs are not cut off.

With newly-authorized loan limits in high cost areas that go as high as $729,750, giant gift-asissted mortgages with effectively no cash investments up front by purchasers are “an unacceptable risk” for the agency, he said.

Where's this all headed? Probably to court again to challenge HUD's proposed regulatory move, and almost certainly back to Congress, which currently is working on an FHA Modernization bill as part of a large housing relief package.

We'll keep you posted as new developments occur.

From: The Realty Times
http://realtytimes.com/rtpages/20080616_washingtonreport.htm