New HUD Push To End Charitable Downpayment Plans

by Peter G. Miller
September 30th, 2007

Every few years and with grim determination, HUD announces that it will act against such programs as the one offered through Nehemiah. Every few years, in the face of congressional opposition and public complaints, the idea vanishes.

HUD’s worry is not unreasonable. The federal department is concerned that third party downpayment plans often result in artificially inflated home values. These higher values, in turn, make mortgage lending more risky — and that’s a problem for an insurance program such as the FHA.

Under the Nehemiah plan, for example, a seller might provide a charitable contribution to the organization equal to 3 percent of the sale price plus $499. Nehemiah then provides a grant to the borrower equal to 3 percent of the sale price. A grant of course does not have to be repaid.

What concerns HUD is that when a third-party nonprofit organization is involved a seller might simply increase the price of the property to cover the cost of the charitable contribution. However, such a worry should not be a major worry because every FHA loan can only be originated when there is also a full-blown, on-site, FHA appraisal by an actual, licensed, independent appraiser.

From a political perspective, it seems strange that HUD would seek to push through such a contentious idea when it’s on the verge of getting legislation which would effectively eliminate the need for third party charitable programs. The proposed FHA modernization bill if passed by the House would allow HUD have FHA mortgages with no downpayment while the Senate version requires a 1.5 percent downpayment. Either bill would allow borrowers to buy homes with less than the 3 percent up-front which is now required.

Meanwhile, the Mortgage Bankers Association (MBA) said it “expressed concerns with the final rule on Downpayment Assistance Programs released today by the U.S. Department of Housing and Urban Development (HUD). The final rule, originally published in May, addresses standards governing a borrower’s investment or downpayment in Federal Housing Administration (FHA) insured mortgages. Specifically, the rule deals with the practice of allowing gifts by family members and certain organizations.

“MBA believes that downpayment assistance can play an important role in supporting FHA’s mission,” said Steve O’Connor, MBA Senior Vice President of Public Policy. “Indeed, seller-funded downpayment assistance programs comprise approximately 30 percent of FHA’s total volume, providing important assistance to cash-strapped borrowers. While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

“We believe that legislation to modernize FHA remains the most effective way to improve the program,” continued O’Connor. “Legislation would empower the Secretary to address the housing needs of underserved borrowers by allowing FHA to keep pace with market changes and industry standards.”

According to the MBA, “the final rule prohibits downpayment assistance consisting, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: (1) the seller, or any other person or entity that financially benefits from the transaction; or (2) any third party or entity that is reimbursed directly or indirectly by a person or entity that financially benefits from the transaction.”

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This entry was posted on Sunday, September 30th, 2007 at 12:00 pm and is filed under , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

7 Responses to “New HUD Push To End Charitable Downpayment Plans”

  1. Tim D Says:

    I am an appraiser and I have seen many cases where these downpayment assistance programs have caused exactly what HUD is worried about, the sales price is inflated to cover the 3% plus $499 fee. The appraiser is then pressured by the lender and real estate agents involved in the transaction to “hit the value”. You have to remember that the lender chooses the appraiser and many unethical lenders stop using appraisers who do not “hit the value”.

  2. Peter G. Miller Says:

    Tim. Thanks for your posting. You raise a good point and I have no doubt that what you see happens widely.

    That said, it hardly seems fair for HUD to worry about third-party downpayment programs when FHA regulations allow owners to offer as much as a 6-percent “seller contribution.” Does anyone really believe that home prices are not inflated to account for seller contributions?

  3. RC Says:


  4. Mike Says:

    While the concern about “over inflating” home prices to cover this gift is a valid concern, you seem to be forgetting that most of those who default on the loans are doing so 2 or 3 years into their mortgage–NOT immediately after closing!! Even if the price of the home was inflated 3% to cover this gift amount by the time this mortgage defaulting occurs the house value has surely increased well beyond that small amount over 2 or 3 years. In other words, worst case these capped amounts were absorbed a long time ago and have no effect on the current mortgagee’s status. Also, as this is a gift and does not have to be repaid by the buyer it does NOT figure into what they owe the banks.

    This recent housing crisis is NOT all about sub-prime by the way. There are plenty of average homeowners who got greedy and went into loans that were way over their heads. Quite frankly, they were irresponsibly taking out mortgages they KNEW they could not afford. Who’s to blame for that? How about the person taking out the loan in the first place.

    C’mon people, let’s not blame everyone else for our own stupidity. Many of those sinking now should look in the mirror and truly ask were they duped/scammed OR did they have dollar signs in their eyes and did not use due diligence when signing contracts and loan papers–no one forced them do so and they could have easily taken out calculator and done the worst case scenario math.

    I hardly think down payment assistance groups are to blame, even mildly, for the current housing problems. DPA groups help people who can otherwise afford mortgage payments get past the closing table where we all know the taxes and other fess can cripple potential homebuyers. Helping with those initial closing costs simply gets them past this hurdle. It does NOT, however, guarantee they won’t lose the home years later due to other circumstances. NO ONE can guarantee this for ANY buyer except for those who can afford to NOT take out mortgages. Job loss, illness, relocation, etc. can wreak havoc…this DPA issue was barely a mole-hill and made to be Mount Everest and a smoke screen if you ask me. How about asking HUD what their motives are–they are doing this out of the goodness of their governmental hearts–wake up! It’s all about the money and a govt agency is no different…even government entities must show value or risk being shut down too.

    Think about it…


  5. Lisa Says:

    On top of the 3% and the 499.00 is interest. Hud/Government made a deal with the devil. We tried to get answers from HUD and FHA before we worked on buying a home. HUD/FHA does not answers questions. Remember when you vote for the senators and congress, president. You put Satan in the White House and on Capital Hill. Learn your laws in the your state. State and Federal do not work together. Federal does not trumiph state law, if it is in the Banking Industry.

  6. August Says:

    I live in Texas, we do not have any rights,Texas is a private state. Hidden Laws which make consumers pay heavly. But…It’s a (I love Jesus State). But the Laws are written so we can and will be deceived, In more ways than one. If you’re going to change anything, change the way the banks do things. First start with the fair disclourse. Make sure the banks, home loans car dealerships, tell us how they received the interest rate. Every little detail, needs to be explained.
    If you think,you have not been had. Go to the Texas Statues, Read Law 348.301. (it’s called the midnight law. 97% of Texasan does not know about this law. Our President Bush signed this law, before he went into the White House

  7. Erin Says:

    Even with thte infalated amounts to cover I have to agree that this is not really what has been causing the crisis. I have a couple of friends who lost their houses not because of the infalted rate, but the variable rates. Some people just take the hit with the inflate because this is the only way for them to get the chance to own a home. It does seem a little greedy, but it’s the price the lenders and such are requiring to finance some of the people who would not generally be able to get a home with a traditional loan. Just like with added high interest with a car loan if you have terrible credit you have to suffer so that’s the basis here that there is the add on to the price of your house.

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