New HUD Push To End Charitable Downpayment Plans
September 30th, 2007
Related FHA Stories
- FHA Mortgage Program Delays Downpayment Ban for Two Charities
- HUD Again Tries Stop Third-Party Down Payment Plans
- FHA Mortgage Definition Game
- Court Halts HUD Effort To Ban FHA Down Payment Assistance Programs
- FHA Reform To Ban Downpayment Assistance
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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