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Borrowed Time? Agencies Fight Efforts To Shut Homebuyer Aid Programs

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By ALAN ZIBEL

The Associated Press

Published: June 27, 2008

WASHINGTON - Nonprofit groups are battling the Bush administration's attempt to kill programs that allow homebuyers lacking money for a down payment to get funds from sellers that are channeled through charities.

Legislation being debated in the Senate this week eliminates nonprofit down-payment assistance programs, which have surged in popularity in the past decade. Lawmakers in the House want to impose new regulations but not get rid of the programs entirely.

The programs' critics say defaults and foreclosures from these no-money-down loans are rising to such an extent that they threaten to put taxpayers on the hook if a government-run mortgage insurance fund should need a bailout. They also question whether the charities involved deserve their nonprofit status.

The down-payment arrangements involve charities that receive money from a home seller eager to help the buyer and get the deal done. The charity then provides a similar amount of financial assistance to the borrower after charging the seller a processing fee - typically about $400 to $600 - for its services.

The programs, which receive no federal subsidy, help borrowers qualify for loans through the Federal Housing Administration, a government agency that backs loans made to low-income borrowers or those with poor credit.

Although the FHA does not allow sellers to provide assistance directly to buyers, the government ruled in 1998 that money routed through a nonprofit organization does not conflict with that prohibition, allowing such programs to grow increasingly popular.

Program opponents say sellers, including homebuilders, merely inflate their prices to pay for the down-payment assistance. Supporters, however, say that without such programs, borrowers such as April Keels, 33, a school administrator from Atlanta, would be locked out of the housing market.

Nearly four years ago, Keels bought a new four-bedroom home outside Atlanta for $160,000, with $5,000 in down-payment assistance arranged through Sacramento, Calif.-based Nehemiah Corp. of America.

Saving money for a down payment, she said, would have taken years. Ending the programs, in her view, would "hurt a lot of people like myself - middle-class Americans who are working really hard, who are paying their bills" but don't have enough saved for a down payment.

With dozens of subprime lenders having left the mortgage market last year as the housing crisis accelerated, "we are about the only game in town for lower-income families who just want a shot at the American dream," said Scott Syphax, chief executive of Nehemiah.

Government officials warn that defaults on such loans threaten the financial health of the FHA. The agency's commissioner, Brian Montgomery, said this month that the agency had to book a $4.6 billion charge in May against its capital reserves of more than $18 billion because of expected losses on loans made in the past 15 years. Those forecast losses, he said, are largely due to charitable down-payment assistance programs, which he called "circular financing schemes."

"Unless we take action to mitigate these losses, we will either have to shut down or rely on appropriations to operate," Montgomery said. Last fall, the Department of Housing and Urban Development proposed eliminating the programs but was blocked in court. It is trying to do so again.

The FHA loans traditionally require a down payment of 3 percent, but no-money-down loans using charitable down-payment assistance grew to about 35 percent of the agency's new loans last year, up from about 5 percent in 2001.

Defaults are higher than on the FHA's other loans. As of February, about 10 percent of borrowers receiving seller-financed down-payment assistance were either 90 or more days delinquent or in foreclosure, government statistics show.

That's greater than the rate of about 6 percent for ordinary FHA loans, but less than the rate of about 24 percent for subprime loans made to borrowers with poor credit.

In addition, two years ago, the Internal Revenue Service questioned whether nonprofit groups that provide seller-funded down-payment assistance should continue to qualify as tax-exempt charities. Mark Everson, IRS commissioner at the time, said the organizations "mislead honest homebuyers and ultimately jack up the cost of the home."

The IRS has revoked the tax-exempt status of about 30 down-payment assistance providers, but big organizations such as Nehemiah and AmeriDream continue to qualify as tax-exempt charities.

In Congress, supporters of the programs include the Congressional Hispanic Caucus and the Congressional Black Caucus, which wrote in a letter last week that eliminating the programs "will greatly reduce the gains that African-Americans have made in increasing homeownership rates."

Ann Ashburn, president of Gaithersburg, Md.-based AmeriDream, is hopeful that House lawmakers will be able to prevail.

"Once you get past all the sound bites, the program has a lot of merit," she said.

Rep. Barney Frank, D-Mass., and Rep. Gary Miller, R.-Calif., argue that tighter regulations could solve problems with the programs.

With tighter lending standards and restrictions to make sure appraisals aren't inflated, "I see no reason why it shouldn't continue," Miller said.

The housing bill would allow the government to back $300 billion in new, cheaper mortgages for homeowners facing foreclosure.

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