FHA Bans “Gift” Down Payment Assistance Programs

The Federal Housing Administration (FHA) has written a new rule that will no longer allow down payment assistance from popular programs such as the Nehemiah Program and AmeriDream. As I stated in my blog “Down Payment Assistance Programs” in February of this year, these programs “gift” money to the buyers for the down payment of the home provided the seller agrees to make a donation to the charity in the amount of the down payment plus a service fee. These changes will take effect 30 days after the FHA publishes them in the Federal Register.

Brian Montgomery with the FHA said, “These contributions often function as an incentive to purchase the home. But, these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the ‘gift’ is something they end up paying for and is not a gift at all.”

Although these programs provide much-needed funds for down payments to otherwise-qualified buyers, the default and foreclosure rate on mortgage with the down payment assistance programs are much higher than for normal FHA mortgages. In 2005, the Government Accountability Office (GAO), the investigative arm of the US Congress, reported that borrowers who receive gifts from these seller-financed down payment assistance programs are more than twice as likely to default and become delinquent than other FHA borrowers and in 2006 the Internal Revenue Service called the charities “scams” and blamed them for increasing the cost of housing for these buyers.

The Mortgage Bankers Association of America (MBA) blasted the new rules. Steve O’Connor, Senior Vice President of Public Policy for the MBA, stated that the programs offer “important assistance to cash-strapped borrowers. O’Connor also said, “While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

Both Nehemiah and AmeriDream have filed lawsuits against HUD in federal court seeking an injunction against HUD from implementing these rules. Nehemiah, as a result of a 1998 settlement with HUD, will have 6 months before the rule becomes effective for them. For all other down payment assistance programs, the rule becomes effective October 1, 2007.

I will update my blog as more information becomes available on the down payment assistance programs. Please contact your Senators and Representatives in support of the programs and ask them to block the new HUD rule.

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