Seller Funded Down Payment Assistance Charities - Scammers or Saints?
The United States House of Representatives just passed a massive mortgage bailout bill that includes many changes to the Federal Housing Administration and the Government Sponsored Enterprises. One particular change in the bill is that seller-funded down payment assistance through a third party is now prohibited in obtaining FHA loans. This in direct response to the unscrupulous behavior of many seller funded down payment assistance charities that sprang up in the past decade.
The way seller funded down payment assistance charities worked was to take a "charitable" donation from a home seller and then pass on the money to a home buyer since laws prohibit home sellers from directly giving down payment assistance to buyers. These gifts were often given to low income or low credit individuals and families and allowed them to qualify for a home loan from the Federal Housing Administration (FHA) that requires a 3% downpayment. The charity would receive a processing fee from the home seller and the home seller often bumped up the price of the home so that the amount of their "gift" would be recovered from the purchase price. Since these charities were non-profits oftentimes the home sellers received a tax deduction for their contribution. The result was that the home buyer gets to get into a home without putting anything down, but eventually had to pay back the money they received in the form of fees or increased home prices.
The pioneer of these charities is Nehemiah Corp. of America. According to this article from the Columbus Dispatch, Nehemiah received 99 percent of its revenue from donations from home sellers. In particular, it had a partnership with a home seller called Dominion which routed money for thousands of home sales in central Ohio. Some home buyers have filed suit against these companies for the extra costs they had to incur in taking the "assistance".
Some proponents of these programs say that they really do help people who have little savings get into a home, but the cost of these loans to the FHA is very high. In April, FHA Commissioner Brian Montgomery said the following: "Insured loans relying upon seller-funded down payment assistance have been demonstrated to have an unacceptably higher risk of default and foreclosure - harming borrowers they intend to help and risking the integrity of the entire FHA program and its ability to help more at-risk low- and moderate-income homeowners. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments. We simply cannot sustain this business." Today in the news item for the bailout bill it was reported that these programs are "largely the reason why the agency's reserve has fallen by $4.6 billion".
From my point of view, it seems that these seller funded payment assistance programs were just a way for home sellers to close deals in the guise of being charitable. True charity is when nothing is expected in return. Personally, I cannot believe that these scams lasted for so long. I am glad that Commissioner Brian Montgomery looked into this problem and actually did something about it. There are legitimate down payment assistance programs such as churches that receive donation from people who are not home sellers. Though smaller in scale, these programs are still around for those who need them. I am sure that schemers are finding new ways to exploit the insured FHA loans, but at least one large hole is plugged with the current bill.
Have you been helped by a down payment assistance program? What is your take on the issue?