Seller Funded Down Payment Assistance Charities - Scammers or Saints?

by Xin Lu on 23 July 2008 22 comments

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".

ARTICLE CONTINUES BELOW

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?

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24 Jul. 2008 | 12:00 AM Sam

I couldn't agree more with you. Seller funded DPAs are nothing more than a money laundering scheme that violates FHA regulations. I applaud Commissioner Montgomery for standing up the likes of Nehemiah and other "non-profits" that generate hundreds of millions of dollars from their down payment scheme.

There is a clear correlation with the FHA's rising delinquency rate and the increase in so called "non-profit" down payment assistance. The fact that the seller contribution isn't tax deductible as a charitable contribution but is deductible as a sale expense should be anyone's first clue.

These non-profits do not help borrowers achieve successful homeownership- there isn't meaningful counseling, education, or even a screening process. There are no income or geographical restrictions, and the only criteria for participation is the sellers willingness to contribute a matching "donation".

Anybody who argues that seller funded DPA's are legitimate are either ignorant as to how these grants work, are deluding themselves, or have an economic interest in upholding the scam.

Sam
Fix My Personal Finance
http://fixmypersonalfinance.com/

26 Aug. 2008 | 1:42 PM Cherie

Down payment assistance programs are not a scam. They are here to help potential homeowners get into houses. I do agree that some lenders take advantage of the programs and raise the sales prices or do whatever they can to get the homebuyers into the houses, but with this I would not condemn the down payment assistance industry. In lots of cases the buyers are able to have more money saved once they get into their home so that if something does come up they will not be in a bind. There is no difference with down payment assistance programs or with homebuyers family members helping them get into their homes. Most people just do not have those family members that can help them out.

24 Jul. 2008 | 7:43 AM Lucille

I am assuming this doesn't impact actual down payment or closing cost programs run by cities or state housing programs?

24 Jul. 2008 | 8:10 AM Kelja

The program was nothing more than a government backed scam on both the taxpayer and the buyers of these homes. Most of the people who bought homes under these programs had no business entering into a transaction like this. They now represent the biggest percentage of foreclosures.

Another case of Governmental Mis-management.

Oh, Well, there are too many out there that believe and want the government to be our savior. Witness the new Mortgage BAILOUT Bill. Another fine program with many unforeseen consequences. (Why is it I see those consequences but others do not?)

I have rented & saved hoping to buy into this market as prices returned to normal. Guess I'm screwed.

24 Jul. 2008 | 9:20 AM Jumpoff

Are you kidding me? I have seen pleanty of people, including myself, become home owners because of Nehemia. It was the only way many of these people could get into their first home. Now what? The ladies at the church don't have enough in their coffee can's to help the number of people helped by these programs. The reason these people are failing on their loans is because of the voo-doo crap loans that they took when they didn't fully understand them, were duped or were just plain stupid, not because of Nehemia.

24 Jul. 2008 | 9:33 AM Xin Lu

Jumpoff, the people who get help from these downpayment assistance programs got FHA loans, which are not voo-doo loans. FHA loans generally have favorable rates and terms and are insured by the government. I'm sure if you were helped by Nehemiah you would know this. Within this group of people with FHA loans the default rate is a lot higher than usual and that's why the government is doing something about it.

I would love to hear your side of the story, though.

24 Jul. 2008 | 5:54 PM Jim

Elimination of DPA will be a short term disaster for lower priced housing. A very large proportion (I bet half) of first time homebuyers use down payment assistance. Taking that many buyers out of an already soft market will stop any chance of a recovery and push more sellers into foreclosure.

DPA buyers still have to clear the crediworthiness hurdle and the appraisal hurdle.

A better solution would be to adjust the mortgage insurance premium to a higher level for DPA customers.

I agree it's probably a good move long term, but it's really going to hurt prices short term.

24 Jul. 2008 | 6:19 PM Xin Lu

The thing is, FHA loans only require a 3% downpayment (if this bill passes into law it would require 3.5%). For an median priced home priced at $215,000, that's about $6000 to $7000. If a family can't save that much money then it might not be a good idea to jump into a mortgage that costs more than $1000 a month, either. When people put in a bit of a downpayment they are less likely to walk away from a home. It's only seller-funded DPA that are considered scams so many first time buyers will probably still be able to find real help.

25 Jul. 2008 | 9:09 AM Tom Malone- Mortgage Planner

I am a Mortgage Planner and I specialize in helping individuals and families own a dream of their own with assistance of the Ameridream program. Losing the Seller DAP is going to deprive thousands of young first-time buyers who have not had the opportunity to save $10,000 required for downpayment from owning a home of their dreams and force them to RENT for a number of years until they could save their down-payment. Paying their landlords mortgage and building their landlords wealth, when they could be building their own wealth.
I hope that the congress will re-think their position and allow Seller DAPs. One way to allow it, is to have the FTHB take a the Amerdream Homeowners Education program or any FTHB certified Homebuyers education program in order to qualify for the assistance.
The loss of the Seller DAP will be seen in lower home sales in the 4th quarter and beyond.

25 Jul. 2008 | 9:46 AM Anonymous Coward

Tom,

What kind of first time home buyers are purchasing $300,000 homes? That's quite an aggressive step. My first home was $65,000. Not my dream house, but my first house I could comfortably afford.

You are seriously wrong if you are trying to convince people they need to buy "the home of their dreams" as their first home purchase.

25 Jul. 2008 | 10:11 AM Xin Lu

$300,000 is 50% above median in the United States. It's a really cheap house here in the Bay Area, but the mortgage would cost quite a bit. If you get a $300,000 loan at 6.5% fixed for 30 years the mortgage is $1896 a month. Additionally there are taxes,insurance, utilities, and utilities. So if a family has to reasonably afford that home they should be making more than $6000 a month. I don't think it's very hard to save $10,000 if you're making $6000 a month and renting for a couple years. The logical reason why these families absolutely CANNOT save is either 1) they don't have income 2) they don't manage their finances well 3) they have a lot of other debts. All three reasons would be contributing factors to a higher foreclosure rate.

25 Jul. 2008 | 10:19 AM Gidgette

in places like Southern California good luck finding a decent condo for much less than $300k for a family and those are usually fixers. Even now single family homes are still over the half million dollar mark if you want anything that has good schools and is in a decent neighborhood. I would love to see the prices be comparable with most of the rest of the country, but it just isn’t realistic in places like this.

25 Jul. 2008 | 10:26 AM Xin Lu

In the zipcode I live the average price per squarefoot is $641 so a 1000 square foot shack costs $641000. So guess what, I'm not buying because I know it's ridiculous. Even with the DPA, the buyer needs to make over $12k a month to support that loan. You can definitely save some money at that income level. I think the problem is that people with much lower incomes got into these mortgages.

25 Jul. 2008 | 11:43 AM Homebuilder

You wanna cause a depression....pass this bill...dont ask why when the new home industry, mortgage, construction, and all the companies that manufacture materials for homes go out of business. Most builders use these programs because the government programs are jokes. They have too many requirements from the buyers and 95% of buyers never qualify for the programs. Just increase the standards to qualify for them...otherwise you will see how bad the economy can really get...it will be bad....

26 Jul. 2008 | 3:19 PM Guest

I'm all for doing away with seller funds down payment if FHA can prove they've caused more foreclosures. I've worked in the mortgage industry for about 15 years so folks spare me the rubbish you've heard on the news. I'm looking right now at the real numbers. I don't have a dog in this hunt I've only done a handful of these things because I don't like fooling with residential anymore. However I've watched this closely because I do understand trickle down economics and how many businesses and potential homeowners this will squash. Because like the programs or not I can understand the big picture. Here's an actual table of the real foreclosure numbers:

Percentage Of Loans In Foreclosure
FHA
Fiscal Year
Dec. 31 One Year Later
Dec. 31 Two Years Later
Dec 31 Three Years Later
Percentage Of Loans Using SFDPA

2000 0.91% 1.71% 1.82% 1.74%
2001 1.05% 1.86% 1.53% 4.92%
2002 1.08% 1.54% 1.24% 9.18%
2003 1.19% 1.44% 1.23% 18.40%
2004 1.14% 1.41% 1.44% 27.19%
2005 1.08% 1.87% 33.09%
2006 1.21% 32.78%

First column is the year obviously, second is the foreclosure rate one year later, the third is two years later, the fourth is three years later, and the last column is the percentage of FHA loans using seller funded down payment assistance - just in case cutting and pasting it didn't give it enough room. The years with the steepest increase in seller funded down payment assistance there was a decline in foreclosure rates. Use your brain genius if the person has more money in the bank their likelihood of making their payments increases not decreases. I will say that not one customer I ever used a grant for, NOT ONE in 15 years has defaulted. However, I've had plenty overextend and put a ton of money down and then unforeseen circumstances (lay-offs, death of a spouse, one guy's wife had a stroke and they were in their 20's so they were ill prepared insurance wise)cause foreclosure. In one case a couple put $10,000 of their own funds in and never made a payment and couldn't refinance out or sell in time because they were in a 97% loan. Don't kid yourself folks there's no difference in today's market in 97% and 100% - you're stuck no matter how you look at it or who gave you a down payment. The so called community development grants from the government hog tie the feet of these low income borrowers to properties that usually aren't so great to start with. These down payment assistance charities came along and gave customers more freedom in a govy loan and it was praised and well received. Most of these companies do operate as charities and give back, granted there are some scam artist out there. I watched the lawsuits over the years pretty closely - since the outcome will have a huge impact on my customers and the economy. I myself bought my first home with an Ameridream grant and had the house paid off within three years. In the last two attempts from HUD to shut these companies down both judges stated they were only given "anecdotal evidence but no real data" proving their points and the judges threw the lawsuits out.

Not only is the fallout from this going to cause a $60 billion hit to the economy in new home sales (yes that's the real number if not higher) in the first year. The low figure is 20,000 homes a month. Don't kid yourself folks realtors will just go back to the olden days of parking lot transactions rather than lose 20,000 new home sales a month. That's enough to keep me up at night with my toes clenched. In my state alone one of my largest clients is the state's largest builder who utilizes these programs and he told me this week this will shut him down. Which means of the 1500 folks that work for him they'll be jobless by Christmas. So guess what they won't be doing? Spending money - further hitting the economy. I estimate between the mortgage industry, the down payment industry, realtors, builders, construction, landscaping, etc. more than 10,000 folks will lose their jobs around November. That's just in my state. I spoke with the processing department at the largest retail operation center in the nation yesterday and she told me half of her people will be let go because they just won't need them if the down payment assistance grants go away. The government threw the baby out with the bath water here and that was one of the most idiotic moves I've seen in a while. They could have limited the programs or given a pricing adjustment to loans that use them or how about made the MI premium higher on these all the while phasing them out. Duh..but to chop it off was a bad bad move. Sam, I understand you don't like the programs I understand your point of view but I think you've only gotten information you've read on the internet or in the newspapers. The real information I've seen doesn't prove anything about down payment assistance causing foreclosure. The only thing I've seen is that HUD has had a bee in their bonnet for years about it and finally figured out a way to get their way - tuck it in a bill they knew had to pass. Most of the legislators even Nancy Pelosi went on record saying they knew this was going to have dire effects on mainly minorities but they had to pass the bill hoping to get the chance to reintroduce seller funded down payment assistance soon. Hope they move fast cause they only have til October 1st.

K Johnson

26 Jul. 2008 | 3:28 PM Guest

I really wish it had pasted exactly like what I pulled it off of because it shows that like I said in the years with the sharpest increase in seller funded dp the foreclosures fell. Both years. It also shows that when seller funded transactions hit 32.78% that the foreclosure percentage was about the same as its ALWAYS been at which was 1.21%. If when the percentage of seller funded transactions was only 1.74% of new home sales and the foreclosure rate after 24 months was 1.71% and when it rose to 33.09% in 2005 the 24 month foreclosure rate was 1.87% and for the 12 month foreclosure rate it was 1.08%. Explain to me again how seller funded down payment assistance caused a higher rate of foreclosure.

26 Jul. 2008 | 3:30 PM Guest

You're right its half based on the numbers so far this year. In my bank its 66% of FHA loans have used down payment assistance from sellers. This is gonna be a killer and most people are such sheep they don't even see what is coming their way.

26 Jul. 2008 | 7:00 PM JenN

My mom's only offer on the small townhome she and my dad bought shortly before he died was one of these loans.

Except the 'donation' had to be made in the BUYERS name, not the sellers, so she doesn't even get a tax deduction for it.

In this market she had no choice but to take the offer. (For less than the loan-payoff even before a $10K 'donation'). My family is not well-to-do, this cost a chunk of her savings that she could have used.

My brother and I suspected a scam but the both the lawyer my mom consulted and a realtor not associated with the sale assured us it was legal.

28 Jul. 2008 | 12:48 PM Suz

It's very hard, especially in a higher market, to have enough in savings to afford your first home. I'd be interested in one of these programs, but as with anything I think research would be in order... Including with the BBB to see what kinds of complaints one of these companies has had.

-Suz

24 Feb. 2009 | 7:03 AM Crow

Re: what Suz wrote: "It's very hard, especially in a higher market, to have enough in savings to afford your first home. I'd be interested in one of these programs, but as with anything I think research would be in order... Including with the BBB to see what kinds of complaints one of these companies has had."

The reason it's hard to afford a home is because prices are still artificially high and need to come back down to be in line with incomes. These bogus devices to get people into houses they can't afford will do no one any favors and will lead to lasting credit damage, financial chaos, etc. It already has!

And if you think the BBB will help you think again--they are a business membership org, and they do not report all complaints. Their new rating system has been criticized by businesses and consumer org's alike; it can be impossible for a good business to get the highest rating, and it can still be possible for a bad one to get a good rating.

If the IRS called these DPA's a scam that is a clear red flag. It takes a huge amount of complaints and problems to move a federal agency into saying that, and even more for them to ACT on it. I have worked with consumer org's and made use of federal and state agencies, and have followed the problems of the BBB and consumers' over-reliance on it, etc. There can be serious problems before an agency acts, and serious problems before a BBB reports anything. I have also done legal research that is far beyond what most consumers know how to do. Consumers are WAY too quick to dismiss "internet complaints" or "consumer complaints." Often, that is the most truthful if not the ONLY report, you can find.

1 Aug. 2008 | 1:06 PM Mortgage Banking Professional

Down Payment Assistnace Programs are not a scam and, how many of you bought your homes with 100% financing and had the seller pay your closing costs? I have bought 2 homes this way so I could use my savings for reserves and pay off high interest loans. I have advised clients of this as well. I have yet to have a client forclose using a down payment assistance with an FHA mortgage. Forclosures usually happen when applicants lose jobs or become ill and cannot make payments. Our unemployment rate is on the rise and has been (for the one who has the table from 2000), I guess this was not taken into consideration.

Also, did you calculate the forclosures for the conventional loans as well? We have politicians that are not educated on the facts making decisions that are going to kill our housing market. This is turn will effect our economy.

Most of my customers use 4% from the seller and a $300 processing fee. This is typical on most conventional mortgages where the seller pays closing costs and does not inflate the market. If the customer chooses the right instituiton that has the low closing costs then the program benefits everyone.

Eliminating this program will push borrowers back to subprime loans with devistating rates.

24 Feb. 2009 | 6:55 AM Crow

The IRS said many of these are scams and I agree. http://www.irs.gov/newsroom/article/0,,id=156675,00.html

They are not charities if the "gift" is rolled into the cost of a house, nor are they charities if they're laundering money for sellers and builders. Whether the money is kicked back to the seller/builder or simply assists in making a sale to an unqualified buyer, it reeks of a scam. A true gift is not the same as these programs and congress did not ban true gifts. It's disgusting that the housing industry got behind the effort to bring back these devices which contribute to artificial price inflation and foreclosures. NOT everyone should buy a house, and NOT everyone can afford to. This nonsense about homeownership being "The American Dream" has crossed the line from puffing to deception IMO, because a house isn't an investment, and it's not right for everyone. Time to stop vilifying renters, and time to investigate the housing and lending industries for mortgage fraud, and imprison some corporate CEO's, instead of handing them a mega-billion-dollar bailout.

Seller Funded Down Payment Assistance Charities - Scammers or Saints?

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