Feds cut down-payment assistance programs
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Opposition to rule change
This fall, the Department of Housing and Urban Development adopted a rule that prohibits the down payment money from coming, directly or indirectly, from the seller or "any other person or entity that financially benefits from the transaction." HUD administers the FHA. The rule takes effect Oct. 31.

The down-payment industry has come to be dominated by two nonprofits: AmeriDream, based in Gaithersburg, Md., and Nehemiah Corp. of America, based in Sacramento, Calif. Both have asked federal courts to block HUD from enforcing the rule. The housing department won't comment, other than saying it will defend itself in court.

"HUD completely disregarded any effort to fix the problems and improve the program," says Ann Ashburn, president of AmeriDream. Among the improvements she suggests: prohibiting sellers from inflating their sales prices to make up for their down-payment contributions and requiring property appraisers to include the down-payment gifts in their assessments.

If the new regulation goes into effect on Halloween, it would immediately end down-payment assistance grants from AmeriDream and all its competitors except Nehemiah. Scott Syphax, president of Nehemiah, says his nonprofit won a six-month exemption as a result of litigation against HUD 10 years ago, so Nehemiah will be able to serve as a conduit for down payments until March 31 -- six months after HUD published the rule in the Federal Register.

Effect on housing market?
The heads of AmeriDream and Nehemiah say the new rule is short-sighted.

"This particular rule couldn't have happened at a worse time for working families and for the economy itself," Syphax says. "Over 10,000 homeowners are created every single month utilizing this program. Those people immediately will no longer be served."

HUD disputes that the new rule will harm the economy, explaining in a regulatory filing that it "will have a positive impact on the housing market and on the economy by reducing the number of mortgages that would otherwise default and go into foreclosure, driving down property values and negatively impacting a community's tax base and economic viability."

Ashburn and Syphax say they are outraged that HUD would publish the new rule while the House and Senate are weighing FHA reform. House bill 1852 would bar HUD from implementing the rule and would allow FHA to insure zero-down mortgages. A Senate bill would allow HUD to implement the rule and would lower the down payment requirement to 1.5 percent instead of 3 percent.

It seems clear that if FHA reform becomes law someday, the minimum down payment is likely to be lowered from the current 3 percent. A lowered threshold would please potential homebuyers who can't or won't save a few thousand dollars for a down payment.

In the meantime, people who want FHA-insured mortgages will have to save up that 3 percent down payment, apply at Nehemiah before next March, or hope Nehemiah or AmeriDream win their court challenges.