Policymakers give OK to down-payment
A homeowner who receives down-payment money
as a gift, instead of drawing from savings, is more likely to fall
behind on the house payments and lose the home in foreclosure. But
are the risks of allowing these loans worth the societal benefit?
Policymakers say yes -- even when taxpayers' money is involved.
As a result, the nonprofit down-payment assistance
industry, which uses private money, is about to get some competition.
The federal government wants to muscle in on the nonprofits' turf
to the tune of $200 million a year.
Nonprofit down-payment assistance programs take advantage
of a loophole in the rules governing Federal Housing Administration-insured
mortgages. Under FHA rules, sellers are not allowed to give down-payment
money to buyers. But the rules allow buyers to accept gifts of down-payment
money from a variety of sources, including relatives, government
agencies and charities.
The genesis of a loophole
Six years ago, a nonprofit called the Nehemiah Corp. figured out
that it could accept a "charitable contribution" from
a home seller, then "donate" that money to the buyer,
and it was acceptable under FHA guidelines. Other nonprofits got
into the act, and now down-payment assistance programs help about
17,000 buyers a month -- roughly one in five FHA borrowers nationwide.
The federal housing department was skeptical of the
industry, and has issued two studies warning that nonprofit down-payment
assistance bring about more delinquencies and foreclosures than
the norm. In a study released last year, the Department of Housing
and Urban Development compared Nehemiah-assisted loans with other
loans in four cities and concluded that the foreclosure rate on
the Nehemiah-assisted loans was more than twice as high -- 7.8 percent,
compared to 3.2 percent for all other loans in those cities. HUD
acknowledged that the sample size was too small "to accurately
project the default rate on loans with down-payment assistance."
Nehemiah and its fellow nonprofits have responded
two ways: by contending that the studies are flawed, so the loans
aren't really that much riskier, and by saying the extra risk is
No free lunch
"Here's my message on the stump, very succinctly: Folks, there
ain't no free lunch in improving homeownership in this country,"
says Scott Syphax, president of Nehemiah. "We, as a society,
have to not only embrace those happy moments when we can turn keys
over to a home buyer, but we have to understand as a society that
we're going further out on the risk curve if we're going to give
people the chance to build prosperity."
Minorities, immigrants and female heads of households
are less likely to own their homes for a variety of reasons, including
a lack of inherited wealth. That's where down-payment assistance
comes in, says Ann Ashburn, chief executive of AmeriDream, another
prominent down-payment provider.
Ashburn says AmeriDream's financial and educational
programs "are for the people who don't have the family members
who can give the down payment, or go sit with you to talk about
the different terms and what you need to do."
She agrees with Syphax that there's no free lunch.
"If you look at any financial transaction, there's going to
be a percentage of defaults," she says. "But there's going
to be a greater percentage that gets a chance to prove themselves
and do the right thing, and the benefits that they get from that
are tremendous. That's why the social good of getting folks into
their homes and keeping them there is so wonderful."
Bill would create new government
Now the Department of Housing and Urban Development says it wants
to help poor people make their down payments, too, even if the resulting
loans are riskier. Under the proposed American Dream Downpayment
Act, the administration wants to give $200 million a year to help
first-time home buyers make their down payments.
The bill passed the House this month, and the Senate
has yet to act on it. Under the proposed law, the federal government
would give an average of $5,000 to 40,000 home buyers each year
to help them with their down payments and closing costs. The bill
is part of the administration's effort to increase homeownership
among minorities by 5.5 million families by 2010.
The nonprofit down-payment assistance industry is
glad to win the argument over the wisdom of helping people make
their down payments. It is wary of the federal government's plan
to give money to home buyers.
"What it does is validate what we're doing,"
says Jon Cottin, executive director of the Homeownership Alliance
of Nonprofit Downpayment Providers (HAND), a group that lobbies
for the biggest players in the industry. But Cottin notes that the
federal government wants to use taxpayer money, while the nonprofits
use private-sector money.
According to a study
of FHA loan data commissioned by HAND, the mortgage borrowers
who are most likely to fall behind on their payments, or lose the
house to foreclosure, are those who get their down-payment money
from federal grants.