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Policymakers give OK to down-payment gifts

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.

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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 worth it.

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 program
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.

 

 
-- Posted: Oct. 9, 2003
   

 

 
 

 

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