Report: Down payment gift mortgages too risky
Most lenders don't allow home sellers
to give down payment money to buyers, even indirectly, because those
mortgages are deemed risky. But there's an exception: The Federal
Housing Administration, or FHA, will insure home loans in which
the seller provides the down payment -- as long as the money passes
through a nonprofit agency first.
Now a federal inspector concludes that such loans
indeed are riskier and shouldn't be allowed. But the FHA clings
to a narrow legal interpretation that allows indirect down payments
by the seller, even as it acknowledges that such loans carry more
risk of default and foreclosure.
Nonprofit down payment assistance providers play
the middleman in 30 percent of FHA-insured mortgage transactions.
That means three in 10 FHA-insured mortgages are structured in a
way that private insurers won't touch. The cost is borne by borrowers
who pay FHA insurance premiums, but taxpayers ultimately bear the
The FHA insures mortgages for people with flawed
credit who don't have a lot of money for a down payment. The agency
requires buyers to make down payments of at least 3 percent, but
some or all of that money can come in the form of a gift from a
relative, employer, government or nonprofit agency.
The down payment can't come directly from the seller.
But the FHA will let a nonprofit agency give down payment money
to a buyer, then immediately collect a "contribution"
of the same amount -- plus a service fee -- from the seller. The
Program was the first nonprofit to use this loophole and many
competitors have sprung up, including Neighborhood
Gold and AmeriDream.
New study's conclusions
Since 2000, three studies have looked at down payment assistance.
This year's study was done by the Government Accountability Office
at the request of U.S. Rep. Bob Ney, R-Ohio, chairman of the Subcommittee
on Housing and Community Opportunity. The 99-page
report concludes that:
- When home sellers indirectly give down payment
money to buyers, they jack up prices by about the same amount,
causing buyers to overpay.
- Such loans have higher default and foreclosure rates.
The GAO recommends that the FHA track these loans
better, require lenders to inform appraisers when the seller is
indirectly providing down payment money, and to close the loophole
that allows the practice.
Brian Montgomery, the federal housing commissioner
who supervises the FHA, acknowledges that seller-funded down payments
make for riskier loans. But he says the FHA's goal is to encourage
homeownership among "the population that FHA was established
to serve, families who are otherwise underserved by the private