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Report: Down payment gift mortgages too risky

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Alternatives 'more costly and riskier'
"Because of this fact," Montgomery writes in a reply to the GAO, "FHA has determined that additional requirements or restrictions that would prevent these borrowers from obtaining FHA financing would not be beneficial, leaving this population with financing options that are more costly and riskier than FHA."

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In other words, it's better for a home buyer to get down payment assistance and an FHA loan than to get a high-rate subprime loan that would have an even higher likelihood of ending up in foreclosure.

The FHA wants Congress to approve a zero-down-payment program that is, in Montgomery's words, "designed to address the concerns that GAO raises in the report -- that buyers using seller-funded gifts are paying too much for their homes and putting themselves in a risky position."

Citing an opinion from the housing department's attorneys, Montgomery denies that seller-funded down payments are an "inducement to purchase," which would make them unallowable. The way the FHA sees it, money is given to the buyer out of the nonprofit's general fund and the seller's contribution is made a few minutes or hours later to that same general fund. Therefore, the money can't be traced directly from the seller to the buyer.

Balancing risk, opportunity
For their part, the nonprofit middlemen have always challenged assertions that loans with seller-funded down payments are riskier or that the sellers raise their prices by the down payment amount.

Even if the loans are risky, the benefits for FHA home buyers outweigh the costs to those buyers who end up losing their homes to foreclosure, the nonprofits say.

FHA home buyers are, by definition, at higher risk of foreclosure, "but they are still deserving of an opportunity for homeownership," says Ann Ashburn, president of AmeriDream.

She proposes a partnership between the FHA and down payment providers in which the nonprofits would adhere to a code of conduct. She envisions a joint effort where the government and nonprofits provide homeownership education for first-time buyers and loss mitigation to help people keep their homes after they have fallen behind on payments.'s corrections policy-- Posted: Dec. 1, 2005
More stories by Holden Lewis
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