FHA wants to insure zero-down mortgages

Jill could add the upfront mortgage insurance premium to the loan amount, borrowing $102,250; that would raise her initial monthly principal and interest payments to $663.19, or $31 more than Jack's monthly payment.

Potential effect on private lenders
By offering zero-down loans, the FHA would be stepping onto the turf of the down-payment assistance industry, with unpredictable results.

The down-payment assistance industry consists of nonprofit corporations that allow home buyers to leap through a loophole and circumvent the FHA's requirement to make a 3 percent down payment. The loophole can be found in a rule that lets FHA borrowers receive gifts of money with which to make down payments or pay closing costs.

Gift money can come from relatives, employers and nonprofit organizations. It can't come directly from sellers. But sellers can contribute money to nonprofits that then pass along the money in the form of gifts to home buyers. A thriving network of nonprofits -- among them Ameridream and Nehemiah Corp. of America -- takes advantage of this loophole and allows home buyers to get FHA mortgages with no out-of-pocket money down.

HUD jumps through the loophole
HUD tried to close the loophole a few years ago but backed off. Now it appears that the federal government has gone full circle. "It's a pure vindication of Nehemiah's pioneering down-payment assistance," says Scott Syphax, president of Nehemiah.

"Understand that when we first started, the work that we do was seen as being completely outside the mainstream," Syphax adds. "Government's adoption of the Nehemiah approach to homeownership is the purest evidence that our position not only has been vindicated, but also embraced."

He calls the FHA proposal "a very important step in democratizing the access to homeownership in this country" and that Nehemiah supports the proposal, "and, however, is going to be very watchful on making sure that the details are not onerous to the families that the program is intended to serve."

Ann Ashburn, president of Ameridream, calls the proposal "a major policy shift" for HUD and the FHA that needs to be fine-turned.

"I see where we can work together and come up with a better product and use the experience we've gained working with low- to moderate-income home buyers," she says. "That's why I would push forward the public-private partnership."

Potential flaws
As Ashburn sees it, the main flaw in the FHA's proposal is that borrowers will move into their homes with no equity. In contrast, recipients of down-payment assistance move into their homes with some equity, albeit a small amount. Another flaw can be found in the higher insurance premium and interest rate. People who can't save enough for a 3 percent down payment feel the effects of higher payments immediately, Ashburn says.

Both Ashburn and Syphax say they feel confident that their nonprofits, and the industry as a whole, will endure. Ameridream and Nehemiah administer community development and other programs in addition to offering down-payment assistance.