HUD Wants to Cut Certain Downpayment Grants

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The Department of Housing and Urban Development wants to stop the way certain non-profits give cash to aspiring new homeowners for a downpayment, a program supporters say has helped nearly a million people buy a home.
A variety of programs help homeowners overcome the downpayment hurdle. The vast majority of low income borrowers turn to the FHA, which requires a 3% downpayment.
Some downpayment assistance programs offer loans or outright grants

The Department of Housing and Urban Development wants to stop the way certain non-profits give cash to aspiring new homeowners for a downpayment, a program supporters say has helped nearly a million people buy a home.

A variety of programs help homeowners overcome the downpayment hurdle. The vast majority of low income borrowers turn to the FHA, which requires a 3% downpayment.

Some downpayment assistance programs offer loans or outright grants to homeowners. HUD is specifically targeting non-profits that survive by getting the downpayment grant back from the seller along with a fee for the service.

“Non-profits could still come in and give homeowners money for the downpayment,” says HUD spokesman Lemar Wooley. “Our problem is when there is an obvious quid pro quo.”

But the non-profits, real estate industry figures and homeowners say these loans are crucial to these borrowers.

“The folks we serve, they are minorities…single mothers…raising families, working class folks, just above working poor, says Bob Newman, executive vice president and chief operating officer at AmeriDream. “They are paying rent and bills. Their rent in some cases is higher than a mortgage. Getting the downpayment has been the biggest barrier to home ownership.”

In the wake of the meltdown of the subprime market, where those with inadequate credit paid higher rates, these programs may become even more important, advocates say.

“There aren’t going to be any other outlets,” says Rick Del Sontro, CEO of Home Downpayment Gift Foundation, based in Washington. “What you’re going to make people susceptible to is predatory lending.”

HUD posted the proposed rule change last Friday and already dozens of bankers and real estate agents have waded through the cumbersome process at http://www.regulations.gov/fdmspublic/component/main to criticize the proposal known as

HUD-2007-0065.

The programs started in 1997 and HUD has wrestled with them ever since. It first tried to get rid of these programs in 1999, but backed off in 2001 after industry protest.

Last year the IRS ruled that some of the groups did not qualify as non-profits. The IRS said those that are funded by sellers do not act in “disinterested generosity and from a charitable impulse.”

The IRS said “charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements.” The non-profits typically take a fee for their service.

HUD claims that the process jacks up the price of homes, costing homeowners and taxpayers more money. HUD says loans with these types of downpayment assistance have double the typical foreclosure rate—about 6%.

Del Sontro counters that his industry is serving the most cash-strapped households and doing not much worse than those who get downpayment loans from family, who default at about 5%.

“They’re not the ideal lending community to start with,” Del Sontro says. “We’re not talking about executives who have 750 plus FICO scores and are making $150,000 a year.”

He denies that the standard process adds cost to the price of the home.

The non-profit groups believes HUD wants to eliminate their grants and replace them with their own version of a 100% financing program under a wider department modernization scheme Congress is considering. Del Sontro and Newman say the industry says it welcomes more regulation, suggesting mandatory borrower education, for example.

“They want to replace a private sector solution with a government program,” says AmeriDream’s Newman.

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