Ban on homebuyer aid fought

Nonprofit asks stay of HUD's halt to seller-financed assistance

October 13, 2007|By Jamie Smith Hopkins | Jamie Smith Hopkins,Sun reporter

A Gaithersburg nonprofit that provides down payment assistance to homebuyers is battling a government plan to ban the practice by the end of the month.

AmeriDream Inc. is one of the biggest groups that help low- and moderate-income buyers with the 3 percent down payment required for loans insured by the Federal Housing Administration. The aid is financed by money from home sellers. About a third of the 314,000 people who received FHA loans in the 2006 fiscal year had down payment assistance from nonprofits.

The Department of Housing and Urban Development, which oversees the FHA, intends to stop accepting deals with such seller-financed payments because it says people who get that help are more likely to lose their homes.

HUD officials have considered such a move on and off for years, long before the current turmoil in subprime lending that has led banks to tighten their standards.

FHA loans, like subprime mortgages, are aimed in part at lower-income buyers and people with imperfect credit. The loans, made by private lenders and insured by FHA, rapidly lost ground during the housing boom as buyers turned to 100 percent financing, loans with interest-only payments and other exotic products.

AmeriDream, which says the payment assistance ban will hurt lower-income homebuyers, filed a lawsuit this month to overturn it. This week it asked the U.S. District Court in Washington to put a stay on the ban while arguments are heard. The nonprofit says HUD ignored a variety of suggestions to improve down payment assistance, such as requiring that buyers receive counseling.

"We're going to fight this thing and fight this rule hard so that we can have an opportunity to continue to provide the much-needed assistance," Robert Newman, executive vice president and chief operating officer of AmeriDream, said in an interview yesterday.

Newman said the nonprofit has provided assistance to more than 200,000 homebuyers since it was founded in 1999, about 2,200 of those in Maryland. Most were first-time homebuyers, he said.

Newman, who said AmeriDream also helps homeowners avoid foreclosure, believes buyers who get down payment assistance are losing their homes more frequently because they don't have resources to tap in times of trouble - just as they didn't have the money for the down payment.

But HUD thinks buyers aren't getting any favors from the down payment help.

About 15 percent of the loans made in the 2000 and 2001 fiscal years with nonprofit down payment assistance have since ended in foreclosure, compared with about 6 percent of total FHA loans, the government said. Later mortgages also have above-average foreclosure rates.

Brian Montgomery, the federal housing commissioner, said in a statement when the rule change was announced that sellers simply raise the price of their homes to cover the donation or fee they will have to pay.

"The homebuyers are often unaware that the `gift' is something they end up paying for," Montgomery said in the statement.

The Internal Revenue Service ruled last year that down-payment-assistance nonprofits aren't truly charities if they are just funneling money from sellers to buyers. It calls such payments "self-serving, circular financing arrangements."

AmeriDream gets almost all of its funding from seller service fees. Newman said a buyer does not receive assistance from his or her seller, but rather from a pool of money contributed by earlier sellers. He said a seller's payment amount depends on a variety of circumstances, not simply the amount of the assistance given to the buyer.

"We still have our 501(c)3 [tax exempt] status," said Newman, adding that he doesn't expect to lose that charity designation.

The National Association of Home Builders is among those supporting the assistance payments. It has argued that a ban would have a "devastating impact" on efforts to expand homeownership.

Holden Lewis, who follows mortgage and real estate matters for Bankrate.com, said there's been talk of banning the practice for almost as long as it has been allowed. The debate comes down to a value judgment, he said: If 15 percent of the homeowners end up in foreclosure, is it better to ban the assistance altogether to avoid that or continue it for all the buyers who don't end up in trouble?

"On this one, I really, really feel ambivalent," said Lewis, who thinks both critics and proponents have a point. "I probably come a little bit more down on the side of the down-payment-assistance programs because they do say, `Look, if there are objections, then let's refine it.'"

jamie.smith.hopkins@baltsun.com

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