Home loan aid programs could be cut in housing bill

Nonprofit groups are battling with the Bush administration over whether to kill programs that allow homebuyers without the money for a down payment to get funds from sellers that are channeled through charities.

Legislation being debated in the Senate this week eliminates nonprofit down-payment assistance programs, which have surged in popularity over the past decade. Lawmakers in the House, meanwhile, want to impose new regulations but not get rid of the programs entirely.

Critics say defaults and foreclosures from these no-money down loans are rising to such an extent that they threaten to put taxpayers on the hook if a government-run mortgage insurance fund someday needs a bailout. They also question whether the charities involved deserve their nonprofit status.

The down-payment arrangements involve charities that receive money from a home seller, who is eager to help the buyer out and get the deal done. The charity then turns around and provides a similar amount of financial assistance to the borrower, after charging the seller a processing fee - typically around $400 to $600 - for its services.

The programs, which receive no federal subsidy, help borrowers qualify for loans backed by the Federal Housing Administration, a government agency that backs loans made to low-income borrowers or those with poor credit.

While the FHA does not allow sellers to provide assistance directly to buyers, the government ruled in 1998 that money routed through a nonprofit doesn't conflict with that prohibition, allowing such programs to surge in popularity.

Opponents say sellers, including homebuilders, merely inflate their prices to pay for the down-payment assistance. But supporters say that without such programs, borrowers such as April Keels, a 33-year-old school administrator from Atlanta, would be locked out of the housing market.

Nearly four years ago, Keels bought a new four-bedroom home outside Atlanta for $160,000, with $5,000 in down-payment assistance arranged through Sacramento, Calif.-based Nehemiah Corp. of America.

Saving up money for a down payment, she said, would have taken years. Ending the programs, in her view, would "hurt a lot of people like myself, middle-class Americans who are working really hard, who are paying their bills" but don't have enough saved for a down payment.

With dozens of subprime lenders having left the mortgage market last year as the housing crisis accelerated, "we are about the only game in town for lower-income families who just want a shot at the American dream," said Scott Syphax, chief executive of Nehemiah.

Still, government officials warn that defaults on such loans threaten the financial health of the FHA. The agency's commissioner, Brian Montgomery, warned this month that the agency had to book a $4.6 billion charge in May against its capital reserves of more than $18 billion, due to expected losses on loans made over the past 15 years. Those forecast losses, he said, are largely due to charitable down-payment assistance programs, which he called "circular financing schemes."

"Unless we take action to mitigate these losses, we will either have to shut down or rely on appropriations to operate," said Montgomery. Last fall, the Department of Housing and Urban Development proposed eliminating the programs, was blocked in court and is now trying to do so again.

Sen. Kit Bond, R-Mo., says the surge of foreclosures nationwide provides ample evidence of what can happen when borrowers extend themselves too much.

"Putting a family in a home they cannot afford is setting them up for failure," Bond said. "They should wait until they've saved ... for at least a modest down payment."

The FHA loans traditionally require a down payment of 3 percent, but no-money down loans using charitable down-payment assistance grew to about 35 percent of the agency's new loans last year, up from about 5 percent in 2001.

Defaults are higher than the FHA's other loans. As of February, about 10 percent of borrowers receiving seller-financed down-payment assistance were either 90 or more days delinquent or in foreclosure, government statistics show.

That's greater than the rate of about 6 percent for ordinary FHA loans, but less than the rate of about 24 percent for subprime loans made to borrowers with poor credit.

In addition, the Internal Revenue Service two years ago questioned whether nonprofit groups that provide seller-funded down payment assistance should continue to qualify as tax-exempt charities. Mark Everson, the IRS commissioner at the time, said the organizations "mislead honest homebuyers and ultimately jack up the cost of the home."

The IRS has revoked the tax-exempt status of about 30 down-payment assistance providers, but the biggest organizations such as Nehemiah and AmeriDream Inc. continue to qualify as tax-exempt charities.

In Congress, supporters of the programs include the Congressional Hispanic Caucus and the Congressional Black Caucus, which wrote in a letter last week that eliminating the programs "will greatly reduce the gains that African-Americans have made in increasing homeownership rates."

Ann Ashburn, president of Gaithersburg, Md.-based AmeriDream, is hopeful that House lawmakers will be able to prevail. "Once you get past all the sound bites, the programs has a lot of merit," she said.

Rep. Barney Frank, D-Mass., and Rep. Gary Miller, R.-Calif, both argue that tighter regulations could solve any problems with the programs.

With tighter lending standards and restrictions to make sure appraisals aren't inflated, "I see no reason why it shouldn't continue," Miller said.

The housing bill would allow the government to back $300 billion in new, cheaper mortgages for homeowners facing foreclosure, but negotiations on the legislation hit a snag Wednesday over whether a $6 billion package of tax breaks for renewable energy producers should also be included. The legislation appeared likely to be pushed off until next month, after lawmakers return for a weeklong July 4th break.