Down-payment aid debated

Home buyers turning to non-profits for cash

by J. Craig Anderson - Jul. 10, 2008 12:00 AM
The Arizona Republic

Arizonans treading in the housing market's choppy waters have found an unusual lifeline - a group of non-profit organizations that siphon down payments from home sellers to buyers.

Use of the decade-old practice known as down-payment assistance has dramatically increased since the demise of subprime lending because it offers another opportunity for buyers without substantial savings to obtain mortgage loans.

Advocates of down-payment assistance contend it has kept Arizona's failing real-estate market on life support by opening doors for responsible borrowers who simply lack the cash for a down payment.

Critics of the practice say it allows home sellers to kick back a percentage of bank-loaned money to buyers, which would be illegal if not done through a non-profit intermediary.

Housing statistics also indicate that charity-assisted loans default at higher rates compared with loans where the down payment comes from the buyer.

The Federal Housing Administration, which insures all loans involving down-payment assistance, has argued that such loans carry a higher default rate and could ultimately bankrupt the FHA.

A housing-reform bill up for vote in the U.S. Senate this week calls for eliminating the practice, while a competing resolution in the House would allow it to continue with some restrictions.

Phoenix loan originator Dean Wegner said nearly half of the home loans being issued involve seller contributions to special non-profit organizations that gift the money - usually 3 to 6 percent of the home's sale price - to buyers after charging a transaction fee of $400 to $600. Unlike other charitable contributions, the seller's donations are not tax-deductible.

"It's a loophole in the FHA guidelines that says the down payment can come from a 501(c)(3) charity," Wegner said.

Now that subprime loans and their creative financing schemes are gone from the market, lenders have returned in droves to FHA loans and the primary reason is down-payment assistance, he said.

"This is what everyone is talking about now," Wegner said, adding that sellers are generally willing to put up the money because it greatly increases their chances of finding a buyer.

The two leading providers of down-payment assistance are AmeriDream, based in Gaithersburg, Md., and Sacramento-based Nehemiah Corp.

Nehemiah was involved in 676 Arizona home-sales transactions in 2007 and is on pace to quintuple that amount this year, passing down payments from buyer to seller on 1,692 sales as of early July.

AmeriDream President Ann Ashburn said the two non-profits provide a vital service to low-income, minority and first-time home buyers while giving the economy a needed boost.

Ashburn opposes eliminating down-payment assistance programs that benefit "good, qualified people."

"The real tragedy will be that 100,000 to 200,000 home buyers annually will be locked out of homeownership," she said.

AmeriDream data indicates that roughly a million U.S. residents have used down-payment assistance in the past 10 years, including nearly 43,000 Arizonans.

Nationwide, $130 billion in loans have been generated by the practice, the non-profit says, with about $5.5 billion in Arizona.

Since its advent, down-payment assistance has faced several attempts by the federal government to ban its practice, but so far the courts have protected it.

In recent months, FHA Commissioner Brian Montgomery has launched a full-scale verbal attack on down-payment assistance, calling it a "shell game" that threatens to bankrupt his administration.

"We had to book an additional $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio," Montgomery said in June.

"Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate."

Montgomery also said the federally insured value of those loans is often inflated, because many sellers simply tack on the amount of their charitable contribution to the home's sale price.

About 30 percent of all FHA loans now involve down-payment assistance, according to the U.S. Department of Housing and Urban Development, FHA's parent agency.

HUD data indicates that charity-assisted loans were more than twice as likely to go into default or foreclosure in recent years than loans with the down payment coming from buyers' pockets.

However, Wegner said all FHA loans have credit-score and income requirements, which make them far less risky than subprime loans.

"These people are still getting scrutinized heavily," he said.

One such buyer is Lawrence Smith, who recently purchased a vacant Phoenix home from an out-of-state investor. Although he had never heard of down-payment assistance, his real-estate agent recommended he look into it.

"I had gone through a divorce, so most of my assets were gone," Smith said.

He got an FHA loan with down-payment assistance through AmeriDream. Smith said the entire process was transparent and spared him the six to 12 months it would have taken to save up a down payment.

"I think if you have people that have decent credit and decent incomes, but for whatever reason can't come up with the down payment, it makes a difference," he said.