The latest government blunder is an ill-timed and unfair announcement by the Federal Housing Administration (FHA), which will negatively impact millions of potential homeowners nationwide. FHA is overseen by HUD, the U.S. Department of Housing and Urban Development. On Monday, FHA said it was banning borrowers using FHA loans from receiving down-payment assistance offered from charities and non-profit agencies that give homebuyers grants based on money received from home sellers.
What You Must Know About Down Payment Aid Programs
Over the past decade, hundreds non-profit agencies – including well-regarded organizations like Ameridream (http://www.ameridream.org) and The Nehemiah Foundation (http://www.getdownpayment.com) – have helped more than two million individuals and families become first-time homebuyers. But Monday’s announcement by FHA, which becomes effective in 30 days, effectively chokes off this form of down-payment assistance – at least as it pertains to FHA loans.
That’s unfortunate, because everyone knows that coming up with a down-payment is the biggest obstacle to homeownership in
In the end, without non-profits providing aid for down-payments – and yes, even aid that is funneled directly or indirectly from home sellers – minorities and working class families will be the ones who suffer most. Homeownership will become increasingly out of their reach. For minorities and low-to-moderate income families that may have been inclined to use FHA loans, those loans are now a far less attractive option.
So why this new FHA ruling – and why now?
The feds claim the measure is to prevent mortgage defaults. But I’m not buying that argument – and neither are many other astute observers.
FHA loans are government-insured loans that protect lenders when a borrower defaults on a mortgage. A decade ago, FHA loans were so popular that they accounted for nearly 1 out of every five mortgages in
There is little doubt that the rise of the sub-prime mortgage market this past decade was a direct result of easy credit policies, rising home prices, and the decline of federally insured FHA loans as a viable alternative for borrower with spotty credit records.
Which Borrowers Are Most Likely To Default On Their Mortgages?
The FHA is acting on its concern that giving grants to low to moderate income people might result in homeowners with above-average default rates. In fact, HUD in 2005 twice published reports suggesting that very idea. HUD also said that people who received down payment assistance from non-profits were endangering the FHA insurance pool. But other research doesn’t support concerns that these borrowers are any more high-risk than others. And bankers don’t seem to believe it either. That’s why the Mortgage Bankers Association is outraged at the FHA ruling.
“The default rate is a lot lower when homeowners have gone through counseling. That’s why we require it on certain programs.” says Scott Guthrie, a vice president with M&T Bank Corp in
In response to the HUD survey, members from HAND – the Homeownership Alliance of Nonprofit Downpayment Providers – published their own research study on the matter. According to HAND’s findings, about 75% those receiving down payment gifts get their money from relatives, while roughly 25% get money from non-profits and community-based organizations. But HAND concluded that the default rate is no different between the two groups of buyers: exactly 5.1% for each. So clearly, just getting money from a non-profit won’t automatically make someone more likely to get behind on a mortgage.
Currently, 40% of all FHA loans feature some form of down payment assistance. But FHA isn’t playing fair with this new rule. It’s only stopping down payment aid that comes via non-profits. It’s not placing any restrictions on money a potential homebuyer can get from well-heeled relatives or friends. Needless to say, generally speaking, many minorities and working class families are less likely to have wealthy family members and friends to help them out by supplying a down-payment gift.
Other research also contradicts HUD’s findings.
A study by the University of Georgia Family & Consumer Services College found that many families earning as little as $30,000 annually can become successful homeowners when they are aided by down payment programs.
Interestingly, minorities benefit most from such aid. A study from the Federal Reserve Bank of
Programs that require no down payment result in 2.5% more renters becoming homeowners, according to the Fed’s research. But a cash payment of $5,000 dramatically boosted the rate of homeownership, by increasing the percentage of renters who can own a home by up to 13% for African Americans, and 7% for Hispanics. When the cash payment is $10,000 those percentages double.
Against this backdrop, what is FHA doing? Instead of promoting down-payment programs, it is instead banning them. The agency is also trying to revamp its own rules to be able to insure no-money-down loans. All of this flies in the face of Fed data about what would have the most impact on homeownership in
The IRS Also Puts First-Time Buyers In A Jam
An IRS ruling in May 2006 shook the entire down payment assistance universe. In essence, the IRS said many organizations that provide down payment assistance weren’t following the letter of the law, and didn’t qualify as tax-exempt charities. At issue was the practice of non-profits essentially playing middle men, obtaining seller donations and passing along the exact amount of that contribution at or before closing to homebuyers.
The IRS said such activities don’t adhere to the standards of organizations operating as non-profits under the law. To meet the definition of a tax-exempt charity, a non-profit housing agency should offer a complement of educational services that go beyond just providing grants. Another critical point, the IRS said, is that non-profit housing organizations must have a broad-based fundraising program, securing gifts, grants and contributions from a multitude of sources, like foundations, businesses, government agencies and the general public – not just donations from home sellers. When non-profits only get money from a home seller in order to pass along that money to a home buyer, that serves a private interest (i.e. the parties involved), and not the public’s interest, which is a key part of the definition of a charitable organization.
This IRS ruling resulted in many non-profits shutting their doors, discontinuing down payment assistance programs, or changing their organizational structure. The Neighborhood Gold Program (http://www.neighborhoodgold.com) is a case in point. Previously, if you want to buy a home with no money down, the Neighborhood Gold Down Payment Assistance Program could help you do it. Neighborhood Gold worked with The Buyers Fund, Inc. a non-profit organization, to offer first-time homebuyers grants. Now those grant-making activities have ceased. While the Provo, Utah-based Neighborhood Gold organization still offers homebuyer education, it discontinued its down payment assistance program as of July 3, 2007.
Also, American Family Funds (http://www.affdpa.com), which had been a non-profit, is now operating as a government grant program. Interestingly, Neighborhood Gold and American Family Funds were both founding members of HAND.
As an African-American personal finance expert, I’ve heard from a lot of minorities who feel slighted by the banking system. They worry that their race or ethnic background will hurt their chances of getting a mortgage, or they complain that lenders unfairly saddle them with higher interest rates and bigger loan fees. Unfortunately, predatory lending and discrimination do exist. For instance, recent separate studies by the Federal Reserve Bank, the Center for Responsible Lending and the Consumer Federation of America all revealed that African-Americans, especially black women, are two to three times more likely than whites to be steered into more costly sub-prime mortgages, regardless of credit history or income. Sadly, with policies like those put forth today by FHA, as well as that recent IRS ruling, it’s easy to see how such discrimination can still occur.
0 comments:
Post a Comment