Origination News Feature Story

Downpayment Assistance Providers Seek Bill

By Brian Collins

WASHINGTON-Nonprofit housing groups and their supporters will be lobbying Congress to pass a bill in September so they can continue to arrange downpayment assistance on Federal Housing Administration loans in October.

But they will likely have more success next year with a new Congress and new administration.

Congress passed a major housing bill in July that bans seller-funded downpayment assistance on FHA loans starting Oct. 1.

Sources indicate that a bill introduced by Rep. Al Green, D-Texas, to repeal the ban of seller-funded DPA will be lucky to make it through the House before Congress adjourns for the elections.

"Maybe they will make it through the House, but it doesn't have a chance in the Senate," one source said.

Senate Banking Committee leaders support the elimination of DPA on FHA loans, which is a critical component of the homeownership programs run by Nehemiah Corp. of America, AmeriDream and other nonprofit groups.

The Green bill would allow FHA to charge higher mortgage insurance premiums for DPA borrowers with low credit scores.

For DPA borrowers with credit scores above 679, FHA would have to charge its standard mortgage insurance premium.

"I have introduced this bipartisan bill to revive this critical program under new standards that will effectively balance the risk of potential foreclosures with the goal of increasing homeownership," Rep. Green said just before Congress adjourned for its August recess.

Reps. Maxine Waters, D-Calif., Gary Miller, R-Calif., and Christopher Shays, R-Conn., are co-sponsors of the bill (H.R. 6694).

The Bush administration and the Department of Housing and Urban Developing have been trying to stop seller-funded downpayment programs for years due to high default and claim rates on FHA-insured loans.

In a seller-funded DPA transaction, the builder or home seller actually provides the downpayment assistance and they usually jack up the price of the house to cover the expense. The nonprofit brings the seller and buyer together for a fee.

However, borrowers that receive seller-funded DPA have default rates three times higher than other FHA borrowers, according to HUD.

HUD data also show that FHA does not lose money on seller-funded DPA loans when the borrower has a credit score above 679.

However, the claim rate is twice as high as similar FHA loans where the borrower receives a gift or downpayment assistance from a relative or a government program.

Lately, FHA single-family originations have been surging and loans with seller-funded DPA are tracking that growth and continue to make up one-third of FHA loan production.

A Credit Suisse mortgage report estimates that "first-time homebuyer volumes are likely to decline by $2 billion to $3 billion per month after October" due the elimination of the seller-funded DPA programs.

Nehemiah president Scott Syphax said a lot of people are "aghast" that Congress is killing this program. And there is a grassroots effort to reinstate the DPA program.

"I know how cynics in Washington view the program. Out here in the real world, what we do matters. It matters to the homebuyers. It matters to the local economy. It matters to the people who want to serve low-income homebuyers," Mr. Syphax said.

The National Association of Home Builders is a strong supporter of downpayment assistance and the builders are working with the nonprofits to build a coalition and try and reinstate the program this year.

"We would like to see it happen this year but the prospects are bleak," said NAHB executive vice president and chief executive Jerry Howard.

Nevertheless, the builders will be talking to the presidential candidates and their campaigns along with senators and congressmen to "make sure we can move this bill early next session," Mr. Howard said.