Thursday, June 26, 2008
Down payment assistance charities, blamed for housing crisis, targeted for elimination in housing bill
The Senate version of the Foreclosure Prevention Act of 2008 (Section 113) contains the following language, designed to shut down seller-funded down payment assistance charities: [the quoted provision imposes a down-payment requirement on first time home buyers who seek FHA assistance, but, in effect, prohibits the use of funds from a seller-funded down payment assistance charity]
SEC. 113. CASH INVESTMENT REQUIREMENT AND PROHIBITION OF SELLER-FUNDED DOWNPAYMENT ASSISTANCE.
Paragraph 9 of section 203(b) of the National Housing Act (12 U.S.C. 1709(b)(9)) is amended to read as follows:
`(9) CASH INVESTMENT REQUIREMENT-
(A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.
(B) FAMILY MEMBERS- For purposes of this paragraph, the Secretary shall consider as cash or its equivalent any amounts borrowed from a family member (as such term is defined in section 201), subject only to the requirements that, in any case in which the repayment of such borrowed amounts is secured by a lien against the property, that--
(i) such lien shall be subordinate to the mortgage; and
(ii) the sum of the principal obligation of the mortgage and the obligation secured by such lien may not exceed 100 percent of the appraised value of the property.
(C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:
(i) The seller or any other person or entity that financially benefits from the transaction.
(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).
The red-lettering in section (C) is my own gloss on the language in the statute. Even most real-estate lawyers would miss the significance of that section without a bit of important context. For years, the Service has been trying to shut down seller-funded down payment assistance charities. These are 501(c)(3) organizations that solicit funds from home builders and developers. The charities then make grant to lower and middle income families sufficient to make a down payment on a home, perhaps built by the same builder or developer who made the contribution. In essence, the charity convinces the home builder to provide a discount (equal to the down payment necessary to obtain third party financing) for first time home buyers. Oftentimes those homes are FHA backed, providing the creditor with even more protection. The Service mistakenly asserts that the seller-funding of the downpayment creates an improper private benefit, nevermind the public benefit gained from encouraging home ownership. Even if that were true, the answer, of course, would be to deny the seller a charitable contribution deduction not shut down the charity altogether!
The Foreclosure Prevention Act, a monstrous amalgamation of provisions that would make even a tax lawyer blush, does just that, shuts down the charities altogether. Proponents blame down payment assistance programs for the housing mess, never-mind the greed and graft of lenders, speculators, and adjustable rate mortgage brokers who really caused the mess. Talk about a regressive policy. From a Wall Street Journal Article last weekend:
The [no down-payment] offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment. Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year. The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.
This all seems ridiculous to me. Blaming the charity and their beneficiaries for the housing mess is like blaming a lowly gas station attendant for price of gasoline. Everybody knows that the housing market crash is more a result of "irrational exuberance" of better off investors than the poor first time home buyers. Indeed, most down-payment assistance charities engage in extensive screening and require beneficiaries to attend long hours of budgeting classes before they are granted down payment assistance. Moreover, most of the homes in default these days were financed through adjustable rate mortgages, which FHA and most down-payment assistance charities do not support! No wonder both the Congressional Black and Hispanic Caucuses smell a rat:
The nonprofit groups have the backing of several influential members of Congress, including Reps. Maxine Waters (D., Calif.) and Barney Frank (D., Mass.). The Congressional Black Caucus and the Congressional Hispanic Caucus sent letters this month to House and Senate leaders urging that the programs stay intact, citing their role in improving minority home-ownership rates.
Fortunately, the House version of the bill does not contain a prohibition against seller-funded downpayment assistance. Still, the IRS is nevertheless pursuing its policy of denying or revoking tax exempt status to charities that receive funding from sellers or developers. For more discussion on the FHA efforts against downpayment assistance charities see this entry in the WSJ's Development Blog.