Members of House Say “YES” to FHA Down Payment Fraud “NO” to Reform

FHA rules do not allow property sellers to give buyers the funds for their down payment.  The reasons why FHA prohibits the borrower from obtaining funds for the down payment from the seller are numerous.  However, common sense dictates the most obvious reason is that it is simply a scheme to enable 100% financing.  Why is it then that the House of Representatives wants to override FHA and recent legislation to support down payment fraud and undermine reform?  

Background:

Real estate brokers and lenders have been getting around FHA’s rules for years by encouraging sellers to simply give the down payment to the buyer through an intermediary such as a non-profit organization.  As a result, numerous “non-profit” organizations and grant brokers have sprung up all over the country eager to 'process' down payment grants for a fee.  This has led to a booming business for grant providers, builders, real estate agents, and lenders who all earn fees from this part of the real estate industry.  Buyers also love the programs because it means that they don’t have to budget, sacrifice, or save for a down payment.  Sellers especially love these programs because it increases home prices (typically the price is raised) while providing a steady stream of buyers that are not as value conscience as buyers who save and carefully budget for their home purchases.  

And of course, wherever there is a big pile of money you will find members of the House of Representatives that are more than happy to ignore the obvious in order to support the causes of loyal campaign contributors.  

With all this money flowing and so many shiny happy people, you might ask “So, what’s the big deal?” Glad you asked.  The problem is that down payments are there for a reason, and borrowers that don’t have any skin in the game are simply riskier than borrowers that do have skin in the game.  As a result, FHA/HUD has been trying to terminate seller funded down payment grants for years until Congress finally put an end to them this year via the Section 2113 of the Housing and Economic Recovery Act of 2008 (HERA) which was signed by President Bush on July 30, 2008.  

However, on July 31, 2008, in what can only be deemed as an act of bad faith, Represenatives Al Green (D-TX), Maxine Waters (D-CA), Christopher Shays (R-CT), and Gary Miller (R-CA) introduced H.R. 6694 which proposes to preserve seller funded down payment grants.  Their solution for offsetting the excessive risk that seller-funded down payment grants create is to implement risk based mortgage insurance premiums that would increase premiums for many borrowers who actually save their down payment.  The kicker is that the higher premiums only apply to borrowers with middle to low scores, and borrowers with credit scores of 680 or greater would not have to pay risk based premiums at all.  This, of course, requires FHA to adopt a risk assessment model that has already failed the mortgage industry and created catastrophic losses that threaten our entire financial system just to enable a practice that sustains housing inflation and promotes mortgage fraud.

Facts:

Despite all the smoke and mirrors and countless reports that have been commissioned or produced by the down payment assistance providers, the mechanics of down payment grants remain that the seller is the ultimate provider of down payment funds.  All day long and twice on Sunday, that is merely laundering the down payment which is the epitome of fraud (and by fraud, I mean deception and/or trickery).  I understand that fraud is not a nice word, and that its not likely to win me any friends in the House of Representatives.  However, I don’t write this blog to make friends or give people the warm and fuzzies.  I write this blog because I care about what is going on in America and I am not willing to go around with my eyes shut remarking on the how fine the Emperor’s new clothes are.  The Emperor isn’t wearing any clothes, and the House of Representatives is supporting a bill that promotes outright down-payment fraud.  

But you say “C’mon, how are seller-funded down-payment grants considered down payment fraud?” Okay, here are the facts, and you decide:

1. FHA requires a 3.5% cash investment from the borrower.  The source of the funds must be via borrowers funds or bona fide non-profit/public assistance or family gift.  The funds may not be provided by the seller or for-profit entity. 

2. To circumvent FHA rules, a third party pledges the down payment funds to the borrower, but REQUIRES the seller to reimburse matching funds plus processing fee after closing.

3. Prior to closing, the grant provider forwards the down payment to the closing agent with the requirement that matching funds from the seller plus fee be returned after closing.

4. Funds to reimburse the grant provider plus grant processing fee are withheld by the closing agent and forwarded to the grant provider after closing.

5. The IRS treats funds provided by the seller as a selling expense and not as a charitable contribution.  

6. The IRS considers the grant a rebate against the sales price for the buyer which reduces the buyer’s cost basis in the property for tax purposes.   

And Now a word on some of the Sponsors:

The most notorious sponsor of H.R. 6694 is representative Gary Miller (R-CA) who, according to articles in the New York Times, LA Times and the Washington Post, was being investigated by both the FBI and IRS over questionable land deals.  The media has reported everything from land deals with a campaign contributor, charges of improper claims of imminent domain to avoid tax liability, and misuse of staff for personal business. The Blogosphere is rife with outrage and criticism over the antics of Miller.  It is interesting to note that Rep. Miller's liquid net holdings (less real estate and his own company stock) increased from a range of $1,093,035 to $2,670,000 in 1998 when he started in the House, to a range of $7,499,039 to $33,463,000 in 2007.  Its no surprise Mr. Miller is ranked 10th in the House of Representatives in regard to personal wealth or that he receives substantial donations to his campaign from real estate related industries.  Click here to view campaign donations for Gary Miller.  

Rep. Gary Miller is a co-sponsor and member of the House Financial Services Committee that approved the Mark-Up of H.R. 6694. At the Mark-Up hearing, Rep. Miller cited support from Realtors and National Home Builders. 

Another co-sponsor of the H.R. 6694, Christopher Shays (R-CT), has also come under fire in an article published in the New York Post which points out that the National Association of Realtors (NAR) has pumped $800,000 into Shays campaign.  Not surprisingly, NAR is a proponent of H.R. 6694, while Shay's opponent, Jim Himes is opposed to H.R. 6694.  While NAR has been doing somewhat of a rug dance to deflect criticism over their zealous infusion of in excess of $800,000 to Shays campaign, the fact still remains that NAR issued a letter to the House Financial Services Committee on September 15, 2008 in support of H.R. 6694.  Deny and spin all they might, NAR's actions speak for themselves.

Representative Maxine Waters (D-CA) doing damage control for Rep. Shays was quoted in the Hartford Courant as denying that NAR lobbied for H.R. 6694.  The Hartford Courant states:    

"On Friday, Waters concurred, saying the measure was not lobbied by the National Association of Realtors.  

"It was pushed basically by community groups and organizations who wanted to have people have an opportunity to get housing, who maybe couldn't afford the down payment, but maybe could afford to pay a mortgage every month," Waters said."

However, Teri Buhl, the New York Post writer who exposed the Shays/NAR $800,000 relationship was quick to point out inaccuracies in the Hartford Courant story in a followup story published in the Mortgage Implode-O-Meter.  Buhl writes:    

"After reading these comments I called Trupo to clarify the issue, reminding her that the same week the Congressman helped get H.R. 6694 marked up and out of committee, the NAR began their first T.V. ad supporting Shays.   

Trupo responded that media buys take time to plan and they had agreed to support Shays well before that.  When pressed about the timing of the NAR-PAC decision to back Christopher Shays with their members' money Trupo firmly responded, "We finalized our decision for Shays in August." 

Interesting, considering Shays' actions show he jumped into the seller-funded down payment assistance party well before that."

Based on NAR's clear support of H.R. 6694 and Buhl's research, Its hard for the cat to deny eating the canary while the feathers are sticking out of their mouth.  

Conclusion:

Since it certainly doesn’t add up to bona fide down payment assistance, what else do you call it? Scheme? Scam? Actually, that is exactly what the IRS calls it.  Regardless of what you call it, paying a third party to conceal the source of the funds for the down payment is dishonest. Thus, the sponsors and supporters of H.R. 6694 stand for deception and trickery. 

This brings us to the question of what exactly is going on with our society that blindly accepts the practice of elected officials openly and notoriously supporting “fraud/scams/schemes” (choose word) against the will and advice of FHA?  Click here to view members of the House of Representatives who support H.R. 6694.  Are seller-funded down payment grants and H.R. 6694 bogus? Tell me your thoughts.    

More on the Down Payment Assistance Provider Controversy:

Check out the down payment grant provider lawsuit against the Mortgage Lender Implode-O-Meter and myself to remove my story regarding the Penobscot Grant America Program and the Christopher Russell and Ryan Hill.  Click here to view Mortgage Lender Implode-O-Meter page on lawsuit.

Click here to view the story the down payment providers don't want you to read.  

Check out the Genesis Program and the multiple entities that are brokering the program as a for-profit venture.  Click here to view. 

Resource: Links to information and reports:

1998: FHA Approval Letter of the Nehemiah Home Ownership Program dated April 3, 1998

1999: Sources of Homeowner Downpayment; Proposed Rule [Docket No. FR-4469-P-01] published September 14, 1999.  Proposal to prohibit non profit organizations from directly or indirectly receiving funds for the buyer’s gift from the seller. 

2000: Mortgagee Letter 00-8, dated March 3, 2000 regarding Nonprofit Agency Participation in Single Family FHA Activities clarified that HUD does not approve down payment assistance programs when the down payment assistance is in the form of a gift, and reiterates that lender’s are responsible that programs meet  guidelines as specified in the 4155.1 Rev 4, Change 1.

2001: Withdrawal of Proposed Rule on Sources of Homeonwer Downpayment Pursuant to Section 203 of the National Housing Act. [Docket No. FR-4469-N-02].

2002: Mortgagee Letter 2002-2, dated January 16, 2002 regarding Credit Policy Issues-Payment of Borrower Obligations by Nonprofits.

2002: Down Payment Assistance Program Operated by Non Profit Entities, OIG Report # 2002-SE-0001, dated September 25, 2002.  Click here to read. 

2003: FHA Case File Review: Underwriting Practices and Loan Characteristics Contributing to FHA Loan Performance Report # 2003-SE-0001.  Click here to read.

2005: An Examination of Downpayment Gift Programs Administered by Non-Profit Organizations: March 1, 2005. Click here to read.

2005: Mortgagee Letter 2005-02, dated January 4, 2005 titled Seller Concessions and Verification of Sales clarifies that appraisers much verify all sales concessions, including seller funded down payment assistance and make appropriate adjustments.  Select Mortgagee Letter 05-02 and 05-06. 

2005: GAO Report: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance GAO-06-24  November 9, 2005. Click here to read. 

2006: IRS Targets Down Payment Assistance Scams; Seller-Funded Programs Do Not Qualify As Tax Exempt.

2006: Mortgagee Letter 2006-13 dated May 25, 2006 regarding Charitable Organizations Making Down payment Gifts advises mortgagees how to determine whether the gift from the providing charitable organization can be used for all or part of the borrower’s down payment.  It also clarifies that when the   organization’s non-profit status is revoked or voluntarily terminated, that as long as the contract is signed on or before the termination, that the source would be deemed acceptable.

2007: Standards for Mortgagor’s Investment in Mortgaged Property: Proposed Rule[Docket No. FR-5087-P-01] Proposed Rule published May 11, 2007.

2007: GAO Testimony Before the Subcommittee on Housing and Community Opportunity, Committee on Financial Services, House of Representatives, Mortgage Financing, Seller-Funded Down Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance.  Released June 22, 2007.

2007: Standards for Mortgagor’s Investment in Mortgaged Property: Final Rule [Docket No. FR-5087-F-02] dated October 1, 2007 (effective 10/31/07).  

2007: Order vacating HUD’s 2007 Final Rule entitled Standards for Mortgagor’s Investment in Mortgaged Property and remanding the matter back to HUD.  Civil Action # 07-1282 (PLF) Penobscot Indian Nation, et al, v. HUD, et al; and Civil Action # 07-1752 (PLF) Ameridream, Inc. v. Alphonso Jackson/HUD.

2008: Standards for Mortgagor’s Investment in Mortgaged Property: Additional Public Comment Period [Docket No. FR-5087-N-04] Proposed Rule; Reopening of Comment Period.  

2008: Housing and Economic Recovery Act 2008 (HERA).  Section 2113 prohibits seller-funded down payment assistance.  Effective for all FHA loans receiving credit approval after 10/1/2008.

2008: H.R. 6694, Short Title: FHA Seller-Financed Downpayment Reform and Risk Based Pricing Authorization Act of 2008 introduced in the House of Representatives on 7/31/2008 a day after President Bush signed the Housing and Economic Recovery Act of 2008 into law.

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