Ameridream and Nehemiah Lobbied to Stop 100% Financing

Ameridream Inc and Nehemiah Corp of America are lobbying to legalize their (currently illegal) business model, as it involves laundering down payments on FHA loans from home sellers to buyers for a fee.  As previously chronicled on this blog, HUD fought for years to end this practice, arguing it  has resulted in dramatic losses to the FHA program and borrowers.  Nehemiah and Ameridream's case for bypassing the normal down-payment requirement is that it "opens the door to homeownership for thousands of buyers."  I have argued against this point previously.  However, for this article, we'll accept the claim at face value.  So naturally, you would think that Nehemiah and Ameridream would support above-board, legitimate 100% financing by the FHA itself. 

But if you thought that, you would be dead wrong.  Amazingly, public records show that Ameridream and Nehemiah actually lobbied against legislation that would have allowed FHA to create a zero down-payment pilot program.  Not only did they lobby against legislation for 100% FHA financing, they actually testified that 100% financing might be too risky for FHA.  In doing so, they've inadvertently provided some of the best and most authoritative arguments against their own, arguably-fraudulent programs to get borrowers "free homes" insured by the FHA.

Background:

H.R. 3755- ZERO DOWNPAYMENT ACT OF 2004

In 2004, H.R. 3755- Zero Downpayment Act of 2004 was introduced in the House of Representatives.  The purpose of the bill was to authorize FHA to implement a special pilot program that would have allowed for zero down payment.  Although both Ameridream and Nehemiah publicly praised the spirit of the bill, their actions and testimony prove otherwise. 

On March 24, 2004, Ann Ashburn, CEO of Ameridream, made the following statement in her testimony to the U.S. House of Representatives Subcommittee on Housing and Community Opportunity, Committee on Financial Services regarding H.R. 3755: (Click here to read entire transcipt on Committee Meeting)

"Second, we would suggest that in considering how best to promote homeownership through zero down loans, the subcommittee safeguard against potential concerns to home buyers, such as higher monthly payments, higher interest rates, and larger mortgages. Additionally, the subcommittee should bear in mind that homeowners taking on zero down loans would enter homeownership with zero, or even negative, equity, a position that could make them likely to default on their loans."

Did I hear that right, or did she say that being in a zero equity position could make borrowers more likely to default?

Now let's look at what Scott Syphax, CEO of Nehemiah Corporation of America, had to say to the same subcommittee:

"In this particular program as it is proposed today, they will likely walk in with zero equity, or, as the gentleman who spoke before me referenced, potentially negative equity… 

… However, our concern is that in the increased fees that potentially are put in place to finance the program, that you disadvantage the least among us able to pay. That extra $25 to $50 a month, while maybe not meaningful to some of us, for those that we are all attempting to serve with this legislation in the low- and moderate-income categories, that money is very, very dear.  And because of our experience, and the studies that we have done in showing that downpayment-assisted families can successfully be homeowners, we suggest that it be carefully evaluated before any decision is made as to what the increase in the MIP that is imposed on this program."

That's funny.  H.R. 600, which Syphax and Ashburn fully support (if they didn't write it themselves), provides for increased premiums which are almost double regular premiums and substantially higher than proposed under H.R. 3755.  Yet surprisingly, neither seem to care about the additional cost to the home buyer now.   Curiouser and curiouser!

In a press release following the testimony, Syphax went on to echo Ashburn's concerns that zero equity could lead to higher default risk: (Click here to read entire release):

"Unlike families who today use privately funded down payment assistance, under the proposed new system, homebuyers could move into a home in which they have negative equity of up to eight percent. Under this scenario, when a homebuyer goes through economic hardship the homeowner may be more willing to simply walk away from the home and let the lender foreclose. 

Aside from the obvious fact that inflating the sales price to include the down payment still leaves the borrower with no equity or "skin in the game", the higher financed mortgage insurance premiums under H.R. 600 would also reduce the borrower's equity.  And since the market is declining, borrowers are likely to end up with more negative equity even faster.  

H.R. 3043- ZERO DOWNPAYMENT PILOT PROGRAM OF 2005:

In June 2005, H.R. 3043 titled the Zero Downpayment Pilot Program of 2005 was introduced in the House.  Here is an excerpt from Ameridream's testimony: (click here to view Ameridream press release)

AMERIDREAM, INC. TESTIFIES ON CONGRESSIONAL BILL H.R. 3043, "The Zero Downpayment Pilot Program Act of 2005" Washington, D.C. (June 30, 2005)

"Through the current proposal, families will enter homeownership with a 100-105% loan-to-value. This would place families in the position of owing more than the house is actually worth, thus providing them with zero to negative equity in the house. In addition, the family will also have a higher interest rate and pay additional costs, all adding up to a higher monthly mortgage payment, in turn, reducing low- to moderate-income wage earners' disposable income to meet other family needs.

It is also important to recognize that the additional money paid monthly by these homeowners has increased from the amount they would have paid under last year's bill. According to the Congressional Budget Office, the current bill would cost around $38 million over 5 years. You may recall that last year's score was over $560 million. CBO has reported that the difference is made by charging participants higher interest: 0.75% for the first five years (which is up from 0.50%) and 0.50% for the remainder of the loan (which is up from 0.25%) until it reaches a 78% LTV.  While we recognize the current bill requires housing counselors to disclose the higher fees, it is important that home buyers know that downpayment assistance providers are a resource for assistance in paying these fees.

Third, we recommend that the Zero Down program homebuyers have a 700 credit score.
The amount of equity that a family has in its home has been shown to be one of the principle drivers of mortgage default. The vast majority of borrowers do not default. Borrowers are much more likely to continue with their mortgage payments if they have equity in their homes even if the borrowers encounter financial hardship due to a job loss, a divorce, or a serious illness. Borrowers with positive equity can sell or refinance their homes and generate cash. In comparison, cash-strapped borrowers who owe more than their homes are worth are much more likely to simply turn in the keys and let the loan foreclose.

Require a 700 minimum credit score?! Now that is really interesting considering that H.R. 600 would allow for a minimum 620 credit score.  While borrowers with credit scores at or over 680 would not have to pay increased premiums, borrowers with scores between 640 and 679 would have to pay an increased upfront premium of 3.0% and annual premiums of 1.25%- and HUD would have to establish even higher premiums for borrowers with lower scores.  That is a significant increase considering that current premiums are 1.75% upfront, and .55% annually for high loan to value loans. But again, neither Ameridream or Nehemiah has complained about the substantial increased cost burden proposed under H.R. 600.  And of course, their fees for serving as the down payment "middleman" further adds to the cost. 

How much more would a borrower have to pay under H.R. 600 as opposed to H.R. 3043? Let's take a look:

Under this comparison, the sales price is increased to cover the seller's contribution for the down payment "gift" so that the net proceeds to the seller are equal.  The mortgage insurance used in the comparison are based on premiums proposed for each bill.  As you can see, the loan amounts are higher for the loan involving seller-funded down payment assistance (SFDPA) under H.R. 600 than the 100% financing proposed under H.R. 3043.  Furthermore, the costs would be substantially higher for the borrower utilizing SFDPA than FHA 100% financing.  While both programs result in negative equity, the negative equity for the SFDPA loan would be greater than FHA 100% financing.  

Now let's look at what happens if you reduce the sales price for the 100% loan to match the seller net to the the SFDPA transaction:

As you can see, the FHA 100% loan once again beats the SFDPA in terms of equity and overall borrower costs.  But what if the sales price for both are exactly the same (unlikely in practice)?  Let's take a look:

At first glance, it may appear that the SFDPA loan beats the 100% FHA loan by a little less than $500 in borrower costs.  However, you are forgetting that the net to the seller is $4000 less for the SFDPA transaction.  But this analysis isn't comparing apples to apples — if the seller were to make the same contribution for the FHA 100% transaction and provide a closing cost or buy down credit, the savings to the borrower would be substantial.

Anyway you slice it, the privatized profits and distorted sale incentives of SFDPA do the following compared to the proposed FHA 100% loan programs:

• saddle the FHA with a higher loan balance to insure
• saddle the borrower with more negative equity (and thus higher foreclosure likelihood)
• allow a middle man to needlessly abscond with a transaction fee 

Now let's take a peek at lobbying efforts. 

According to lobbyist reports, both Ameridream and Nehemiah hired lobbyists to curtail legislation for 100% financing as well as the 2003 American Dream Downpayment Initiative.  

Here are but two examples:

• Patton Boggs LLP 2004 year end lobbying report for client Nehemiah Corporation of America clearly cites specific lobbying issues: Funding for down payment assistance; change in FHA loan limitations to eliminate requirement of cash down payment.

and:

• Velasquez/Magana 2004 year end lobbying report for client Ameridream cites specific lobbying issues: American Dream Downpayment Act, Sub-Prime lending, Government Sponsored Downpayment Programs, 103% loans.  

In reviewing lobbying activity reports for Ameridream and Nehemiah, both have spent in excess of $1.5 million to lobbyists from 2003 to 2008. 

Speaking of lobbyists….

Remember the economic impact study released by Nehemiah that was completed by Robert Fountain and Robert Waste January 29, 2009? The report purports that DPA generated $38.6 in revenues and created 235,000 new jobs.  Well, it turns out that Robert Waste (who was co-commissioned on said report) is registered with the City of Sacramento as a contract lobbyist for Nehemiah and their for-profit affiliate, Capital Station 65, LLC.  Click here to view Sacramento Lobbyist Registration report. 

In case you don't know about Capital Station 65, LLC, it is a for profit partnership between NVI, Inc (a for-profit corporation owned by Nehmiah and Invision Holdings (owned by Ron Mellon and Steve Goodman) with Scott Syphax as the managing partner.  Capitol Station 65, LLC has received a little over 19 million in California taxpayer funded Prop1C Funds for their Township 9 development. They have also received over 2.2 million in taxpayer dollars from the City of Sacramento, and another $550,000 in state infill grants.  According to Nehemiah Corp of America's 2006 Form 990 Return of Organization Exempt from Income Tax, Nehemiah loaned Capitol Station 65, LLC $6,750,000 in 2000. The same return shows a $6.7 million equity loss in NVI for 2006. 

It doesn't take a rocket scientist to question whether this for-profit affiliate of the "non-profit" Nehemiah is really "arms-length".  How many legitimate nonprofits do you know "lend" money to money-losing for-profit real estate development companies?  Seems a lot like the SFDPA tail is wagging the dog here.  Even without the lobbying against "competing" government arrangments, it's enough to make one question whether SFDPA companies are anything but for-profit looting operations for their founders and management.

Latest Data on SFDPA from HUD:

According to the latest testimony from U.S. Department of Housing and Urban Development Secretary, Shaun Donovan, loans involving seller-funded down payment assistance accounted for only 12% of FHA's portfolio at the start of 2008 yet were responsible for 30% of foreclosures for that year.  Here is a key excerpt from Donovan's testimony: (click here to read entire testimony)

Moreover, much of our recent loss activities have been attributable to the growth in seller-funded down payment assistance. These loans grew from under 2 percent of all FHA home purchase originations in FY 2000 to greater than one-third of purchase originations in FY 2007 and 2008. The seller-funded down payment originations result in completed foreclosure at three times the rate of loans where borrowers provided their own down payments and while they only represented 12 percent of the FHA portfolio at the start of 2008, accounted for 30 percent of all foreclosure completions that year. The termination of this program should substantially reduce FHA loses on new originations in the years ahead.

Conclusion

When taken in context with the history of abuse and self-dealing involving the founders of both organizations, "astroturfing" practices to distort public reaction, and the (successful) attempts to influence legislation in order to kill FHA's own 100% financing, and not-so-non-profit behavior with affiliated companies, it is reasonable to question whether these entities are truly acting in the best interests of the public.  

We need to take Ameridream and Nehemiah's good advice: if 100% FHA programs had to be stopped, private seller-funded downpayment programs over FHA loans must be stopped doubly so.  If you agree, please do your part to contact congress to stop HR 600 today.

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