FHA Down Payment Assistance -- they're back?!?

The buzz on new Fannie Mae, Freddie Mac, and FHA loan limits (as reported previously here and here) seems to have muted the trumpets of victory for FHA Down Payment Assistance organizations such as Nehemiah, HART, AmeriDream, among many others. Said victory was announced earlier this month.

What is this FHA down payment assistance and what was the victory? Well, I'm glad you asked.

In a nutshell, here's how the FHA down payment assistance works: A buyer agrees to purchase a home. The buyer wants to do this through an FHA loan but they don't have the required 3% down payment. So the home seller 'donates' the 3% to a non-profit 3rd party organization (see above), and the 3rd party 'grants' an amount equal to 3% in the name of the buyer. Effectively, the home seller pays the 3% down payment for the buyer.

What often happens is the seller increases the purchase price by the amount of the down payment, effectively 'financing' the amount in to the buyer's loan. Some say this artifically inflates home values. Others say it's downright fraud.

The US Department of Housing and Urban Development (affectionately referred to as "HUD") who oversees the FHA program (go here for more info) has at least twice now attempted to end these programs, stating concerns that the programs increased the risk of foreclosure for those who were already at-risk, and inflated home values.

These claims HUD says are supported most recently by a report released in June 2007 by the Government Accountability Office, or GAO. For some light bed-time reading, go here.

IMHO ('in my honest opinion' for those of you who aren't heavy texters), HUD was throwing out the baby with the bath water, just as Senate Bill S. 2452, the Home Ownership Preservation and Protection Act of 2007 was trying to do with Yield Spread Premium. Read my rant about that one, here.

Apparently Judge Friedman (alledgedly, of course) is a fan of my blog and took my comments about Yield Spread Premium to heart and applied them to the HUD case, stopping the rule that would have ended the down payment assistance programs. Your Honor, I am, well, honored. Next time I'm in DC, coffee and bagels on me.

For what FHA said (very briefly) about the ruling, go here. For some additional light reading, the court order can be found on AmeriDream's Web site, here.

Nehemiah has a timeline displayed on their Web site to give us an idea of how things unfolded (or more accurately unraveled) in HUD's rule from their point of view, right up to the final ruling. I guess they've been so busy celebrating they forgot to post the final ruling (although it is posted elsewhere on their site). Let's all enjoin hands and sing a campfire song, shall we? A little legal jargon humor for you there in case you missed it.

I would assume since they weren't able to remove the programs altogether, HUD will tighten its grip on them. The likely next step would be to ensure sellers don't raise the home price as an attempt to off-set the 3% donation -- this is also a common practice with conventional loans that involve a seller concession to pay for all or part of the buyer's closing costs. Uh oh, now we're really stirring up the bees....

And now with the temporarily increased mortgage limits (FHA has a pretty nifty map to find the new limits in different areas), that 3% 'contribution' can be as much as $22,000, though not quite that big for folks in these here parts). That's big bucks.

I'll keep you posted as things develop, but sounds like the down payment assistance program is going to be around for a while and at least until the end of the year is available for a whole new set of buyers (larger loan amounts). Technically the program actually never went away...

If you are in the market to purchase or refinance a home, let me know.

As always, thanks for reading!