FHA Down Payment Assistance - Down But Not Out?

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As most know, the “Housing and Economic Recovery Act of 2008” which has been passed and signed into law to take effect in October, bans seller assisted down payment programs such as the Nehemiah, Ameridream, Futures Home Assistance. In my opinion, this drastic overreaction is the result of political pressure and some doubtful statistics. I have written about it several times elsewhere on this site. Scott Syphax, President and CEO of Nehemiah Corporation of North America pointed out the most significant of the problems with these statistics in an editorial reply in the Sacramento Bee on Sunday. In it, Mr. Syphax pointed out:

“Research would have shown that data used by FHA and the Government Accountability Office comes from a data warehouse that the U.S. Department of Housing and Urban Development’s own inspector general cited as unreliable. In short, FHA undercounts the number of DPA loans by up to three times and divides that number into the number of claims it pays.”

Such an erroneous calculation goes a long way toward explaining the 3 times higher default rate cited by critics of down payment assistance, but there is a significant factor which Mr. Syphax understandably left out. That factor is the amount of fraud which has been associated with loans which employed down payment assistance programs. I’m sure this is partially because he probably doesn’t want to draw any unnecessary, and in fact undeserved, bad attention to his program, but also because this fraud is extremely difficult to quantify.

Many mortgage brokers want to turn a blind eye to the massive fraud that has gone on in their business during the “hit the numbers” housing boom that has been going on until relatively recently. Accurate statistics on this are impossible because much of the fraud has actually passed by undetected. Unfortunately, anyone who has been paying consistent attention to mortgage fraud reports in the news over the past few years could scarcely have failed to see how much of that fraud has been related to FHA loans. In particular, FHA loans which used down payment assistance.

This high level of fraud in not inherently associated with seller assisted down payment assistance, but is rather the result of inadequate quality control during the loan submission process. These problems could easily be solved without banning down payment assistance programs.

For both political and practical reasons, many in Congress agree that down payment assistance programs should be continued. Although the portion of the new law banning down payment assistance has not yet taken effect, HR6694, the “FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008” was introduced on July 31. All the non-profit organizations which have been facilitating the program are already out beating the bushes to round up support. If you would like to help, the Nehemiah Corporation has a website set up to help you find out how. You can find it by clicking here.

In the meantime, loan originators should remember that seller assisted down payment programs can still be used.