A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill, that would mend rather than end the practice, gains momentum.
HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.
The influential chairman of the House Financial Services Committee urged those attending a committee field hearing in Stockton Saturday to lobby the Senate -- which shoehorned language banning seller-funded gifts into HR 3221, the sweeping housing bill signed into law July 30 -- in support of the bill.
HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans, Frank said. Borrowers with scores between 620-680 who relied on seller-funded gifts might be subject to higher insurance premium fees.
Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA's insurance requiring taxpayer subsidies.
HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.
Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.
Nonprofits that funnel payments from home builders to lenders to help borrowers meet minimum down-payment requirements on FHA loans dispute HUD's claims and have filed lawsuits that delayed HUD's implementation of a rule change banning the practice (see story). But the passage of HR 3221 made those court challenges moot.
Home builders -- many of whom relied on seller-funded gifts to close 20 percent to 30 percent of their sales in the second quarter -- have been bracing for the end of the program, and some lenders have already stopped processing such loans.
Frank said the bill that would give seller-funded gifts a reprieve, HR 6694, has the support of HUD Secretary Steve Preston because it also addresses an issue near and dear to the department's heart -- risk-based pricing.
In an effort to make FHA's loan guarantee programs operate more like private mortgage insurance, HUD on July 14 began giving borrowers with good credit a break on their upfront insurance premiums, while charging those with spotty credit more (see story).
Opponents of risk-based pricing maintain it places an unfair burden on low-income borrowers who rely on FHA loan guarantee programs. The Senate inserted a one-year moratorium on the use of risk-based pricing into HR 3221, which begins Oct. 1 and ends Sept. 30, 2009.
Under risk-based pricing, the upfront premium for FHA mortgage insurance ranges from 1.25 percent to 2.25 percent, depending on credit score. When the moratorium on risk-based pricing takes effect Oct. 1, FHA will begin charging all borrowers an upfront premium of 1.75 percent. Before the introduction of risk-based pricing in July, FHA had charged all borrowers a flat 1.5 percent upfront premium. In returning to a one-size fits all pricing structure, HUD said it was forced to raise premiums for all borrowers by 25 basis points to keep the program self-sustaining.
HR 6694 would allow HUD to continue risk-based pricing for borrowers with lower credit or FICO scores, but mandate refunds of some or all of the additional premiums paid if borrowers make timely payments.
HR 3221 had no provisions banning seller-funded gifts or risk-based pricing until it got to the Senate, Frank said, recounting the intense debate that took place around the massive housing bill. The bill's most hotly debated provision was a $300 billion expansion of FHA loan guarantee programs to help troubled borrowers refinance into more affordable loans (see story).
"The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing," Frank said at Saturday's hearing. "That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground -- and it will pass the House, I can guarantee you. What you want to do now obviously is talk to your senators. We think it will go through there -- it has the approval now of the Secretary of HUD."
A HUD spokesman said he could not confirm that Preston supports HR 6694, and that HUD is still reviewing the bill.
"We understand that Congress is working on legislation related to seller-funded down-payment assistance, but our primary focus is on implementing the recently passed housing bill," the spokesman, Lemar Wooley, said in an e-mail. "Throughout this process, our number one priority is to ensure FHA's insurance fund remains sound and does not require taxpayer dollars."
At Saturday's hearing, Merced Mayor Ellie Wooten said the down-payment assistance program offered by Nehemiah Corp. of America was "heavily used" in Merced County.
"We are an agricultural community, and (farmworkers) are solid people, but many people don't have bank accounts with the 20 percent down payment," Wooten said. The minimum down payment for FHA guaranteed loans is now 3 percent, and is being raised to 3.5 percent on Oct. 1.
Wooten, a Realtor, said the Nehemiah program helped many borrowers get into homes, and "they made their payments and there was no monkey business. When the Nehemiah program was (banned), it knocked out quite a few very good qualified buyers. It has hurt us."
Democrat U.S. Rep. Dennis Cardoza, a former Realtor who represents Merced, Modesto and Stockton, also said down-payment assistance programs are "critical" in the region. "We have low-income folks who still have the ability to pay but don't have the ability to bring large down payments. When I was a Realtor, I had hundreds of folks tell me that's how they got into their house."
If Congress does take action to preserve FHA's ability to accept seller-funded down-payment assistance, it would have to move quickly. Although the ban mandated by HR 3221 doesn't take effect until Oct. 1, builders like Lennar Corp. have set a Sept. 23 deadline for loan applications involving seller-funded gifts.
Nehemiah President and CEO Scott Syphax, who also attended the hearing, said he believes HR 6694 -- currently awaiting a hearing in Frank's Financial Services Committee -- can emerge from the House and Senate in time to beat the deadline.
In a telephone interview before the hearing, Syphax said there's been a grassroots effort to preserve down-payment assistance programs.
"What's happened with this is the people have taken this over from us," Syphax said. "We are not in control at this point. Across the country, folks are forming groups on their own, making their own fliers. These are everybody from homeowners who have received a benefit, to people working in the real estate space. They are the ones turning this around -- it's not us."
Nehemiah and other supporters of down-payment assistance programs, including the National Association of Mortgage Brokers, the National Association of Black Mortgage Brokers and the National Urban League are planning a rally in Washington, D.C., on Wednesday.
