The outside auditors mention the gifts dozens of times in the HUD report: "The lender did not verify the gift did not ultimately come from an unacceptable source." Sometimes the report simply referred to the gift from an [unspecified] nonprofit. (Just search Transfer of Gift Funds in the PDF document.) It wasn't the only investigation into the Down Payment Gift Programs by non-profits.
The Government Accounting Office (GAO) was alarmed enough in November 2005 to issue a report that said, among other things, "assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance." (The overpricing they suspected contributed to higher delinquency claims.) Full report here. PDF
The GAO report quoted from a HUD report that was published in March 2005.
In March 2005, HUD commissioned an investigation into the Down Payment Gift Programs administered by Non-Profit Organizations. What they found was that many of those non-profit gift programs were seller-funded. It's illegal for the seller to pay the down payment. But a non-profit can. Often that meant the builder paid the non-profit to "donate" the down payment mostly by raising the price. The effective source of the down payment was, of course, the builder. But the non-profit got the credit. The builder and the lender also got to select the appraiser. (p74) Because "Having “an appraiser who is flexible” was critical to facilitate seller-funded DA deals." The seller-funded DA was exclusively an FHA program. (p94) And "the loans are tantamount to a zero downpayment mortgage (See Appendix VI), as most borrowers clearly do not have a direct investment in the mortgage transaction." (p101)
It took three years until 2008 for the Bush administration to finally convince Congress to eliminate the seller-funded down payment program. Not that they didn't try. (See Setting the record straight below.) Eliminating the program meant the end to the Nehemiah Program.
THE NEHEMIAH PROGRAM
The Nehemiah Program is described in this About article as, "the largest private down payment assistance program in the country." The About article author bragged that "When used in conjunction with an FHA loan, it lets buyers purchase a home, even if buyers don't have any money." [Bolding mine because the writer of the article, a realtor, clearly didn't think it extraordinary or even a minor problem.]
How it worked - again from the About article: "The seller gives up to 6% of the purchase price to the Nehemiah Corporation, plus a $599 fee. Nehemiah then gives the donation to the buyer to pay for the down payment and / or buyer's closing costs. Because it is a gift, the buyer doesn't need to pay it back." Generosity personified, right?
Wikipedia entry on the non-profit Nehemiah Corporation of America. The default rate of a sample of Nehemiah-assisted loans was 19.42 percent. Those who didn't get assistance defaulted at a rate of 9.7 percent. (p 13 GAO report)
Setting the record straight. In September 2008, the White House issued a fact sheet to set the record straight about the looming crisis. The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSEs and again in October there was Setting the Record Straight: Six Years of Unheeded Warnings for GSE Reform
Lots and lots of non-profits. Another non-profit that provided down payment to sellers was AmeriDream that claims it helped over 250,000 qualified homebuyers become homeowners. "Homebuyers never have to repay the gift from AmeriDream."
AmeriDream and Nehmiah weren't the only non-profit Down Payment providers. From the HUD web site:
AMERIDREAM
The AmeriDream program offers gift funds up to 10% of the home's purchase price which do not have to be paid back. Buyers must agree however, to return any funds that are not used toward down payments or closing costs and to return the funds if the sale of the home does not close on the scheduled closing date.
NEHEMIAH
The Nehemiah Program has helped over a quarter of a million Americans purchase homes. Unlike some down payment assistance programs, Nehemiah offers down payment help to anyone who qualifies for an approved FHA loan. Buyers can get up to 6% of the final contract sales price for down payment and/or closing costs.
AMERICAN FAMILY FUNDS
American Family Funds (AFF) administers The Dove Foundation, a non-profit charity offering down payment and/or closing cost assistance to qualified American home buyers. Once you are pre-qualified for the FHA loan and find a property you want to buy, notify your loan officer, who will apply for the AFF down payment assistance on your behalf.
FAMILY HOME PROVIDERS
Family Home Providers is a non-profit affordable housing company offering down payment assistance to any family with steady employment and good credit. Under the Family Home Providers plan, those with an FHA loan are eligible for 3% of the final contract price of the home purchased with the FHA approved loan.
FUTURES HOME ASSISTANCE
Futures Home Assistance is a non-profit charity group offering a free down payment gift up to 6% of the closing costs of a home purchased with an FHA loan. The mission statement of Futures Home Assistance includes the belief that people who dream of owning a home should not be hindered because of a lack of down payment funds.
GRANT AMERICA
The Genesis Program, also known as Grant America, is a non-profit down payment assistance program. It is operated by the Penobscot Indian Tribal Nation and is HUD-approved to offer up to $34,000 in assistance, even to those living outside tribal jurisdiction.
HOUSING ACTION RESOURCE TRUST
The Housing Action Resource Trust or HART program is a non-profit housing organization offering help to home buyers who qualify for FHA "first mortgage" loans. A first mortgage does not mean "first-time home buyers only," but rather those who are getting the initial mortgage and not applying for a second mortgage or home equity loan.
NEWSONG
Newsong provides a down payment assistance program for residential and commercial properties. This program offers a one-time gift for all closing costs, and there are no income requirements or limits on who can participate. Anyone who qualifies for an FHA loan can apply to receive down payment help from Newsong.
PARTNERS IN CHARITY
Partners In Charity (PIC) is a non-profit group offering down payment assistance on properties such as single-family homes, condominiums, and multi-unit properties. Assistance is also available for rehabilitation programs. Partners In Charity funds are offered to those who qualify for FHA loans or are pre-approved for FHA loan amounts.
RESPONSIBLE HOME OWNERSHIP
The Responsible Home Ownership program is run by a non-profit organization called Community Housing and Development Corporation. This program offers down payment assistance to low-income individuals who have steady income and good credit. Check with your loan officer if you have specific questions about your participation in this program using an FHA home home loan.
QUICKDOWN
Quickdown is a program that works with non-profit agencies to provide down payment assistance. Home buyers who benefit from Quickdown are those who qualify for approved or pre-approved FHA home loans. This program is designed for those who want to buy a home but are "cash challenged" and can't afford the down payment.
Many in the real estate industry were suspicious. A realtor asks, "Is Seller Paid Down Payment Assistance Coming Back?" It was a rhetorical question. He knew it wasn't. He even doubted the legality when they were legal.When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.And, "past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans." [Bolding mine.]
Media campaign to save the seller-funded non-profits. The media campaigned for the practice to be reintroduced. One writer was incensed. Don't miss this article on how the Los Angeles Times article distorted the truth on seller-funded down payment loans.
Arguably, this process involves sales price fraud, a seller concession (in contrast to the claimed "charitable gift"), unlicensed lending, money laundering, and defrauding the Federal government (the FHA has no way of knowing which loans have "real" downpayments and which are being paid by the seller through markups). The FHA, IRS, FBI, GAO, and Congress itself have all ruled against or reported critically on this practice. It's enough to make you wonder if the Mob is involved.March 2010 Forbes: FHA: The Feds' Next Housing Debacle
In other words, there's a lot of reasons Congress outlawed the practice at the behest of the FHA, which only secondarily involve possibly higher default rates on these loans.
March 2010 Forbes examined Uncle Sam's Deadbeat Mortgage Lenders
Pine State Mortgage topped the list of Uncle Sam's biggest deadbeat lenders with a FHA default ratio of 16.99%. (The default ratio reflects loans that are either in default or that have resulted in a claim to the FHA.)
March 2011 - The Latest Celebrity Foreclosures in pictures.
ONE CERTAINTY. You won't get the full story from the media. Or any book lauded by the New York Times. The closest you will come is by reading authors and economists you trust like Thomas Sowell. The Housing Boom and Bust.
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