The Wall Street Journal “U.S.-Backed Mortgage Program Fuels Risks” reports that the FHA is allowing new home builders to use “nonprofits” to circumvent down payment requirements. To a lesser extent, existing home sellers are following the trend. FHA requires a 3% down payment, which cannot be provided by the seller. To get around this, D.R. Horton (NYSE:DHI) is using Nehemiah Corp. as the conduit.
The percentage of FHA mortgages with down payments from the nonprofits has been increasing steadily: 2% in 2000, 18% in 2003, and 34% this year. The FHA and Congress have been sending conflicting messages. FHA regulations prevent direct cash gifts from sellers to buyers. The concern is that the value of such gifts will inflate the selling prices. However; the FHA says that without down payment assistance, buyers will turn to riskier subprime mortgages. FHA mortgages are fixed rate, while most subprime mortgages have been adjustable rate.
The Senate version of the FHA modernization bill would eliminate down payment assistance programs, while the House bill would keep the status quo. The Senate is focusing on buyers needing to have some skin in the game to reduce the FHA’s risk. The House sees forcing down payments as an impediment in the FHA’s role in promoting home ownership, especially for minorities.
The process that the FHA is turning a blind eye to involves builders or existing home sellers making voluntary (non-tax deductable) contributions to a nonprofit and the nonprofit making a corresponding grant to the home buyers. The Journal does not go into any overhead charged by the nonprofits. The scary part is that the “contribution” can be targeted to benefit specific buyers. It’s not like D.R. Horton is contributing so disadvantaged families can buy any home.
The audacity of this arrangement is that builders are heavily advertising no money down financing. If a buyer cannot come up with a 3% down payment, they are in no position to handle a sudden rise in taxes or insurance, or any type of emergency repair. These arrangements are setting both home buyers and the FHA up for disaster.