Most home loans that don't require a down payment disappeared when the housing bubble burst and lenders became more careful.
But they're surprisingly still available — and with federal government guarantees.
The Federal Housing Administration runs the down-payment assistance program that allows prospective homebuyers to get a government-backed loan without having to put up any of their own money. Instead, they can use a gift from a family member, an employer or a charitable nonprofit organization to provide the required 3 percent down. The aim is to help low- and moderate-income people buy homes.
But now the FHA is trying to shut down a major part of the program, citing high default rates. And taxpayers may soon have to pick up the tab.
How The Program Works
Brian Demer, who used the FHA down-payment assistance program to buy a new condominium in Aldie, Va., says he wouldn't have been able to buy it without the program.
"Bottom line, I didn't have to put 3 percent down, which was a big deal," he says.
Demer got his down payment from the nonprofit organization Genesis on a recommendation from Holly Davis, a loan officer at SunTrust Bank in Reston, Va. Davis calls the FHA down-payment assistance program the "hot program," especially because private lenders are pulling their no down payment, 100 percent financing deals.
Under the FHA program, the home's seller teams up with a nonprofit organization to give the buyer the money for the down payment.
"The seller makes a contribution of a designated amount in the real estate contract to the nonprofit," Davis says. "There's also a fee, typically ranging between $300 and $400. So what happens is the seller is making a donation to the charity and in return the charity is giving that money to the buyer."
But that cozy relationship between the seller and nonprofits has come under fire. The IRS has revoked the nonprofit status of 30 of the assistance providers.
Former IRS Commissioner Mark Everson said the situation could "mislead honest home-buyers and ultimately jack up the cost of the home."
Conflict Of Interest?
A senior research fellow at the Heritage Foundation, David John, says the program could be a conflict of interest for nonprofits.
"What concerns me about some of the nonprofits that are involved is that this essentially becomes a fundraising activity where the nonprofit actually ends up with a fee in return for providing this mortgage assistance, which we know is paid by the seller of the home, anyway," John says.
John says he worries that it might encourage nonprofits to provide down payments to people without the means to make payments.
FHA statistics suggest there's reason for concern. Data show that buyers who receive down payments through nonprofits are two to three times more likely to default than FHA homebuyers who provide their own down payment.
The FHA projects the high defaults will require it to ask for a $1.4 billion subsidy from Congress next year — the first one in its 74-year history.
Because of high default rates and conflict of interest issues, the FHA is trying to shut down the nonprofit down-payment program, even though it now accounts for more than a third of all FHA loans. That's up from 5 percent in 2001.
Program's Backers Challenge FHA
But the program's supporters are fighting back.
"There are too many questions that are not answered here," says Rep. Gary Miller (R-Calif.).
Miller, a former homebuilder, argues that the FHA's data on defaults is suspect and says the agency has refused to provide adequate documentation. He also argues the FHA is trying to imitate nonprofit assistance through its own program called The American Dream Downpayment Initiative.
"What they've said to us is, 'Let's continue the American Dream Downpayment Assistance program and that's using taxpayer dollars to give to somebody, but let's exclude the private sector, which doesn't cost the taxpayer anything from participating in the same program,'" Miller says. "That's a problem I'm having."
Scott Syphax, CEO of Nehemiah Corporation of America, the originator of the non-profit down-payment model, sees the conflict as bureaucrats flexing their muscles.
"HUD has never forgiven the fact that we have been more successful at bringing people to FHA and creating new homeowners through their programs than they've been themselves," Syphax says. "And that's the reason that they want to take over the program and do it themselves ... they feel essentially we're operating their franchise."
An FHA spokesperson says its American Dream program is not competing with the nonprofits.
The future of nonprofit down-payment assistance programs is also being debated in Congress. The housing rescue bill pending in the Senate eliminates the program. The House-passed version continues it, but with additional restrictions.