Some in Congress Will Not Let the Smoke and Mirrors DPA Programs Die

In the housing/economic stimulus bill signed into law recently, the so-called charitable downpayment assistance programs were eliminated. Called a “form of mony-laundering” by the Calculated Risk Blog, basically, here is how they worked:

I own a listed house priced at $100,000. Someone suggests that a buyer for my house enrolls in a “charitable” DPA program. I receive an full price offer for my house and am asked by the buyer or their agent to make a “donation” of the buyer’s closing costs (usually 6% of the sales price) to a “non-profit” like Ameridream, plus pay a handling fee of a few hundred dollars to the non-profit, which “gifts” the money(less their fees) to the buyer. If I, the seller, take the deal, my net (before my closing costs, commissions, etc.) drops to below $94,000. The buyer’s mortgage – around $100,000.

The programs allow buyers to get into houses with little or none of their own money in play. I seem to recall that the housing and mortgage crisis was caused by folks buying houses who couldn’t afford houses.

Back to my scenario: What I have seen in charitable down payment assistance transactions is that the seller counter offers, raising the price of the house to cover his contribution- i.e $106,000 – Seller nets around $100K, Buyer gets a mortgage of $106K, providing the house appraises for the higher value. Everybody’s happy, right? Sure- The buyer is mortgaged at 6% above the house’s value with the bank holding the paper for the buyer who has no money in the deal. Guess what happens if the buyer decides they don’t like the house or can’t make the payment, or realizes the house is mortgaged for more than its worth.
The email below, which I received last week, announces a newly introduced bill that will reinstate the charitable DPA companies, which tout over 1 million homebuyers being helped by charitable DPA. I wonder how many of them defaulted.

Down payment funds are available for those who really need them. Locally the Tennessee Housing Development Agency (THDA) offers assistance, Shelby County and the City of Memphis both have down payment assistance programs. Applicants must undergo training on credit and home ownership to be eligible. There are DPA programs for police officers and teachers. It is still legal under FHA rules to take gift money from family members. None of these programs encourage artificially inflating the value of the house being bought. Also, FHA allows gift funds from family members.

For the sake of fairness, the entire email from Ameridream announcing the new Congressional bill is below

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August 1, 2008
Last night, Congress introduced bipartisan legislation, H.R. 6694 that would reauthorize and reform charitable downpayment assistance. This bill would remedy a harmful provision in the new housing law which limits homeownership opportunities for low and middle-income Americans. The legislation, sponsored by U.S. Reps. Al Green (D-TX), Gary Miller (R-CA), Maxine Waters (D-CA), and Christopher Shays (R-CT) reauthorizes and reforms charitable downpayment assistance funded in part by sellers, which has helped over one million families and individuals become homeowners since 1999. The program was eliminated by legislation signed by President Bush on July 30, 2008.
The Green-Miller-Waters-Shays plan would re-authorize and reform non-profit downpayment assistance and secure it as an allowable source for FHA borrowers. The bill seeks to ensure that providers of the downpayment assistance operate in a transparent manner to guard against conflicts of interest. The bill also includes language to ensure that FHA maintains its financial stability by permanently authorizing the Secretary to assess higher premiums to higher risk borrowers.
It is important that you contact your elected officials in Congress and tell them that you support downpayment assistance and urge them to support H. R. 6694. To reach your elected officials, please call the US Capitol Switchboard at 202.224.3121.
To learn how you can support it, visit http://www.supporthomeownership.com.
AmeriDream continues to be your trusted advisor, bringing timely and accurate information when you need it most.
Thank you for your continued support and confidence.
Join The Growing List of DPA Supporters:
• Congressional Leaders
• US Conference of Mayors
• The National Association of Counties
• The National Home Builders Association
• Labor Council for Latin American Advancement
• The National Urban League
• Association for Homeowners Across America
• The 32,000 housing industry professionals, gift recipients and homebuyers who have either written or called Congress to support DPA

________________________________________

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Phone: (301) 977-9133 | Toll Free: (866) 263-7437 | (866) AMERIDREAM | www.ameridream.org
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Joe Spake is a Memphis-based Real Estate Broker and Consultant. He blogs at Joe Spake's Weblog and Memphis Real Estate Buzz. Joe's Social Network.