Wednesday, May 09, 2007

HUD Proposes Ban on Seller Down Payment (Again)

by Tanta on 5/09/2007 08:57:00 AM

Bloomberg reports that HUD's Inspector General is trying, once again, to institute a ban on "down payment assistance" programs (DAP) that involve seller (builder) funds laundered through pseudo-non-profit organizations. HUD's first attempt to ban this practice, in 1999, failed in 2000 after the homebuilder and lender lobby pulled out all the stops. Since then, the IRS--that well-known consumer advocate--has gone after the "non-profit" status of these groups, but even with adverse IRS rulings, HUD has heretofore failed to curb this practice.

What we have this time that we didn't have last time, it seems, is hard evidence from the IG's office that 1) the foreclosure rate on these "assisted" loans is double the rate for the rest of the FHA portfolio and 2) the sales price on these homes is inflated by the amount of the "assistance." I doubt that will shock anyone here at Calculated Risk, but do bear in mind the following. Back in 1999/2000, all those of us who supported the ban had to go on was 500 or so years of experience with lending, which told us that the very concept of the "down payment" is defeated if it is made by the seller, and that in a transaction involving an unsophisticated buyer and a sophisticated seller, "freebies" often manage to get reimbursed somewhere.

But because, for 500 years or so, no one was really dumb enough to allow this sort of thing, we in the civilian reality-based community didn't really have hard statistical evidence that it was merely a bonanza for builders and a disaster for vulnerable homebuyers. And--this will shock you--HUD seemed to have a hard time coming up with hard statistical data, too. Turns out, lenders were not supplying the full loan-level data to HUD that would allow these loans to be easily identified. Even so, in September 2002, with the cruddy data reporting it faced, the HUD IG managed to pull off a statistical sampling and file-level review of selected loans that showed 1) DAP loans on the rise and 2) DAP loan defaults at double the rate of other loans in the portfolio. The IG suggested that HUD ban the program.

HUD's response?

The Office of Housing believes that OIG's work has been beneficial in providing information on downpayment assistance programs, and appreciates the opportunity to work with OIG in developing the analytical framework for the audit. As your audit report notes, the loan sample does not contain enough defaults to accurately project the default rate on loans with downpayment assistance. Consequently, FHA is procuring the services of a contractor to conduct a more extensive analysis using the framework developed by the OIG. This is necessary because of the effect that changes in these programs may have on all program participants. We anticipate that procurement action will be finalized by November 30, 2002. The final report should be submitted to the Department by September 30, 2003. The Department is confident that it will be able to act upon the report's findings no later than December 2003.

So the IG's work isn't good enough; we need to hire some private contractors to noodle around for another year. What happened in December 2003? Well, nothing. But by the following February 2004 we did get a report from the private contractor, which found:
Below are a list of key findings related to data quality, gifts and other characteristics of the sample:

o TINs were missing 74% of the time when the binder indicated the presence of a non-profit gift.
o Gift source and amount were missing from the CHUMS 28 % and 22% of the time respectively when a gift was known to be present based upon the binder review.
o In the binder, supporting documents such as gift letters were frequently missing or incomplete.
o The average gift from a relative was 9% higher than the average gift from a non-profit.
o Median House prices and seller contributions tended to be higher when gifts from non-profits were present.
o The CHUMS data quality was not greatly compromised by the limitation posed by the lack of multiple gift source fields. The number of instances where more than one gift source was present was minimal, 155 cases.
o Use of gifts from non-profit organizations increased over time (FY 1999 – FY 2002). This is especially evident in the SMSA sample.
o In most cases total assets reported in the CHUMS were higher than total assets found during the binder review.
o The binder review revealed an additional 1,012 gifts not reported by lenders via the CHUMS, representing over 28% of all gifts.

Our recommendations relate to the key findings above: (1) address ways to improve data quality by enhancing validation capabilities in CHUMS for gift-related data fields, (2) conduct further study to determine the relationship between non-profit gifts and other file characteristics to including median house price and seller contribution, and (3) conduct primary research and analysis to determine the underlying source of discrepancies between CHUMS and the binder for borrower required investment and total assets available fields.

Ah, yes, further study required. And did we get that further study? Why, yes, we did. Our intrepid private contractor put another year into this, and issued a report on March 1, 2005:
This report is the culmination of a ten-month effort, beginning in January, 2004, to understand the influence of seller-funded nonprofit downpayment assistance on the origination of FHA-insured home loans. The study involved travel to ten cities and interviews of over 400 persons involved in mortgage transactions—from homebuyers and sellers to realtors, appraisers, underwriters, loan officers, builders, and downpayment assistance providers. The report concludes that seller-funded downpayment assistance for mortgage downpayments has led to underwriting problems that require immediate attention. . .

So did we get "immediate attention"? Well, if you root through the first 356 pages of the FY 2006 Performance and Accountability Report, past all the high-priority stuff like the "faith-based initiatives," you get this little item on page 357 from the OIG:
At our urging and in light of recent Internal Revenue Service ruling regarding nonprofits that provide seller funded downpayment assistance, [HUD is] proposing a rule that would establish specific standards regarding a borrower's investment in the mortgaged property when a gift is provided by a nonprofit organization.

Would you like to see the text of this proposed rule? So would I; it's not actually available yet. Per Bloomberg,
HUD plans to propose the ban this month for public comment, possibly as early as this week, Wooley said. More than 100,000 low- and moderate-income consumers bought homes using such programs last year. The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.

``It's painted to be helping homeowners get into houses,'' HUD Inspector General Kenneth Donohue said in an interview. ``But it is circumventing good business practices, and you bet it has resulted in foreclosures.''

Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.

So, it looks like we're about 100,000 loans too late just for 2006. But since house price declines are obligingly putting those borrowers even further underwater than they probably were when the loan was made, it looks like time to get right on this.

I'll keep you posted if the proposed rule ever actually gets released. Perhaps Calculated Riskers would like to comment on it.