Commercial Loan Brokering … Fear Not!
Once Overlooked, Housing Program Provides Affordable AlternativeSen. Rusty PaulDownpayment Assistance, Nehemiah Corporation, Neighborhood Gold, AmeriDream Charity, Family Home Providers During this most recent recession, two market factors have kept the economy from sinking further than expected: Real estate and consumer spending. Strong consumer spending in the face of declining stock values was, indeed, a surprise, yet a relatively new, but often unnoticed program also bolstered the market. That boost came from changes to federal housing laws implemented more than a decade ago, and recent trends suggest it is working better than planned. However, many mortgage lenders and realtors remain unaware of how this program can increase their closings, improve their community lending and help deserving families obtain their first homes. Referred to as downpayment assistance or gifting, these programs target working families with steady employment who are unable to save the required downpayment. Under current law, downpayment assistance programs allow the seller, lender, realtor and buyer to all work together with non-profit affordable housing organizations so families can obtain their downpayment as actual gifts. In the early 1990s, federal housing laws were changed to allow non-profit housing groups to fund the various up-front cash requirements for families who needed a slight boost up the economic ladder. As a result, homeowners were able to enter their first home with equity. Since then, non-profits groups like the Nehemiah Corporation, Neighborhood Gold, the AmeriDream Charity and Family Home Providers have helped place thousands of families in their first homes. According to some estimates, downpayment assistance programs have pumped some $27 billion into housing sales during the current recession. Yet, most of these non-profit groups still have unused money, because mortgage originators, realtors and consumers are unaware of these programs. Also, among those lenders who know about them, there is some resistance, due to fear that these mortgages carry higher default rates. Interestingly, downpayment assistance emerged in the late 1980s as an antidote to rising defaults in FHA loans-largely related to zero downpayment programs. Many home buyers had obtained zero downpayment loans that included financing for closing costs. While these programs allowed more people to buy homes, homeowners were frequently burdened with a mortgage payoff amount that exceeded what their home was worth. When troubled economic times hit, it was often cheaper and easier to simply walk away from a mortgage, rather than sell the house and pay off the debt. In reforming the FHA, a new provision was added to allow downpayment gifting to be operated by non-profit, 501(c)3 affordable housing organizations working under Internal Revenue Service and FHA guidelines. With this approach, the family had equity; thus, discharging the obligation through a sale made more sense. So far, research shows that most default concerns are misplaced. For example, a study by the University of Georgia Family and Consumer Services College found that many families with incomes as low as $30,000 can become successful homeowners when they have access to downpayment assistance. A Federal Reserve Bank of Minneapolis study recently discovered that direct-cash payments and downpayment assistance are much more beneficial to first-time home buyers than interest rate buy-down programs like those operated by Fannie Mae and Freddie Mac, or even zero downpayment plans that fold upfront costs into the mortgage. The study also shows that zero-payment programs increase the number of renters who can become homeowners by 2.5 percent. However, a cash payment of approximately $5,000 has the largest effect on homeownership, increasing the percentage of renters who can own a home by as much as 13 percent for African-American renters and seven percent for Hispanic renters. Consequently, doubling the cash payment doubles the percentages. Meanwhile, the study found that interest rate buy-down programs have a negligible impact on homeownership. Nevertheless, to lessen the lending industry's concerns over defaults, some of these groups are setting up mortgage protection and counseling programs to shepherd downpayment recipients through the critical first months of homeownership. For example, Family Home Providers just announced its Mortgage Assistance Plan (MAP), a free service of counseling and credit intervention for its homeowners. Should there be a problem during the first 15 months of the loan, MAP counselors will work with the family to overcome any financial difficulties and ensure that payments continue to flow to the lender. While each non-profit has differing procedures, the programs are typically quite simple. After a buyer is approved, the charity donates the downpayment with no requirements to pay it back-ever. Anyone qualifying for an FHA loan is potentially eligible for this kind of assistance. The monies for the downpayment come from donations received by the non-profits and from fees paid by sellers to enroll their homes in the program. The typical gift is between two and five percent of the home's final contract sales price. The approach is obviously working. When conceived, the goal of downpayment assistance programs was to reach underserved borrowers and communities, help revitalize neighborhoods of single-family homes and promote homeownership, particularly among minority families. Ten years later, these programs assist working individuals and families with good credit and steady employment, but little or no up-front money to take that first critical step. And, the fact that the economy has benefited is a happy result of a frequently unnoticed federal housing law-a law of unanticipated consequences. Georgia State Senator Rusty Paul is the former assistant secretary for congressional and intergovernmental relations and assistant secretary of community planning and development for the U.S. Department of Housing and Urban Development. He may be reached by e-mail at [email protected]