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].
