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National industry appointments update - 11/21/2007

National Mortgage Professional
Nov 20, 2007

Seller-funded DPA and FHA ... both praying for a miracleChristopher RussellSeller-funded DPA and FHA The announcement by the IRS in May 2006, Revenue Ruling 2006-27, had everyone scrambling, especially when the title of the ruling called downpayment programs a "scam." The IRS revenue ruling basically spelled out the IRS's position that non-profits conducting seller-funded downpayment assistance (DPA) did not meet the criteria for non-profit status and that they would be actively revoking the tax-exempt status of any organization conducting seller-funded DPA. More than a year had passed, and only a few minor organizations had been affected. In the meantime, the sub-prime market imploded and a few lenders filed for bankruptcy, some of which eventually sold for as little as 35 cents on the dollar. Suddenly, Neighborhood Gold/The Buyer's Fund, one of the largest DPA providers, announced it would cease providing downpayment grants on July 3. This comes on the heels of rumors circulating that the other largest and oldest DPAs are in the last stages of their appeals process, pending the revocation of their tax-exempt status. While all of this was happening, the U.S. Department of Housing and Urban Development (HUD) tacitly endorsed DPA and let them continue as normal. They even went as far as posting a Web page, so you could check to see if a DPA still had its non-profit status. A new seller-funded DPA arrives, and it's safe from the wrath of the IRS In late January 2007, the Penobscot Indian Nation passed a resolution allowing for the creation of a national downpayment assistance program available to all low- to moderate-income Americans. As a tribal government, they are free to continue the seller-funded DPA model, unmolested from the IRS. Tribal governments do not get their tax status from the IRS, as the non-profits are required to do. Tribes have their governmental status from congressional recognition. It would require an act of Congress to remove a tribe's governmental status. In response to the wave of new tribal downpayment programs that will inevitably sprout up, HUD developed a case of split personality. On one hand, it seemed to endorse seller-funded DPA, but then, in what appeared to be a crushing blow to DPA, published a Federal Register notice that it planned to enact a new rule that would eliminate seller-funded DPA on Federal Housing Administration (FHA) loans for good. The non-profit DPA organizations responded with military-like precision, and a congressional hearing ensued. During the hearing on DPA programs, Committee Chairwoman Maxine Waters ordered HUD to extend the public comment period 30 days. It appears that the pendulum is swinging back in support of DPA. What is HUD's motivation now, especially since it appeared that the IRS was taking care of the problem for it? As I already mentioned, there is the obvious problem of tribal programs sprouting up, and the other issue is 100-percent FHA. HUD has been actively lobbying for FHA reform that would include risk-based pricing and 100-percent loan-to-value (LTV) loans. HUD's argument is that FHA is not competitive, because it has to go to Congress whenever it wants to develop a new loan product. This, HUD claims, makes it uncompetitive with Fannie Mae and Freddie Mac. However, there is a good reason they have to go to Congress, when Fannie and Freddie can simply develop their own products. The FHA insurance pool is backed by us—the taxpayers. Fannie and Freddie are backed by Wall Street—investors who know and understand their risk. Even the Government Accountability Office (GAO) is skeptical of HUD's ability to safely pull this off. The GAO recently asked Congress to make it a pilot program, because it felt HUD lacked the experience to safely underwrite 100-percent LTV loans. FHA and HUD have missed the mark on competitiveness. HUD is a bloated bureaucracy originating from 1934. Though HUD should be given the lion's share of credit for creating the highest level of homeownership in the world, it has become a slow-moving behemoth that is unable to react to the fast-moving world around it. Mortgage Brokers don't produce FHA loans because they are expensive and FHA makes it hard to become an FHA broker. Many Mortgage Brokers simply don't offer FHA, and HUD appears to like it that way. In a recent hearing, HUD Secretary Alphonso Jackson alluded that FHA didn't need Mortgage Brokers. Even now, as the sub-prime market slowly deflates, there is still a plethora of conventional and non-agency loans to choose from and offer to clients. Mortgage Brokers simply don't need FHA anymore because they have more than enough alternative products available to them. Moreover, HUD has certainly made it clear that brokers aren't welcome. Congress should take note of the fact that FHA isn't failing because it doesn't have 100-percent LTV loans. They actually do have them, when combined with seller-funded DPA. FHA is dying, because no one needs it anymore and the brokers who do need it aren't welcome. Every wholesale mortgage lender and investment bank and Fannie Mae and Freddie Mac have account reps who go out and promote their loan products to lenders and brokers. FHA has seller-funded DPA organizations as its salespeople. It's easy to recognize that the train is about to leave the tracks for FHA. Without the DPA programs out selling FHA loan products, HUD will have no one left to tout the benefits of FHA. They will simply become background noise, as more and more competitive and better-priced loan products are created in the market. Maybe it's time we congratulate ourselves on the success of FHA and then close it down. FHA only makes up two percent of the entire loan market nationwide. Sub-prime loans stepped in and helped borrowers that even FHA could not help. Alt-A products and non-agency loans have surpassed FHA in its core lending category. FHA is an antiquated dinosaur that needs to be privatized or dismantled. It's done a great job, but we just don't need it anymore. Christopher Russell is CEO of Global Direct Sales LLC, a downpayment assistance organization based in Gaithersburg, Md. He may be reached at (240) 780-3329 or e-mail [email protected].
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