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].
