Housing Bill limits agencies’ ability to resell foreclosed homes

With less than a month until the elimination of down payment assistance programs across the U.S., further legal analysis of the language within the recent Housing Bill also bans local governments and agencies from providing this assistance. This will greatly impede these entities from reselling foreclosed homes to worthy families and begin to recover neighborhoods being overcome by foreclosures.

According to legal analyses conducted by two Washington D.C.-based law firms, language within the Housing and Economic Recovery Act that ends seller-financed down payment assistance (DPA) for FHA loan borrowers by non-profit groups, does not make exceptions for government agencies or local governments that still want and are able to provide DPA. The result is that many such government agencies or local governments also will be stopped from providing DPA by that new language.

Simultaneously, the Act allocates $4 billion for local governments to purchase, refurbish and sell foreclosed properties, making homeownership more attainable for working class families. However, the Act, by eliminating seller funded down payment assistance, will cripple local governments’ ability to sell those very same homes in combination with an FHA mortgage should those families receive a down payment from the agency selling the home.

“As towns and cities work to recover from the housing crisis, this overlooked but critical element within the bill greatly limits these entities from being able to buy and sell the swath of abandoned or foreclosed homes to needy families,” said Scott Syphax, president and CEO of Nehemiah Corp. “The Bill overlooks the fact that many of these families will be first-time homebuyers without access to a down payment. Traditionally, local governments and agencies would help by providing this down payment assistance. However, because of overly broad language, this will often no longer be an option for many of these transactions, should the homebuyer want to receive an FHA insured mortgage.”

According to a letter written by Weiner Brodsky Sidman Kider PC, affordable housing funds of government agencies, housing finance agencies or Federal Home Loan Banks cannot be used to provide DPA to worthy FHA loan borrowers if those agencies providing that DPA also “financially benefit” from the sales of the homes. For example, when a local government agency rehabilitates a foreclosed home and sells it, as part of its neighborhood stabilization or recovery plan, it cannot also help the buyer purchase that home with an FHA loan by providing DPA to that buyer. If it did so, when that government agency (or its sister agency) then receives transfer or real estate taxes following that home sale, it would “financially benefit” from that sale. The Act does not permit a provider of DPA to do that.

In addition, the analysis by Patton Boggs LLP states that since the mortgagor must pay not less than 3.5% of the appraised value of the property in cash or its equivalent on an FHA-insured loan, any donation by a government entity toward this 3.5% down payment requirement is prohibited if it has obtained those funds either directly or indirectly from the seller of the property.

Danette O’Neal, formerly the Commissioner, Louisiana Housing and Finance Agency serving under Governor Kathleen Blanco stated, “In an already severely depressed state like Louisiana, limiting aid to local families in need is preposterous.” O’Neal continued, “I can only imagine the devastating impact the October 1 ban will have on the state. As we approach the third anniversary of Hurricane Katrina, the citizens are still facing a shortage of decent housing, a lack of affordable housing loan products and insurance prices that severely effect affordability. The down payment assistance programs have helped hundreds of families regain some sense of normalcy in our hurricane ravished state as well as regain confidence in the American dream. Reinstating these programs is a must, and Congress needs to revisit this issue for the sake of towns and cities nationwide.”

“By limiting the pool of homebuyers to only those who are able to provide their own down payment, the Administration is shooting itself in the foot,” Mr. Syphax said. “This is yet another example of how the Administration has overlooked and underestimated the integral role DPA plays in not only providing necessary help for a high percentage of first-time homebuyers, but also its place in steadying the housing market. Folks on all sides of the equation are going to have a much harder time come October 1 unless DPA is reinstated – and quickly.”

On June 31, Representatives Maxine Waters, Gary Miller, Al Green and Christopher Shays introduced a bill that would reinstate DPA. If passed and signed into law, the FHA Seller-Financed Down payment Reform and Risk-Based Pricing Authorization Act of 2008 (H.R. 6694) will allow down payment assistance to continue indefinitely. Visit www.dpagroundswell.org for more information.

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