The housing stimulus bill (P.L. 110-289) enacted in July bans seller-financed downpayment programs as of October 1, 2008. Under these programs, builders and other house sellers contribute funds to an organization–AmeriDream, Inc. and Nehemiah Corporation of America are among the most prominent–and the organization, in turn, provides those funds to a prospective house buyer to use as the downpayment.
The programs have come under fire from the Internal Revenue Service (IRS), the General Accountability Office (GAO) and HUD’s Inspector General's Office as a “circular funding” scheme. In fact, in 2006, the IRS stripped these organizations of their tax-exempt status, ruling that the sellers often merely raise the property's selling price in order to offer the funding, and therefore the program may not result in a net benefit to the buyer.
The Federal Housing Administration (FHA) twice attempted to ban these programs through regulatory action, noting that loans involving so-called “charity” downpayment assistance are three times as likely to go into foreclosure and have skyrocketed from only six percent of the agency’s originations in 2000 to approximately 30 percent as of 2004. As a result, the FHA now expects to lose $4.6 billion in 2008.
This circular funding scheme threatens the financial viability of the FHA and is a contributing factor to the explosion in foreclosures across the country. Nevertheless, a coalition of organizations, led primarily by Nehemiah, is seeking to have the ban overturned. Legislation has been introduced in the House (H.R. 6694) that would require the FHA to once again insure loans that involve seller-financed downpayments. Although the legislation would make some reforms to the program, it still perpetuates the failed policy of zero-down lending that helped create the current foreclosure crisis and it unnecessarily puts the FHA and taxpayer dollars at risk.
I feel the resident righties new appreciation for populism to be quite disarming...
