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Congress Should Protect Taxpayers and Retain the Ban on ‘Charity’ Down Payment Schemes

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RISMEDIA, Sept. 19, 2008-Congress should pause and carefully consider the consequences before it acts to overturn its recent ban of so-called “charity” down payment assistance schemes, according to the National Multi Housing Council (NMHC) and the National Apartment Association (NAA).

Under these programs, a non-profit provides a down payment to the buyer and is then reimbursed by the seller, often a home builder. In 2006, the IRS stripped several of these non-profits of their tax-exempt status, ruling that the programs benefit sellers more than buyers since sellers often raise their asking price to cover the amount they theoretically “donated.”

“These circular funding programs come with good intentions but produce loans that are three times as likely to go into foreclosure and merely perpetuate the tragically failed policy of zero-down payment lending that helped create the current foreclosure crisis,” noted Jim Arbury, senior vice president for the NMHC/NAA Joint Legislative Program.

“Congress wisely banned these programs in the Housing Stimulus Bill that it passed in July,” said Arbury. “Now it is considering stepping back and once again allowing them. This would be a mistake that would lure more individuals into unsustainable homeownership and put taxpayer dollars at risk.”

“These loans skyrocketed from six percent of the Federal Housing Administration’s mortgage originations in 2000 to approximately 30 percent as of 2004, and now threaten the financial viability of the FHA,” said Arbury. “The FHA says it expects to lose $4.6 billion in 2008, an unanticipated loss it attributes largely to seller-financed down payment mortgages.”

“Today, the House Financial Services Committee will consider a bill (H.R. 6694) that would overturn the ban and purportedly protect the FHA by limiting the use of seller-financed down payment assistance to households with credit scores above 620,” explained Arbury. “Unfortunately, the wishful thinking that higher credit scores translate into lower default rates is not borne out by the facts. According to HUD data, even households with the highest credit scores required by the bill are twice as likely to default if they use down payment assistance.”

“This is why seller-funded down payment assistance programs have come under fire from the IRS, the Government Accountability Office and HUD’s Inspector General’s Office,” Arbury concluded. “For its own financial health, the FHA should not be forced to return to insuring loans that involve seller-funded down payments.”

NMHC and NAA operate a Joint Legislative Program and represent the nation’s leading firms participating in the multifamily rental housing industry. NMHC/NAA’s combined memberships are engaged in all aspects of the development and operation of apartment communities, including ownership, construction, finance and management. Together, the organizations operate a federal legislative program and provide a unified voice for the private apartment industry. Nearly one-third of Americans rent their housing, and more than 14% of all U.S. households live in an apartment home.

For more information, visit http://www.nmhc.org.

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