A recently suspended zero-downpayment program called "SNAP" is focusing new attention on the rapidly growing field of "downpayment assistance" -- a major vehicle for cash-short renters to buy their first home.

An estimated 600 downpayment assistance programs are active nationwide, typically involving charitable or nonprofit groups that provide fully-disclosed "gifts" of settlement costs and downpayment money to FHA and other moderate-income borrowers. Among the largest and best-known are Nehemiah Corp. of America, based in Sacramento, CA, and Ameridream, Inc., based in Gaithersburg, MD. Nehemiah, Ameridream and dozens of other nonprofits are approved by mortgage lenders and the Federal Housing Administration to assist borrowers who need cash to complete a home purchase transaction.

But the SNAP program -- unveiled late this summer and available to borrowers in 48 states -- took the concept into new directions that its promotional materials claimed were "generations ahead of other programs." Among its features: deliberate non-disclosure of the downpayment assistance to mortgage lenders. SNAP stands for "Sell Now Assistance Program." The program is currently suspended, according to its sponsors, and its website is virtually blank.

SNAP, a creation of the Franklin Foundation, a Maryland-based nonprofit organization, worked like this: The foundation would help set up bank accounts in the names of approved home buyers. The accounts would receive contributions from third-party "funding sources" working with Franklin of up to $50,000. The money in the bank account would be verified and documented for lenders using standard "V.O.D." disclosures signed by a bank. However, the source of the deposits would not be disclosed to the lender as part of the transaction file or settlement sheet.

Home sellers participating in the SNAP program would be required to sign a promissory note, and agree to repay the amounts deposited in their buyers' bank accounts after closing. They also agreed to pay an additional 10 percent "administrative fee" to SNAP. Since the promissory note would be paid off outside closing, lenders presumably would have no knowledge of the arrangements.

Why would that be significant? For one thing, most lenders price their mortgages to borrowers in part on loan-to-value (LTV) ratios, and in part on the perceived financial and credit strength the borrower brings to the table. A borrower who had $50,000 in a bank account to handle a 20 percent downpayment and settlement costs would look far more solid -- and deserving of a lower interest rate and better loan terms -- than a borrower who actually contributed little or nothing of personal funds to the transaction. Such a borrower would start with zero equity in the property, but the lender would assume the buyer had a substantial equity in the home.

Major wholesale mortgage lenders were outraged when they learned the details of the SNAP program last month. A spokesman for Countrywide Home Loans, Ken Preston, said that his firm has not participated in SNAP "knowingly," but conceded that it would be difficult to detect such transactions in any event.

Other major lenders, who asked not to be identified, said they are checking loan files, title and settlement records of recent transactions to determine whether they might have unwittingly funded zero-down mortgages that they thought were conforming loans.

A mortgage broker, Paul E. Skeens of Carteret Mortgage Corp. in Waldorf, MD, said "I would fire" anybody in his office who used the SNAP program. "It is obvious that you are circumventing the rules" that require full disclosure of outside gifts to mortgage applicants.

Franklin Foundation spokesman Craig Nash, who initially declined to comment on SNAP, recently said the program has been put on ice, at least temporarily.

"The truth is we do not have answers to questions" about SNAP's legal or regulatory bases for creating bank accounts in borrowers' names and keeping lenders in the dark about the source of home buyer downpayments.

Nash also declined to discuss a variety of other issues, including the identities of the "funding sources" or the names of the lawyers who, according to SNAP's website, had approved the program for use in 48 states.

The takeaway here: Downpayment assistance by charitable organizations is an established, heavily-used technique to help first time buyers. However, buyers and the realty agents working with them should be wary of programs that do not disclose all financial arrangements to lenders. Not only is non-disclosure unfair to lenders. It may result in defaults and foreclosures when buyers end up with houses they cannot afford.

Published: November 15, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.