It's an issue that's been festering for years, and last week it blew up again: The Bush administration relaunched its campaign to ban “downpayment gift” programs where home sellers make contributions to nonprofit groups that then funnel most of the money to purchasers.

At a National Press Club luncheon, FHA commissioner Brian Montgomery said such programs - which effectively cut downpayments to zero and may artificially inflate sales prices - rack up three times the number of foreclosures and insurance claim losses compared with loans where buyers come up with their own downpayments.

Montgomery noted that “no private mortgage insurance companies back these loans,” and the FHA insurance funds no longer can tolerate their high foreclosure rates. One of every three FHA loans in recent years has carried some form of downpayment gift, often facilitated by large, politically influential nonprofit corporations.

The heads of the two largest downpayment gift providers -- AmeriDream Inc. and Nehemiah Corp. of America -- immediately denounced the proposed ban. Ann Ashburn, president of AmeriDream, which has arranged more than 250,000 gift-assisted loans, said “over 100,000” buyers would be kept out of homeownership in the coming months if HUD gets its way.

Scott Syphax, president and CEO of Nehemiah, said “HUD has the temerity” to relaunch its efforts to ban downpayment gifts despite two federal decisions that blocked the agency's previous regulatory proposal -- issued last October. The court decisions primarily faulted HUD on federal administrative procedural grounds, rather than dealing with the substance of the regulation.

The Congressional Black Caucus, the National Urban League, and the Congressional Hispanic Caucus all have opposed the agency's earlier efforts.

Despite opposition in Congress, however, HUD argues that it has a statutory responsibility to safeguard the integrity of FHA's reserve funds, which it says are being depleted by insurance claims on seller gift-assisted loans that default and must be foreclosed.

Montgomery has warned Congress that the FHA insurance funds, which currently are solvent, will require direct appropriations next year if the losses from the downpayment assistance programs are not cut off.

With newly-authorized loan limits in high cost areas that go as high as $729,750, giant gift-asissted mortgages with effectively no cash investments up front by purchasers are “an unacceptable risk” for the agency, he said.

Where's this all headed? Probably to court again to challenge HUD's proposed regulatory move, and almost certainly back to Congress, which currently is working on an FHA Modernization bill as part of a large housing relief package.

We'll keep you posted as new developments occur.

Published: June 16, 2008

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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.