If you've been waiting for the Obama administration to restore the once-booming “down payment assistance” program for FHA mortgages, you may have a problem: Obama's top housing official thinks the Bush administration's decision to end seller-financed down payment plans - the ones run by companies such as Nehemiah Corp and Ameridream, Inc. - was the “right decision.”

In an interview I had with Shaun Donovan, the new HUD secretary, he said downpayment assistance is acceptable if the money comes from sources not connected with the transaction -- local government grant programs, nonprofits gifts from family members for example.

But seller-financed deals, where the cash for the buyer's downpayment flows from the home seller through a tax-exempt charity to the purchaser, has produced disproportionately high rates of defaults, foreclosures and losses to FHA insurance funds, said Donovan.

Brian Montgomery, who served as the Bush administration's FHA commissioner, adamantly opposed seller-funded down payments, and resisted efforts by congressional Democrats to restore the program last year. Montgomery has remained in his post during the early months of the Obama administration, pending confirmation of Obama's FHA commissioner, David Stevens.

Both the National Association of Realtors and the National Association of Home Builders have called for resumption of down payment assistance, citing the hundreds of thousands of home purchases by lower and moderate income buyers that used the program from 2001 to 2008.

Texas Democratic congressman Al Green introduced legislation in January to bring back down payment assistance, but with a number of changes including minimum credit scores, counseling for buyers and tougher standards for the organizations offering the programs.

In the interview, Donovan, who ran New York City's housing development and preservation department for four years prior to joining the Obama team, said he is “absolutely concerned” about the rapid growth of the FHA program ... and the potential for fraud and poorly-underwritten loans slipping through the cracks.

FHA volume has zoomed from less than a three percent market share during the housing boom years to more than 30 percent at present. Down payments go as low as three and a half percent on loans that can approach $730,000 in high cost areas.

Donovan said he is pressing Congress for more money for FHA to upgrade computer systems, hire more staff, and expand fraud-detection and loan-monitoring capabilities significantly.

FHA's “historical role, which is really being demonstrated (today),” he said, “is to ensure there's adequate capital available for housing,” especially for first-time buyers and people with moderate incomes who may not be able to afford the higher down payments required by Fannie Mae and Freddie Mac.

“We're serving that role,” Donovan said.

Published: April 13, 2009

Use of this article without permission is a violation of federal copyright laws.

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.