US House Panel OKs Bill To Reinstate Downpayment Assistance

Washington, DC — September 16, 2008
By: Jessica Holzer, Dow Jones International News

WASHINGTON (Dow Jones)--A U.S. House panel on Tuesday approved legislation to avert an Oct. 1 ban on seller-funded downpayment assistance programs for federally-insured mortgages.

A new federal housing law killed such programs for loans backed by the Federal Housing Administration beginning Oct. 1, after a strong push from the Department of Housing and Urban Development, which says they lead to default rates two to three times that of other FHA loans.

The compromise measure that cleared the House Financial Services Committee by voice vote on Tuesday would reinstate the programs. But it would also reverse a one-year moratorium on risk-based pricing for FHA loans that Congress had approved over the administration's objections.

Still, it faces an uphill climb attracting the administration's support.

"We continue to have deep reservations about the bill in its current form," HUD spokesman Steve O'Halloran said.

The ban on seller-funded downpayment assistance could hurt some home builders who had been relying on the programs to move inventory after zero-downpayment loans dried up for subprime borrowers.

Under the programs, a non-profit organization or other third party agrees to make the downpayment on behalf of a home buyer and then is reimbursed by the seller, often a home builder. This allows home buyers without the means for the required 3% downpayment for an FHA loan to get a federally backed mortgage. That downpayment is set to rise to 3.5% on Oct. 1.

HUD contends that loans using downpayment assistance are riskier because sellers usually charge more for homes when they fund the downpayment. Borrowers end up paying for the downpayment assistance through larger mortgage payments, they argue.

Aside from home builders and non-profit groups, the programs have strong support among lawmakers from urban districts with many lower-income residents. Proponents argue the program should be reformed, not banned.

The legislation would reinstate seller-funded downpayment assistance - but only for borrowers with certain minimum credit scores. Borrowers with slightly lower credit scores will also be eligible for such assistance, though they will have to pay a risk-based premium to the FHA.

"We continue to believe that reinstating downpayment assistance will ensure that working-class families that have nowhere else to turn for help will still be able to own a home," said Scott Syphax, president and CEO of the Nehemiah Corporation of America, one of the largest providers of downpayment assistance.

Supporters are aiming to attract HUD's support by heading off the moratorium on risk-based pricing.

The FHA had started charging risk-based premiums to all borrowers since the start of the housing downturn, but the new housing law placed a one-year moratorium on the practice, beginning Oct. 1.

-Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com

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For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

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