Dr. P.V. Viswanath



Economics/Finance on the Web
Student Interest


Politics & Economics: Home Down-Payment Gifts May Cease; Proposed Aid Ban Would Deal a Blow To Nonprofit Groups
Wall Street Journal, May 14, 2007


In what could be a crippling blow to downpayment-assistance programs, the Department of Housing and Urban Development is proposing that home buyers using certain government-insured loans be prohibited from accepting down-payment gifts that are indirectly funded by the home seller.

HUD's proposed rule threatens dozens of nonprofit groups, including Nehemiah Corp. of Sacramento, Calif., that have doled out hundreds of millions of dollars of payment assistance to mostly low-income home buyers across the country.

Such groups have been controversial because many provide down- payment gifts to buyers and are then reimbursed by individual home sellers and home builders. Critics say some builders have included the cost of the gift into the price of the house, which inflates values. Critics also say these gifts lead to higher than normal foreclosure rates.

HUD officials declined to comment beyond the rule, which was proposed Friday. The rule comes one year after the Internal Revenue Service said many seller-funded gifts benefit profit-driven sellers and may not qualify as a charitable activity.

Down-payment assistance is typically used by borrowers who take out loans insured by the Federal Housing Administration, which requires borrowers to have a minimum down payment of at least 3%. In fiscal 2006, according to HUD, about a third of borrowers using FHA loans to buy single-family homes, or about 103,000 borrowers, used down-payment gifts from nonprofit groups.

According to HUD, the overall foreclosure rate for FHA-mortgages used to purchase homes in 2004 was 3%, while such loans involving down-payment gifts from nonprofit groups had a foreclosure rate of 6.4%.

In Senate testimony on March 15, the HUD Inspector General said there was "a universal concern that seller-funded nonprofit down- payment assistance providers inflate real-estate prices and increase the risk of default."

Supporters say down-payment gifts have served low-income home buyers better than subprime mortgages, which have even higher default rates. Scott Syphax, Nehemiah's chief executive, says the HUD rule could further crimp the ability of low-income buyers to afford a home using FHA loans.

"At the very time that the collapse of subprime is killing access to the American dream, the one program that is a lifeline for working families is marching to the front of line to shut the last open door," Mr. Syphax said in an interview.




  1. Do you think that the proposed ban is unfair or unnecessary?
  2. After you read this article, read this linked NY Times article; see if your perspective changes.