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Nonprofit Mortgage Organizations Zero Downpayment

August 5th, 2010

The mortgage meltdown and the housing crisis had many players. We all hear of the big banks, Wall Street movers and shakers, and greedy mortgage brokers. But there is a group of players that so far has flown under the radar. I am referring to the nonprofit mortgage organizations.

We have heard of Association of Community Organizations for Reform Now (ACORN), AmeriDream, Nehemiah, Neighborhood Housing Services of America (NHS) and the National Community Reinvestment Coalition. These organizations offered quality educational programs to first time home buyers.

However, the down payment assistance programs were the problem. This amounted to a zero down or a 100% financing mortgage for the homebuyer. The bulk of the money behind these programs were sellers and developers, hence, seller funded downpayment assistance. When a borrower has no money in the game it is always easier to walk away when he hits a losing streak.

Many critics of the seller funded downpayment assistance programs refer to them as money laundering. The seller gets the money to the low-income homebuyer via the nonprofit organization. Ameridream and Nehemiah were the key nonprofit players.

The seller/developer donates money to the nonprofit. The nonprofit gives the money to the homebuyer and collects a fee from the seller/developer. The seller adds on some fees and costs to recoup the money he has given the nonprofit. And the house price is inflated. This in a nutshell is the seller financed down payment assistance program. There were also the 103, 105 and 110 loans which gave you a check when you left the escrow office. Just imagine, you have the keys to a house you can not afford, and a check to boot.

AmeriDream and Nehemiah had a good thing going with this “zero” down plan and they wanted to keep things just the way they were. Maybe that was why they did not encourage Congress to legalize a zero downpayment  program for the FHA. They both lobbied against the FHA zero down program. And went so far as to call the program too risky for the FHA.

In 2004 Ann Ashburn, CEO of AmeriDream, made a statement to the U.S. House of Representatives Subcommittee on Housing and Community Opportunity, Committee on Financial Services,  regarding H.R. 3755. In part she said, “…homeowners taking on zero down loans would enter homeownership with zero down, or even negative equity, a position that would make them likely to default on their loans”.

Scott Syphax of Nehemiah fully supported Ann Ashburn’s comments “…Unlike families who today use privately funded downpayment assistance, under the proposed new system, homebuyers could move into a home in which they have negative equity…when a homebuyer goes through economic hardship the homeowner may be more willing to simply walk away from the home and let the lender foreclose”.

AmeriDream also testified in June 2005,  regarding H.R. 3043 zero downpayment pilot program. The company recommended that Zero Down program homebuyers have a credit score of 700.

Yuliya Demyanyk, an economist at the Federal Reserve Bank of  St. Louis concluded that the credit score does not by itself predict the true risk of default of subprime mortgage loans or of the subprime mortgage crisis.  Demyanyk claims that borrowers with high credit scores, above 700, the serious delinquency rate in 2007 was almost four times as large as in 2005. In addition, the serious delinquency rate in 2007 for the best group was almost the same as the rate in 2005 for the worst FICO credit score group.

There is no benefit to the homebuyer or to the community with seller funded downpayment assistance programs. The default rate is 2 to 3 times higher than regular FHA loans. Seller Funded Down Payment Assistance was prohibited under the Housing and Economic Recovery Act of 2008 (H.R. 3221), and it is seen as a “scheme” by the IRS and it is in direct violation of HUD regulations.

If you can’t save for a downpayment, minimum 3.5%, you are not ready to buy a house. In the real world people get sick, lose their jobs, get divorced, the neighborhood changes and you get stuck. You can’t sell at a profit so you walk away.

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Entry Filed under: Non Profit Organizations