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Special Reports
Emerging Markets
Will the IRS Crackdown on DPAs Cripple the FHA?
The IRS eyed Nehemiah for two years.
By Brian Collins
An Internal Revenue Service crackdown on downpayment assistance providers
could cripple the Federal Housing Administration's single-family program, which is dependent on borrowers receiving
downpayment assistance for a large proportion of its loan volume.
As the FHA's share of the purchase mortgage market has declined over the years, the proportion of its loans with
downpayment and closing-cost assistance has increased dramatically.
Slightly more than 50% of FHA homebuyers use charitable downpayment assistance programs, according to Nehemiah
Corp. of America, the largest downpayment assistance provider. Other estimates put it at 30% to 40%.
Nehemiah and other nonprofits view the IRS action as a direct threat to their downpayment assistance activities,
even though they received IRS and Department of Housing and Urban Development approvals in the past.
Meanwhile, lenders see it as a mixed blessing that may help to spur Congress to pass legislation this year that
updates and revitalizes the FHA program.
After reviewing downpayment assistance programs for the past two years, the IRS has concluded that nonprofit organizations
that fund downpayment assistance through contributions from sellers and builders are abusing their tax-exempt charitable
status. "Increasingly, the IRS has found that organizations claiming to be charities are being used to funnel
downpayment assistance from sellers to buyers through self-serving, circular-financing schemes."
IRS commissioner Mark Everson also expressed concerns that sellers generally recoup the assistance by increasing
the sales price and FHA loans with downpayment assistance have higher default rates. (Fannie Mae and Freddie Mac
do not accept loans with downpayment assistance from nonprofits.) "So-called charities that manipulate the
system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the
image of honest, legitimate charities," commissioner Everson said.
HUD data show that defaults on loans with downpayment assistance from nonprofits are two times higher than other
FHA loans and the claim rate is three times higher.
The IRS also said that it's examining 185 nonprofits to see if there is a direct correlation between the amount
of downpayment assistance provided to homebuyers and the payment nonprofits received from the sellers.
Nehemiah president Scott Syphax said the IRS has been examining his shop for two years. "Our 501(c)(3) charitable
status is still in good standing," Mr. Syphax said. And Nehemiah continues to provide downpayment assistance
on FHA loans.
Nevertheless, the Sacramento, Calif.-based nonprofit is preparing for the worst. "We are reviewing all options,"
Mr. Syphax said, including legal action.
If the IRS really eliminates downpayment assistance, he warned, "You close the door of homeownership potentially
to hundreds of thousands of families."
The Mortgage Bankers Association also acknowledges that the IRS actions hamper the FHA's ability to serve first-time,
minority and low- and moderate-income homebuyers.
But MBA also sees it as an opportunity to press Congress to pass FHA reform legislation this year. "This underscores
the need to pass FHA reform legislation," MBA vice president Steve O'Connor said.
The Bush administration recently proposed to eliminate the FHA 3% downpayment requirement so FHA borrowers could
get a low- or no-downpayment loan under a new risk-based premium structure. These reforms would make downpayment
assistance unnecessary for many borrowers.
HUD also is using the IRS action to urge legislative action, claiming the FHA reforms would provide "safer
and more affordable financing options" for homebuyers who currently rely on downpayment assistance.
The FHA clearly needs a shot in the arm. Its share of the mortgage purchase market has slipped to 3% from 3.8%
just a year ago. Originations for the first six months of fiscal year 2006 ending March 30 totaled $25.4 billion,
down 25% from the same period a year ago. The default rate on FHA loans is 7.16%.
Meanwhile, the FHA continues to accept loans with downpayment assistance from qualified 501(c)(3) charities. And
the downpayment assistance providers, such as AmeriDream, based in Gaithersburg, Md., are not going to melt away.
"AmeriDream believes the IRS interpretation of the code is erroneous," president Ann Ashburn said. "AmeriDream
will continue to operate our downpayment assistance program."
She noted that the IRS "rebuffed and ignored" requests for guidance on downpayment assistance over the
past three years. Now it has issued a ruling that could have a "negative and catastrophic impact on homebuyers."
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