Clock ticking again on seller-funded down payments

Federal regulators on Monday renewed their efforts to ban seller-funded down-payment assistance on FHA-guaranteed loans, publishing a proposed rule and reopening the public comment period on the plan until Aug. 15.

The Department of Housing and Urban Development says allowing sellers or others with a financial stake in the sale of a home to fund down payments inflates home prices and triples the chance that a home will end up in foreclosure.

A federal district court judge in March blocked HUD from implementing a final rule banning the practice that was published in the Oct. 1 Federal Register, saying HUD had not fully explained why it was reversing course from past policies. Nehemiah Corp. of America and two other nonprofits that operate seller-funded down-payment-assistance programs sued HUD to block implementation of the rule (see story).

In Monday's Federal Register, HUD restated its previously proposed rule, but provided additional details on the rationale behind it.

Although HUD had previously argued that it could continue to allow seller-funded down-payment programs by introducing risk-based pricing, Congress has not acted to allow HUD to charge riskier borrowers higher rates. The FHA Mutual Mortgage Insurance Fund now faces losses that would require taxpayer subsidies of $1.4 billion in fiscal year 2009, HUD said.

Loans involving seller-funded down-payment assistance made up more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier. Lifetime claim rates for the loans are above 28 percent, compared with 12 percent for all other high-loan-to-value FHA backed loans. It costs HUD six cents for every $1 of such loans it insures.

"It is not possible under current law to charge insurance premiums in an amount sufficient to cover this increased insurance claim risk, even if the maximum allowable insurance premiums were charged to all FHA-insured home buyers," HUD said in Monday's Federal Register.

Once the public comment period is closed, HUD will decide whether to publish a final rule. The final rule would go into effect 180 days it is published, barring another legal challenge by groups that facilitate seller-funded down-payment assistance.

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