I don’t know about you, but I found the recent published reports that Beazer Homes USA Inc. will pay as much as $53 million to settle mortgage fraud charges relating to its own buyers particularly disturbing.
According to news reports, Beazer allegedly ignored income requirements so as to make loans to unqualified buyers. As one could have predicted, these loans blew up.
But to make matters worse, Beazer allegedly attempted to hide from the Federal Housing Administration (FHA) excess default rates on their loans, and, according to prosecutors, charged homebuyers interest "discount points" at closing but kept the money and didn’t reduce the interest rates on loans.
However, the alleged "Sleazer" tactic that particularly bothered me was a kind of Scrooge-like downpayment assistance plan: Beazer offices allegedly provided cash gifts to homebuyers so they could make a minimum down payment, but then added an equivalent amount of the gift price on top of the purchase price of the home.
Downpayment assistance plans have traditionally been touted as a good way to enable low- and moderate-income families to make home purchases, especially in regard to FHA-insured loans. The programs were the veritable backbone of most charities involved with getting more Americans to become homeowners.
Then it all truly went askew and today many downpayment assistance plans are not to be trusted.
MortgageFraudBlog is an interesting Web site for those with a morbid eye for news, as it runs in perpetual motion all the breaking stories on mortgage fraud. On a typical day you might see headlines such as "Lawsuit Filed Against Mortgage Loan Modification Company," or "Five Indicted in Michigan Mortgage Fraud Scheme," or "Metropolitan MoneyStore Conspirator Sentenced."
MortgageFraudBlog is put together by attorney Rachel Dollar. I checked in with her about Beazer’s alleged fairytale lending schemes.
"This was a different story than we usually carry on our Web site," she noted, "Usually it’s about indictments of employees of financial service companies, but in this case the frauds were perpetrated against the borrowers, more so than the lender."
Although in the end the lender gets screwed when the borrowers go under. As Dollar pointed out, the U.S. Housing and Urban Development Department did a study of the default rates in loans that used downpayment assistance programs and discovered defaults were much more prevalent when downpayment assistance programs were permitted to be involved.
The other thing she noted is that a lot of the practices, such as the misuse of downpayment assistance plans, were prevalent in the industry. …CONTINUED
There were all sorts of ways to trick up a downpayment assistance program. One common one was for the seller to buy a membership or make a contribution to an independent organization specializing in downpayment assistance, which then in a kind of quid pro quo gave downpayment assistance to the seller’s client.
Think about it: Basically the seller is funding its own downpayment assistance. Money goes from company "A" to entity "B," which then gives it back to company "A" in the form of downpayment assistance.
Unbelievably, this was once seen as a win-win for everyone. The seller gets its asking price for a home and the buyer gets a down payment for the purchase. It just wasn’t a win-win for the lender because the bank ends up funding the loan with incorrect loan-to-value ratios; it lent on a home far more than it was worth.
Somewhere along the line, HUD, which had previously allowed charitable downpayment assistance, realized it was being taken to the cleaners and in 2007 issued a regulation to effectively ban such programs by prohibiting the use of downpayment assistance funded by sellers.
It’s now two years later and a new push has arisen in Congress to overturn that ban.
While researching this story, I noticed that one Ann Ashburn, president of AmeriDream Inc., a Gaithersburg, Md., firm that calls itself the largest non-faith downpayment-assistance charity, testified earlier this year in favor of overturning the ban before a House of Representatives Appropriations Committee overseeing HUD.
So, I contacted AmeriDream to see if I could get Ashburn’s view of downpayment assistance. I was told she was much too busy to talk to the press, but I could submit questions. I e-mailed four, the core questions being: Was there a HUD backlash against downpayment-assistance programs? And, where does the downpayment-assistance industry stand today?
In a matter of days, I saw in my e-mail box a note from AmeriDream’s marketing team that my questions were answered. When I read the responses, I realized that Ashburn, or her representatives, did not even try to answer the questions, but sent along paragraphs of canned statements about the bill being circulated in the House to overturn the ban.
What was Dollar’s view of downpayment assistance? "The issue is disclosure," she says. "Any program that hides the true facts from the lending institution is not something a homebuyer should be involved in. But, if there’s full disclosure and the lender approves, then downpayment assistance is fine."
What about the folks hurt in the alleged Beazer Home scam? Although many of the borrowers have lost their homes, that doesn’t mean they can’t get the fees back. Dollar expects there to be a restitution fund, which will be the vehicle that will do the refunding.
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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