The highs and lows of parenting and real estate.

The Impending End of Ameridream

Have we ever discussed down payment assistance? I’ve explained the program so many times in person that I can’t recall if I’ve ever set the metaphorical pen to paper about the subject. Well let’s just assume for the sake of this post that I haven’t; here’s a quick run-down.

When the market (and the economy) was hot a few years back and the mortgage industry was a thriving, risk-taking, happy-go-lucky thing, there were loan programs that provided 100% financing. A buyer could purchase a property with no money down and wouldn’t even be on the hook for closing costs if he or she could get the seller to agree to pay them. 100% programs were among the first to be cut when things started to sour and mortgage companies began to go belly-up.

The government sponsors what’s called an FHA loan, that allows buyers to purchase a house with only 3% of purchase price down, and this 3% can be gifted to the buyer. This is not a new program at all, but during the boom, there was little reason to use FHA loans and they kind of went out of fashion for a few years. Now that 100% is gone, the FHA loan is the new black, if you know what I mean.

Down payment assistance programs like Ameridream (which is the most well known of the programs, but Nehemiah is another) are a kind of work-around that turns FHA into a 100% loan. FHA stipulates that although 3% down can be gifted to the buyer, it cannot be gifted by the seller (too close to home). So a non-profit organization called Ameridream was created that allows people to donate money to them and they, in turn, gift that money to buyers for their down payments. It allows a seller, if they agree to it, to donate the 3% down payment to Ameridream (plus a $500 service fee) in the name of the buyer of their house and then Ameridream will gift that money back to the buyer, who can then buy the house. I know, it sounds shady, but it’s been taken to court lots of times, and had so far stood up to the scrutiny.

Unfortunately, that has come to an end, at least for the time being. The housing bill that The President recently signed made these down payment assistance programs illegal as of October 1, 2008. The idea is that these loans where people don’t have any money to put down, are much more likely to be defaulted on, thus costing the government more money to pay back the mortgage companies (FHA loans are loans that are made by banks, but insured by the government).

So here’s what it comes down to: if you want to buy a house with no money down, you better do it soon. And by soon I mean like next week. Until this ruling is overturned or appealed, you’re going to need at least 3% of the purchase price of the house you want to buy saved up, or you’re going to be out of luck.

4 Responses to The Impending End of Ameridream

  1. ” I know, it sounds shady, but it’s been taken to court lots of times, and had so far stood up to the scrutiny.”

    Actually, the Nehemiah program model has NEVER been adjusdicated to be compliant with federal law. This is a myth. The legal question before the court in the suits last year had to do with HUD’s compliance with the APA. The question before the court was NOT whether Nehemiah’s model complied with the law.

    I’ve never seen the word “gift” placed in quotation marks as often as it is when discussing this subject.

    The real estate industry has always had a bad reputation when it comes to honesty and ethics (see historical annual Gallup Poll rankings on honesty and ethics in professions surveys).

    A program where buyers are told they are getting a gift and then have to pay for that gift in the form of a higher price and inflated mortgage balance is simply not honest.

    Now I often see how some argue that prices are raised when sellers pay for recurring and non-recurring closing costs and that those are built into the price of the home also; so what’s the difference? The difference is that there is no certification of a gift with those concessions. There is no representation to the home buyer that he/she will be given the closing cost assistance free and without charge. That’s not the same as the “gift” programs. They are certified to be free.

    Also, you see the “nonprofits” argue that the “appraisal comes in” so that makes it okay. What they don’t tell you is that appraisals are not exact by their very nature. Appraisals are opinions of market value defined as “estimates” in HUD handbooks.

    Existing anti-flipping regulations and more recently, a 2008 FHA Mortgagee Letter state that under certain circumstances, such as the quick resale of a home at an increased price, the underwriting of an FHA loan requires that a second appraisal be obtained to verify the property value. As long as the second appraisal is not more than 5% below the first appraisal, the first appraisal is acceptable. Effectively, HUD has declared that the permissible tolerance between two appraisals is 5%.

    The “gift” programs distort sales prices by the 3% down payment requirement plus the “gift” fee charged by the “charity.” Now you can see that the sales price inflation can live like a virus within the acceptable range between two appraisals. Like a computer virus, just because it can find a place to hide in the system, doesn’t make it legal.

    The problem is not with the appraisers. How can HUD discipline an appraiser for an “error” of less than 5% when HUD itself has committed to 5% as an acceptable tolerance? So when the “charities” send you after a red herring that “the appraisal comes in” so all is well – think twice. The problem is that there are two different prices on the home. The appraisal issue is a distraction designed to get you off the subject of price inflation.

    Let me suggest a mental exercise to see if you think making someone pay for their gift is honorable or ethical. Let’s say it’s your birthday party, and some character shows up that you have never met before. Strangely, this character has brought with him a $4,000 gift (big screen, vacation package, fill in the blank of what $4,000 gift you would like for your birthday) and makes a “big todoo” about it. Kind of odd since not even your parents or other family members, people who actually know you, gave such a gift.

    After all the fanfare, and the OMG thank you so muchs, the stranger leaves … and leaves you wondering who was that man who gave me so much and why would he give me – a stranger – so much?

    A little time goes by and one day, after work, you go home get the mail and are stunned to see that that nice man had charged that “gift” to your credit card. But it doesn’t end there, he also charged you a $750 fee for getting you the “gift!” Now what do you think of him? Now you know why he crashes every birthday party in town with his “gift.” Welcome to Nehemiah.

    I have to stop typing now because I ran out of quotation marks.

  2. Well, suffice it to say that I don’t agree with your perception of the problems that are inherent to down payment assistance programs. Your ‘gift’ metaphor implies that the gift receiver is unaware of the process behind this gift, when in fact, in down payment assistance, the buyer is not only aware of the ins and outs of receiving the down payment, but they have asked for it and almost always NEED to have it in order to purchase the property. This is a negotiated part of the contract, like any other piece. It comes out of the seller’s profit and Ameridream or Nehemiah are simply a means to moving the money.

    Down payment assistance is not being currently outlawed because it harms the seller or the buyer, but because it allows buyers who aren’t necessarily as qualified as they need to be purchase a house and obtain a mortgage, and puts the government and banks at risk of even more of the foreclosures that have been swamping the market and bankrupting the industry.

  3. While I’d heard about Ameridream before I didn’t know what it was. Thank you for explaining this. I think ending the program for the time being, the way you’ve explained it, makes sense. I guess we got a little house happy and now we are all suffering as a result.

  4. Downpayment assistance is not what is contributing to the foreclosure epidimic. People who knowingly buy homes that they can not afford is.

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