Why is financial literacy missing from a standard public education? I started thinking about this because I recently heard about this down-payment “gift” program targeted at low-income home buyers run by a biblical-sounding “non-profit” organization known as the “Nehemiah Corporation of America“. As far as I understand it, this is how it works:
Let’s assume I’m a single mother making $15 an hour and I want to purchase a home. I might be able to swing a mortgage payment, but there’s no way I’m going to be able to save up the 10% or so down payment that is usually required to secure affordable financing for a home. I go to the Nehemiah Corporation, they talk to their friends who are looking to sell some overpriced houses with higher interest loans to borrowers with poor credit in areas without a lot of buyers. Nehemiah gets the seller to give up 2-3% on the purchase price (which they probably would have done anyway during real negotiations) and they use this to fund the down payment, which is provided by Nehemiah until the sale is complete. After the deal is closed, Nehemiah receives its money back in addition to a $500 processing fee that is built into the buyer’s loan. Basically, in this situation the buyer is financing the 2-3% down payment in a very short-term manner for a $500 fee. If I’m buying a home for $150,000 the 2-3% FHA required down payment is $3000-$4500. As I only need the loan long enough to close the deal in a week or two, my effective interest rate based on the $500 fee to Nehemiah is 11% to 16.7%. That’s not horrible except that your effective loan term is zero.
So, what’s wrong with all this? The problem is that these down payment “gift” programs allow people to buy homes who should not be buying homes. People who lack the financial discipline or income to put together even the most modest down payment. They also allow sellers to take advantage of federal housing laws and federally guaranteed loans in order to unload over-valued properties to unsophisticated (stupid) borrowers. This is not even taking into account the collusion with appraisers to manipulate appraisal values. With the borrowers putting none of their own money down, they are more likely to enter risky arrangements and to eventually default on these taxpayer-funded loans.
Basically, these so-called non-profits (whose management no doubt make incredible salaries) are masquerading as quasi-religious charities, which end up misleading buyers and defrauding the government when properties enter foreclosure. If you scratched the surface, I would expect to find ghetto real-estate speculators and groups like the Nehemiah Corporation in bed together. This is no surprise here in Dallas where religion and business go together like chocolate and peanut butter.
The U.S. Department of Housing and Urban Development granted AmeriDream Inc. and Nehemiah Corporation of America temporary extensions. The organizations are the nation’s largest nonprofits working to arrange down payments for loans backed by the Federal Housing Administration. They are suing HUD over the rule change.
The law forbids sellers from paying down payments for buyers who secure loans through the FHA. Down payments show that borrowers have savings. They also give buyers equity or a stake in the house.
For years, however, sellers have been able to get around the law by forwarding down-payment money through special nonprofits.
The Observer has found a high rate of foreclosure in FHA-backed loans in the Charlotte area, especially when those loans involved an arranged gift from a charity to cover a borrower’s down payment.
The Observer reported in September that FHA loans accounted for almost a quarter of recent foreclosures in Mecklenburg County.
“Loans are twice as likely to go into foreclosure” with seller-financed down-payment assistance programs, said Bill Glavin, special assistant to the Federal Housing Administration commissioner. “People’s lives are at stake.”
He told the Observer that high numbers of foreclosures in FHA-insured loans threaten to bankrupt the system.
“The default rate on those loans was so bad that if they continued, starting this fiscal year, we’d finally start to pay out more than we’d take in,” he said.
HUD Defeated on Down-Payment Assistance:
The decision was heartening, said Scott Syphax, Nehemiah chief executive. “That is not to say that we don’t believe that there are issues that need to be addressed and standards that need to be raised,” he said.
The nonprofit group supports some tougher standards for the programs, such as homeownership education and a requirement that appraisals be done at arm’s length to prevent manipulation, he said. “We continue to hope that a sensible common ground can be achieved.”
