Banking Law

HUD Resumes Fight To Delete DAP

After carefully considering an adverse ruling by a federal district court judge over its failure to follow the procedures mandated by the Administrative Procedures Act, HUD has decided to thank the judge for outlining the course of action it now plans to follow in eliminating seller-funded downpayment assistance (DAP).

Last year, a federal judge in the District of Columbia, issued a preliminary injunction against an earlier ban on seller-assisted down-payment gifts proposed by the Department of Housing and Urban Development. The judge ruled that HUD "failed to provide a rational basis in support" of the ban.

HUD spokesman Brian Sullivan said in an interview that the agency, "lost on a technicality. The court gave us a good road map for how to get it done."

Many observers believed that HUD shouldn't have required two federal district court judges (another in California also issued a similar ruling) to tell it how to properly issue a rule in accordance with the APA. Nevertheless, it's nice to know that HUD believes that it finally gets it.

According to FHA commissioner Brian Montgomery, it's a matter of life and death.

"Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments," Montgomery said at a National Press Club event.

Such loans are currently one-third of the government agency?s portfolio, he added, and led the agency to book an additional $4.6 billion in unanticipated long-term losses in an annual re-estimate.

"No insurance company can sustain that amount of additional costs year after year and still survive," he argued. "Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate."

[...]

Mongtomery said that HUD would reopen to public comment a hotly-contested proposed rule that would look to ban the down-payment assistance program.

"We are concerned about this business because the substantial losses affect FHA?s bottom line and FHA?s ability to serve American citizens who need access to prime-rate home loans," he said.

"Given these concerns, we cannot just stand by ? we must make our case again."

As expected, the nonprofit corporations that have been making servicing fees from laundering seller-funded downpayment assistance payments from rendering valuable "services" for homebuilders and borrowers, are crying in their beer.

Losing one third of the FHA?s business that uses downpayment assistance will deny annually over one hundred thousand qualified moderate income, minorities, first-time homebuyers and women-headed households from becoming homeowners,? said Ann Ashburn, president of AmeriDream, Inc., a large down-payment assistance provider.

She argued that denying key groups the ability to purchase a home would further destabilize an already-wobbling housing market.

It shouldn't come as any surprise to folks like Ms. Ashburn that the overwhelming majority of the American taxpayers who will have to fund the FHA if it runs into financial difficulties is already less than enamored with using the FHA as a tool to bailout imprudent borrowers, lenders and the enabling investors who funded the subprime fiasco. Cutting back on this form-over-substance scam that enables borrowers who otherwise wouldn't qualify for a government-guaranteed loan to get one, borrowers who are much more likely to default than borrowers who do not receive such assistance, is going to be politically popular with those taxpayers. Ms. Ashburn needs to find herself another scam to use to fleece the taxpaying public. This one is headed, surely albeit slowly, to the dustbin of history.

Brian Montgomery gets it.

"FHA is designed to help stabilize the economy, operating within manageable, low-risk loans," Montgomery said. "It is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.

"We don?t want to dramatically enlarge FHA?s portfolio, with a substantial portion of the portfolio problematic, high risk loans that cost homeowners who were careful and bought homes within their means."

This bad idea would have been blown out of the water already if HUD had been able to follow the Administrative Procedures Act. With the recent changing of the guard at HUD, and the installation of a bureaucrat to head HUD who appears to have bi-partisan support in Congress and doesn't appear to suffer from the lack of a moral compass as did his predecessor, there's hope that HUD will manage to get it right this time around and will slam the door on this scheme once and for all.

Full post as published by Bank Lawyers Blog on June 10, 2008 (boomark / email).