FHA down payment program violates federal law – report

by Ryan Smith10 Aug 2016
A down-payment assistance program from the Federal Housing Administration may violate federal law, according to a government watchdog.

In a letter to the chairman of the House Financial Services Committee, the Inspector General of the Department of Housing and Urban Development said the FHA program forces borrowers to accept a higher interest rate and poses a risk to the FHA’s insurance fund.

And while the inspector general’s audit was pending, FHA violated official procedures by making “significant core changes” to the program, apparently attempting “to make what problems we found arguably appropriate,” HUD Inspector General David Montoya wrote.

“HUD has failed to recognize the disturbing parallels to the seller-funded down payment assistance arrangements practices in the late 1990’s to 2008 which caused wide-scale problems to the program and whose reverberations are still felt today,” Montoya wrote.  “It is exactly these types of risks, to the borrowers and to the health of the overall FHA’s Fund which taxpayers rely on, that compel me to now raise these concerns.  It appears that the specific down payment assistance funding arrangements highlighted in the audits creates even more significant economic disparity over time since the borrower is burdened with a higher interest rate for the life of the loan.”

“Breaking the law, trapping borrowers in higher interest rate loans, and trying to cover it up by secretly rewriting the rules – this is the sad, sorry state of today’s FHA,” said House Financial Services Committee Chairman Jeb Hensarling (R-Texas). “How ironic that the Obama Administration here has been caught engaging in the same sort of shady subprime lending schemes it condemns. Secretary Castro told Congress last year that seller-assisted down payment assistance poses such ‘a serious risk to the health’ of the FHA – and thus to taxpayers – that the FHA was working hard to shut it down. The inspector general’s report makes it clear the FHA still has not succeeded.”

About 60,000 FHA loans are originated each year under the program’s borrower-reimbursed funding arrangements – “which violate the plain language” of federal law and “adversely affect the FHA-insured loans of participating borrowers who may have unknowingly been steered into these arrangements,” Montoya wrote.

Among the problems Montoya noted were:
  •  “[F]or a borrower to get the (housing finance agency’s) down payment assistance as part of this specific program, the borrower had to accept the higher interest rate mortgage.  The higher interest rate charged to the borrower in these programs would not have been required had the borrower received the down payment assistance from another source.”
  • “[C]osts to the borrower far exceeds the down payment, negatively affects the borrower, and makes these loans a risk to the FHA insurance fund.”
  • “To our knowledge, the borrower was not informed that they could receive a lower rate and could avoid these additional costs with down payment assistance from another source.”
  • The illegal financing arrangement “places the borrower and the FHA at undue risk of loan failure…”
  • “The statute prohibits parties that financially benefit from the loan origination transaction…from providing the minimum investment.  Even under a narrow reading of the prohibition, U.S. Bank benefitted from the primary market transaction, charging fees to the borrower for its participation and later reimbursing the Housing Finance Agency that advanced the down payment assistance, through securitization proceeds.”
  • “In addition to the legal violation, these transactions represent significant increased costs to borrowers and related risk to the FHA insurance fund.”

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