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FHA downpayment-assistance programs remain under scrutiny, HUD's inspector general says

The Office of Inspector General for the U.S. Department of Housing & Urban Development (HUD) says it is not backing off its scrutiny of higher-priced Federal Housing Administration (FHA) loans that receive downpayment assistance from government-sponsored development authorities.

HUD Inspector General David Montoya said his office strongly disagrees with the agency’s conclusion that a batch of loans originated by NOVA Financial & Investment Corp. met the guidelines of the FHA program and were eligible to be insured. Last year, Montoya’s office, an independent wing of HUD that conducts audits and investigations of the agency’s programs and operations, flagged several hundred premium-priced FHA loans originated by NOVA and other lenders.

In the case of the Arizona-based NOVA program, HUD's inspector general said that 709 loans probably weren't eligible for the FHA backing because borrowers were charged a higher interest rate. The mortgage rate was calculated to recapture the cost of the downpayment assistance, and the additional revenue was eventually funneled back to several government-sponsored downpayment-assistance programs used in the NOVA loans. 

“While we do not have a concern with the overall downpayment-assistance program, we believe this specific aspect, where external lenders are originating FHA loans with ineligible downpayment-assistance gifts and secondary financing — and agree to inflate the interest rate on the borrowers’ FHA loans — violates the law and harms borrowers,” Montoya said in the statement released last week. “We stand behind the audit’s findings and intend to pursue all avenues at our disposal to continue to convey concerns.”

The office is also auditing HUD’s oversight of FHA loans “originated with ineligible downpayment-assistance gifts and secondary-financing loan programs,” a spokesman indicated on Tuesday.       

“This audit was initiated based on three [inspector general] external-lender audits that determined lenders allowed funds derived from premium-priced mortgages to be used to pay for the borrowers’ downpayment-assistance gifts or secondary financing that was provided by housing-finance agencies,” the spokesman said. 

Montoya’s remarks came after FHA’s top gun Ed Golding strongly endorsed the legality of using downpayment-assistance programs run by state housing authorities. In a blog post last week, Golding said the agency had conducted a thorough investigation and determined that borrowers receiving downpayment assistance would continue to be eligible for agency-backed loans, and the programs “are legal and consistent with the National Housing Act.”  

Golding’s statement was cheered by mortgage-industry trade groups, which have claimed that the scrutiny of NOVA by HUD's inspector general was casting a cloud over the use of downpayment-assistance programs offered by state housing authorities. In a statement, the Mortgage Bankers Association (MBA) said it was “deeply troubled” by the quick pushback from the inspector general.

“Until there is official, authoritative policy guidance from the HUD secretary — published in the Federal Register — we urge lenders to evaluate their ongoing participation in these programs with extreme caution,” MBA wrote last week.    

FHA requires a 3.5 percent downpayment, but numerous programs across the country have sprouted up to help borrowers cover those costs. Rob Chrane, chief executive officer of Down Payment Resource, told Scotsman Guide News last week that about 12 percent of the 2,500 programs in its database were at issue. Most downpayment-assistance programs are associated with state and local housing authorities.

“There was some people who thought that HUD wasn’t pushing back hard enough,” Chrane said. “This seems to be HUD starting to assert their position a little more strongly than they did before. It is not going to go away until the [inspector general] says that, ‘OK, we are satisfied.’” 



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