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HUD says FHA loan-downpayment assistance from housing authorities is 'legal'

Federal Housing Administration (FHA) top gun Ed Golding signaled this week that borrowers receiving downpayment assistance would continue to be eligible for agency-backed loans despite the heightened scrutiny of these programs from the auditing wing of FHA’s overseer, the U.S. Department of Housing and Urban Development (HUD). 

In a blog post, Golding wrote that the FHA will continue to insure loans that get downpayment assistance from state and local housing authorities. Last year, HUD’s Office of Inspector General flagged several hundred FHA loans originated by NOVA and loanDepot for receiving “ineligible gifts”  from housing and development authorities.

The Inspector General deemed the loans were likely ineligible for FHA endorsements, and their riskiness put the insurance fund at risk.

 “After conducting a thorough and deliberative process, HUD has determined that housing-finance agency downpayment assistance programs are legal and consistent with the National Housing Act,” Golding wrote. “Government entities may provide funds to borrowers to help make downpayments on FHA loans.”

Golding noted that about 60,000 families receive downpayment assistance in tandem with FHA loans each year through state and local development authorities.

“Downpayment assistance programs are sometimes coupled with neighborhood revitalization initiatives, funded through federal and other public sources,” Golding wrote. “When combined in this manner, these sources of funds play a critical role in expanding affordable homeownership and creating vibrant neighborhoods.”

Golding acknowledged that the loans carried greater risk, and that the agency was working on ways to mitigate the default rates of loans that get downpayment assistance.

Brian Chappelle, a partner the consulting firm Potomac Partners, said HUD's General Counsel issued a legal opinion last August that the agency had no basis to challenge the legality of NOVA's down payment assistance program.  

"There definitely was widespread concern but I don't believe a lot of lenders stopped participating in the program in light of the legal opinion," Chappelle said. "Lenders were getting more apprehensive as the issue dragged on, but [Golding's] decision was welcome news and should eliminate any uncertainty going forward," he added. 

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, said 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. Most typically, borrowers have sought out downpayment assistance with FHA loans, Chrane said, but an increasing number of borrowers are also getting help to get loans through Fannie Mae and Freddie Mac's 3 percent downpayment programs. 

Chrane said Golding’s letter was encouraging, but won’t entirely reassure lenders or the administrators of these assistance programs.

“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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