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Down Payment Assistance Funding Scheme Violates Law, Forces Borrowers to Accept Higher Interest Rate Mortgage

Washington, Aug 8 -

WASHINGTON – The Federal Housing Administration (FHA) is steering borrowers toward a down payment assistance program with a funding scheme that violates federal law, forces borrowers to accept a higher interest rate, and poses a risk to the FHA’s insurance fund, according to the Inspector General of the Department of Housing and Urban Development (HUD).

In addition, while the Inspector General’s audit was pending, FHA violated official procedures by making “significant core changes” to the program in an apparent attempt “to make what problems we found arguably appropriate,” HUD Inspector General David Montoya wrote in a letter to House Financial Services Committee Chairman Jeb Hensarling (R-TX).

“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.” 

Chairman Hensarling said, “Breaking the law, trapping borrowers in higher interest rate loans, and trying to cover it up by secretly re-writing the rules – this is the sad, sorry state of today’s FHA.  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 clear the FHA still has not succeeded.”

An estimated 60,000 FHA loans are originated each year using 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,” the Inspector General said in his letter.

Among the problems the Inspector General uncovered with the down payment agreements between FHA, U.S. Bank and housing finance agencies (HFAs) around the country:

To read the Inspector General’s letter, click here.