HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance

HUD FHA

This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.

In the letter, Golding advised that:

• Government entities may provide borrowers with funds for down payments on FHA loans; and

• Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.

Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”

Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:

• The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;

• The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and

• The lender did not perform due diligence to ensure DPA was eligible.

After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:

• Governmental entities are a permissible source of funds for down payments on FHA loans;

• FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and

• FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.

The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.

Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.

The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”

Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.