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A housing program blamed in part for high default rates on government-backed loans, derided as a “scam” by the Internal Revenue Service and targeted for years for elimination by the agency that ran it looked like it finally had reached its end this fall, after Congress finally banned it. But now, in a sign that some lessons of the housing crisis have yet to be learned, a movement is afoot to bring it back.

The program is called seller-funded down payment assistance. When U.S. Department of Housing and Urban Development Secretary Shaun Donovan told Congress last month that dramatic growth in seller-funded down payment assistance programs in recent years had added to high default rates on Federal Housing Administration-backed loans, it might have seemed like the final blow. The programs, initially intended to help low and moderate income people buy homes, had long been under fire, the subject of complaints from HUD, the General Accounting Office, and the IRS. And with FHA default rates threatening to trigger yet another taxpayer bailout, policymakers have plenty of motivation to steer clear of any lending approaches deemed risky or problematic.

       

Illustration by: Matt Mahurin

But supporters of seller-funded down payment assistance aren’t giving up. Despite Donovan’s stance, they’re still supporting a bill to revive the program — a measure now before the House Financial Services Committee. Sponsored by Rep. Al Green (D-Tex.), the bill has 17 co-sponsors, among them powerful lawmakers such as Rep. Maxine Waters (D-Calif.). Backers include builders and realtor groups, the Mortgage Bankers Association, and the Congressional Black Caucus. Committee Chairman Barney Frank, D-Mass., told the Wall Street Journal last year he wants to reform the program, not kill it. And supporters are continuing to pressure HUD to preserve it.

“We do agree there were problems with the previous program,” said David Ledford, senior vice president for housing policy at the National Association of Home Builders. “But we still support the legislation. HUD was somewhat at fault for not properly monitoring it. It can be done more carefully, and with tighter controls. But HUD is just throwing up its hands and saying things turned out badly and we shouldn’t do it at all.”

But Ledford’s views aren’t widely shared by many in the mortgage industry, and they simply don’t reflect reality, according to the program’s numerous critics. FHA’s seller-funded down payment assistance should have ended years ago, given ample evidence of its problems, said Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md. company that covers the lending industry. The GAO concluded that homes purchased using the programs were appraised at and sold for 2 to 3 percent more than comparable homes bought without the assistance. The IRS in 2006 revoked the tax-exempt charitable status of providers of seller-funded down payment assistance – and called the programs “scams.” HUD’s Inspector General and the FHA itself have complained the programs raise home ownership costs and lead to more foreclosures, saying homeowners using the assistance were two to three times more likely to default on payments than other borrowers.

Both the FHA and HUD allow homebuyers to receive downpayment money from third parties, such as relatives, employers, government agencies and independent nonprofits. But unlike much of the rest of the mortgage industry, the FHA also allowed homeowners to get downpayment help from nonprofits or charities funded in part by sellers. And that’s where the problems came in.

In a speech last summer, former FHA Commissioner Brian Montgomery called seller-funded down payment assistance programs “circular financing schemes.” Property sellers often raised the sales price of a home to cover the cost of downpayment “gift,” the GAO noted. The charity or nonprofit that supplied the down payment money was reimbursed by the seller for it, along with service costs and fees, once the deal closed. Borrowers unwittingly paid for it all. Critics contended some charities existed solely to funnel the downpayment money from the seller to the buyer. The program was especially popular with builders.

The Mortgage Lender Implode-O-Meter, an influential financial blog leading a blogosphere campaign against reinstating the downpayment program, explained that buyers qualified for FHA loans using grant letters from the charities as proof of downpayment. As far as the FHA was concerned, the grant was a charitable donation that came from an independent nonprofit, and not the seller.

Suckers!…Of course the losers in this scheme are the FHA (the taxpayer –who actually has to insure these loans), and ultimately the borrower — who is probably already underwater and overextended.

After buyer lawsuits, rising defaults, and other controversies, Congress finally ended the practice as part of the mortgage rescue package approved last summer, and the programs were banned as of Oct. 1. The bill to revive them is a long shot to eventually become law, given the past controversies. But the fact that a campaign even exists means one of the biggest lessons of the financial meltdown – that buying homes with no money down isn’t exactly a great idea – seems to be lost, at least on some.

“It’s a program that HUD doesn’t really want, the mortgage industry doesn’t really want and most community groups don’t really want,” Cecala said. “It’s got such a lousy track record. That anyone would want to resurrect it at all is astonishing.”

Added Cecala: “The fact that Congress would even consider this… are these guys serious? Did they do any research on this at all? It should have a skull and crossbones on it.”

Dean Baker, co-director of the Center for Economic Policy and Research, who warned before the financial crisis of a growing housing bubble, expressed similar sentiments. “I’d say it’s a bad idea that won’t go away,” Baker said. “I think it’s basically crazy. Arguably one of the lessons we were supposed to have learned is that we shouldn’t have been pushing homeownership, everywhere and always.”

“It’s a long shot to become law, but I wouldn’t rule it out. You have some big groups pushing it on the other side.”

Seller-funded down payment programs drew little attention earlier in the decade, when the FHA had a much smaller share of the mortgage market, and when helping low-income borrowers get into homes was an aggressive public policy goal, noted Patricia McCoy, a University of Connecticut law school professor who specializes in banking and securities regulation.

But use of the programs increased sharply, after the subprime meltdown led to an expansion of FHA-backed lending. And last month, HUD Secretary Donovan told Congress that while loans with seller-funded down payment assistance represented only 12 percent of the FHA portfolio at the start of 2008, they accounted for 30 percent of all foreclosures completed that year. He said the end of the program “should substantially reduce FHA losses on new originations in the years ahead.”

Some large down payment assistance providers, however, are countering with a campaign that contends the ban is hurting working class Americans, who want to buy homes but can’t come up with steeper downpayments because of tightened lending standards. A website sponsored by the bill’s supporters refers to the measure as “DPA Reform” and includes a running tally of the number of Americans denied access to homeownership since the programs officially ended.

Ann Ashburn, president of AmeriDream, a Gaithersburg, Md. provider, said in a statement last fall that “eliminating charitable down payment assistance will slam the door on over 100,000 teachers, firefighters, working families and others who rely on these programs annually to become homeowners.”

AmeriDream spokesman Henry Fawell said the company is “cautiously optimistic” about prospects for reviving the program. Helping buyers with downpayments would benefit the economy as a whole and could jump start the housing market, he said. Vacant homes are scarring neighborhoods with blight, but many borrowers can’t come up with downpayments on their own to buy them, he said.

Fawell acknowledge problems with the programs in the past, but said the new bill addresses them by including requirements for higher credit scores, fees for riskier borrowers, and penalties for inflated appraisals. “We have support on both sides of the aisle,” Fawell said.

The bill’s co-sponsors include one Republican, Rep. Gary Miller of California, a former builder.

With the Obama administration busy handling banks stress tests, bailouts and financial regulatory reform, the bill to reinstate seller-funded down payment assistance isn’t facing much active lobbying opposition. And down payment providers and housing lobbyists have a long history of successfully fighting off attempts to end the programs. HUD began trying to do so back in 1999 and again in 2007, when it was successfully sued by AmeriDream and by the Nehemiah Corp. of America, another large provider. Barely 24 hours after Congress approved the ban last summer, Rep. Green introduced a measure to bring it back.

One possibility is that supporters could slip in reinstatement of the program into a larger housing bill. But Cecala, of Inside Mortgage Finance, thinks it’s still a hard sell. Putting people in homes with no money down is a widely discredited idea, he said. Although civil rights groups still support the programs, the thinking has changed regarding the best approach to help minority borrowers.

“The Community Reinvestment Act and other programs are a much more sustainable way to get people into homes as opposed to subprime and no-downpayment FHA loans,” Cecala said. “But they also are a lot more work for both the lenders and borrowers.”

In the meantime, Ledford, of the builders’ association, said his group is working with HUD to see if first-time homebuyers can apply some of the new $8,000 tax credit toward downpayments. HUD is trying to make sure some of the same circular financing problems that plagued the seller-funded down payment assistance program wouldn’t affect that proposal, he said.

It seems that when it comes to seller-funded down payment assistance, the fight never really ends

“I strongly believe that those financial institutions receiving federal aid through the TARP must quickly provide a full accounting for their funds received, and I sincerely hope that the Department of the Treasury will move quickly to address this massive transparency gap,” said Klobuchar. “The Treasury Department’s failure to collect information on how companies are using TARP funds is, quite simply, unacceptable.”

Klobuchar said, “[R]eports of questionable uses of TARP funds, still-frozen credit markets and the continued slowing of the economy … called into question whether the funds were being used appropriately.”

The full letter after the jump.

The Honorable Henry M. Paulson, Jr.
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, DC 20220

Dear Secretary Paulson:

I am writing to you today regarding my concerns about the Troubled Asset Relief Program (TARP). I strongly believe that those financial institutions receiving federal aid through the TARP must quickly provide a full accounting for their funds received, and I sincerely hope that the Department of the Treasury will move quickly to address this massive transparency gap.

In the nearly three months since the Emergency Economic Stabilization Act was signed into law, American families have anxiously waited for its benefits to reach Main Street. But recent economic statistics show that these benefits are not helping those who are the most in need. Credit is not loosening up. Sales of existing homes dropped by 8.6 percent in November, and we have lost at least 1.9 million jobs this year. It is not surprising that the Conference Board’s consumer confidence index fell to an all-time low of 38 last week.

The Treasury Department’s failure to collect information on how companies are using TARP funds is, quite simply, unacceptable. Therefore, I hope that you will work with the Office of Financial Stability to determine a path forward that will enable us to once and for all answer the growing number of questions regarding appropriate expenditure of TARP funds.

Thank you for your consideration of my request. I look forward to your prompt reply.

Sincerely,

Amy Klobuchar

Over at Second Street and Washington Avenue, a precarious chain-link fence encircles a field of dirt that was supposed to be the anchor for Brighton Development’s Portland project. The developer, which was responsible for much of the riverfront renewal, likewise halted plans for its Warehouse District Live/Work project late last year.

In fact, an increasing number of plans for downtown development continue to be suspended in mid-air with little hope of completion. Just today, it was announced that Minnetonka developer Opus has pulled out of the Nicollet, which was heavily touted as the tallest residential tower in Minneapolis, and loaded to the gills with high-class amenities to boot (pictured above in a design rendering). The Nicollet hasn’t pre-sold enough units to secure construction financing. And with the credit crunch increasing requirements for both commercial and residential financing, its future looks bleak.

Earlier this week Finance and Commerce wrote about the North Loop neighborhood, which sits in a sort of development purgatory as the Twins Stadium gets assembled in its center and plans get stalled all around it. The Pacific project, the paper notes, has been scrapped. The original plan included 327 condos, a 133-room hotel, and retail space. The reason, according to developers, is that financing dried up.

But the other major hurdle downtown developers face is selling the condos. Not only is the condo market in glutted mode (there’s presently a 12.5-month supply of condos in Minneapolis); stricter lending standards are simultaneously making condo sales more difficult. Condo buildings composed of rental units and retail space are considered…

Continued: Click “Read More”high-risk to lenders because so many businesses fail. Condos with a high number of rental units on top of abandoned businesses are hard to resell.

For those reasons, the North Loop Village (developed by the Hines group) has been altered from what was slated to be a quaint downtown community imagined as “Twinsville” all the way down to a 350-unit apartment building, and even the latter is still only a faint possibility at this point. Originally North Loop Village included 1,250 residential units, 120,000 sq. feet of office space, and 45,000 sq. feet of street-level retail on eight acres of land.

So what will become of all those empty holes? And what does this mean for downtown? It means the city will have to spend more money to court developers and finance projects if it wants to continue with its long-range North Loop Master Plan, a tableau that includes mixed-use development, retail space, walkable streets, and mass transit like the Northstar Commuter Rail Line.

According to Beth Elliott, Minneapolis’ principal city planner, the slowdown or halt in development won’t affect the plans for the Northstar, which is slated to open in 2009. “The two aren’t very related at this point,” she tells Minnesota Monitor. “Obviously we want development around transit lines. But its path is more based on people who are coming into downtown from the suburbs.”

And as for development of the North Star Village around the transit line, Elliott says that Hines is currently going through an environmental review process of the area, meaning that all options — from more apartments to fewer, more retail to none — are still possible.

Elliott says the city hasn’t seen a lot of new projects proposed for the area suffering from a serious and unplanned slowdown. “A lot of properties have already been converted,” she says. The plan for the city now, she notes, is to court development on “trickier” sites by offering potential for financial support. “What the city will do is continue to support development with potential for financial subsidy,” she says.

“Everything is slowing down,” she adds. “But in places were we own sites, like the Mills District, our plan is to move forward with RFPs.”

The press response in the US is decidedly vague and sanguine compared to the reaction in the UK. Let’s compare.

Here are the wire summaries [1] [2] that readers of the New York Times got today.

And here are a pair of highly recommended pieces from today’s Guardian [1] [2].

Below the jump, an excerpt of Heather Stewart’s report in the Guardian (link #1 above).

Continued: Click “Read More”

As finance ministers and central bankers arrived in Washington to discuss ways of tackling the crisis, the IMF warned, in its twice-yearly World Economic Outlook, that governments might be forced to step in with more public bailouts of troubled banks and cash-strapped homeowners before the crisis was over.

“The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system,” it said.

After warning this week that the world’s financial firms could end up shouldering $1trn (

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