In spite of the critics, down-payment assistance programs are winning over builders, lenders, and home buyers

By Lisa Marquis Jackson
January 2004
Big Builder

In Las Vegas, perhaps no other business rivals the competitiveness of tourism like housing. For savvy builders, like locally owned Signature Homes, that has meant continually looking for new approaches to offering value. "We recognize the importance of developing a competitive edge," says Jim Cerrone, vice president of sales and marketing for the builder. "The market hasn't always been this hot. And just because the market's good, it still doesn't mean everyone can get into a house."

That philosophy is one of the reasons Signature teamed up with Sacramento-based Nehemiah Corp. of California four years ago and today sees some distinct pluses in working with the charitable nonprofit that has made more than 150,000 down-payment assistance gifts on FHA loans available to home buyers. Signature, which expects to complete about 600 units this year, builds product that runs the gamut: from condos to multi-million dollar homes. But with its core business in the first-time and first move-up buyer categories, it's no surprise that the company has used down-payment assistance programs (DAPs) in an effort to set themselves apart.

Today, 50 percent to 60 percent of that core business is funded through the Nehemiah program. As of November 2003, that figure accounted for 17 percent of the loans for the entire company.

While a growing number of builders are taking advantage of down-payment assistance programs, many builders continue to take a decidedly low-key posture in deploying them. That's due in part to concern over the higher risk of default associated with buyers who take advantage of DAPs. But it's the nature of how DAPs work that tends to fuel deeper reservations. Qualifying home buyers receive down payments as gifts, rather than as loans, funded by donations.

The arrangement, though legal, raises eyebrows among those who argue that donations from builders are really just discounts in disguise. It also has attracted opportunists looking to profit on what is widely regarded as a loophole in FHA loan regulations. As a result, many builders remain reluctant to promote DAPs in their marketing and some are even reticent to talk about the depth of their involvement with them.

But across the country, especially in sluggish markets such as Indianapolis, Cleveland, and Denver, these programs are greatly expanding the number of qualified buyers--and the credibility of DAP gifting programs. That has led to a growing number of organizations that ultimately compete with Nehemiah, including AmeriDream, of Gaithersburg, Md.; Neighborhood Gold, of Orem, Utah; and Housing Action Resource Trust (HART), of Rancho Cucamonga, Calif. As a result, builders are getting more pragmatic about using them.

When it comes to recapturing costs of its Nehemiah donations, Signature Homes chooses to account for it as "part of doing business," says Cerrone. "It's no different than landscaping or framing or anything else."

And unlike some builders who tout "no money down," Signature's marketing strategy implores the buyer to participate in the financial responsibility. "We have a number that we think the buyer should be able to come up with while we are building their home," says Cerrone. A past campaign heavily promoted in the local media read: $1,200 moves you in. "While $1,200 isn't a lot of money, they at least have some investment," says Cerrone.

Some of Signature's direct competitors are also using DAPs. But, in a hot market, Cerrone says others are reluctant to give their money away.

The Big Picture

Since its inception in 1998, Nehemiah alone has put more than $18 billion into the real estate market and $420 million into the national economy. "This is not an anomaly," says Scott Syphax, president of Nehemiah. "It has become an integral part of the mortgage system of this country."

Nehemiah's reputation gained traction in 2002 when it formed a strategic alliance with Homebuilders Financial Network (HFN), the Miami Lakes, Fla., backend mortgage origination provider to 31 national and regional builders. Now reportedly among the top five largest originators of new home loans in the country, HFN's group generates $8 billion in home sales. Under the terms of the alliance, Nehemiah offers down-payment assistance to buyers interested in homes built by their partners. However, only eight HFN builders qualify for FHA loan activity--a prerequisite for DAP.

Still, the numbers are impressive. Through July 2003, HFN conducted 3,473 FHA transactions worth $526 million. Of those, 1,542 loans, or 42 percent, have been DAP transactions. "It's become prevalent in this business," says Tom Meyer, president of HFN. "I can't think of a builder we're working with [in the qualifying segment] that isn't using it to some extent."

While Beazer Homes has been one of the most public supporters of Nehemiah, other HFN builders participating in DAPs include Cambridge Homes, Dominion Homes, Dura Builders, Oberer Development, Golden Heritage Homes, Bill Clark Homes, and Performance Reality. According to Syphax, there are two primary drivers that compel builders to get involved: "It's good business, and it meets public policy."

"It's all about affordability," says Meyer. "There is absolutely demand and absolutely under-supply." But he cautions that demand is only meaningful if it can be fulfilled through affordability. "As rates rise, mortgage finance is the tool that has the greatest impact for a builder to maintain affordability."

That's a fact that is hard to dispute. Although John Laing Homes is not currently using any DAPs in its southern California Inland division, vice president of sales and marketing Colleen Dyck says if the company's market position were to change, it would embrace these programs.

"In past downturns, builders have had a propensity to immediately drop prices and throw in a plethora of upgrades that benefit the investors looking for a deal--not the families that need a home. It compromises the investment of our homeowners and our backlog and can artificially deflate the market even further," says Dyck.

So What's the Problem?

During the past three years, a virtual industry has sprouted up around what some have deemed a government loophole. DAPs work because, according to FHA regulations, a buyer who cannot come up with the money for a down payment can use a "gift" from a nonprofit organization. Typically, DAPs turn to home sellers for assistance in creating a pool of funds. Those funds help pay the costs of managing the process and doling out the down payment gifts.

"One of the problems in this industry is that it's not difficult to form a 501(c) 3 nonprofit," says Meyer. "It doesn't mean you're doing any good for the community, that you're plowing back some money. It just means you're an opportunist. There are people at my door every day trying to convince me to use their program."

The U.S. Department of Housing and Urban Development (HUD) issued a Mortgagee Letter in 2002 clarifying the requirements and restrictions that nonprofits must meet in order to participate in FHA single-family activities. This was done in response to some groups who were gifting to pay down a buyer's personal or credit card debt instead of a down payment. Other indiscretions were attributed to conflict of interest scenarios where nonprofits had staff members who received financial benefits from a profitable entity that was contracted to provide services.

"Any time something creative is done, there is the potential and opportunity for abuse and misuse," says Meyer. "There were some abuses in the program, but they have been stopped."

The HUD letter eventually weeded out the number of eligible nonprofits considerably--from thousands to about 600 today.

But the less-than-charitable intentions have left their mark. Cerrone says Signature Homes' encounters with other nonprofits have left buyers burned. "We'd get to the closing table and our buyers couldn't close."

But that doesn't mean there aren't good organizations out there.

Today, Nehemiah handles all of Signature's DAP business. "They seem to be the best," says Cerrone. "They fund on time, they are a good group of people who work with us well. There are very few problems of any kind. Nehemiah makes it easy."

Meyer agrees. "Nehemiah has absolutely given back. And that's what the whole purpose of the program is. We also embrace them because they are serious and committed to make sure that everything works," he says.

For now, the future for organizations like Nehemiah look promising given the high level of policy support for homeownership by the Bush administration. In fact, Syphax says the kindest compliment Nehemiah has ever received is the formation of the president's American Dream Down Payment Act. Still, HUD is in the process of conducting a "comprehensive" review of the performance of seller-derived down payment assistance.

A HUD spokesperson, who asked not to be named, summed up the department's concerns: "The core question remains, do third party programs expose the FHA to more risk?" Several studies and audits thus far point to a lack of data and inefficiencies in the information system to track DAP loans in the FHA portfolio. Whether the findings will alter the landscape for DAP programs is unclear. HUD's general stance is that it doesn't make sense to put families into homes they will ultimately default on.

"Just focusing on whether or not these loans are going to perform as well isn't necessarily a meaningful question," argues Meyer. "The question that must be asked is: 'At what cost?' " Meyer speculates that if homeownership is truly a desirable objective, then we need to determine what the price we as a society are willing to pay to achieve this goal.

"Maybe that's a higher foreclosure rate, which puts an added burden on the FHA insurance fund. The point is, there is nothing wrong with that if we determine that is the price we are willing to pay and it is a legitimate objective," says Meyer. Syphax agrees. "We have to take a greater level of appropriate and sensible risk to put these people in homes," he says.

Good business aside, builders and lenders agree that the gratifying use of these programs is the ability to put people in homes that couldn't otherwise afford it.

"Why not get them in a home, build some pride of homeownership, and build some equity," says Cerrone. "It helps build a better community--there's no question about it. There are those people that will tell you 'those buyers are going to be the first ones to walk away,' but we haven't found that at all."

The Players

With hundreds of nonprofit groups offering down-payment assistance programs (DAPs), there are plenty of partners to choose from. But according to John Cottin, executive director of the Bethesda, Md.-based association, Homeownership Alliance of Nonprofit Down payment providers (HAND), "there is a general understanding in the industry that the larger DAPs include Nehemiah, AmeriDream, and Neighborhood Gold. HART does get mentioned as well."

Nehemiah Corporation of America
Sacramento, Calif.
www.nehemiahcorp.org
www.getdownpayment.com

AmeriDream Inc.
Gaithersburg, Md.
www.ameridream.org

Neighborhood Gold
Orem, Utah
www.neighborhoodgold.com

Housing Action Resource Trust (HART)
Rancho Cucamonga, Calif.
www.hartprogram.com

Why Builders Still Shy Away from DAPS, according to HFN's Tom Meyer:

Political: Builders don't believe DAPs are a good practice and question whether homeowners are financially ready to own a house.

Past Experience: Builders have had experience with a program that didn't work for them.

Peak demand: Builders feel their market is so good they don't need the administrative hassles--donations can be deployed elsewhere.

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