Congress weighs reprieve for seller-funded gifts

STOCKTON, Calif. -- A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill, that would mend rather than end the practice, gains momentum.

HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.

The influential chairman of the House Financial Services Committee urged those attending a committee field hearing in Stockton Saturday to lobby the Senate -- which shoehorned language banning seller-funded gifts into HR 3221, the sweeping housing bill signed into law July 30 -- in support of the bill.

HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans, Frank said. Borrowers with scores between 620-680 who relied on seller-funded gifts might be subject to higher insurance premium fees.

Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA's insurance requiring taxpayer subsidies.

HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.

Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.

Nonprofits that funnel payments from home builders to lenders to help borrowers meet minimum down-payment requirements on FHA loans dispute HUD's claims and have filed lawsuits that delayed HUD's implementation of a rule change banning the practice (see story). But the passage of HR 3221 made those court challenges moot.

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