The Inspector General of the Department of Housing and Urban Development has found a new ally in his fight to reform the down payment assistance programs run by HUD and state and local housing finance agencies.
House Financial Services Committee Chairman Jeb Hensarling said Monday that HUD is "breaking the law and trapping borrowers in higher interest rate loans and trying to cover it up by secretly rewriting the rules — this is the sad, sorry state of today's" Federal Housing Administration.
HUD IG David Montoya has criticized the down payment programs, arguing that lenders charge high interest rates to reimburse housing finance agencies for the assistance.
"The illegal financing arrangement 'places the borrower and the FHA at undue risk of loan failure,'" Hensarling said in a press release, citing an IG report on the issue.
HUD estimates that 60,000 FHA-insured loans are originated each year with down payment assistance.
"HUD has failed to recognize the disturbing parallels to the seller-funded down payment assistance arrangement practices in the late 1990s to 2008 which caused wide-scale problems to the program and whose reverberations are still felt today," Montoya said in a July 26 letter to Hensarling. "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."
In a down payment assistance transaction, the housing finance agency and U.S. Bank require lenders to inflate the interest rate on an FHA loan to cover the cost of the assistance and securitizing the loans, according to Montoya's letter to Hensarling. That can raise the mortgage rate by 150 basis points when the interest rate is 3% for non-assisted borrowers.
In addition, the housing finance agency, U.S. Bank and FHA lenders are allowed to charge securitization, administration and tax fees.
But the IG claims that U.S. Bank is not entitled to a securitization fee. Montoya contends in the letter to Hensarling that it "allows U.S. Bank to gain a fee that is not universally applied to all FHA transactions."
HUD did not respond to requests for comment. In a statement, U.S. Bank said it is "in compliance with current law and the guidelines of the DPAP program provided by the FHA and HUD. We are also aware of the ongoing dispute between the HUD and its Inspector General. If and when the program guidelines change, we will comply accordingly."
But HUD Deputy Secretary Nani Coloretti recently issued a statement that the department will conduct its own investigation into the issues raised by the IG's auditors.
For his part, Montoya appears skeptical. "During the last few weeks it has become clear to us that the legal analysis supporting the continuation of this program was based on a concept and not the actual facts brought to light" in the OIG audit, he said in the letter to Hensarling.
The seller-funded down payment programs offered during the housing boom relied on the home seller to subsidize the buyer's down payment and they usually increased the sales price to cover the cost, which also increased the buyer's monthly mortgage payments and FHA defaults.
Hensarling "raises important concerns about down payment assistance programs and the potential for abuse," said David Stevens, president and CEO of the Mortgage Bankers Association.
But the "DPA loans from housing finance agencies have actually performed well over time, as opposed to some of the more toxic programs like the seller funded down payment assistance program, which was terminated by Congress in 2008," Stevens added.
Stevens said that a narrowly targeted program can "serve America's housing needs, but it needs to be highly constrained and used with vigilant oversight on loan quality with clear consumer disclosure."
