HUD: Downpayment Gifts Hurting FHA Loans

The share of Federal Housing Administration homebuyers using downpayment assistance from nonprofits has grown from less than 1% to 25% over the past six years, and it has hurt the performance of FHA loans, according to the Department of Housing of Urban Development."As the use of downpayment assistance has grown, so has the riskiness of these loans," HUD Assistance Secretary John Weicher says in a letter to Congress. The Weicher letter reveals that the cumulative claim rate for loans insured in fiscal year 2001 is 9.0% for purchase loans with downpayment assistance from nonprofits, compared with 3.4% for all FHA purchase loans. Separately, HUD has issued a mortgagee letter (2004-28) that requires lenders to keep a record of downpayment assistance and a copy of the wire transfer to make sure the nonprofit is the source of the cash contribution at the closing table and not the seller. "They are telling the lenders that you better make sure the nonprofits had their money in first," said attorney Phillip Schulman. Otherwise, HUD might ask the lender to indemnify the FHA if there are any losses on the loan, he said. Mr. Schulman is with the Washington law firm of Kirkpatrick & Lockhart.