Ari Karen is a partner at Offit Kurman.
Ari Karen is a partner at Offit Kurman.

An audit released by the Department of Housing and Urban Development last week found that NOVA Financial & Investment violated Federal Housing Administration guidelines by originating FHA loans with borrowers that received state government down payment assistance.

The Office of the Inspector General at HUD concluded that the down payment assistance was not a gift and thus represented an ineligible down payment source for an FHA loan. Its reasoning was that the down payment assistance loans were subjected to premium pricing, which in turn resulted in higher-priced mortgage backed securities whose proceeds later funded additional down payment assistance.

In other words, the assistance was not a gift because borrowers paid for the assistance through premium rates and as such, the loans would not be eligible for FHA insurance, the OIG's office contends.

The OIG's decision, if upheld by HUD, would essentially eviscerate bond programs. These down-payment assistance programs are already problematic for most lenders because lenders have to pay the same compensation to loan officers on bond and regular forward mortgages.

Since lenders actually make substantially less on bond loans many lenders have either stopped doing bond loans or are seriously considering that option.

Now, without a vehicle to close a loan requiring government assistance (since they are no longer FHA-eligible according to HUD's OIG), many lenders might simply decide not to allow funding through such programs.

It should be noted that the Inspector General's conclusions are not final and merely make recommendations that the agency need not adhere to. However, this is an important issue to watch to determine whether HUD will adopt a recommendation that could spell the end to many down-payment assistance programs.