The Housing and Economic Stimulus Act of 2008 effectively killed off seller-funded down payments by banning their use with FHA-insured mortgages after October 1. Now, consumer groups are rallying with lawmakers to protect this form of funding for homebuyers.

Back in the 1950s, boxer Rocky Marciano faced off against Jersey Joe Walcott for the World Heavyweight Championship. Undefeated Marciano took a crushing blow from Jersey Joe in the first round that sent him to the canvas. Things looked pretty grim, but Marciano managed to turn it around and win the match. Today, his miraculous comeback could be the inspiration for those fighting to keep seller-funded down payment assistance (DPA) programs alive.

Down for the count

In July, President Bush signed a sweeping housing bill into law. Among the topics tackled by the legislation was seller-funded DPA, a program that gives home sellers the option of funding a buyer's down payment. This process is facilitated by non-profit organizations such as Nehemiah Corp. and AmeriDream, which act as the middlemen, accepting a donation and fee from the seller, and then gifting that donation back to the buyer.

At issue is the use of these assistance programs with FHA-insured mortgages, which have lenient underwriting guidelines and very low down payment requirements. It's being argued that FHA borrowers who rely on seller-funded down payment assistance have a higher risk of default-and that dilutes FHA resources. Overuse of seller-funded assistance can also have an inflationary effect on home prices, because sellers are naturally inclined to raise the asking price of the home to cover the cost of their gift.

On the strength of those arguments, the July housing legislation disallowed the use of seller-funded assistance with an FHA mortgage as of October 1, 2008.

Comeback kid

The impending ban has stirred up a rally among some lawmakers, consumer rights groups, and homebuilders. Now, there's a new proposal working its way through Congress that would keep seller-funded assistance alive. The new bill is called H.R. 6694, and was introduced by Rep. Al Green (D-Texas).

Under the hoped-for legislation, FHA borrowers would need a minimum credit score of 680 to qualify for assistance. Those who have credit scores between 620 and 680 could still obtain seller gifts, but would be charged higher mortgage insurance premiums. Seller-funded assistance would not be available to anyone with a credit score below 620 until mid-2009. Thereafter, the HUD secretary would have the option to loosen these requirements.

As of September 24, H.R. 6694 had received House approval and was awaiting review by the Senate, which has until September 30 to sign the bill. Otherwise, the ban written into the July housing bill (Housing and Economic Stimulus Act of 2008) becomes permanent.

Seller-funded assistance has picked itself up off the canvas and is still throwing punches. Fans are watching the fight with their fingers crossed, hoping the bill will come out as a law.

Published on October 7, 2008