This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.