AmeriDream, Nehemiah Sue HUD

HUD issued a final rule yesterday prohibiting sellers and other interested parties from contributing to a borrower’s downpayment on mortgages insured by the Federal Housing Administration.

The ruling bans downpayment assistance from “the seller, or any other person or entity that financially benefits from the transaction; or any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction,” the rule said.

But DPA programs have contributed $3.8 billion to more than 1 million loan closings during the past decade, according to a copy of a lawsuit complaint and comments provided by plaintiff AmeriDream Inc. — which also named HUD Secretary Alphonso Jackson as a defendant. The complaint indicates the U.S. District Court for the District of Columbia will handle the case.

“The regulation adopted by HUD is arbitrary and capricious,” the complaint states. “It is contrary to the clear intent of Congress, HUD’s own historic practices and interpretations, and governing judicial precedents.”

In addition to the havoc the move will wreak on housing markets, AmeriDream — a charity that is in the DPA business — claims it will suffer “immediate and irreparable harm” once the regulation is enforced.

HUD’s office of general counsel reviewed and blessed the process used by AmeriDream — which provided more than 200,000 gifts for over $726 million since its 1999 founding as a faith-based organization, according to the complaint. Average home purchase prices on the related transactions were $108,000.

But in its ruling, HUD said it will not expand volume on FHA-insured loans “at the expense of sound and sustainable purchases by homebuyers,” adding that the number of potential foreclosures will be reduced because of the ruling.

AmeriDream claims the regulations violate the National Housing Act’s goal of promoting home ownership and exceeds HUD’s and Secretary Jackson’s scope of authority. In addition, the regulation allegedly violates the Regulatory Flexibility Act and the U.S. Constitution.

The company alleges HUD ignored over 14,000 comments in support of continued DPA and said the agency unfairly gave AmeriDream competitor Nehemiah Progressive Development Corp. an additional six months to avoid the regulation.

Gaithersburg, Md.-based AmeriDream is asking the court to stop HUD from enforcing the new rule.

Despite its six-month advantage, Sacramento, Calif.-based Nehemiah Corporation of America has also filed a lawsuit against the housing agency.

“HUD’s action to move forward with banning privately-funded downpayment assistance programs is outrageous and we have responded by filing a lawsuit in federal court yesterday to challenge the merits of HUD’s damaging rule and to seek an injunction blocking implementation of this rule,” Nehemiah President and CEO Scott Syphax said in a statement yesterday. “Opposition to this proposal by groups including the National Association of Home Builders, the Mortgage Bankers Association, the U.S. Council of Mayors and the National Association of Counties speak to the validity and importance of seller-funded downpayment assistance programs.”

But HUD dismissed most of the concerns outlined in comments about the ruling from a number of organizations, noting that loans with seller-assisted downpayments have higher loss rates and currently represent nearly a third of its REO portfolio.

“Many commenters, through their statements urging HUD not to eliminate downpayment assistance, indicated that they believed the May 11, 2007, proposed rule would eliminate all downpayment assistance,” the agency explained in the final rule. “HUD is not eliminating all privately funded downpayment assistance. Such assistance is permitted, for example, from family members, the borrower’s employer, state or local governments, charitable organizations that do not rely upon a party with a financial interest in the transaction for downpayment assistance, or labor organizations.”

Related:

DPA DOA
The U.S. Department of Housing and Urban Development has said no to seller funded downpayment assistance on federally insured loans.