Before the housing boom got underway in the late 1990s, a California nonprofit group hatched an idea to help families who qualified for government-backed mortgages but still couldn't raise the down payment.
A home builder would agree to make a donation to the nonprofit in an amount equal to the down payment. The nonprofit would give the cash to the buyer, often earning a generous fee for its role as middleman. In less than a decade, nonprofits had arranged more than a million no-money-down house sales around the country. By 2008, they represented more than a third of all loans backed by the Federal Housing Administration.
Now many of those loans have gone bad. Defaulting at up to three times the rate of other FHA loans, they are one reason the housing agency's insurance fund is about to drop below its required capital level for the first time since it was created during the Great Depression.
Congress last year stopped the FHA from insuring any more of the loans, saying they were risky and carried the potential for fraud and abuse. One case in July confirmed those concerns: As part of a settlement of criminal charges in U.S. District Court in North Carolina in July, Beazer Homes USA Inc., acknowledged that its employees had defrauded buyers by simply rolling the extra cost of the down payment assistance into the house price.
Little attention has been paid to the role of the down payment programs in the origins of the financial crisis. Government and court records examined by the Huffington Post Investigative Fund illustrate how two large housing nonprofits - Nehemiah Corporation of America and AmeriDream Inc. -- worked closely with the mortgage divisions of the nation's biggest home builders, adding fuel to the housing bubble and in effect paving the way for even riskier subprime loans by private lenders.
Nehemiah, the Sacramento, Calif.-based inventor of seller-funded down payment assistance, and its closest competitor, AmeriDream of Gaithersburg, Md., together facilitated 40 percent of all such loans backed by the FHA. Over eight years, they arranged 392,000 mortgages worth $54 billion, records from the Department of Housing and Urban Development show.
While the two nonprofits earned tens of millions of dollars in fees from the deals, borrowers have defaulted on more than $3 billion worth of the loans. So far that has translated into losses exceeding $1 billion for the FHA insurance fund.
Last month FHA officials said they expect the agency's cash reserves to soon fall below the level mandated by Congress, which is at least 2 percent of the value of all the mortgages it backs. Some lawmakers are concerned that the FHA insurance account - which always has been funded by fees from borrowers - could need a taxpayer bailout. But Housing and Urban Development Secretary Shaun Donovan has said that the FHA's funds will recover because the quality of loans the agency insures has been improving.
Officials at Nehemiah and AmeriDream declined requests for interviews for this article. In a statement to the Investigative Fund, AmeriDream president Ann Ashburn said she hopes that Congress will pass a bill to create a new gift program "to help stabilize the U.S. housing market."
In testimony to Congress in 2007, Ashburn acknowledged that "the extremely fast growth led to a measure of disorganization among down payment assistance providers, and, in some cases, excesses by certain individuals associated with those entities." The National Association of Home Builders, one of the group's allies in the effort to revive the system, also noted the past problems but said they can be fixed.
"Let's reform it so it can operate in a safe and sound way," said David L. Ledford, senior vice president of the association. "The down payment is still the major hurdle and obstacle to homeownership ... It would be great if sellers could help out in a way that's managed properly."
The non-profits have enjoyed the support of an unlikely coalition of real estate interests and civil rights activists - as well as some Democratic and Republican lawmakers who have received campaign contributions from key players. At a congressional hearing in May, Rep. Gary Miller (R-Calif.), co-sponsor of a bill that would restart the system with tighter rules, said that the ban was "an injustice to a lot of the private sector."
Since January 2008, Nehemiah, AmeriDream, and AmeriDream's affiliate, the Association of Homeowners Across America, have spent roughly $2 million lobbying Congress, at first to prevent the ban and then to reverse it, according to disclosure forms.
"They did a lot of pushing and pulling," said Mark Calabria, who until recently was a high-ranking Republican staff member on the U.S. Senate Committee on Banking, Housing and Urban Affairs. "That really tells you this is the most danger they've ever been in. It also tells you how much money they were making."
Working with the Builders
Seller-funded down payment assistance was the creation of Don Harris, a Sacramento lawyer and minister. In 1994, Harris named his organization after the Biblical figure Nehemiah who rebuilt Jerusalem. He sought to revitalize blighted pockets of the California capital by turning low- and moderate-income renters into homeowners.
The model was simple. The FHA required homebuyers to put down a minimum of 3 percent. Nehemiah would front the money to a qualified buyer. After the deal closed, the seller would donate the same amount back to Nehemiah, along with a fee ranging from a few hundred dollars up to one percent of the sales price. In the end, all parties seemed delighted: The buyer got his no-money-down loan, the seller unloaded a house at the asking price, and Nehemiah collected its cut.
When down payment gifts come from a family member or a traditional charity, the buyer can shop around for the best deal on the best home. But seller-funded gifts were an enticement to purchase a specific house at a specific price, usually from a large company developing a huge tract of homes.
Harris' idea quickly proved to be lucrative for his nonprofit. Nehemiah's revenues from down payment gifts and fees jumped from $18 million in its first year to $162 million by 2002. Others took notice. AmeriDream was founded as a nonprofit in 1999 under a model similar to Nehemiah's. Soon, hundreds of other copy-cats sprouted, many of them nonprofit in name only, as the IRS would later rule.
According to HUD data, Universal American Mortgage Co. -- the in-house mortgage company for Lennar Homes, the second-largest builder in the country by volume -- underwrote $2 billion in FHA loans with Nehemiah's help alone between 2000 and 2008. For the in-house lenders of Centex, D.R. Horton and Dominion Homes, Nehemiah facilitated just shy of $1 billion in sales each.
Within a few years, the Government Accountability Office looked into down payment assistance programs, finding that rather than making a true donation, many sellers were just factoring their contributions into the sales price. That was the practice confirmed in July by Beazer Homes, which said as part of a deferred prosecution agreement that it "accepts and acknowledges" that its former employees engaged in criminal acts by inflating the price of homes funded with down payment gifts. Beazer agreed to pay $5 million to the federal government and up to $48 million to homeowners who'd been defrauded.
Filings in the North Carolina case do not specify which nonprofits provided the "gifts" in Beazer's deals and no nonprofit was charged with any wrongdoing in the matter. According to HUD records, Nehemiah served as a conduit for the down payments on $400 million in Beazer Mortgage Corp. loans nationwide from 2000 to 2008. Nehemiah has said that it told builder partners that price inflation was not permitted.
'Illusion' of Rising Home Values
Aside from questions about the home builders' conduct, the high foreclosure rate among buyers with seller-funded down payment assistance quickly became evident in some places. Mildred Wilkins, then a foreclosure specialist for Fannie Mae in greater Indianapolis, a hotbed for such programs, said she began to receive a "startling" number of new cases around 2002. She was disturbed by how many of the bad loans on Fannie's books had been backed by the FHA and facilitated by seller gifts.
"These were neighborhoods explicitly advertised as [down payment assistance] communities," said Wilkins. Most of the homes were new construction, with prices between $100,000 and $150,000, and went to low- and middle-income buyers, many of them African-American, she said. On many of the quickly soured mortgages, the price at foreclosure could be 15 percent less than the original sales price. "At the very minimum, the price had been inflated by the amount of the down payment, plus the administrative fee, plus the closing cost and taxes [and] a couple of other little things," she said.
In some cases, there were much larger costs built into the mortgage, she said. To secure an FHA loan, a buyer cannot have any outstanding judgments against him. Wilkins said she saw dozens of loans in which the lender paid off the buyer's previous debts and added them to the final price tag of the home. In many such cases, the buyer essentially had a bad car loan rolled into a new, government-insured mortgage. "They were told by the financial institution, partnered with the builder, 'Don't worry about it,'" she said.
These inflated sales prices helped put some upward pressure on the lower end of the housing market, at least in communities where seller-funded gifts were common. "It created the illusion that the average sales price was in fact higher than it was," said Wilkins, who is now a consumer housing advocate.
As the wave of loans crested, Nehemiah publicly decried the tactics of other down payment providers, and called for government intervention. "Allowing credit card and car payments to be wrapped into housing -- it was so wrong," said William Atlas, a former Nehemiah chief financial officer who left the nonprofit in 2004 but remains a great believer in its staff and mission. "It's like watching a boat cruising toward the rocks, and everybody's partying on the boat, having too good a time to listen to the horn."
Soon it wasn't just competition threatening Nehemiah's model - it was the housing bubble itself. A river of cash was flowing from Wall Street into the mortgage market, meaning that builders and mortgage brokers marketing to subprime buyers could avoid the FHA and its down payment requirement entirely by getting loans through the private market, where rules were looser.
Nehemiah's fee revenue dropped from $162 million in 2002 to $70 million in 2005. Instead of charging a full percent of the purchase price to facilitate the transaction, Nehemiah went to a fixed fee of as little as $495. It slashed its staff down to only 20 people at one point, according to a former employee.
Things looked even worse for Nehemiah when the Internal Revenue Service ruled in 2006 that seller-funded down payment gifts did not qualify for tax exemptions but rather were "scams" that left both buyers and the government stuck with houses sold at an inflated price. The IRS immediately rejected several dozen applicants seeking nonprofit status for down payment assistance programs and said it would begin reviewing the previously granted tax-exempt status of 185 other providers. (Nehemiah's status was already under review independently, according to its most recent audit.) Yet in the majority of cases, the IRS never took action to shut them down.
When housing prices peaked, low- and no-down payment mortgage providers began to pull out of the market, and Nehemiah seemed poised for a comeback. The nonprofit took in more than $360 million in down payment gifts and fees in 2007, representing billions of dollars worth of mortgages issued after the market's peak.
Lobbying For Another Round
The problems of FHA loans with seller-funded down payment assistance finally led Congress to ban the practice last year. Not long afterwards, in September 2008, Nehemiah's current head, Scott Syphax, addressed a rally in front of the U.S. Capitol. Flanked by a troupe of civil rights activists, including former NAACP Executive Director Benjamin Chavis Muhammad and representatives of the National Urban League, Syphax warned that if the ban went into effect, aspiring lower-income homeowners risked being consigned to the "rental plantation." The Rev. Al Sharpton had been stumping for Nehemiah and others since the previous fall, when he blasted Senate Democrats who'd grown skeptical of down payment assistance during the housing crash. And hip-hop mogul Russell Simmons soon would be speaking for the program in an online video.
he Capitol rally also included members of the National Association of Mortgage Brokers, which as part of its $1.5 million in federal lobbying that year was pushing for a bill that would have kept Nehemiah and AmeriDream in business. Also in attendance was Rep. Al Green (D-Texas), who sponsored the bill to revive down payment programs while subjecting borrowers to stricter credit standards.
Green's co-sponsors on the bill include California's Miller and Rep. Maxine Waters (D-Calif.), who has called seller-funded down payments "an instant source of equity" for borrowers, arguing that "homeownership would be out of reach to thousands ... without down payment assistance programs."
Nehemiah and AmeriDream officials have returned that loyalty to their bipartisan boosters in Congress. Last year, AmeriDream's Ashburn, board member Tom Carmody, vice president Robert Newman, and Nehemiah's Syphax each donated $1,000 to Waters' campaign. Ashburn has donated $2,000 to Miller's campaign since 2007, while Carmody and Ashburn also made the largest individual donations -- of $2,500 apiece -- to America First, a political action committee with ties to Miller that disbursed at least $12,500 to the National Republican Congressional Committee in 2008. One of the lead lobbyists on down payment assistance, Lesli McCollum Gooch of Potomac Partners DC, is a former senior policy adviser to Miller.
McCollum Gooch did not return phone calls seeking comment. Ashburn said in her statement that the reincarnation of down payment gifts would "expand responsible homeownership while establishing unprecedented safeguards for homebuyers."
In its latest audit, Nehemiah reported it still had more than $16 million in assets. The nonprofit also said it expected to successfully challenge any IRS ruling that could revoke its nonprofit status.
With many of its former clients in danger of losing their homes, Nehemiah recently launched a new venture, called NFinit Solutions - advertised at its old Web address,www.getDownPayment.com. The group now offers itself as an intermediary between lenders and borrowers who are in foreclosure. It will earn a fee for each such solution it arranges.
Jeff Horwitz is a freelance writer who recently finished the Lorana Sullivan Investigative Business Reporting Fellowship at Columbia University. Dave Jamieson, a freelance writer in Washington, D.C., won the 2007 Livingston Award for Young Journalists.