Overview:
The Genesis Foundation (Genesis) is a 501(c) 3 organization that administers the PreferredProgram®, currently the nation's widest used privately-funded down payment assistance program. Genesis currently helps over 2000 buyers a month to achieve the dream of homeownership. Genesis detailed the process that the program would operate in great detail to the IRS in its application in 2000 and in 2005 received its final determination letter of tax exempt status.(Exhibit 1).
The United States Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA) determined that these type of programs comply with its guidelines in April of 1998 (Exhibit 2). Over the past 10 years privately-funded down payment assistance organizations have given $3.8 billion in cash for down payment assistance and helped over one million people become homeowners. These new homeowners have in turn spurred $11 billion of direct spending with $24 billion of net economic impact. In 2006 alone, privately-funded down payment assistance represented 50% of FHA purchase loans originated. Removal of these programs would seriously and adversely affect the FHA insurance fund (Exhibit 3).
Based on HUD's Economic Report 101502, Economic Benefits of Increasing Minority Homeownership, (Exhibit 4) HUD would suggest that the effect of privately-funded down payment assistance on first year federal taxes currently equates to $750,000,000. In addition, there would appear to be a significant ripple effect to the economy by increasing homeownership. Based on HUD's figures for calculating ripple effect, the current net effect of the down payment assistance industry is $3.5 billion a year to the economy. This would qualify as "an economically significant regulatory action." To immediately halt the contribution of this financial assistance and access to homeownership may hasten an economic downturn in housing markets adding risk to the FHA insurance fund. We urge FHA rescind the Proposed Rule.
1. Members within the down payment assistance industry have from the very beginning asked HUD for more stringent guidelines. HUD has repeatedly rebuffed these overtures. FHA is on record as saying "Borrowers ... are representative of the population that FHA was established to serve, families who are otherwise underserved by the private sector."
From the very beginning of pilot programs, members within the down payment assistance industry have requested HUD oversight and more stringent guidelines (Exhibit 5). HUD rebuffed these overtures and said in 1999 "...we do not see the advantages to FHA of imposing the additional regulations for non-profit participation...(Exhibit 6)." Repeated overtures to meet and discuss since that time have also been denied. As recently as 2005 in response to the GAO report (Exhibit 7) HUD qualified that down payment assistance programs assist the very borrowers that the FHA is commissioned to assist:
"Borrowers who rely on seller-funded down payment assistance are representative of the population that FHA was established to serve, families who are otherwise underserved by the private sector."
Furthermore, HUD refuted the allegation that seller-funded down payment assistance is a seller inducement. HUD contends that because there is no relationship between the funds the buyer receives and the seller's contribution to the nonprofit, there is no inducement to purchase by the seller.
"Because the buyer has not received funds from the nonprofit that can be traced to the seller's contribution, there has not been an inducement to purchase by the seller."
Funds gifted to a buyer come out of a pre-existing pool of funds and not directly from the sellers' funds and seller participation is not assured.
2. FHA currently permits gifts from relatives, employers, labor unions, charitable organizations, government agencies and close friends. Therefore the mere provision of gift funds does not in itself pose additional or unanticipated risk.
FHA alleges that gifts represent significantly greater risk to the insurance fund. Notwithstanding this supposition, existing FHA regulations under HUD Handbook 4155.1, Rev. 4, change 1, paragraph 2-10c, permit borrowers to obtain FHA insured mortgages with no cash investment of their own, as long as the gift funds come from a permissible source, including relatives, employers, and even close friends (Exhibit 8). Therefore, the provision of gift funds by organizations affected by the proposed rule do not pose an additional or unanticipated risk to the FHA insurance fund on the basis that such gift funds enable borrowers with limited cash investments in the sales transaction to obtain FHA-insured mortgages for home purchases.
3. FHA appraisers are responsible for establishing that home values are correct.
According to FHA one of its concerns is that the sales price is often increased so that that seller's net proceeds are not diminished. This increases FHA's risk that it will not recover the full amount owed if forced to acquire and resell the home purchased by a participating borrower who then defaults on the loan.
First, FHA –approved appraisers are responsible for establishing that sales prices are consistent with appraised values. It is inappropriate and misdirected for FHA to penalize organizations that administer down payment assistance programs and the homebuyers who benefit from these programs due to its challenges associated with adequately regulating and overseeing FHA-approved appraisers.
Further, there is no empirical data to support FHA's concern related to sales price. In fact, FHA homes sales data indicates that the median price of homes sold using gift programs is at or below that of borrowers that had the down payment consistently over the last several years (Exhibit 9). FHA itself consistently sells "HUD Homes" above list price. Finally, FHA currently, according to 4155.1 paragraph 1-7 A, allows a seller to contribute up to 6% of the sales price towards concessions for the benefit of the buyer (Exhibit 10).
4. HUD characterizes this as a "significant regulatory action." However, HUD never analyzed the loan pool to determine if there was actual increased severity on the FHA insurance fund and FHA losses on claims paid on such mortgages.
FHA has allowed charitable organizations to be a gift source without regard to the source of the nonprofits funds. Characterization of seller fees as a gift source is legally and technically incorrect in the case of most down payment assistance programs. FHA previously determined that service fees earned from sellers did not constitute an indirect contribution (Exhibit 7 and Exhibit 11). As a substantive modification, FHA's empirical basis for this change in policy is wholly inadequate or non-existent. FHA has not indicated any analysis of the loan pool to determine if there was actual increased severity on the FHA insurance fund and FHA losses on claims paid on such mortgages.
5. Concerns regarding quid pro quo relationships are unfounded because approved nonprofit organizations are already authorized to be the seller and source of the gift funds on the same transaction.
These concerns regarding quid pro quo relationships are unfounded because approved nonprofit organizations are already authorized to be the seller and source of the gift funds on the same transaction (see Mortgagee Letter 96-52).
6. Reliance on the IRS revenue ruling is incomplete since noted exempt organization experts have indicated that the IRS overlooked prior IRS rulings which hold that homeownership assistance and reducing the burden on government qualify as valid purposed tax exempt status.
In an open letter to the Internal Revenue Service (IRS), Marcus Owens, Former head of Exempt Organizations at the IRS and currently with Caplin & Drysdale, said clearly the IRS didn't weigh all the factors when issuing Revenue Ruling 2006-27 (Exhibit 12). This letter reiterates previous attempts by the down payment assistance industry to work with the IRS to establish a working nonprofit, private program that would achieve the government's goals of increased homeownership, specifically among low-income families and minorities. Owens also restated why down payment assistance programs must be considered 501(c)3 organizations.
Factors the IRS has not taken into account in its current ruling:
1) Does not consider the clear federal public policy on homeownership.
2) Down payment assistance programs are consistent with 501(c) 3 guidelines because they are charitable to the buyer, educational for the buyer, and reduce the role of government.
3) Prior IRS ruling 200321005 and Revenue Procedure 96-32 which hold that homeownership assistance and reducing the burden on government qualify as valid purposed tax exempt status.
Similarly, Bruce R. Hopkins, an expert on legal issues concerning nonprofit, tax-exempt organizations and the author of 11 books including, The Law of Tax-Exempt Organizations, blasted the IRS Revenue Ruling 2006-27. In his open response letter, to the Revenue Ruling (Exhibit 13). Hopkins requests that the IRS rescind the ruling or reissue it in a proposed form for public comment. It particularly addresses several of the issues that the IRS did not consider when publishing the ruling.
Including:
1. The affects to federal homeownership policies.
2. HUD's current rules and policies.
3. The adverse impact on hundreds of thousands of low- to moderate-income individuals in regards to homeownership.
4. Previous rulings (Revenue Procedure 96-32 and Revenue Rule 79-17, 18 &19).
Furthermore, to date there have been NO revocations by the IRS of any companies that were chartered to do down payment assistance programs.
7. FHA has failed to take into consideration the number of small real estate companies, mortgage companies, closing offices, title companies and home builders that use privately-funded down payment assistance programs.
Contrary to FHA's claim pursuant to the regulatory Flexibility Act (5 U.S.C. 605 (b)) the Proposed Rule will have a significant impact on hundreds of small businesses that participate in privately-funded down payment assistance transactions. With the collapse of sub prime products in the marketplace, there are few safe alternatives for these small companies to utilize that work in low- to moderate-income and minority neighborhoods. This increasingly puts them in a position to no longer have products available to sell and will have a significant economic impact in those small businesses.
Conclusion: Genesis encourages FHA to better regulate all down payment assistance. We urge FHA rescind the Proposed Rule in favor of good faith negotiations towards better regulation with proven risk mitigation tools for all gift sources that would reduce overall risk to the FHA insurance fund.
Genesis encourages FHA to better regulate all down payment assistance. We commend FHA for its commitment to promoting homeownership and its desire to protect homebuyers and the public trust. However, the proposed rule as currently drafted is ill conceived and overbroad. We urge FHA rescind the Proposed Rule in favor of good faith negotiations towards better regulation with proven risk mitigation tools for all gift sources that would reduce overall risk to the FHA insurance fund.
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