Reaction was swift to the HUD ruling yesterday to bar nonprofit’s from helping homeowners with down payment assistance on the FHA program. AmeriDream and Nehemiah Corp. of America have filed a suit.  Below is a section about Nehemiah’s complaint reported at the Sacramento Bee:

Nehemiah, which says its down-payment program has helped some 230,000 low-income and minority homebuyers, sued the U.S. Department of Housing and Urban Development on Sunday in U.S. District Court in Sacramento, seeking a court order overturning the ban. A Maryland nonprofit that offers a similar program announced its own suit against HUD.

Below is a section of the press release from AmeriDream:

Gaithersburg, MD — AmeriDream, Inc., a 501(c)(3) charitable entity dedicated to helping low and moderate income families purchase their own homes, announced today that it has filed suit to block a regulation issued by the Department of Housing and Urban Development (HUD) which seeks to terminate successful down payment assistance (DPA) programs sponsored by AmeriDream and other charities.

We’ll see how this develops.

For a few years now the IRS has had issue with down payment assistance programs which borrowers use to meet the 3% required down payment on a FHA loan. Basically, the IRS doesn’t think these assistance programs are non-profits. Since FHA only allows non-profits to contribute towards this 3% the whole thing falls apart if the IRS strips them of their non-profit status.

Today the FHA announced that it will prohibit borrowers from using seller-financed down payment assistance programs.

WASHINGTON — The Federal Housing Administration will prohibit borrowers from using seller-financed down payment assistance programs that have helped hundreds of thousands of people buy homes but have come under the scrutiny of federal authorities.

Such programs allow home sellers to give money to charities, which then give down payment assistance to buyers. The sellers pay the charities a service fee, then often recoup the money by charging a higher price for the homes, usually 2 or 3 percent more, or an amount equal to the down payment, according to a study by the Government Accountability Office.

Inflating the price is bad, however, this isn’t easily done in todays market and appropriate safeguards are already in place. Furthermore, the seller (if accepting an offer from a FHA borrower) needs to understand that they will need to give 3% from their proceeds towards down payment assistance. If they choose to do so then the loan should move forward.

Talk about bad timing. Since the collapse of the subprime market FHA has seen a resurgence in the past few months. This new ruling will essentially kill the FHA program for now and will make the housing market worse. I can understand greater scrutiny, but to freeze out all these assistance programs in one big swoop doesn’t sound right. Isn’t there a better way?