EXCLUSIVE: The OUTRAGEOUS story behind H.R. 600… Why Democrats are Supporting a Bill that Allows People to Get FHA-Insured Mortgages Without Down Payments.

This article is the second in a series of investigative reports related to a bill now in committee in the U.S. House of Representatives. At least eleven prominent Democrats and one Republican are supporting H.R. 600, which if passed, would restore a practice that was banned just last year when congress passed the Housing and Economic Recovery Act of 2008.

It is a story that needs to be told… because H.R. 600 has to be STOPPED. Seller funded down payment assistance is harmful to homebuyers… harmful to taxpayers… and harmful to our nation's economy. The only people H.R. 600 helps are those that profit enormously from its passage, and a significant portion of those profits will assuredly come at the expense of the American taxpayer.

This is also a story that illustrates how corporations with deep pockets and lobbyists can spin facts, manipulate the media and intimidate bloggers. This part of the story is disturbing to say the least.

Mandelman

Our story begins with a wonderful sounding phrase… down payment assistance. It conjures up images of young, hardworking couples getting help when buying their first home. And that's precisely what down payment assistance programs are for. No one is suggesting that there's anything wrong with such programs… and no one is trying to change them.

Many government agencies, both state and federal, offer down payment assistance to qualified individuals under various circumstances, the Department of Housing & Urban Development, for example, offers dozens of them. And in addition, some nonprofit organizations, such as charities and churches also offer down payment assistance programs. The Federal Housing Administration, HUD, and the Internal Revenue Service all have rules that allow for such programs, and no one is trying to change those rules.

According to an article that appeared in Forbes Magazine on August 7, 2008:

Under present HUD rules, a home buyer can get help with the requisite 3% down payment from friends, relatives, a union, a charity or a government entity. But the money isn't supposed to come from anyone with an economic stake in the transaction. When it does, the stated transaction price is something of a fiction, and the requirement that buyers start out with positive equity is evaded. No-equity loans are a source of trouble. That's what the trillion-dollar mortgage crisis is all about.

In this country, however, there are always those looking to take advantage of loopholes in the rules especially when doing so presents an opportunity for profits… and that's where our story begins.

Roughly a decade ago, several companies decided that, since borrowers with FHA-insured loans were able to get down payment assistance from family, employers, government entities or charitable organizations, they would enter the down payment assistance market by becoming nonprofit "charitable" organizations.

The difference between these organizations and the rest, however, was that they had a plan to accept so-called "donations" from the seller of a property, and then turn around and provide a "grant" to the buyer of that property, who would use the funds to satisfy the down payment requirement on a FHA insured mortgage. For handling that transaction, these charitable organizations would receive a fee… roughly $400 -$800, according to various published sources.

Thus was born a new industry, referred to as Seller Funded Down Payment Assistance, or SFDPA.

With the housing market heating up in 2003, there were millions of people who wanted to buy homes or condos that didn't have the money to satisfy the 3% down payment requirement imposed under FHA rules. And, a seller funded down payment assistance program seemed a perfect fit.

Sellers liked SFDPA because in reality, it would cost the sellers nothing. As an example, a seller would "DONATE" $5,000 to one of the nonprofit charities offering seller funded down payment assistance, and that company would keep several hundred dollars for their trouble and give the rest to the buyer who would then use the funds to make his or her down payment. It could cost a seller nothing because he or she could simply mark up the sales price of the property by the same $5,000 and in that way recoup the "donation" that was made to the nonprofit.

Developers, who built hundreds or thousands of homes, wanted to sell them as quickly as possible, and through these types of schemes, they could be marketed as being available with "No Money Down".

Some of the nonprofit companies that offered seller financed down payment assistance became very successful, earning tens, if not hundreds of millions of dollars as a result of the fees earned for handling these transactions.

Then in 2005, the General Accounting Office, or GAO, conducted a study on the loans that were initiated with seller funded down payment assistance and found that buyers who received such assistance were twice as likely to default on their loans. FHA, who insured these loans against losses, was understandably concerned and began working on a rule that would put a stop to the practice.

Additionally, the Internal Revenue Service had some questions about these nonprofit "charities" that existed to provide down payment assistance grants to home buyers, and on May 4th, 2006, the IRS released their ruling, which stated that seller funded down payment assistance providers would no longer be qualified as tax-exempt charities.

That might have been the end of the story, but the people behind these programs were not about to let a little thing like an IRS ruling stop them from operating. Some had found a loophole and were about to slip right through it.

Under FHA rules, nonprofit charities and government entities are permitted to offer down payment assistance programs. Since the seller funded down payment assistance companies could no longer operate as nonprofit charities, maybe they could become government entities? But, how? HOW, indeed.

If you look up the definition of a "government entity," you'll find that it includes:
1. Federal, state, and local governments.
2. Indian Tribal Governments.
(You can find the official definition here: http://www.irs.gov/govt/index.html)

Indian Tribal Governments are classified as "government entities," and they have all of the rights of other government entities, with the exception of three. They cannot make war. They cannot coin money. And they cannot engage in foreign relations. Other than that, they are government entities and as such are free to govern themselves.

With Native American Tribes being considered "government entities," one of the providers of seller funded down payment assistance, seeing that they could no longer operate as a nonprofit charity as a result of the IRS ruling, decided to align itself with the Penobscot Tribe of Maine. On March 6th, 2007, a company calling itself Global Direct Sales presented the Penobscot Tribe with a check for $5,000 to establish the "Fair Housing Administration," in which Global Direct Sales was the Managing Partner.

This "Fair Housing Administration," as a result of the Tribe's involvement, was considered a Government Agency and thus was allowed to provide seller funded down payment assistance grants through something called the "Grant America" program. (www.fha.dpa.com)

The Grant America Program, not being a charity, had a new scheme for providing seller funded down payment assistance.

According to their Website, the buyer would "sell" the seller on purchasing a membership in something called "The Owner's Alliance". How much would such a membership cost? Well, between 3% and 20% of the price of the seller's property, of course. Assuming the seller's property was selling for $200,000, that would make the membership in The Owner's Alliance sell for somewhere between $6,000 and $40,000.

"Wow… that must be some membership," I thought to myself. So, I went to the new government agency's Website to see what some of the benefits of The Owner's Alliance membership might be… just to see what I was missing by not being a member. The list of benefits was quite long, and included such valuable benefits as:

•Discounts at Theme Parks. •A Directory of Contractors for Home Repair. •50-75% savings on local newspapers, "delivered right to your door!" •Free Dial-up Internet Access. •Access to News, Traffic, Weather and More on the Owners Alliance Website. •A One-Week Introductory Trial Membership to the International Fitness Club Network and "the privilege of paying the club's lowest membership rate for the type of membership selected." •Local Grocery Coupons – That may be printed out as needed, •A Pet Assure Benefit that offers discounts on pet products. •Access to a network of dental providers offering discounts of 15% to 50% off of certain dental services (discounts, however, depend on the individual dental provider). •The Dining Program – Offers discounts of up to 50% at 20,000 restaurants. •Auto Pricing & Maintenance – A 10% savings on maintenance & new car pricing. •A Voice in Washington through The Owners Alliance, which claims to represent property owners across America. •A VIP Health & Wellness Benefit – Offers one-stop shopping for "top brand vitamins". •Discounts at certain chiropractors, nurse hotlines, and telephone counseling. •And much, much more!

Well, that certainly is some membership, especially when you consider that it only sells for $6,000 - $40,000, assuming, of course, you're selling your home for $200k. It takes real hubris to create a "membership" like that. It's the sign of someone who thinks they are, if not above the law… then certainly beyond scrutiny.

Meanwhile, in response to the GAO study that showed the relatively higher default rates of seller funded down payment assistance loans, HUD and the Federal Housing Administration (the real FHA) had continued their work on a rule change that would ban seller funded down payment assistance altogether.

On May 11, 2007, FHA issued a proposed rule that terminated seller funded down payment assistance. The rule became final on October 1, 2007, was scheduled to take effect on October 31, 2007. And the story might have ended there, but again, it didn't.

The country's largest providers of seller funded down payment assistance grants, including Global Direct Sales, the Genesis Program, Ameridream and the Nehemiah Corporation, all filed lawsuits against the FHA, and they were subsequently combined into a single action by the court.

As amazing as it might seem, the suit filed by the seller funded down payment assistance companies against the FHA prevailed due to procedural issues (something about FHA not having allowed for sufficient time for public debate), and on April 3, 2008 FHA's rule was vacated and remanded back to HUD.

Not to be dissuaded by the court's decision, on June 11, 2008, HUD published a new proposed rule on seller funded down payment assistance that again terminated the practice and this time the rule incorporated the concerns of the court in the FHA case.

Finalization of the new HUD rule, however, was rendered moot when the U.S. Senate got involved and included the termination of down payment grants in H. R. 3221, The Housing and Economic Recovery Act of 2008, which was signed into law by President Bush on July 30, 2008 and took effect on October 1, 2008.

And the story certainly might have ended there… but incredibly, once again it did not.

On July 31, 2008, ONE DAY after the seller funded grants were banned by congress, a new bill, H. R. 6694 was introduced into the House of Representatives by Rep. Al Green (D-TX), in an effort to reinstate seller funded down payment assistance.

With the 2008 presidential election in full swing, a mortgage industry expert and Blogger, by the name of Krista Railey, who had been following the seller funded down payment assistance companies for many years, and who was shocked by their apparent resilience, decided to write an article on her Blog, the FHA Whistleblower, which is found on the mortgage industry "insider" Website, ML-Implode.com.

ML-Implode is a site that was set-up on December 31, 2006, to keep track of mortgage lenders in the US that had started, as the site puts it, "going bust". The individuals behind ML-Implode came out of the technology and mortgage industries. They saw what was happening in the housing market and recognized what would soon follow much earlier than many others.

The ML-Implode.com site soon became one of the highest trafficked sites for information on the housing and mortgage meltdown. ML-Implode became so well known and so highly trafficked, that by 2008, many members of congress were turning to it for information on the crisis.

Railey is a mortgage industry expert who closely followed the collapse of the housing market since its beginnings. She saw seller funded down payment assistance as being harmful to borrowers, and with the housing market in free fall as of last September, she set out to write an expose intended to draw attention to the practice and she mentioned the leading providers of such programs: Nehemiah Corporation, AmeriDream, and Global Direct Sales, specifically.

Global Direct Sales was founded by Christopher Russell and Ryan Hill, who together own 64% of the "agency". These are same two gentlemen that founded AmeriDream about a decade ago, another seller funded down payment assistance company that operated under the nonprofit/charity business model eliminated by the IRS ruling issued in May of 2006.

Again, according to the Forbes article:

Russell got rich off this racket once before. A decade ago Russell and Ryan Hill, a former mortgage loan officer now acting as Global Direct's financial officer, created a tax-exempt charity called AmeriDream that would help home buyers come up with down payments. This outfit teamed up with a for-profit firm called Synergistic Marketing. From the seller AmeriDream got, besides reimbursement of its down payments, a fee averaging $800. It kicked 40% of that fee over to Synergistic, in which Russell and Hill were minority investors. By 2002, Russell's last year as chief executive, the charity called AmeriDream cleared $6 million on $182 million in revenues. When he cashed out of Synergistic that year he collected $3 million. Hill, who left AmeriDream with Russell, made $11 million off his Synergistic stake, which he sold in 2004.

All of this came to light in 2004, when the Senate Finance Committee held the Congressional Hearing on Charity and Oversight Reform, which Russel referred to as "a joke of a hearing," in a letter to Railey last September. Russel and Hill left Ameridream between 2003-2004 when the scandal became public. The arbitration decision states that Russell's non-compete agreement with Ameridream ended on March 30th, 2006, just before he and Hill made their deal with the Penobscot Tribal Council.

According to AmeriDream's 990 tax filings, between 2000-2004, Synergistic Marketing received $26,483,916 in marketing fees from AmeriDream. The tax returns contain disclosures that the two officers of Ameridream were Members in the Synergistic Marketing LLC.

All of this and more was chronicled by Railey in her article that first appeared on the ML-Implode Website on September 9, 2008. In her article, she referred to the Global Direct Sales' practices as being a "scam". Within a few hours, ML-Implode's management saw the "scam" reference and asked Railey to remove it from the article and republish it, which she did. The article was republished on September 15, 2008.

But, it was too late. Christopher Russell, who was watching the site carefully, saw the article posted, downloaded a copy and within a few days ML-Implode was notified that Global Direct Sales had filed for an injunction attempting to "restrain and enjoin defendants from disseminating untrue, false, and/or misleading statement regarding plaintiff's, their business, and their business dealings". Russell was seeking an injunction in Maryland courts, and ML-Implode was being sued by Global Direct Sales for defamation.

Why did Russell care so much what some Blogger on some Website had to say about Global Direct Sales LLC? Because with the economic meltdown now dominating the discussions in congress and all across America, members of congress were reading the Bloggers on the ML-Implode.com site, and they weren't saying positive things about seller funded down payment assistance.

In his letter threatening legal action written to Krista Railey on September 10, 2008 as a result of her article on ML-Implode.com:

"Spend the money for a good lawyer because I use the best and I am coming after you hard."

Mr. Christopher Russell

It is obvious that Russell filed the lawsuit alleging defamation in an attempt to silence or at least intimidate Railey and others on the ML-Implode site… and it worked, to at least some degree. Under the advice of counsel, they removed any references that used such words as "scam," and although the court did not grant Russell's injunction, to this day ML-Implode is cautious as to what they publish. Russell has deep pockets… ML-Implode does not, and win, lose or draw… it costs money to defend yourself in court.

Russell and others in the industry, were working behind the scenes to garner support for the H.R. 6694 bill that was seeking to bring back the seller funded down payment assistance programs that congress had banned a few months earlier on July 30, 2008. Railey and other industry Bloggers were trying to get the message out that seller funded down payment assistance programs, especially in today's housing market, were harmful in far too many cases. The battle ended, however, when the 110th Session of Congress ended in December 2008, and the H.R. 6694 bill was closed.

The end of the story… come on… you know better than that by now…

Predictably, the legislation allowing reinstatement of seller funded down payment assistance reemerged with the new congress this year, albeit with minor changes, as H. R. 600. It was introduced by Rep. Al Green (D-TX) and is supported by 14 Democratic congressional representatives and one Republican, which has allowed its supporters to slap the ever-popular "bipartisan" label on the proposed bill.

Backers of the bill also include the National Associations of Realtors, Homebuilders, and Mortgage Bankers… three associations that would clearly benefit from being able to sell homes without down payments using FHA insured loans. (At this time, there are no organizations opposing the bill's passage, although I was thinking of starting one. I might call it: "The Fellowship of Future Foreclosure Victims".)

H.R. 600 has been positioned by those in the seller funded down payment assistance industry as being an important component of the economic stimulus sorely needed by our nation in these difficult times. It is also described by its backers in congress as being critical to many first time homebuyers and minorities who would not be able to buy homes without it. Supporters in congress say that the HUD and GAO reports that show these loans as having a default rate three times higher than other loans are wrong and should not be trusted.

In fact, the lobbying efforts to get this new bill passed are obviously as well organized, as they are insidious. As an example, Railey and other Bloggers, publishing articles in opposition to H.R. 600's passage, quickly find numerous comments appearing on their Blogs that are very much in favor of H.R. 600. When the IP addresses of these comments have been researched, however, it has been easily ascertained that the comments are often being made by employees of seller funded down payment assistance companies, most notably the Nehemiah Corporation.

Of course, proponents of H.R. 600 say only positive things about the bill's impact, but The Washington Post, on January 8, 2008, reported the following:

For years, the FHA has tried to eliminate these programs, without success. Now it is attempting once more to write rules that would ban this funding. But those rules would be moot if the House provision survives, creating unprecedented financial problems for the agency, argued Preston, who was joined by FHA Commissioner Brian Montgomery.

By law, the FHA must break even each year, meaning it must collect as much in premiums as it pays to cover foreclosure-related losses. If at the start of a fiscal year the FHA estimates it cannot do that, the Senate and House appropriations panels make up the shortfall using taxpayer money.

Because of the poor performance of seller-funded down-payment loans, the FHA may ask for $1.4 billion in appropriations for the fiscal year beginning Oct. 1 -- the first such appropriation in its history.

In truth, the only people that benefit from seller funded down payment assistance programs are the realtors, the mortgage companies, and the homebuilders who all profit from a sales commission or a closed deal that otherwise never would have happened.

The GAO, the IRS, FHA and HUD have all completed studies that show clearly that the default rates on these loans are every bit as bad as the worst of the sub-prime mortgages. Of course, since Realtors, mortgage companies and home builders are all in trouble this year, they see the banning of seller funded down payment assistance programs as detracting from their incomes, and they've pointed their lobbyists on every Congressional Representative that will listen.

It would seem that anyone who takes the time to understand the ramifications of H.R. 600's passage would stand on a chair and scream at the top of their lungs: NO!

Providing mortgages to people who cannot save enough to satisfy a 3% down payment requirement is a bad idea, but putting people into homes that are underwater from the day they move in is even worse… especially in today's declining market.

Margaret Burns Director, Office of Single Family Program Development for HUD, in her written statement before the Committee on Financial Services Subcommittee on Housing and Community Opportunity in the United States House of Representatives:

While well intended, the programs have had a significant negative impact on FHA's business for the last several years. Loans made to borrowers who rely on these types of seller-funded gifts perform very poorly. The foreclosure rates on these loans are more than twice those of all other home purchase loans insured by FHA.

Moreover, FHA experiences higher loss rates from the sale of the properties associated with these particular foreclosures, a reflection of the overvaluation that occurs with these programs. The higher foreclosure rates represent a financial burden for FHA and taxpayers, but of greater concern, they hurt the families who lose their homes and the neighborhoods in which those homes are located.

The core problem with these programs is not that the borrowers they serve are riskier or less credit-worthy; it's that the programs disrupt the natural negotiations between buyers and sellers in a way that results in inflated sales prices and thus higher mortgage amounts.

Seller-funded downpayment assistance programs flourish in weak real estate markets. In weak markets, low buyer demand means that sellers are less likely to get full asking price for their homes and are therefore willing to participate in programs that will help them sell for a higher price. As such, the property overvaluation associated with seller-funded gift programs occurs in markets that are least able to adjust to and accommodate pricing variations.

For example, in fiscal year 2006, more than 50 percent of FHA's purchase mortgage business in both Ohio and Indiana was for borrowers who relied on nonprofit seller-funded gifts. In these states, home values have been stagnant or declining. In soft housing markets, borrowers with no or negative equity who face any kind of financial hardship have fewer options to recover and can slip into foreclosure fairly quickly, despite the best efforts of FHA's loss mitigation programs. High foreclosure rates in these communities contribute to additional deterioration in home values and a vicious cycle of property depreciation.

Haven't we, as a nation learned that providing a home mortgage to someone who can barely afford it does not help that individual, to the contrary, it puts that person at tremendous risk, and it is the root cause of the economic meltdown from which we may not recover for a very long time.

Yet the 15 Democrats and one Republican continue to champion the legislation as being important to our nation's economic recovery? I can see how it might help lead to the economic recovery of some realtors, mortgage brokers, and builders, but beyond that, how can people being put into underwater mortgages be seen as being helpful to anyone else?

Already, far too many people who did nothing wrong are being swept under as a result of these types of lending practices. It is inconceivable that the American people would stand by while congress passes into law a practice that would assure our nation of further pain in the future, to say nothing of the borrowers duped into such a high-risk arrangement in these troubled times.

I urge you to tell your representatives: Absolutely NO on H.R. 600!

Because the only people that it stimulates are those that profit from its passage.

LINKS TO RELATED SOURCES AND EXHIBITS:

Prohibition of Seller Funded Down Payment Assistance
Questions and Answers from Federal Housing Administration Website:
http://portal.hud.gov/portal/page?_pageid=73,7597819&_dad=portal&_schema=PORTAL

Housing Secretary Expresses Concerns With Mortgage Bill
http://www.washingtonpost.com/wp-dyn/content/article/2008/07/08/AR2008070802683.html?hpid=sec-business

Testimony Before the Subcommittee on Housing and Community Opportunity, Committee on Financial Services, House of Representatives Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance Statement of William B. Shear, Director Financial Markets and Community Investment http://www.gao.gov/new.items/d071033t.pdf

AN EXAMINATION OF DOWNPAYMENT GIFT PROGRAMS ADMINISTERED BY NON-PROFIT ORGANIZATIONS
http://www.hud.gov/offices/hsg/comp/rpts/dpassist/dpa2.pdf

WRITTEN STATEMENT OF MARGARET BURNS
 Director, Office of Single Family Program Development, Office of Housing, U.S. Department of Housing and Urban Development Hearing before the Committee on Financial Services
Subcommittee on Housing & Community Opportunity, United States House of Representatives "Homeowner Down Payment Assistance Programs and Related Issues" June 22, 2007
http://www.hud.gov/offices/cir/test062207.cfm

IRS Targets Down-Payment Assistance Scams; Seller-Funded
http://www.irs.gov/newsroom/article/0,,id=156675,00.html

FHA Program Key in Surge of Foreclosures, Denver Post
http://www.denverpost.com/ci_4228048

Going Tribal
The government keeps trying to crack down on down-payment assistance programs. But Christopher Russell is one step ahead of the law.
http://www.forbes.com/forbes/2008/0901/042.html

The Article by Krista Railey that Started the Law Suit Against ML-Implode: http://whistleblower.ml-implode.com/?p=142

Letter from Christopher Russell Threatening Legal Action over Railey's Article:
http://whistleblower.ml-implode.com/wp-content/uploads/2008/09/christopher-russell-wb-comment.pdf

Krista Railey's Declaration Filed in UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND in Response to Injunction:
http://s3.amazonaws.com/iehi-img-mli/article/penobscot-20081008/railey_declaration.pdf

Defendant's Exhibits Used to Defend Injunction:
http://s3.amazonaws.com/iehi-img-mli/article/penobscot-20081008/railey_exhibits.pdf

Railey Article Documents Penobscot Indian Tribe Down Payment Grant Program:
http://whistleblower.ml-implode.com/?page_id=122

Article Documents Judge Denies Injunction:
http://ml-implode.com/viewnews/2008-11-07_PreliminaryInjunctionAgainstMLImplodeDenied.html

Krista Railey's Blog, FHA Whistleblower on the ML-Implode Website:
http://whistleblower.ml-implode.com/

Congressman Al Green's Statement on H.R. 600 and Reinstating Seller Funded Down Payment Assistance:
http://www.house.gov/apps/list/press/tx09_green/pr080108dpabill.html

Major Seller-Funded Down Payment Company Sinks to New Low – Comments on Blogs Come From Backers of Bill.
http://whistleblower.ml-implode.com/

Wall Street Journal on Nehemiah's Online Campaign
http://blogs.wsj.com/developments/2008/08/14/nehemiah-hits-web-to-save-downpayment-assistance/

IRS Status of Charitable Organizations (from HUD Website)
FHA approved mortgagees that seek FHA mortgage insurance on loans secured by single-family houses, on which down payment assistance has been provided to the borrower in the form of gifts, are required to determine that the gifts are from sources acceptable to FHA. http://www.hud.gov/offices/hsg/sfh/np/irstatus.cfm

September 29, 2008, Washington Post Article: FHA Down Payment Rule To Ban Seller Financing
http://www.washingtonpost.com/wp-dyn/content/article/2007/09/28/AR2007092801828.html

Down Payment Assistance Programs Outlawed
http://themortgageinsider.net/mortgage/down-payment-assistance-programs-outlawed/

LIST OF CONGRESSIONAL REPRESENTATIVES CURRENTLY LISTED AS SPONSORS OF H.R. 600:

Rep. Charles Wilson (D-OH)
Rep. Al Green (D-TX)
Rep. Gary Miller (R-CA)
Rep. Gerald Connolly (D-VA)
Rep. Henry Johnson (D-GA)
Rep. Barton Gordon (D-TN)
Rep. Jim Costa (D-CA)
Rep. Barbara Lee (D-CA)
Rep. Yvette Clarke (D-NY)
Rep. Maxine Waters (D-CA)
Rep. Debbie Wasserman Schultz (D-FL)
Rep. Robert Wexler (D-FL)
Rep. Albio Sires (D-NJ)
Rep. Eddie Johnson (D-TX)
Rep. Sanford Bishop (D-GA)
Rep. Bennie Thompson (D-MS)

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The Next Hit: Quick Defaults. More FHA-Backed Mortgages Go Bad Without a Single Payment

The Washington Post

Sun Mar 8

4