Gaithersburg NonProfit Called Out for Role in Foreclosure Crisis
Gaithersburg-based AmeriDream, Inc. is prominently mentioned in a Huffington Post story looking at seller-funded down payment assistance (DPA) programs for new home buyers. The programs allow home builders to give a three percent down payment to possibly unqualified buyers by laundering it through a nonprofit corporation, which takes a fee for the service. As the HuffPo concludes:
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 ended these programs last year, and the IRS has investigated the nonprofits since 2006. The ground has been plowed before—see The Wall Street Journal, for example—but HuffPo puts some meat on the bones.
Some basic truisms:
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.
Of course, the “charitable gift” was nothing of the sort. Home builders merely raised their prices to cover the down payment and the vigorish paid to the nonprofit middlemen, thus helping to inflate the housing bubble:
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.
The story is surprisingly light on a key fact: the amount of losses. The story says current losses are $1 billion, though last spring HUD claimed $4.8 billion in “long term” losses. HuffPo’s piece clarifies (not really):
[Editor's note 10/13/09: While HUD officials have said that mortgages with down payment assistance are defaulting up to three times faster than other loans insured by the FHA, the department has not provided all the data behind its calculation. However, available data and statements by FHA officials indicate that nearly 15 percent of down-payment-assisted loans were in some stage of foreclosure last year.]
There are a couple of useful graphs though, including a breakout comparing the amount of mortgages done through AmeriDream vs. Nehemiah. One of the scariest things is the “Losses by State,” which shows that Texas is third largest, with about $150 million in losses. This is remarkable because Texas did not see much of a housing bubble, and prices there have remained mainly stable. That would suggest that DPA deals will more often turn out to be bad even in a relatively good housing market.
The HuffPo story focuses on California-based Nehemiah Corporation of America, the concept’s originator and Hertz to AmeriDream’s Avis.
Here’s some videos AmeriDream has launched as part of its lobbying campaign to restore DPA. AmeriDream had revenues of about $144 million in 2007, according to its latest available tax return. CEO Ann Ashburn cleared about $350,000 that year. To put it in perspective, that’s about what your average go-getter mortgage broker made that year to facilitate dicey loans.
One thing to realize: even though these home-builder-funded DPA loans are federally banned, low and no-down payment deals are still getting done on existing houses-and some of them are pretty crazy, as this deal suggests.
A 20-year-old woman with three jobs pays $183,000 for a “box” with no kitchen in Oakland, Calif., and claims it’s now worth $250k ’cause she put in a kitchen. She’s spending 54 percent of her income to service the mortgage and taxes. It’s all backed by FHA.
I feel like it’s 2006 all over again.