BEGINING OF THE END - 2002 Home Buyers' Down Payments Are Now Paid by Some Builders
It wasn't Nehemiah's money, though. It was a home builder's. After Nehemiah made a down-payment gift to Ms. English, the builder gave Nehemiah a gift of the same amount. In effect, the builder itself was paying the down payment. That sort of thing didn't used to happen, for a good reason: Buyers who have none of their own money in a house -- nor even any money from a close relative -- were considered default risks. Lenders weren't interested in making such loans. And the Federal Housing Administration, a mortgage guarantor that often deals with first-time buyers, in most cases wasn't interested in guaranteeing the loans.

REPEAT OF 2002 WALL STREET JOURNAL
Home Buyers' Down Payments Are Now Paid by Some Builders

Gifts Funneled Via Charities Help Ownership But Also Draw Criticism as High-Default Risk

By PATRICK BARTA and QUEENA SOOK KIM
Staff Reporters of THE

Some aspiring homeowners spend years saving enough for a down payment. Not Tongela English. The 31-year-old single mother, a sorter for the Postal Service in Columbus, Ohio, got into a new $148,000 three-bedroom house even though she had scant savings.

What she had was a referral to Nehemiah Corp., a not-for-profit group that was willing to provide her with a $4,400 down payment, no strings attached. "I thought there had to be a catch," Ms. English said recently in the dining room of her new split-level in a subdivision called Williams Creek, the smell of paint still in the air. "They just gave me the money."

It wasn't Nehemiah's money, though. It was a home builder's. After Nehemiah made a down-payment gift to Ms. English, the builder gave Nehemiah a gift of the same amount. In effect, the builder itself was paying the down payment.

That sort of thing didn't used to happen, for a good reason: Buyers who have none of their own money in a house -- nor even any money from a close relative -- were considered default risks. Lenders weren't interested in making such loans. And the Federal Housing Administration, a mortgage guarantor that often deals with first-time buyers, in most cases wasn't interested in guaranteeing the loans.

But a few years ago, the FHA, after intense internal debate, changed its attitude. Accepting Nehemiah's program, the agency agreed to guarantee loans in which home buyers got a down-payment gift that was ultimately paid for by the seller.

Now such deals are proliferating. According to a trade association, roughly 17,000 Americans per month buy homes with down payments from "gifting" groups, which turn around and collect contributions covering the gifts from the sellers. That amounts to 3% of U.S. home buyers, enough to extend the housing boom in some regions and to affect market dynamics for all involved, from buyers to builders to lenders.

The mission of Nehemiah, founded by a clergyman, is to make homeownership possible for people whose lack of ready cash shuts them out. The group's current president, Scott Syphax, says: "What we do is good for America."

To others, it has many flaws. Critics call it an end-run around sound lending policy, a possible force for housing-price inflation, and a way for home builders to plump up their own sales at what could turn out to be the expense of taxpayers.

A recent audit by the Housing and Urban Development department's inspector general suggested that mortgages made through the gift programs carry default rates far above average. If so, they add stress to the mortgage-banking system at a time when foreclosures are already at record levels. Barbara Allen, a housing analyst at the New York investment bank of Natexis Bleichroeder Inc., says, "I don't care how laudable it is, you're letting people into homes with no money at risk," increasing the chance the loans will blow up. Nehemiah disputes the results of the federal audit.

Other critics worry about the programs' possible upward pressure on housing prices, because home sellers sometimes jack up the price to offset the expense of the gifts. Gifting organizations concede such price-boosting goes on occasionally but say they discourage it.

The price increases -- coupled with the fact that many current sales couldn't be made without the gift programs -- suggest that the programs tend to buoy both the overall housing market and the sales of some builders. About 38% of Denver-area sales by KB Home have been made with down-payment grants this year, says Charles Konkus, director of a Nehemiah lookalike called Partners In Charity. KB won't comment on that. Mr. Konkus says it's clear "gifting programs are sustaining home sales" in Denver.

Nehemiah was the brainchild of Don Harris, a real-estate attorney and minister at a mostly African-American Baptist church in Sacramento, Calif. He was looking for a way to bring homeownership to residents who didn't have the money for a down payment, nor a well-heeled relative who could provide it. Although programs have existed to let people buy without down payments -- even a program from mortgage buyer Freddie Mac -- many require impeccable credit. For people who didn't quite meet that test, Mr. Harris came up with the idea of a pool to provide down payments and in some cases closing costs.

Working With Builders

For funding, he began working with home builders, which were eager to participate in a program that could stimulate sales and bring them good press as well. Mr. Harris named his group for an Old Testament figure who rebuilt Jerusalem after its destruction. Mr. Syphax, who runs it now, says, "Nehemiah was the rebuilder of cities and so are we."

Nehemiah also needed to win over lenders. They couldn't expect to sell a mortgage for which the home seller had provided the entire down payment to Fannie Mae or Freddie Mac, the dominant buyers of home loans. Fannie and Freddie generally don't buy those loans because of the default risk. Many believe that a seller, unlike a relative, has no incentive to help a buyer who runs into trouble making monthly payments. But Mr. Harris figured lenders would get on board if the FHA accepted Nehemiah's plan.

The FHA worried about the default risk and also the possibility that sellers who gave down-payment money might boost their prices to recover it. If they did, this could mean the homes were selling at inflated prices, so that the FHA couldn't recoup the full loan amount in the event of a foreclosure. After vigorous debate, the FHA finally agreed in 1998 to guarantee the mortgages. Since then, Nehemiah says, it has provided down-payment gifts to about 130,000 home buyers in more than 5,000 cities.

Here's how it works: If a would-be buyer is short of down-payment funds, either the builder, a lender or a real-estate agent will tell the buyer about Nehemiah's program. Nehemiah then simply gives the buyer the down-payment money -- later collecting a contribution of the same amount from the home builder. It also collects a small fee from the seller, part of which it donates to a charity, often one involved in community development. The builder doesn't get a tax deduction. Nehemiah says this is because the contribution is considered a "cost of sale," just like any other cost a seller has in moving the product.

Some individual sellers use the program too, especially when they're having trouble finding a buyer. In conjunction with their real-estate agent or a lender, they'll steer a cash-short buyer to Nehemiah or a similar group. Like builders, the individual seller later gives the nonprofit a contribution to cover the gift.

Nehemiah , although started with a minority focus, works with families of all races. Also all income levels -- although the FHA's mortgage limits, ranging from $144,000 to $261,000, tend to keep anyone from buying a palace through the program. And while Fannie Mae and Freddie Mac don't buy the loans, a secondary market for the mortgages does exist, provided by Ginnie Mae, the Government National Mortgage Association.

"We create an opportunity for all sides of the equation to win without spending any public money," says Mr. Syphax, a former Eli Lilly & Co. executive who took over management of Nehemiah last year. Among imitators it has spawned are Ameridream Charity Inc. of Gaithersburg, Md.; Neighborhood Gold of Provo, Utah; and Partners In Charity, which is in East Dundee, Ill.

Their influence is evident in Denver. This is a market where inventories of unsold homes are double those of two years ago, and price pressure has dissipated as a result. Don Bobeda, a local broker at Prudential Portrait Realty South, says that two years ago, his office did a free-down-payment sale about every two months. Now it does at least one a week -- 8% to 10% of its business. Without them, the local market "would have a lot less momentum," he says.

A big user is KB Home, the Los Angeles builder formerly known as Kaufman & Broad. KB joined with Partners In Charity 11 months ago to make down-payment grants available in all 12 of its entry-level communities in the Denver area. They range from $3,000 to $7,000. FHA-guaranteed loans generally require just a 3% down payment.

Some of the purchases spurred by the gifts appear to steal sales from the future, such as Wayne and Diane McCarroll's. Last summer, the McCarrolls were living in an RV while saving money for a down payment on a house someday. Then Ms. McCarroll saw a KB newspaper ad offering "$0 Down $0 Closing Costs $0 Up Front Fees." The couple stopped by the office, which was filled with others clutching the same ad.

A saleswoman approached, says Ms. McCarroll, and -- "zip zap" -- they were home buyers. "We would have waited until February or March before we started looking to buy," says Ms. McCarroll, a 55-year-old assistant at a commercial-lending firm. "But the down-payment opportunity let us get in now."

Partners In Charity's Mr. Konkus expects KB to make about 1,500 contributions to his group this year. That would represent down payments on about 6% of the big builder's national sales. KB, which also works with other gifting groups, declined to comment on his estimate.

KB's median selling price in the Denver area is up from a year ago even as its number of homes sold has slipped 15%. KB says that prices are up because it is "evolving into offering more high-end homes for move-up buyers."

Pushing Up Prices

Denver-area appraisers say they're seeing signs that down-payment gifts are pushing up prices. In a suburban subdivision called Stone Ridge, 13 of 23 sales in the past year were above the asking price, says Stewart Leach of the Colorado Board of Real Estate Appraisers. Typically, he says, the increase exactly equaled the down-payment gift and fee.

One national builder, Beazer Homes USA Inc., says it draws up projections of how many buyers will use down-payment gifts in a bloc of homes it's selling, then spreads its cost of funding the gifts among the prices of all those homes. Buyers can ask Beazer for upgrades such as a fancier kitchen in lieu of free down payments from a gifting organization, says Ron Kuhn, president of Beazer Mortgage, a unit of the Atlanta-based builder.

Beazer agrees that down-payment gifts tend to help sales. Without them, Beazer could still sell homes in softening markets, but it would "take a little longer," says David Weiss, chief financial officer. "You'd just need to spend more time helping the home buyer through the savings process." As for any effect on prices, Beazer notes that all of its homes are independently appraised.

When an individual seller uses a gift program, a real-estate listing agent will sometimes raise an asking price already recorded. "More often than not, if we're talking a 6% contribution on a $100,000 purchase price, what the seller will try to do is increase the purchase price from $100,000 to $106,000," says Michael Jones, a real-estate agent for Century 21 Joe Walker & Assoc. in a Columbus suburb.

Mr. Jones says he will raise a price only if he thinks the market conditions warrant it. Some other agents, he says, are willing to raise a price beyond what's normal for the area when a down-payment gift is involved, thus "artificially inflating the prices." Once sales at these prices go through, they can be used by appraisers and sellers to support higher prices throughout the local market.

Gifting organizations, while acknowledging that such price boosting goes on, call it uncommon and say they discourage it. "We have rejected deals where we hear about price inflation. We think it's an unethical practice," says Mr. Syphax of Nehemiah . His organization last year asked HUD to implement new rules to prevent such inflation. Gifting companies are pushing for stricter controls through the Homeownership Alliance of Nonprofit Downpayment Providers, the trade group that estimates the programs are used by 17,000 home buyers a month.

Recent default worries have done nothing to still controversy over the programs within federal housing agencies. In 1999, HUD proposed to bar its FHA unit from guaranteeing mortgages when down payments came ultimately from the seller. The proposed rule said that although the FHA had tried to prevent this situation, "some charitable organizations have been able to circumvent these restrictions in various ways, including the establishment of a fund that provides the 'gift' to the home buyer." Nehemiah urged homeowners whom it had helped to write to HUD opposing the rule, and many did. It ultimately wasn't adopted.

Then this September, the HUD inspector general released an audit that zeroed in on 2,261 mortgages in four cities on which Nehemiah had provided the down payment. It found 19.39% of them to be in default, defined as 90 days late. That compared with 9.7% for other FHA-guaranteed loans in those cities -- and a nationwide 90-day-delinquency rate on all mortgages of just 0.78%.

The report concluded that mortgages made with programs such as Nehemiah's were contributing to loan losses at the FHA, and that "allowing these programs to continue represents an increased risk to the FHA insurance fund." The FHA says it continues to evaluate the wisdom of the programs.

Gifting organizations dispute the audit, citing the relatively small number of loans it checked. Nehemiah says its own research has found that default rates on its gift loans are actually lower than those on other FHA-guaranteed loans.

But even a high default rate wouldn't invalidate gifting programs, Mr. Syphax says. "We as a society and as a nation are going to have to extend our hands and accept a bit more risk" to boost homeownership for the less-affluent, he says.

Ms. English in Columbus figures default is definitely not in her future. She was living in subsidized housing with her two daughters, earning about $42,000 a year and unable to save for a down payment. When she shopped around anyway, she heard about the down-payment gifts from a sales agent at Dominion Homes Inc., a Dublin, Ohio, builder.

Ms. English selected a brown house with plum-colored shutters. After signing the papers, she brought her daughters to the construction site every week to take snapshots as the house went up. She says she cried when she moved in in August.

The monthly payment of $1,060 is $360 higher than her old rent, not counting tax deductions on the interest part of the payment. It's structured to rise twice, topping out in two years at $1,260. Ms. English figures raises will enable her to cover the higher payments. "If I had to get a second job, I'd do it" to prevent losing the house, she says.

Write to Patrick Barta at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it and Queena Sook Kim at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Updated December 10, 2002

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