HUD OIG: FHA’s Downpayment Program Has Problems

An audit by the HUD Office of the Inspector General found that FHA is pressuring borrowers into accepting higher interest rates, puts the FHA’s Mutual Mortgage Insurance Fund at risk, and uses a funding scheme that may be in violation of federal law, according to a letter from the IG to a high-ranking Republican lawmaker.

HUD Inspector General David Montoya wrote in a letter to House Financial Services Committee Chairman Jeb Hensarling (R-Texas) that in addition to stating he believes that FHA’s downpayment program is in violation of the National Housing Act regarding prohibited sources for downpayment assistance, that FHA violated official procedures by making “significant core changes” to the downpayment program in order to “make what programs we found arguably appropriate.”

“HUD has failed to recognize the disturbing parallels to the seller-funded down payment assistance arrangements practices in the late 1990s to 2008 which caused wide-scale problems to the program and whose reverberations are still felt today,” Montoya wrote in his letter to Hensarling.  “It is exactly these types of risks, to the borrowers and to the health of the overall FHA’s Fund which taxpayers rely on, that compel me to now raise these concerns. It appears that the specific down payment assistance funding arrangements highlighted in the audits creates even more significant economic disparity over time since the borrower is burdened with a higher interest rate for the life of the loan.”

“It is exactly these types of risks, to the borrowers and to the health of the overall FHA’s Fund which taxpayers rely on, that compel me to now raise these concerns.”

David Montoya, HUD Inspector General

Montoya wrote further that an estimated 60,000 FHA loans per year are originated using the borrower-reimbursed funding arrangements which violated the “plain language” of the federal law and “adversely affected” FHFA-insured loans of borrowers who were “unknowingly” steered into the arrangements.

“Breaking the law, trapping borrowers in higher interest rate loans, and trying to cover it up by secretly re-writing the rules—this is the sad, sorry state of today’s FHA,” Hensarling said. “How ironic that the Obama Administration here has been caught engaging in the same sort of shady subprime lending schemes it condemns.  Secretary Castro told Congress last year that seller-assisted down payment assistance poses such ‘a serious risk to the health’ of the FHA—and thus to taxpayers—that the FHA was working hard to shut it down.  The Inspector General’s report makes clear the FHA still has not succeeded.”

In response to the HUD OIG's findings, Acting FHA Commissioner Ed Golding shared the following statement from HUD Deputy Secretary Nani Coloretti:

“HUD wishes to issue a clarification on the HUD legal opinion on August 11, 2015, the Deputy Secretary’s management decision of May 25, 2016, and the “From The Desk Of” issued by Ed Golding, Principal Deputy Assistant Secretary for the Office of Housing on July 20, 2015 and May 25, 2016. To the extent that the Deputy Secretary’s Management Decision may have been interpreted by some to endorse otherwise unlawful practices, we wish to make clear it does not.”

Golding continued, “Indeed, the HUD Office of Inspector General (OIG) alleged certain practices that the Department will investigate further. HUD will separately look into any inappropriate practices, some examples include: the extent to which government-sponsored Down Payment Assistance (DPA) programs fully informed borrowers of the loan terms, or imposed inappropriate fees or costs, or enabled steering or any other coercion of borrowers. HUD reiterates that the Department is supportive of government-sponsored DPA Programs. They enable access to credit that allows American families to purchase homes.”

Click here to read Montoya’s full letter to Hensarling.