Generally, nonprofit organizations that assist people who want to become homeowners should be applauded and recognized for the value they add to their community. But a recent report backed by the Huffington Post Investigative Fund sheds light on two nonprofits whose ill-conceived efforts to help prospective buyers with down-payments contributed more to foreclosures than to sustainable home ownership.
Nehemiah Corporation of America and AmeriDream Inc., the nonprofits in question, both worked to help home-buyers purchase houses with mortgages insured by the Federal Housing Administration without making any down-payment from their own pockets. Together, these two companies arranged 392,000 FHA mortgages before Congress prohibited the FHA from financing such loans.
The FHA required homebuyers to put down a minimum of 3 percent. Nehemiah would front the money to a qualified buyer. After the deal closed, the seller would donate the same amount back to Nehemiah, along with a fee ranging from a few hundred dollars up to one percent of the sales price… The buyer got his no-money-down loan, the seller unloaded the house at asking price, and the Nehemiah collected its cut.
While this system allowed more people to begin their dreams of homeownership, problems quickly arose. Sellers started jacking up their prices in anticipation of the arrangement, and buyers were given mortgages that they were not realistically able to sustain. The default rate on these types of loans – which grew to one-third of all FHA loans outstanding by last year – is three times the default rate for other FHA loans. The program that earned Nehemiah as much as $162 million in fees is its peak year (2002), has led to losses exceeding $1 billion for the FHA insurance fund as borrowers defaulted on $3 billion worth of loans.
This situation, and the way it was allowed to continue unchecked for so long, is one more symbol of the dire need for a Consumer Financial Protection Agency that will regulate all financial products and lenders, potentially stopping bad deals before they can create nationwide problems.