Judge throws out ban on down-payment assistance

Federal regulators have not adequately explained their decision to reverse a policy allowing seller-funded down-payment assistance on FHA-backed loans -- or provided sufficient responses to suggestions on ways to mend, rather than end, the practice -- a federal judge has ruled.
The ruling means the U.S. Department of Housing and Urban Development will have to reopen an administrative proceeding that culminated in a rule change last October banning seller-funded down-payment assistance on loans guaranteed by the Federal Housing Administration (see Inman News story).
Claiming seller-funded down-payment assistance artificially inflates home prices and more than doubles the odds that a loan will end up in default, HUD put forward the proposed rule change last spring. A final rule banning the practice was published in the Federal Register on Oct. 1, after HUD received more than 15,000 comments on the proposal.
Three nonprofits that provide seller-funded down-payment assistance filed separate lawsuits to block implementation of the rule, saying it would have a disproportionate impact on minorities, low-income and single-parent families who rely on the down-payment-assistance programs they provide.
In a Feb. 29 order setting aside the rule change, U.S. District Court Judge Lawrence Karlton said that although HUD provided a "reasoned basis" for the rule change, it "was not honest with itself or the public that it was reversing course from its prior policy."
In putting forward the proposed rule change, Karlton said, HUD presented evidence that seller-funded down-payment assistance harms consumers by inflating home prices, and that the increased default rates on such loans leads to greater losses. HUD also noted abortive attempts at ending seller-funded down-payment assistance during the Clinton administration.
But more recently, Karlton said, HUD had "warmed" to seller-funded down-payment assistance -- a fact omitted in its arguments for a change in course.
In a 2005 letter, HUD Assistant Secretary for Housing Brian Montgomery defended seller-funded down-payment assistance against calls for a ban by the U.S. Government Accountability Office. Although Montgomery recognized problems with the practice, he said those who relied on seller-funded down-payment assistance "are representative of the population that FHA was established to serve."
At the time, Montgomery said that instead of banning the practice, FHA would rather charge higher premiums on loans that relied on seller-funded down-payment assistance.
Karlton said that "while HUD may have set forth good reasons for the rule's adoption, it did not adequately explain why it was changing its mind."
By failing to acknowledge its previous position, HUD violated the Administrative Procedures Act, which governs the process for implementing such changes, the judge said in his order.
Karlton said HUD also failed to provide an adequate response to some arguments put forward by proponents of seller-funded down payment assistance for overhauling, instead of abolishing, the practice.
Those suggestions included the same proposal put forward by Montgomery in 2005 -- that HUD implement risk-based pricing for loans involving seller-funded down-payment insurance -- and require lenders to inform appraisers of the source of down-payment assistance.
HUD maintains that it is implementing risk-based pricing, and that FHA modernization legislation now being considered by Congress will lower or eliminate down-payment requirements for some borrowers.
But Karlton said such an argument is "a non-sequitur" because HUD's intent is to introduce risk-based pricing in conjunction with a ban on seller-funded down-payment assistance, rather than in lieu of a ban, as proposed in 2005.
In ordering the Housing Department to reopen the rulemaking process, Karlton barred HUD Secretary Alphonso Jackson from participating in the proceedings because of remarks attributed to him during the public comment period.
In a June 5, 2007, article by Bloomberg News, Jackson was quoted as saying he was "very much against" seller-funded down-payment assistance. "I think it's wrong. I don't want to continue to be a partner in a program where so many people can't afford to keep up their payments."
The article also paraphrased Jackson as saying HUD intended to approve the new rule even if the agency received critical comments.
"Allowing the public to submit comments to an agency that has already made its decision is no different from prohibiting comments altogether," Karlton said.
But Karlton also said courts have found that just because officials take positions or express strong views doesn't mean they are no longer capable of being objective and fair.
Because Jackson was not involved in the original rule-making proceeding -- he had delegated that authority to Montgomery -- it might be "imprudent" to reopen the process simply to exclude him, Karlton said.
But since he had already decided to reopen the process for other reasons -- because HUD failed to provide a reasoned analysis for its departure from prior policy, and did not adequately respond to comments -- disqualifying Jackson "will likely impose little or no burden on the agency," Karlton ruled.
The ruling was made in a case brought by Nehemiah Corp. of America in the U.S. District Court for the Eastern District of California. Two similar lawsuits were filed by AmeriDream Inc. and the Penobscot Indian Nation in the U.S. District Court for Washington, D.C.
Scott Syphax, the president and chief executive officer of Nehemiah, issued a statement this week saying the company was "thrilled with the Court's decision to support low- to moderate-income families across the country" and looked forward to working with HUD in the future.

Article is by the US Housing and Urban Development
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Some Banks are Withdrawing Equity Line of Credit From Homeowners!

Homeowners Losing Equity Lines
As House Values Fall, Some Banks Withdraw Credit

(By Susan Biddle -- The Washington Post)

In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.
"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."
The appeal of home equity lines has always been their flexibility
They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.
Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.
Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.
Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.
"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.
Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.
It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.
Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.
By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.
Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."

Lenders singling out Specific Counties!

San Francisco Chronicle
Kenneth Harney

Sunday, February 3, 2008

(02-03) 04:00 PST Washington -- Critics call it the new redlining: Many of the country's largest mortgage lenders are imposing loan restrictions in entire counties or ZIP codes that they rank as risky or "declining."

On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from 1 to 5, in ascending order of perceived risk. In areas rated in categories 4 and 5 - roughly 100 counties in metropolitan areas nationwide - Countrywide said it will now require 5 percent larger down payments from most applicants. If a loan program previously allowed a minimum 5 percent down payment, now applicants will be required to come up with 10 percent to qualify.

An additional 970-plus counties are rated more-moderate risks, in categories 1 to 3, with 5 percent down payment increases if an appraisal report indicates there is an "oversupply" of houses for sale or a marketing time of more than six months.

Other national lenders have distributed their own proprietary "declining markets" lists. GMAC-ResCap of Minneapolis even has a Web site allowing loan officers to type in a ZIP code and instantaneously learn whether the company ranks the area a D, C or lower risk. Although the public is not supposed to see the site, one mortgage company executive provided me with an access link.

In late January, a ZIP code for McLean, Va., - a high-income, high-cost residential community and home of mortgage investment giant Freddie Mac - was rated a high-risk D. The upscale residential neighborhood in northwest Washington, D.C., where Fannie Mae, another mortgage investor, has its headquarters was rated at an elevated risk of C.

Ironically, restrictions imposed by Fannie Mae late last year have prompted lenders to compile area by area risk ratings and impose down payment penalties. In a notice to lenders on Dec. 5, Fannie Mae said all loans delivered after Jan. 15 of this year on properties located within "declining" areas would be subject to 5 percent higher down payment requirements. The company's own electronic underwriting system had begun flagging selected markets as high risk in summer. Fannie Mae also strongly encouraged lenders to use "supplemental" data sources to come up with their own risk-ratings by market area.

Critics say that imposing higher down payment standards or other penalties for applicants in an entire county, metropolitan area or ZIP code is unfair to homeowners and buyers whose properties are located in sub-markets or neighborhoods within those jurisdictions that may not be declining in value, or not by enough to justify punitive underwriting requirements.

Ted Grose, president of 1st Mortgage Advisors Inc. in Los Angeles, said labeling entire counties as "declining" is "ridiculous - it totally fails to distinguish between areas where prices are rising or relatively stable, and other neighborhoods or communities where they are not."

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a consumer advocacy group active in litigation against subprime mortgage companies, said that "sound underwriting has nothing to do with geography. It is based on the income and qualifications of the applicant, and the valuation of the property by a professional appraiser."

"Anything else," said Berenbaum, "runs afoul" of federal fair lending and civil rights statutes. "It is redlining."

Paul Skeens, head broker for Carteret Mortgage Corp. in Waldorf, Md., said he had observed that lenders' county and ZIP code designations "have their heaviest impacts on areas with high proportions of minority groups and people with moderate incomes who bought houses" with low and no-down payment programs during the first half of the decade.

Labeling these areas as "declining" and then imposing higher down-payment requirements "becomes a self-fulfilling prophecy," said Skeens. "People can't buy there because they need more cash up front, the houses don't sell, and prices go down."

In an interview, Brian Robinett, chief credit and operations officer for wholesale lending at Countrywide, vigorously rejected the criticism. Countrywide's risk-ranking list distributed Jan. 25, he said, is based on comprehensive data on prices, sales and other indicators spanning 12 to 18 months.

"It would be hard to make the case (of redlining) against" the company's ratings. After all, according to Robinett, a wide variety of property types, income levels and ethnic groups are "equally affected" by every risk ranking. He cited the Los Angeles area as an example, with "Beverly Hills on one extreme" and lower-income, more heavily minority communities within the county on the other.

The takeaway for the time being on this issue: If a major lender has tagged your ZIP code, county or entire metropolitan area with a scarlet letter - and they exist in virtually every state, including many in places generally assumed to have relatively healthy market conditions - you're going to need more cash up front. That will be the case even if the area risk designation has no real applicability to the house you hope to buy or finance.




Bay Area 'soft' markets
Countrywide Financial gave the following ratings to the nine Bay Area counties. The numbers mean the lender will likely require a larger down payment in Alameda, Contra Costa, Sonoma and Solano counties.

County Level
San Francisco 2
San Mateo 2
Santa Clara 2
Alameda 4
Contra Costa 4
Napa 3
Sonoma 4
Solano 4
Marin 2

E-mail Ken Harney at kenharney@earthlink.net.

This article appeared on page K - 8 of the San Francisco Chronicle