WASHINGTON -- The Department of Housing and Urban Development plans to seek a ban on a certain type of down payment assistance that has grown sevenfold this decade and contributed to a surge in foreclosures of government-backed mortgages.
Nonprofit groups, such as Nehemiah Corp. of America and AmeriDream Inc. of Gaithersburg, Md., provide the down payment help and are then reimbursed by the seller. The programs are "a contributing factor of increased risk in our portfolio" of loans, HUD spokesman Lemar Wooley said in an e-mail.
HUD plans to propose the ban this month for public comment, possibly as early as this week, Wooley said. More than 100,000 low- and moderate-income consumers bought homes using such programs last year.
The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.
Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.
In 1999, HUD proposed a similar ban and withdrew it in 2001 after industry opposition.
Foreclosures rose last year in the Baltimore metropolitan area - particularly the suburbs - as problematic loans and a housing market slowdown buffeted new owners with little equity.
But FHA loans weren't part of the problem. HUD records show a significant drop in FHA foreclosures, the result of aggressive efforts to stem the fallout from illegal flipping in the late 1990s.
Vincent P. Quayle, executive director of the St. Ambrose Housing Aid Center, a Baltimore nonprofit that does not offer seller-financed assistance, believes fewer local homebuyers have turned to such programs in the past few years because they can obtain assistance through the city and the state.
But he's still pleased to hear HUD is trying for a ban on seller-financed help. He said buyers paid for that help, literally: "The seller would just raise the price."
Under the program, groups including Sacramento, Calif., Nehemiah and AmeriDream give buyers an average of about $3,400 for a down payment.
They are then reimbursed by sellers of the house, who also pay a service fee. The arrangement was designed to circumvent U.S. rules that bar sellers from giving direct assistance.
Sellers have tried to recover the cost of the fee they pay nonprofits by raising the price of the house an average of 3 percent, a 2005 study by Congress' nonpartisan Government Accountability Office found.
The number of FHA-backed homes purchased with nonprofit assistance has risen to 102,921 in 2006 from 14,603 in 2000, HUD data show. While these payments accounted for just 2 percent of all FHA loans in 2000, they soared to 33 percent of the loans last year.
The Internal Revenue Service held last year that groups providing down payment assistance did not quality for tax exemptions and said it was examining the practices of 185 nonprofits. AmeriDream and Nehemiah said they are in talks with the IRS.
Sun reporter Jamie Smith Hopkins contributed to this article.