Will the rescission of the Department of Housing and Urban Development’s Mortgagee Letter 2019-06: Down Payment Assistance and Operating in a Governmental Capacity, be the last word on restricting housing funds for DPA? The industry doesn’t think so, besides this is not the first time HUD’s gone after down payment assistance programs.
Implemented as a part of the National Housing Act, the provision of funds to assist home buyers in meeting requirements for closing costs and other costs due at time closing, and secure a mortgage insured by the government, i.e. the Federal Housing Administration, has been repeatedly upheld in legislative rulings for decades. The longstanding substantiated verbiage reads that funds provided by a “state or local government agency or instrumentality”, including governmental entities, continue to be recognized as permissible sources of funds that can be used for down payment assistance. This statement is considered to be an exception to laws and rulings that prohibit the use of outside funds to meet minimum required investment (MRI) or down payment requirements under HUD guidelines. This permissible source of funds was reevaluated as a part of early financial reform legislation and was formally upheld in HUD’s Federal Housing Administration: Prohibited Sources of Minimum Cash Investment Under the National Housing Act – Interpretive Rule, issued in December 2012, and referred to as the ‘2012 interpretive rule’.
Despite the longevity of this exception, HUD continues to claim that the corresponding DPA programs, which often comprise up to a third of HUD’s single-family business, are high risk and should not have access to FHA insurance without serious restrictions. The industry’s come a long way since the financial crisis, and even if lower down payment mortgages do constitute a greater propensity for default, this is not necessarily indicative of poorly administered DPA programs. One can’t help but ask why HUD continues to spotlight governmental entity DPA programs in this manner. This suggests that Industry participants need to be prepared to rally against further efforts on the part of HUD to restrict this valued access to funds that help make home ownership a reality for millions of Americans.
Industry obstacles tied to the rescinded ML 2019-06, would more than likely resurface with any future ruling by HUD, and should at a minimum create concerns as follow for industry participants:
APA GUIDELINE INFRINGEMENT
HUD appears to be headed towards releasing their proposed restrictions through proper rule making process. This would alleviate previous concerns that HUD had not adhered to the Administrative Procedure Act (APA) requirements.
GOVERNMENTAL ENTITY DEFINITION & CAPACITY
The documentation requirement in the original mortgagee letter brought into question the very definition of “Governmental Entity” by restricting the geographic areas that can be served, as well as requiring that permission be secured by local authorities. HUD is expected to continue in their efforts to redraw the lines of operational capacity and jurisdictional responsibility for these entities.
INCREASED COST TO ACCESS DPA PROGRAMS
Whether HUD considers industry feedback or not, the changes proposed will almost certainly add costs to the loan process. Suggested documentation requirements could entail fees for jurisdictional and capacity approvals that would more than likely require costly reviews by an attorney or other licensed official.
ACCESS TO FUNDS AT TIME OF SETTLEMENT
In an Office of Management and Budget (OMB) document from earlier this year, HUD said they planned to define “the circumstances in which governmental entities are deriving a prohibited financial benefit.” It is important to note that the possible impact of a future HUD ruling with requirements similar to those outlined in ML 2019-06, could unravel the entire funding process in use by nearly all Governmental Entities, including Housing Finance Agencies (HFA). Previously proposed requirements would potentially eliminate current processes for generating DPA monies and impair access to funds at time of closing.
QMS continues to follow this critical industry issue as it ebbs and flows amidst an already complex landscape of legislation and investor requirements. We at QMS believe it is important to lend our experience and support to both your personal operational efforts, as well as developing industry concerns. QMS is a long-standing provider of quality control audits and reviews that has grown our processes, technology offering, and our expertise alongside of the mortgage industry. We understand where the business has come from and where we’re going. Our goal is to help support your culture and processes within the confines of regulatory change.