Testimony of Ann Ashburn, President, AmeriDream, Inc.

Mr. Chairman, Ranking Member Bond, and members of the Committee, my name is Ann Ashburn, and I am president of AmeriDream, Inc., a 501(c)(3) charitable organization that has provided crucial support to many thousands of low and moderate income families seeking to purchase their own homes.

I respectfully present this testimony with an atypical request: on behalf of AmeriDream, I ask that the Subcommittee not appropriate any funds for our work. Moreover, I urge the Subcommittee to support passage of legislation which would direct that no appropriated funds ever be spent relating to the critical assistance we provide to aspiring homeowners of limited means.

Please permit me to explain.

Congress created the Federal Housing Administration (“FHA”) in 1934 to implement crucial policy initiatives to assist low and moderate income individuals and families in making the transition from tenants to homeowners. To achieve this goal, the FHA guarantees certain loans for low and moderately priced homes.

To qualify for FHA loan guarantees, both the homes and the prospective purchasers must meet certain criteria, among which is the statutory requirement that the homebuyer must make a downpayment of at least three and a half percent of the purchase price of the home. As the Department of Housing and Urban Development (“HUD”) has noted, this criterion has proven to be an insurmountable obstacle for many otherwise qualified low and moderate income families seeking to purchase their own homes:

Many renters find it difficult to save for a downpayment, but have adequate incomes to make monthly mortgage payments and do not pose a significant credit risk. They simply need an affordable financing vehicle to get them in the door. FHA can and should be there for these families.¹

Congress has long recognized that certain forms of downpayment assistance are appropriate to enable low and moderate income families to utilize FHA insured loans. Thus, applicable law permits prospective homebuyers who do not have the funds to make the required downpayment to receive those funds from specified sources as either gifts or loans, depending on the source. For example, downpayment gifts are permitted from relatives, employers, and 501(c)(3) charitable organizations, among others.

Beginning in the mid-1990s, a number of 501(c)(3) organizations came forward to meet the need for downpayment assistance. Initially, those charities largely were faith-based organizations serving the communities in which they were located, and funded by their congregations. Other, nonfaith-based, charities were established soon thereafter. As the scale of DPA programs quickly outgrew the capacity of churches and other traditional sources of support, DPA providers turned to other sources, particularly within the real estate industry, including home sellers. This expanded donor base permitted assistance to be offered on a far greater scale and extended to far more families. Further, the expanded funding sources for downpayment assistance allowed the growth of DPA programs without using taxpayer dollars.

HUD fostered the growth of seller-funded downpayment assistance and created the guidelines under which seller-funded DPA providers operated. Because seller-funded charitable DPA proved highly effective in serving low and moderate income homebuyers that FHA otherwise has difficulty reaching, HUD and FHA historically rejected suggestions to curtail those programs. As recently as November of 2005, the HUD Assistant Secretary and Federal Housing Commissioner wrote:

Borrowers who rely on seller-funded downpayment assistance are representative of the population that FHA was established to serve, families who are otherwise underserved by the private sector. Because of this fact, FHA has determined that additional requirements or restrictions that would prevent these borrowers from obtaining FHA financing would not be beneficial, leaving this population with financing options that are more costly and riskier than FHA. Therefore, FHA has determined that charging a higher premium on these types of loans would be a more palatable alternative, compensating FHA for the additional risk, while still permitting these borrowers the advantage of a more affordable, less risky loan.²

Without downpayment assistance, low and moderate income homebuyers who are unable to come up with a downpayment cannot qualify for an FHA-insured loan, and often must seek subprime or predatory loans, or not purchase a home at all. As the FHA Commissioner testified before the Senate Banking Committee:

Without a viable FHA alternative, many homebuyers tuned to high-cost financing and nontraditional loan products to afford their first homes….Some will be forced to sell or lose their homes to foreclosure. The foreclosure rate for subprime loans is twice that of prime loans. And I think we can all agree that foreclosures are bad for families, bad for neighborhoods, and bad for the economy as a whole. ³

Using the process approved by HUD’s Office of General Counsel in 1998, AmeriDream, a 501(c)(3) charity established in 1999, has disbursed over 200,000 gifts to aspiring homeowners totaling over $700 million. In doing so, AmeriDream established itself as one of the nation’s most prominent DPA providers, and is the nation’s largest nonfaith-based DPA charity. AmeriDream has had particular success assisting low and moderate income families not previously served by HUD and FHA: roughly 80 percent of the recipients of DPA from AmeriDream were purchasing their first home.

On the whole, charitable downpayment assistance (“DPA”) programs have enabled well over one million working families and individuals to purchase their own homes in the last decade, the vast majority of whom were first-time home buyers. Charitable DPA has proven to be an effective means of extending homeownership to many responsible homebuyers who had solid credit and work histories, but could not come up with the downpayment required for FHA loans, thus depriving them of the financially sound alternative to subprime or predatory loans.

By promoting homeownership in marginal neighborhoods, charitable DPA programs have been instrumental in reviving communities, and have earned the strong support of such groups as the U.S. Conference of Mayors and the National Association of Counties.

In fact, HUD itself has utilized charitable DPA in the sale of some of its properties. However, HUD later changed its position and, in 2007, issued a regulation to effectively ban such programs by prohibiting the use of DPA funded by sellers. After the HUD regulation was vacated by two federal courts on the grounds that HUD failed to engage in “reasoned decisionmaking” and “ relie[d] on sources that do not support its conclusions” , the Bush Administration pushed legislation to impose a ban similar to the rejected regulation. Such a provision was enacted as part of the “Housing and Economic Recovery Act of 2008”.

Although the federal courts held that HUD’s claims relating to charitable DPA were unsubstantiated, and thus took the extraordinary step of vacating the regulation HUD issued on the subject, we acknowledge that even highly successful programs such as downpayment assistance present legitimate policy concerns. For that reason, AmeriDream does not support reinstating charitable DPA programs upon the terms that HUD permitted prior to October of 2008. Instead, we strongly support legislation that requires charitable DPA to be implemented in a manner which is fiscally sound, employs rigorous underwriting standards, and ensures accurate appraisals, thus addressing the policy concerns alleged, though not proven, but HUD. Indeed, the Bush Administration HUD Department itself testified in a 2007 hearing on charitable DPA by the House Financial Services Committee Housing and Community Opportunity Subcommittee (“House Housing Subcommittee”) that FHA “Absolutely” could develop underwriting standards for transactions involving seller-funded DPA which would protect the FHA Mutual Mortgage Insurance (“MMI”) Fund. ⁴

Towards that end, members of the House Housing Subcommittee and others have introduced legislation to permit charities to use seller funding for DPA, provided it is done in a fiscally sound manner and utilizes accurate appraisals.

H.R. 600, the “FHA Seller-Financed Downpayment Reform Act of 2009”, would build upon a policy position put forth by FHA in 2005, when it stated, “FHA has determined that charging a higher premium on these types of loans would be a more palatable alternative [than ending seller-funded DPA], compensating FHA for the additional risk, while still permitting these borrowers the advantage of a more affordable, less risky loan.” H.R. 600 would implement that approach by limiting DPA to borrowers with solid credit and by requiring the HUD Secretary to “certif[y] that such loans can be insured without resulting in a need for an appropriation for a credit subsidy.” Implementing H.R. 600 with sound reporting and in a transparent manner would permit seller-funded DPA to be help aspiring homeowners in a fiscally sound manner. Accordingly, the Congressional Budget Office (“CBO”) has concluded that such an approach could ensure the integrity of the MMI Fund, and permit DPA to be implemented without a need for appropriated funds ⁵. H.R. 600 also would impose additional safeguards to ensure the accuracy of appraisals used in connection with transactions utilizing seller-funded DPA.

We recognize that the Senate Appropriations Transportation, Housing and Urban Development and Related Agencies Subcommittee does not have jurisdiction over legislation such as H.R. 600. However, we also recognize that some members of the Subcommittee, quite properly, have expressed concerns relating to the impact of seller-funded charitable downpayment assistance upon the need for appropriated funds. Further, some Subcommittee members, again rightly, have sought HUD Secretary Donovan’s views on the issue.

In response to questions presented in connection with his confirmation, Secretary Donovan stated, “I intend to examine this issue [seller-funded charitable DPA] with care during my first few months in office.” We strongly support a thorough and expeditious review. Further, we respectfully ask that this Subcommittee support H.R. 600 and implement a program of proven success in helping low and moderate income families buy their own homes, typically for the first time, without resorting to predatory or sub-prime financing. Such a program, with appropriate reforms and strict safeguards, would provide a critical boost to housing markets and struggling families at a time most needed, and without—as CBO has confirmed—the need for appropriated taxpayer dollars.

Contact: Ann Ashburn; AmeriDream, Inc.; 200 Professional Drive; 4th Floor;
Gaithersburg, MD 20879; (301) 977-9133; ashburn@ameridream.org.

1-Brian D. Montgomery, HUD Assistant Secretary for Housing/Federal Housing Commissioner, testimony before the Senate Banking, Housing and Urban Affairs Subcommittee on Housing and Transportation, FHA: Issues for the Future (June 20, 2006)(“Senate Banking Hearing”) at 4.

2-GAO-06-24 Mortgage Financing: Additional Actions Needed to Manage Risks of FHA-insured Loans with Down Payment Assistance (Appendix IV).

3-Testimony of Brian D. Montgomery, Senate Banking Hearing.

4-Margaret Burns, Director of the FHA Office of Single Family Housing Program Development , testimony before House Housing Subcommittee, Homeowner Downpayment Assistance Programs and Related Issues (June 22, 2007), transcript at 21.

5-CBO Cost Estimate, H.R. 6694, the “FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008” (September 29, 2008).