The head of the Federal Housing Administration has informed lenders that loans receiving down payment assistance can continue to benefit from government insurance, despite past questions over the legality of certain assistance programs.

Ed Golding, HUD's principal deputy assistant secretary for the FHA, wrote in a recent letter to lenders that "loans that include down payment assistance provided by state and local housing finance agencies continue to be eligible for FHA insurance."

The FHA eligibility for loans benefiting from such down payment assistance programs has been somewhat in doubt after HUD's inspector general raised issue last year about loans that were priced higher because of assistance. The dispute led to concerns that loans receiving down payment assistance could not receive federal backing.

But Golding said following "a thorough and deliberative process," the department determined that "government entities may provide funds to borrowers to help make down payments on FHA loans."

Last summer, HUD Inspector General David Montoya took issue with two down payment assistance programs in Arizona. The watchdog alleged that NOVA Financial & Investment, a Tucson, Ariz., mortgage lender, violated HUD rules by charging borrowers nominally higher mortgage rates in return for assistance. The IG also wanted NOVA to indemnify the FHA for up to $48.5 million, depending on defaults, for 709 loans.

Pete Mills, senior vice president for the Mortgage Bankers Association, said Golding's memo to lenders was "a very positive development."

There has been a "cloud hanging" over the down payment assistance program since the HUD IG issued two audit reports in the past year, Mills said. "Now it appears that we have this resolution between HUD program officials and the inspector general," he added. 

"It looks like this is a green light for the lenders and the finance agencies to continue to participate," Mills said.

HUD's inspector general could not be reached for comment.

Barbara Thompson, executive director of the National Council of State Housing Finance Agencies, said Golding's letter brings more certainty to the situation.

"We needed a resolution and we feel that we got one," Thompson said. "The housing finance agencies can go ahead with their down payment assistance programs knowing that HUD says they are in compliance with law and regulation."

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