A down payment assistance program funded by nonprofit groups and home sellers that is used in one-third of government-backed mortgages would be banned under a federal proposal submitted Friday.
The Department of Housing and Urban Development sought public comment on the plan, which would end a program that now funds more than 100,000 homes a year purchased by low- and moderate-income consumers.
Nonprofits including Nehemiah Corp. of America and AmeriDream Inc. provide down payment help and are then reimbursed by the seller, which also typically pays a service fee. The financing is structured to avoid a federal rule that prohibits direct seller assistance to buyers.
Audits have found that the seller typically raises the price of the home to recoup his payment to the nonprofit, leading to an unusually high rate of foreclosures on the Federal Housing Administration-insured loans.
"The sales price is often increased to ensure that the seller's net proceeds are not diminished," HUD wrote. Industry groups and consumers have 60 days to submit comments on the proposal.