Federal housing officials are trying again to ban seller-assisted down payments on federally insured mortgages, amid concerns about mounting losses tied to these loans.

HUD's Federal Housing Administration (FHA) will reopen the public comment period on a proposed rule that would ban seller-funded downpayment assistance on mortgage transactions insured by the FHA. The proposed rule will be re-published in the Federal Register and comments will be accepted for 60 days following publication. The rule can also be viewed on FHA's website.

Under the seller-funding practice, a third party -- typically a charity -- provides the down payment for the buyer and is then reimbursed by the home seller, often a home builder. This can help home sellers close deals with buyers who can't come up with down payments on their own.

In a speech to the National Press Club, HUD's Assistant Secretary for Housing-Federal Housing Commissioner Brian D. Montgomery warned FHA must take action because these loans, which now make up one third of FHA's portfolio, are causing substantial losses.

This year, as a result of its annual re-estimate, FHA had to book an additional of $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio.

The rule would clarify that downpayment funds for FHA-insured mortgages cannot be derived from sellers - directly or indirectly - or any other party that stands to benefit from the transaction financially.

"The IRS, GAO and our own Inspector General have previously expressed concerns with these circular financing schemes. Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments," noted Montgomery.

Related Sources:

• FHA Seeks to Ban Seller-Assisted Payments
• Prepared Remarks of Brian Montgomery at the National Press Club