The massive, 600-page housing bill heading to the White House is loaded with billions of dollars of new programs, financial assistance for troubled home owners, home buyer tax credits and even a new regulatory structure to oversee Fannie Mae and Freddie Mac.

But the legislation is also missing things that could prove significant for certain home buyers -- primarily those who want FHA mortgage money.

Tops on the list: The final bill effectively kills the popular "downpayment assistance" programs run by companies such as Nehemiah Corporation and Ameridream, Inc.

The Bush administration had sought to ban seller-funded "gift" plans for more than two years, and finally got its wish last Wednesday when the House accepted Senate bill language making them illegal when used with FHA loan insurance.

Downpayment assistance works like this: When a buyer doesn't have enough cash for a downpayment, the home seller makes a "charitable contribution" to a nonprofit, tax-exempt organization. The nonprofit pockets a fee of $400 to $600 -- sometimes even more -- and "gifts" the needed downpayment money to the buyer.

Proponents of the plans say they've helped over a million low and moderate income families buy homes with FHA mortgages over the past decade.

But FHA officials complain that loans with downpayments funded by sellers go into default at two to three times the rate of ordinary FHA loans, in part because borrowers "have no skin in the game," in the words of FHA Commissioner Brian D. Montgomery.

Losses are higher as well, say officials, because sellers frequently add the cost of the "gift" onto the selling price of the house. Proponents challenge FHA's statistics and say appraisers must validate selling prices as part of the FHA underwriting process.

Another key item missing from the final legislation: FHA had lobbied Congress vigorously to authorize it to charge "risk-based" premiums on loans, just as private insurers do. Applicants with low credit scores and low downpayments represent higher risks of delinquency and foreclosure, and should be charged more than applicants with high scores and larger downpayments, argued Montgomery.

The House agreed, but the Senate clamped a one-year moratorium on FHA risk-based pricing in its version, which the House ultimately accepted.

Published: July 28, 2008

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.