Down payment grants advertised as “free money” by local finance authorities often carry a hefty price: thousands of dollars in higher interest.
In exchange for a down payment grant of anywhere from 3 to 5 percent of the price of the home, the finance authorities require lenders to charge above-market-rate interest, forcing hungry home buyers to saddle themselves with higher mortgage notes over the life of the loan.
“We don't twist anybody's arm to take it,” said Terry McCarthy, Executive Director of the Jefferson Parish Finance Authority. He went on to say, “They either use it or they don't get a house.”
The Inspector General for the U.S. Department of Housing and Urban Development, HUD, has been investigating, through a series of audits, for four years whether the down payment assistance programs rise to the level of predatory lending.
“It’s the American dream”
Jeremy and Johanna Ross found their dream home right away.
“My wife and I had been renting a condo and we were expecting our first child and you know, it's the American dream. You want the house. You want the yard. We had a dog that had nowhere to run,” Jeremy Ross said.
Their dream home is in Kenner. While the Rosses had good credit, they didn’t have enough money for a down payment to make their American dream a reality.
Ross said his loan officer told the couple about the down payment assistance grants offered by the Jefferson Parish Finance Authority, or JPFA.
“Based on the fact that it would really help us on closing costs, we weighed the options and it was definitely worth it to go through with it,” Ross said.
“It's a grant. It doesn't have to be repaid either,” said McCarthy said. Local finance authorities market the grants as ‘free’ money that doesn’t have to be repaid. While that’s true, the money doesn’t have to be repaid by the borrower, there is an added cost to them.
Home buyers getting a Jefferson Parish Finance Authority grant pay a higher interest rate.
“If they qualify, they agree to pay whatever rate the lender has. We tack on a little bit for the down payment assistance,” McCarthy said.
For example, someone buying a $150,000 house could end up paying $27,000 more in interest over the life of a 30-year loan. So, they are paying $27,000 more in interest to receive $4,500 from the JPFA.
While the finance authority doesn’t directly get paid the interest, they get reimbursed the amount of the grant by the loan servicer and they get paid fees.
“All the disclosures are in the documents,” McCarthy said.
The premium interest rate is no secret, but it could be easily missed if borrowers don’t closely read the fine print.
The finance authority's most recent disclosure form that's used by third party lenders when they sign people up says "…the interest rate on a mortgage loan may be higher."
For JPFA grants, and grants from many similarly-structured housing authorities across the country, the interest rate is always higher.
Jeremy Ross said he and his wife had an informative lender.
“She explained that it was through Jefferson Parish and it would give us a percentage of what we borrowed. It wouldn't require payback but it would give us a little higher interest rate,” Ross said.
Three other grant recipients we talked to said they didn't realize they were paying a higher rate.
Only public entities can do it
After the housing financial crisis in 2008, Congress banned private banks from giving money to home buyers for a down payment.
“It prevents someone who has an incentive to encourage a bad-quality loan from going ahead,” said Mark Humphery-Jenner, a visiting professor of finance with the A.B. Freeman School of Business at Tulane University.
The Housing and Economic Recovery Act of 2008, prohibited everyone but quasi-governmental agencies, like the Jefferson Parish Finance Authority, from doling out down payment grants.
Traditional home mortgages typically require people to put down 10 to 20 percent in order to buy a home.
Loans backed by the Federal Housing Administration only require buyers to put 3 to 4 percent down. That’s why JPFA and other finance authorities offer 3 to 4 percent down payment assistance.
The different down payment programs vary in their requirements, but most have income limitations and limit the price of the home. Additionally, home buyers have to meet a certain credit score in order to qualify.
Because so many of the loans generated using down payment assistance grants are FHA loans, the U.S. Department of Housing and Urban Development, or HUD, plays a significant role in regulating the programs.
HUD’s inspector general started looking at the premium interest rates and fees that are charged in a 2015 audit of similar programs in Arizona.
HUD Inspector General David Montoya found the loans didn’t always comply with HUD FHA rules.
"The gifts were not true gifts as defined by HUD. They were indirectly repaid by the borrowers through the premium rate in combination with the development authorities' funding mechanism," Montoya writes.
It's because people who get a few thousand to put down end up paying the banks tens of thousands more in interest over the life of the loan.
“Every state in the United States does exactly what we used to do as well as about 1200 finance authorities. So, we don't do anything different than anybody else,” McCarthy said about the JPFA program.
The down payment assistance programs offered by finance authorities around Louisiana all use that similar funding structure, including the Finance Authority of New Orleans and The Capital Area Finance Authority.
“I think depending on who's in office in Washington, every now and then this puppy sticks its head out of the basket,” McCarthy said about the concerns raised about asking borrowers to pay higher interest to get the down payment grants.
HUD has not fully responded to its office of inspector general, but they did issue some guidance to FHA that essentially found the rates weren’t premium interest rates because most down payment assistance programs charge the same higher rates.
HUD’s OIG disagrees, however, and Montoya took his push for reform directly to members of Congress last fall.
In a letter to the chairman of the House Committee on Financial Services, Montoya warns, "The costs to the borrower far exceeds the down payment, negatively affects the borrower and makes these loans a risk."
Montoya’s office estimates some 60,000 loans a year are initiated using down payment assistance grants. Not all of them are risky, but with home buyers not having the money saved to put down, the chances are higher they could default.
“No one really benefits from giving out loans that people can't actually afford,” said Humphery-Jenner.
The inspector general also had a problem with the fees that change hands after people close on their loans.
The finance authorities get paid back the entire cost of the down payment grant and they sometimes receive fees from the professionals that service the loan.
Fees and spending for JPFA
The JPFA down payment assistance program, called the Southern Mortgage Assistance Program, is funded largely through the fees it collects, and by revenue from past bond issues.
“We can never catch up by making $1,000 fee on these houses helping people move to Jefferson,” said JPFA Trustee Sam Schudmak at a recent meeting of the Board of Trustees that oversees the authority.
A budget breakdown provided by the authority shows the agency spent $185,000 more than it took in last year.
It’s why some trustees, like Schudmak, are questioning payments to professionals like Rob Konrad.
Konrad is the general counsel for the JPFA. He's paid a retainer of $3,500 a month.
“Whenever there's an issue that I need to write an opinion on, I charge an additional fee for that and that's always been the case with the authority going back to 1979,” Konrad said at a recent trustee meeting.
“That's not included in your contract?” asked Trustee Marcy Planer. “That's correct,” Konrad replied. Konrad’s contract specifically states his retainer covers opinions. Yet invoices show in the past three years he's made an additional $30,000 in fees.
When asked whether paying Konrad fees over and above his retainer was a necessary expense, McCarthy responded, “It's not a decision I make. It's up to the Board of Trustees and it has been in place for 39 years.”
Konrad issued a statement about the added fees saying, "when issuing such an opinion on behalf of the authority, the general counsel incurs significant liability. As a result of the assumed liability, the authority has always compensated its general counsel, including all of my predecessors, for that increased exposure."
Jefferson Parish Council Member Jennifer Van Vrancken has also questioned some of the JPFA’s spending on a high vehicle and cell phone allowance for McCarthy and per diems paid to trustees who attend free luncheons.
“Certainly if somebody is being paid to be on retainer and be at the beckon call of the board but then getting additional money to do the things that the board is asking, that would seem above and beyond what they should be paid,” Van Vrancken said.
Despite the questions raised about spending and about the funding structure that puts an added burden on the people the authority is designed to help, some of the leaders of the JPFA maintained the authority is meeting its mission, with no changes needed.
“This is costing the parish nothing. There's nothing coming out of the parish funds. We're creating the opportunity for young people to afford a home in Jefferson Parish. Tell me what's wrong with that,” asked JPFA Trustee Dennis DiMarco.
It still begs the question, how much is the program costing people like the Rosses? Four months after they moved in to the home they bought with the grant, Johanna was diagnosed with cancer.
She's currently waging a war on lymphoma.
“It could be worse. We're fortunate to have decent insurance. It still has its out-of-pocket burden,” Jeremy Ross said about their medical expenses.
Despite that added financial burden Ross says he doesn't regret taking the money. “Worth it… No regrets,” he said.
He said he also doesn’t regret paying higher interest, but should he have to?
The Jefferson Parish Finance Authority’s Southern Mortgage Assistance Program offers 3 to 4% down payment grants in three parishes: Jefferson, St Tammany and St Charles. Until last June, JPFA was also running the program in Calcasieu Parish.
“We gave it up because it wasn't making any money and I couldn't justify the expense. We were breaking even,” McCarthy said.
Whether or not HUD takes action on its inspector general’s recommendations will likely depend on the position taken by the incoming HUD Secretary.
President Donald Trump has nominated neurosurgeon Ben Carson for the post, but the US Senate has yet to confirm him.