The Sacramento, California-based Nehemiah Corp., a nonprofit mortgage assistance program, and 184 similar programs around the country, have been accused by the Internal Revenue Service (IRS) of operating a down payment scam and are no longer eligible for tax exempt status, the Sacramento Bee reports. The IRS found that âorganizations claiming to be charities are being used to funnel down payment assistance from sellers to buyers through self-serving, circular financing arrangements.â
At the request of lenders or others, these mortgage assistance programs provide âgiftsâ of cash to prospective home buyers to cover the buyer's down payment, the Bee says. The sellers then give the nonprofit organization a check for the amount of the gift, plus a processing fee ($499 in Nehemiah's case). Sellers add the cost of the gift to the price of the house.
The practice began when representatives of a builder approached Don Harris, assistant pastor of Antioch Baptist Church in Sacramento, to provide seed money for down payments for prospective low-income homeowners. Harris developed the process and eventually, with the support of federal housing officials, the Bee says, built the Nehemiah Corp. The organization has provided $825 million in mortgage aid to low-income buyers since 1997.
The IRS said that the payments are âin response to an anticipated economic benefit, namely facilitating the sale of a seller's home.â The IRS also objected to buyers not paying taxes on the gift, and sellers who often deducted their reimbursement as an expense, the Bee says.
âI fundamentally disagree with their characterization of a program that's helped . . . low income families across the nation achieve homeownership,â said Scott Syphax, Nehemiah president and CEO, the Bee reports. âRight now our advisers are reviewing all options and will be giving us guidance.
IRS Commissioner Mark Iverson said that he thought these organizations were taking advantage of homebuyers. âSo-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the impact of honest, legitimate charities.â
Partners in Charity, Inc. (IPIC) of West Dundee, Illinois, a nonprofit program that also offers down payment help, has been charged by the Department of Justice (DOJ) with making contractual arrangements with sellers, Originator Times reports. The sellers agree to reimburse PIC for the down payment and pay an administrative fee. In addition, the DOJ claims that in marketing the arrangement, PIC falsely advised sellers and others that they could deduct the payments as charitable deductions on their federal income tax returns.
Providing down payment assistance so that public workers can purchase housing in the communities where they work is a priority in states like Florida, where the cost of housing has been rising more rapidly than low and middle-income workers' salaries, the Tallahassee New Press reports. The state legislature has proposed an affordable housing package of $514 million that sets aside $50 million for down payment help. The program is financed from the proceeds of a special tax on real estate and that now totals $945 million.
The New Mexico Mortgage Finance Authority (MFA) offers a first and second mortgage program at below market interest to police officers, firefighters, nurses, medical technicians, teachers, and active members of the reserve, according to the Albuquerque Tribune. The first mortgage covers the house, the second, the down payment, closing costs and private mortgage insurance (PMI). Financing the PMI is very expensive when the home purchase involves a low down payment, though the second mortgage brings down the monthly payment a great deal.
The New Mexico program, called HERO for Home Equity and Required Occupation, has made more than 100 loans statewide, the Tribune says. âThe HERO program is a fantastic move,â said Joseph Montoya, deputy director of programs for MFA. âThere are large markets in New Mexico where teachers, firefighters, and police can no longer live. Essential personnel are being driven out.â