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ARI SHAPIRO, host:

This is MORNING EDITION from NPR News. I'm Ari Shapiro.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

Most no-down-payment home loans disappeared when the housing bubble burst and lenders became more careful. So you might be surprised to hear that those no-down loans are still available and with federal government guarantees. The Federal Housing Administration is trying to stop that, saying that taxpayers will soon be picking up the tab, as NPR's John Ydstie reports.

JOHN YDSTIE: The FHA's Down Payment Assistance program allows homebuyers to get a government-insured 30-year fixed rate loan without having to put up any of their own money. Instead, they can use a gift from a family member, an employer or a charitable non-profit organization to provide the required three percent down.

The aim is to help low and moderate-income buy homes.

Mr. BRIAN DEEMER(ph): The kitchen's my favorite part. It has the upgraded cabinets, it has midnight black, granite everywhere, stainless steel appliances.

YDSTIE: Brian Deemer used the FHA Down Payment Assistance program to buy a new condominium in Aldie, Virginia, a far suburb of Washington, D.C.

Mr. DEEMER: Bottom line was I'd had to come up with three percent down, which is a big deal.

YDSTIE: So you basically a no-down-payment, no closing costs, able to move into a lovely condominium...

Mr. DEEMER: Right.

YDSTIE: ...with no money out of pocket.

Mr. DEEMER: Yeah, exactly.

YDSTIE: Actually, Brian got his down payment from a nonprofit organization called Genesis. Holly Davis, a loan officer at SunTrust in Reston, Virginia, helped steer Brian into the program.

Ms. HOLLY DAVIS (Loan Officer, SunTrust): These are the signs that we put on listings that says no-down-payment program available.

YDSTIE: Davis says with private lenders ending their no-down-payment loans, FHA down payment assistance through nonprofits has become the hot program. Here's how it works.

Ms. DAVIS: The seller makes a contribution of a designated amount in the real estate contract to the nonprofit. So what happens is the seller is making a donation to the charity and in turn the charity is giving that money to the buyer.

YDSTIE: But that cozy quid pro quo between the seller and nonprofits has come under fire. The IRS has revoked the nonprofit status of 30 of the assistance providers. The former IRS commissioner said the situation could mislead honest homebuyers and ultimately jack up the cost of the home.

David John, a housing expert at the Heritage Foundation, puts it this way...

Mr. DAVID JOHN (Heritage Foundation): What concerns me about some of the nonprofits that are involved is that this essentially becomes a fundraising activity where the nonprofit ends up with a fee in return for providing this mortgage assistance, which is actually, as we know, paid by the seller of the home anyway. That just strikes me as a matter of some conflict of interest.

YDSTIE: John says he worries the arrangement may encourage nonprofits to give down payments to risky buyers. FHA statistics suggest there's reason for concern. They show that buyers who receive down payments through nonprofits are two to three times more likely to default than FHA homebuyers who provide their own down payment.

The FHA projects those high defaults will require to ask for a $1.4 billion subsidy from Congress next year. Because of these issues, FHA is trying to shut down the nonprofit-assisted down payment program, even though it now accounts for more than a third of all FHA loans, up from just five percent in 2001.

But the program supporters are fighting back.

Representative GARY MILLER (Republican, California): There's too many questions that are not answered here.

YDSTIE: That's Republican Congressman Gary Miller, a former homebuilder and supporter of the nonprofit program. He argues the FHA sees the nonprofits as competition for its own program called the American Dream Down Payment Initiative.

Rep. MILLER: What they've said to us is let's continue the American Dream Down Payment Assistance program, and that's using taxpayer dollars to give to someone, but let's exclude the private sector from participating in the same program. That's the problem I'm having.

YDSTIE: Scott Syphax, the CEO of Nehemiah Corporation of America, the originator of the nonprofit down payment model, sees the conflict as bureaucrats flexing their muscles.

Mr. SCOTT SYPHAX (CEO, Nehemiah Corporation of America): HUD has never forgiven the fact that we've been more successful at bringing people to FHA and through their programs than they've been themselves. The reason that they want to take over the program and do it themselves is because they feel that essentially we're operating their franchise.

YDSTIE: An FHA spokesperson says its American Dream Initiative is not in competition with the nonprofits.

The future of nonprofit down payment assistance programs is also being debated in the Congress. The Housing Rescue Bill - pending in the Senate - eliminates the program. The House-passed version continues it, but with additional restrictions.

John Ydstie, NPR News, Washington.

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