Mortgage Bankers Association Calls For New Laws After IRS Ruling

by Leroy Baker, Tax-News.com, New York

11 May 2006

The Mortgage Bankers Association (MBA) has called for swift passage of legislation to reform the Federal Housing Administration (FHA) after the issuance of a final rule on downpayment assistance programs by the Internal Revenue Service (IRS).

In a ruling released last Thursday, the IRS stated that organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities. Such programs can qualify as tax-exempt charitable and educational organizations under Internal Revenue Code section 501(c)(3) when properly structured and operated.

The IRS decided to take action after finding that organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements.

However, speaking out against the ruling, Steve O’Connor, vice president of government affairs at MBA said that decision by the IRS will "significantly hamper FHA’s ability to serve first-time, minority and low- and moderate-income homebuyers by eliminating a source of downpayment for over a third of FHA’s borrowers."

A recent study indicated that 88 percent of DAP users were first-time homebuyers, exceeding the FHA average of 79 percent. Additionally, DAP programs served minorities at greater rates. For example, the same study found that over 20 percent of DAP users were African-American families, compared with 13 percent of the FHA portfolio in general.

“There is now a greater urgency to pass FHA reform legislation that would allow FHA to implement new flexible downpayment programs for borrowers," he added.

According to the MBA, the Expanding American Homeownership Act of 2006, will empower the FHA to become a more nimble and effective agency and achieve its mission of providing affordable housing and financing to underserved markets, and Mr O'Connor urged lawmakers to approve the measure this year.

“MBA hopes that Congress will not leave this year without making this critical amendment to FHA’s operating statutes and allowing them to continue to serve the American home buying public,” he stated.

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