Thursday, August 10, 2006

Charity Lending Scams!

IRS: Charity lending is scam -- Down-payment plans called misleading

Calling them scams, the Internal Revenue Service plans to revoke the charitable status of down-payment assistance programs that have fueled the business of Dominion Homes and other builders.

"So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home," IRS Commissioner Mark W. Everson said in a statement. "They also damage the image of honest, legitimate charities."

Federal law prohibits home builders from helping customers directly with down payments. For years, however, builders have partnered with charities to funnel money to buyers. The IRS is examining 185 such charities, which have helped hundreds of thousands of people buy homes with government-backed mortgages.

Typically, a charity gives the customer a down payment, and the builder reimburses the charity plus a processing fee. The programs offer a similarly popular service for individual home sellers, usually through their real-estate agents.

The programs help buyers with the 3 percent down payment required for a government-insured Federal Housing Administration mortgage. Many of those buyers get in over their heads financially and later lose their houses, studies show.

Nearly a third of FHA loans nationally last year involved charitable down-payment assistance to the tune of hundreds of millions of dollars.

Without their charitable status, down-payment assistance programs can't do business with the FHA.

A Dispatch series, "Brokered Dreams," in September detailed the risks to home buyers and taxpayers of such down-payment assistance. The stories focused on the partnership between Dublin-based Dominion and the Nehemiah Corp. of America, a California charity that pioneered the business strategy.

Nehemiah, the largest program, received $143 million in down-payment money from sellers in 2004, according to the most recent IRS filings. Seller "donations" accounted for more than 99 percent of Nehemiah's revenue.

David Dillen, president of Colony Mortgage, partnered with Dominion on hundreds of loans involving down-payment assistance. But Dillen said HUD was long overdue in shutting down the gift programs.

"What the hell took them so long?" he said. Colony followed HUD's rules but didn't agree with them. "It was a big scam."