No down payment? No problem

Loophole still allowing risky mortgages by disguising money as a gift

They didn't. Even more surprising, many Americans can still buy homes with nothing down thanks in large part to the federal government and a legal loophole that lets builders and bankers ensure a steady stream of asset-challenged borrowers for taxpayer-insured loans.

With quietly expanded powers, the Federal Housing Administration is already offering the next-best thing to nothing down on a house: a payment of just 3.0 percent will get practically any American with a pulse and a job a mortgage of up to $729,000, at least until the end of this year.

The FHA has traditionally allowed family and friends to gift a downpayment to homebuyers. In the last 10 years, homebuilders and sellers have gotten into the act by funneling their upfront consideration through down-payment assistance not-for-profits. Technically wiping out a conflict of interest, the charitable outfit collects the cash and hands it over to the mortgage lender taking a bit off the top for all its trouble.

According to a 2005 U.S. Government Accountability Office report, the sleight-of-hand results in higher home prices for FHA borrowers. The agency found that homes sold with nonprofit assistance were appraised and sold for prices about 2 to 3 percentage points higher than comparable homes without such assistance. The report said that appraisers interviewed had sometimes been pressured by lenders, real estate agents and sellers to increase home prices to “bring in the value.”

Not only does this practice burden FHA borrowers with pricier homes, it also increases the odds that the new homeowners can't afford their monthly mortgage payments. Indeed, seller-financed, no-downpayment loans have default rates that are three times the FHA average.