> **An Examination of Downpayment Gift Programs Administered by**
>
> **Non-Profit Organizations**

# 

# 

# 

[Final Report]{.smallcaps}

**[HUD Contract No: C-OPC-22550/M0001]{.smallcaps}**

**[Submitted to: The U.S. Department of Housing and Urban
Development]{.smallcaps}**

![](media/image1.png){width="0.6027777777777777in"
height="0.6027777777777777in"}

**[March]{.smallcaps}** **[1, 2005]{.smallcaps}**

# 

# 

# 

![](media/image2.png){width="2.5194444444444444in"
height="0.5729166666666666in"}![](media/image2.png){width="2.2819444444444446in"
height="0.7229166666666667in"}

FOREWORD

The Office of Housing, in the U.S. Department of Housing and Urban
Development, commissioned an examination by Concentrance Consulting
Group, Inc., a Washington, D.C., based management consulting firm, of
downpayment gift programs administered by non-profit organizations. This
report is the culmination of a ten-month effort, beginning in January,
2004, to understand the influence of seller-funded nonprofit downpayment
assistance on the origination of FHA-insured home loans. The study
involved travel to ten cities and interviews of over 400 persons
involved in mortgage transactions---from homebuyers and sellers to
realtors, appraisers, underwriters, loan officers, builders, and
downpayment assistance providers. The report concludes that
seller-funded downpayment assistance for mortgage downpayments has led
to underwriting problems that require immediate attention, and HUD is
already acting upon recommendations made in this report.

President George W. Bush and Secretary Alphonso Jackson are committed to
expanding homeownership opportunities while providing adequate
protections to low- and moderate-income homebuyers. This report advances
these goals, and I commend it to all readers who share these objectives.

![](media/image3.png){width="2.6041666666666665in"
height="0.8958333333333334in"}

John C. Weicher

Assistant Secretary for Housing/FHA Commissioner

**Table of Contents**

[Executive Summary iv](#executive-summary)

[I. Introduction/Background 1](#i.-introductionbackground)

[II. Key observations 4](#ii.-key-observations)

[Iii. Methodology 11](#iii.-methodology)

[iv. Collective Assessment and cross sectional Analyses
20](#iv.-collective-assessment-and-cross-sectional-analyses)

[V. Interview Results by subject group
31](#v.-interview-results-by-subject-group)

[Non-Profits 31](#non-profits)

[Lenders and Underwriters 48](#mortgage-lenders-and-underwriters)

[Homebuyers 57](#homebuyers)

[Individual Sellers 65](#individual-sellers)

[Builders 70](#builders)

[Real estate agents 77](#real-estate-agents)

[Appraisers 85](#appraisers)

[Other Respondents 94](#other-respondents)

[VI. analysis of findings and recommendations
95](#vi.-analysis-of-findings-and-recommendations)

[Appendix I](#appendix-i)

[Research Objectives 105](#research-objectives)

[Appendix II](#appendix-ii)

[Lines of Inquiry 107](#lines-of-inquiry)

[Appendix III](#appendix-iii)

[Quantifiable Interview Results 122](#quantifiable-interview-results)

[Appendix IV](#appendix-iv)

[Detailed Flow Chart of a Downpayment Assistance Transaction
135](#detailed-flow-chart-of-a-downpayment-assistance-transaction)

[Appendix V](#appendix-v)

[2002 IRS Form 990 Highlights 137](#irs-form-990-highlights)

[Appendix Vi](#appendix-vi)

[Comparative Financing scenarios 139](#comparative-financing-scenarios)

#   {#section-6 .unnumbered}

# Executive Summary

The U.S. Department of Housing and Urban Development (HUD) Office of
Evaluation engaged Concentrance Consulting Group, Inc. (Concentrance) to
conduct an examination of non-profit seller-funded downpayment
assistance programs that provide gifts to Federal Housing Administration
(FHA) borrowers. A previous study conducted by the Office of Inspector
General (OIG) (Audit Case Number 2000-SE-121-0001) concluded that
mortgages involving non-profit downpayment assistance where the
non-profit directs seller funds to homebuyers should be ineligible for
FHA insurance. This examination provides input to HUD's investigation of
how it might continue to promote downpayment assistance programs while
containing the risk of default and foreclosure to acceptable levels. The
purpose of this examination was to gather and analyze data on:

-   Characteristics of seller-funded downpayment assistance programs;

-   Structural and ownership features of seller-funded downpayment
    assistance providers;

-   Relationships among parties involved in seller-funded downpayment
    assistance transactions; and

-   Characteristics of seller-funded downpayment assistance transactions
    that may increase risks of default and foreclosure.

The Concentrance team conducted one-on-one and focus group interviews
with 401 respondents in ten Standard Metropolitan Statistical Areas
(SMSAs) including Atlanta, Charlotte, Dallas, Denver, Detroit,
Indianapolis, Phoenix, Riverside, Salt Lake City and Seattle. These
SMSAs were selected by the HUD Government Technical Monitor (GTM) as
cities with significant seller-funded downpayment assistance activity in
the FHA market. Interviews were conducted between April and July 2004.
HUD provided the Concentrance team with a file containing information on
all loans insured by FHA where the Computerized Home Underwriting
Mortgage System (CHUMS) indicated that the downpayment assistance (DA)
came from a non-profit entity and the loan was endorsed in the
FY2000-2003 period and the property securing these loans is located in
the ten subject SMSAs. The construction mix in this sample data set was
71% existing construction and 29% newly constructed homes. The Charlotte
and Indianapolis SMSAs had the highest concentration of new homes with
seller-funded DA at 64% and 63%, respectively.

The respondents included:

+---------------------------------------+------------------------------+
| -   downpayment assistance providers  | -   underwriters             |
|                                       |                              |
| -   real estate agents                | -   builders                 |
|                                       |                              |
| -   appraisers                        | -   homebuyers               |
|                                       |                              |
| -   mortgage lenders (e.g., mortgage  | -   sellers                  |
|     company executive management,     |                              |
|     loan officers and mortgage        |                              |
|     brokers)                          |                              |
+---------------------------------------+------------------------------+

The team interviewed representatives of two types of downpayment
assistance programs (DAPs). The primary interview focus was on DAPs
whose funding source was property sellers. However, we also interviewed
representatives of traditional DAPs where the source of funds for the
assistance offered was the government or a charitable organization.
Throughout this report these downpayment assistance programs are
referred to as seller-funded DAP or non-seller-funded DAP respectively.
We often will also refer to downpayment assistance simply as DA. When
referring to a program or programs we will use DAP or DAPs respectively.

This is a qualitative study and thus the data has more depth and greater
richness of context than quantitative studies. Qualitative studies have
smaller numbers of respondents than quantitative studies, and do not
have the same properties of representativeness as larger-scale field
studies.

Some of our key observations as they relate to the examination
objectives are as follows:

> [Program Characteristics]{.underline}

-   Seller-funded DA providers serve primarily as conduits for the
    transfer of downpayment funds between buyers and sellers in order to
    meet HUD's gift eligibility requirements. The assistance from the
    non-profit is contingent upon a written guarantee of reimbursement
    by the seller. There is rarely any direct interaction between the
    seller-funded DA provider and the borrower. Without the requirement
    for a conduit to comply with HUD guidelines for arms-length funding
    sources, seller-funded DA provider would no longer have a purpose in
    the transaction.

-   The existence of seller-funded DAPs creates demand for single-family
    housing from first-time buyers who typically have very little
    understanding of the mortgage lending process or the basic
    responsibilities of homeownership. Most respondents recommended
    homebuyer counseling as a way to better prepare these buyers for
    their homeownership responsibilities. The DA providers themselves
    said that counseling/borrower education should be mandatory.

-   Sellers reported that they were able to sell their homes faster if
    they used a seller-funded DAP and they always received their
    targeted amount of net proceeds. Buyers believed that the
    seller-funded DAPs provided them with the opportunity to become
    homeowners and without the assistance they could not have purchased
    a home at that time.

> [Seller-Funded DA provider Structural and Ownership
> Features]{.underline}

-   Many seller-funded DA executives reported that there were instances
    in the industry where the officers and directors of the
    seller-funded DA provider were also owners and officers of
    for-profit marketing and gift application processing entities. These
    entities were captive vendors of the seller-funded DA provider and
    many of the executives were receiving compensation from both
    entities.

-   Interviews with seller-funded DA representatives and parties that
    work with them revealed that these organizations do not have the
    structure or capacity to offer risk-mitigating services such as
    face-to-face homebuyer counseling. In most cases offering such
    services is not part of their business plan.

> [Relationships Among Parties in the Seller-Funded DA
> Transaction]{.underline}

-   Many appraisers reported that they often felt more pressure from
    mortgage brokers or loan officers to "bring in the value" for
    property transactions where a seller-funded DAP was involved.
    Similar pressures were also reported by underwriters who advised
    that they were "strongly encouraged" by their management to be more
    "flexible" when underwriting loans using seller-funded DAPs. The
    mortgage broker or loan officer was described by many respondents as
    having the most power in the transaction yet the least amount of
    management control or oversight.

> [Default and Foreclosure Risks Associated With Seller-Funded
> DA]{.underline}

-   Some mortgage company executives reported that, based on their
    experience, many seller-funded DA loans had lower credit quality and
    higher default rates than other FHA loans.

-   Over 50% of the respondents in each subject group including
    appraisers, mortgage lenders, underwriters, seller-funded DA
    providers and real estate agents, indicated that seller-funded DAPs
    inflated the property sales price and appraised value.

The Concentrance team analyzed these key observations as well as other
data and findings gleaned from our research in terms of three factors
for analysis outlined in the contract statement of work. These factors
focus on:

-   The effect seller-funded DAPs may have on the
    [incentives]{.underline} of various agents in the homebuying and
    mortgage underwriting process;

-   [Safeguards]{.underline} built into seller-funded DAP designs that
    serve to mitigate any increased default risk that may result from
    minimizing the direct equity investment of the homeowner; and

-   Seller-funded DAP designs or incentives created by individual
    programs that lessen the [underwriting quality]{.underline} of
    mortgages and/or increase effective [homeownership
    costs]{.underline} to downpayment gift recipients.

Based upon the results of our analysis, implications for risk to the FHA
Insurance Funds were identified and options for mitigating such risks
were offered for consideration by HUD.

[Incentives]{.underline}

The Concentrance team concluded that incentives were affected by the
presence of seller-funded DA for several agents within the typical
transaction structure, including the sellers, underwriters, and
appraisers. The seller incentive is to increase the sales-price in order
to recoup their cost associated with providing downpayment assistance.
This inflated sales price is not necessarily reflective of similar homes
sold without such assistance. The higher than market sales price
resulting from the seller-funded DA exacerbates subjective motivations
of the participants in the transaction. While these motivations are
inherent in any typical home purchase transaction, we have concluded
that the pressures on these participants are greater when seller-funded
DA is involved. The primary individuals responsible for these pressures
are the loan officer or individual mortgage brokers who sometimes
threaten the appraiser with non-payment, or reduction in business if
their appraisal results do not support the sales price. Loan officers
also complain to management about the perceived inflexibility of
underwriters. These practices discourage underwriters and appraisers
from carrying out their duties as effective risk managers. Their primary
concern becomes sustaining their income source

[Safeguards]{.underline}

The Concentrance team also concluded that the overwhelming majority of
seller-funded DA providers did not build any safeguards into their
programs in order to mitigate any increased default risk that may result
from minimizing the direct equity investment of the homeowner. We have
determined that because the sales price is increased as a result of the
seller-funded DA, it is in essence financed and as such the borrower has
no real equity in the property.

Seller-funded DA providers "offer" or in other words make available
borrower counseling and homeownership education to borrowers broadly.
This offering is not a pre-requisite for receiving seller-funded DA.
Therefore, most borrowers who benefit from the counseling and/or
homeownership education offered are not the same borrowers receiving the
seller-funded DA. Most of the borrowers in our focus groups did not
remember the name of their DA provider and were not aware of any
education or counseling programs their DA provider may have offered. In
fact, the seller-funded DA providers reported having extremely limited
contact with the borrower. Unlike non-seller-funded DA providers; the
vast majority of seller-funded DA providers do not offer face-to-face
counseling as they typically do not have the ability to deliver
grassroots services based on local needs. In all but a couple of cases
seller-funded DA providers that offer borrower focused services such as
counseling and homeownership education provide the service through a
web-based environment or over the telephone. While several prominent
seller-funded DA providers endorsed local, face-to-face borrower
education or homeownership counseling as the preferred and most
effective delivery method, such comprehensive services did not appear to
be inherent in their business plans.

[]{.mark}

Seller-funded DA providers also offer mortgage payment protection
insurance. However due to the standard exclusionary clauses in these
policies; the protection afforded to the mortgage lender or the borrower
is minimal. In addition, we were unable to identify a clearly defined
claims process for borrowers to follow. The lack of a process for claims
adds to the ineffectiveness of the policy as a risk mitigation tool. The
seller-funded DA providers suggested that the claim rates on these
policies are very low and complained that the few claims paid by the
mortgage payment protection insurance provider were disproportionately
small relative to premiums paid for the insurance. Some seller-funded DA
providers confided that the mortgage payment protection insurance was
more of a marketing tool than a risk mitigation benefit. They also
reported that participation in these insurance programs was limited
because of the additional cost to the property seller. The cost of the
insurance is in addition to the seller's contribution to the non-profit
for the downpayment and the associated application processing fee.

The structure of the seller-funded DAPs does not provide for any
safeguards from a lending perspective as these programs are underwritten
using the same criteria as loans where the borrower has met FHA's
minimum 3% statutory investment. However, since the indirect source of
the gift is the seller and not a disinterested party to the sales
transaction, many respondents in the industry questioned whether the
FHA's statutory investment requirement was met. And, because the sales
price is increased to accommodate the seller-funded DA, the resulting
loan amount is the same as would be realized if the financing program
were a zero downpayment program similar to the program proposed in the
President's FY2005 and FY2006 budget submissions to the Congress.
Underwriters also reported that the credit quality of seller-funded DA
loans was inferior to other loans in their FHA portfolio. While some
underwriters reported requiring additional compensating factors for
loans with seller-funded DA, the majority did not impose any additional
requirements.

[Underwriting Quality and Homeownership Costs]{.underline}

Finally, the Concentrance team concluded that the seller-funded DAP
structure leads to a lessening of loan underwriting quality. Our
conclusions are based upon underwriter reports of inferior borrower
credit profiles relative to other FHA loans, and risk layering practices
to include maximum ratios, premium interest rates and, until recently,
the use of temporary interest rate buydown accounts. These risk factors
are in addition to the risks associated with the lack of a direct
investment in the transaction by the borrower. Another factor supporting
our conclusions was the lack of borrower readiness to undertake the
responsibilities of homeownership, as reported by underwriters, realtors
and the borrowers themselves. Furthermore, the effective costs of
homeownership are increased even more by the processing fees charged by
the seller-funded DA providers which get passed through to borrowers in
higher property prices. In some counties the inflated sales price
results in higher settlement fees as well.

Based upon the above conclusions, the Concentrance team identified the
following risk implications:

-   Higher FHA claim amounts due to inflated appraised values that
    result from a breakdown of risk management controls designed to
    segregate duties and responsibilities necessary to ensure that each
    of the professionals in the transaction are allowed the opportunity
    to act with prudence in carrying out their functions.

-   The insuring of loans that pose increased default and foreclosure
    risk to the FHA Insurance Funds without the benefit of any
    additional risk mitigating requirements such as compensating
    factors, or increased mortgage insurance premiums.

-   Increased cost of homeownership to borrowers receiving seller-funded
    DA without realizing any tangible benefit associated with the
    increased costs. These costs include seller-funded DAP processing
    fees, mortgage payment protection insurance premiums and higher
    settlement costs when the expense items are calculated based on a
    percentage of the sales price.

In order to mitigate these risks Concentrance is recommending that HUD
consider the following risk management options:

-   Work with the mortgage and appraisal industries to establish
    standards and guidelines for lenders to follow for ordering and
    managing the appraisal process.

-   Reinforce existing HUD guidelines requiring the separation of
    production and risk management personnel. This is necessary to
    ensure that the decisions of underwriters and appraisers are not
    influenced or controlled by production pressures.

-   Adjust underwriting policies to include the seller-funded DA in the
    6% seller contribution limit.

-   Better align the incentives of the production area with the risk
    management functions of mortgage lending by adding a registration
    requirement for loan officers.

-   Require additional underwriting requirements or eligibility criteria
    in order for these loans to be eligible for FHA insurance.

-   Apply the same enhanced, risk-based premium structure to these loans
    as in the proposed zero downpayment program.

-   Implement the proposed zero downpayment program.

# I. Introduction/Background

The U.S. Department of Housing and Urban Development (HUD) Office of
Housing engaged Concentrance Consulting Group, Inc. (Concentrance) to
conduct an examination of non-profit seller-funded downpayment
assistance programs (DAPs) that provide gifts to Federal Housing
Administration (FHA) borrowers. A previous study conducted by the Office
of Inspector General (OIG) (Audit Case Number 2000-SE-121-0001)
concluded that mortgages involving non-profit downpayment assistance
where the non-profit directs seller funds to homebuyers should be
ineligible for FHA insurance. This examination provides input into HUD's
investigation of how it might continue to promote DAPs while containing
the risk of default and foreclosure to acceptable levels. The purpose of
this examination was to:

1.  Gather data on the workings of major seller-funded DAPs run by
    non-profit organizations in order to identify:

    a.  The systematic and structural features of the programs and

    b.  The potential impact that the design of the programs may have on
        the relationships among all parties involved in the homebuying
        process and mortgage transaction.

2.  Facilitate analysis to understand systematic factors in program
    design that may lead to the potential for increased default and
    foreclosure incidence among FHA-insured borrowers.

The outcome of this examination is intended to help HUD:

1.  Better classify types of downpayment assistance (DA) received by
    homebuyers utilizing FHA insurance and

2.  Consider any policy changes that might be beneficial for assuring
    that homebuyers receiving DA are not at increased risk of default
    and foreclosure.

To complete the examination, data was gathered from various participants
in the mortgage and homebuying process who worked with non-profit
organizations that sponsored a DAP. The respondents included
representatives from non-profit organizations involved in DAPs; real
estate agents; appraisers; mortgage lenders which includes mortgage
company executives, loan officers, and mortgage brokers; underwriters;
builders; and homebuyers and sellers. The team interviewed two types of
DA providers. The primary interview focus was on DAPs where the funding
source was property sellers. Throughout this report they are referred to
as seller-funded DAPs. Some providers offered DAPs where the source of
funds was the government or a charitable organization; they are referred
to as non-seller-funded DAPs.

The targeted participants were geographically dispersed across ten
Standard Metropolitan Statistical Areas (SMSAs), identified by HUD as
having the largest concentration of seller-funded DA activity amongst
the SMSAs represented in the FHA portfolio during FY2000-2003. The
selected SMSAs were Atlanta, Indianapolis, Denver, Phoenix, Seattle,
Dallas, Salt Lake City, Charlotte, Riverside and Detroit.

The Concentrance team, in accordance with the contract Statement of Work
(SOW), executed a four-phased planning, data gathering and analysis
approach. First, the Concentrance team surveyed publicly available data
on seller-funded DA providers in order to gain a better understanding of
their program offerings, participation and process requirements; and
their financial structure and funding sources. Second, leveraging the
data gathered during the public documents survey, the Concentrance team
crafted a research plan and strategy that set-forth the interview
objectives and the associated guides and questionnaires to be used in
interview and focus group settings with each subject group. The
questions and objectives can be found in Appendix I and II of this
document. The research plan and the survey of publicly available
information were documented and presented to the Government Technical
Monitor (GTM) for approval. Third, a feasibility study was conducted to
determine the probability of success in executing the research plan in
each of the ten SMSAs. Fourth, after completing the feasibility
analysis, the Concentrance team executed the revised research plan which
reflected the results of the feasibility analysis.

This report presents the findings and observations of the Concentrance
team. For purposes of this report, the research team made a distinction
between responses and observations. Responses are defined as direct
statements, quotes or opinions expressed by the subject group
participants, whereas observations are defined as an interpretative
qualitative analysis of the subject group responses by the research team
and may not be direct responses to particular questions in the interview
guides.

The team interviewed 401 respondents in focus group and one-on-one
interview settings who participated in transactions involving DA. In
addition, the team arranged discussions with individuals from the
Government Sponsored Enterprises (GSEs) Freddie Mac and Fannie Mae, the
HUD Homeownership Centers (HOCs) and the HUD National Servicing Center.
This report includes:

-   A summary of key observations relative to the program
    characteristics, structure and ownership of non-profits, effects of
    program design on the relationship among parties in the home-buying
    transaction and characteristics of the program and associated
    processes that may affect default and foreclosure. (Section II)

-   An overview of the methods and techniques used by the Concentrance
    team in the execution of the study and subsequent analysis of the
    data and information gathered. (Section III)

-   The results of a collective assessment and analysis of the
    information gathered, including a chart and description of the
    operational and transaction process flows as gleaned from interviews
    with the transaction participants. This section also provides an
    overview of the extent to which the subjects of the study
    corroborated or contradicted each other's responses to selected
    questions that were asked of multiple participants. (Section IV)

-   A summary of the interview results for each subject group. (Section
    V)

-   An analysis of findings relative to the factor for analysis of the
    study, implications for the FHA program as they relate to loans
    involving seller-funded DA and our associated recommended risk
    management options that might be beneficial for assuring that
    homebuyers receiving seller-funded DA are not at increased risk of
    default and foreclosure. (Section VI)

# II. Key observations

The Concentrance team conducted 401 interviews in 10 SMSAs with
individuals that participated in property sales and lending activities
on transactions where DA was provided by non-profits that received
contributions from property sellers. Assured of confidentiality, the
participants interviewed were, for the most part, very open and candid
about their experiences with seller-financed DAPs. The interviews were
collectively analyzed in order to identify meaningful trends, including
conflicting and corroborating statements. We gained insights from
personnel involved in property sales, mortgage loan originations,
mortgage risk management and DA provider management.

The following key insights, characterized in terms of our observations,
are intended to provide information that will assist HUD in identifying
and determining aspects of seller-funded DA transactions that may
advance or impede sustainable homeownership. These observations form the
basis for our recommended risk management options outlined in Section VI
of this report. Our observations are categorized in terms of the
following research objectives for this examination:

  -------------------------- --------------------------------------------
  **Examination Objectives** **Description**

  **Program                  To identify systematic and structural
  Characteristics**          features of the seller-funded DAPs.

  **Participant              To identify potential impacts the design of
  Relationships**            the programs may have among all parties
                             involved in the homebuying process and
                             mortgage transaction.

  **Seller-Funded DA         To identify structural and ownership
  Providers' Structure and   features of seller-funded DA providers.
  Ownership**                

  **Default and Foreclosure  To understand systemic factors in program
  Risk**                     design that may lead to the potential for
                             increased default and foreclosure incidence
                             among FHA-insured borrowers.
  -------------------------- --------------------------------------------

**[Program Characteristic Observations]{.smallcaps}**

-   Seller-funded DA providers serve as conduits for the "indirect"
    transfer of funds targeted for downpayment between the homebuyer and
    the seller as FHA will not allow the seller to provide DA directly
    to the homebuyer. This transfer is described as "indirect" because
    the seller-funded DA provider disburses the downpayment gift to the
    homebuyer from a pre-existing pool of funds. The seller subsequently
    makes a contribution to the seller-funded DA provider in an amount
    equal to the downpayment gift disbursement to the homebuyer, plus a
    processing fee. This contribution, including the processing fee, is
    deducted from the seller proceeds when the sales transaction is
    closed.

-   The motivation for using the seller-funded DAPs by parties driving
    the sales transaction is almost exclusively to transfer gift funds
    to the homebuyer in order to complete the sales transaction. Without
    the requirement for a conduit, the seller-funded DA provider would
    no longer have a purpose in the transaction. There is no evidence,
    based on our interviews that the presence of this intermediary
    provides any additional protections to the homebuyer or FHA,
    especially in those cases where the seller-funded DA providers' sole
    activity is to manage the distribution of a "blind pool" of funds
    provided by sellers. The term "blind pool" is intended to show some
    distinction between the gift provided to the borrower and the funds
    contributed by the seller. There is at least 72 hours between the
    time the gift is provided to the borrower and the contractual seller
    donation is routed to the seller-funded DA provider.

-   The seller-funded DAP structure, in practice, provides for little to
    no contact between the seller-funded DA provider and the borrower.
    The primary interface with the seller-funded DA provider is the
    mortgage broker or loan officer. The seller-funded DA provider
    functions in an order-taking and fulfillment capacity, by accepting
    requests for assistance and funding them with little to no analysis
    or investigation. The seller-funded DA providers, unlike the
    non-seller-funded DA providers, rely completely on the mortgage
    lenders' validation of the mortgage and property transaction.

-   Given the operational structure of these seller-funded DAPs, the
    stated value-added features beyond the DA, such as borrower
    education are rarely realized. For the most part, we did not observe
    any evidence that education programs offered by the seller-funded DA
    providers were mandated for the homebuyer. These programs are
    voluntary. Information on these programs is available over the
    internet to anyone seeking guidance about the homebuying and
    mortgage process. Additionally, unlike non-seller-funded DA
    providers, most seller-funded DA providers we examined are not
    structured to provide a comprehensive education program on a
    face-to-face basis, as all processing is done centrally. Field
    personnel are focused on sales and do not provide such education.
    They interface with the mortgage lenders primarily and, to some
    extent, with builders and real estate agents.

-   The other value-added feature offered as a component of the
    seller-funded DAPs is an optional mortgage payment protection
    insurance, or MPPI policy. The policy offers payment protection for
    the borrower in the event of involuntary job loss where the loss
    persists in excess of 30 days. The fee for participation in the
    insurance is paid by the seller. The seller can purchase coverage
    for the buyer for 1-5 years; however, the one year policy is the
    industry standard. The fee for this optional coverage is another
    item that property sellers routinely add to the sales price in order
    to protect their net proceeds. The seller-funded DA providers that
    offer the coverage indicated that participation in the insurance
    program was limited and, furthermore, the proportion of claims
    relative to premiums paid was low.

-   The borrower, through an increased sales price, incurs costs that
    would not be required in the typical transaction. These costs
    include an additional processing fee charged by the seller-funded DA
    provider to administer the funds transfer and, in many counties,
    transfer taxes, and recordation and other settlement fees are based
    upon this higher sales price, thus increasing settlement costs.

-   Seller-funded DA providers accommodate property sellers and market
    dynamics by encouraging sellers to view the cost of the program as
    an alternative to accepting a bid price below their original asking
    price. Marketing information published by the seller-funded DA
    providers suggests that, by using a seller-funded DAP, property
    owners can execute a sales contract at the "full list price." It is
    a quid-pro-quo: if the purchaser is willing to pay "full list price"
    then the seller agrees to offer DA. The seller-funded DA providers
    reason that the seller was going to lower the sales price, but
    offering seller-funded DA allows them to receive the "full list
    price" for the property and support homeownership. They also point
    out that the seller is not adding the DA to the sales price; they
    are simply selling the property at the "full list price" which
    generates the funds for the contribution.

> Though the seller-funded DA providers deny that it is true, we found
> overwhelming evidence that the cost of the DA is added to the sales
> price, which then increases the allowable FHA loan amount and
> eliminates any borrower equity in the property.

**[Participant Relationship Observations]{.smallcaps}**

Based upon our interviews with all of the participants in the homebuying
and mortgage transaction it appears that:

-   The seller-funded DAP structure requires the seller to, in essence,
    reimburse the seller-funded DA provider for contributions made on
    behalf of the homebuyer for the downpayment.

-   The seller-funded DAP structure exacerbates subjective motivations
    inherent in the typical mortgage transaction that tend to, knowingly
    or unknowingly; compromise the actions and judgments of those
    individuals such as appraisers and underwriters whose fiduciary role
    in the process is to protect the interests of the borrower, FHA, and
    the investment community.

-   The risk control process most vulnerable to compromise is the
    property valuation process.

**[Seller-Funded DA Provider Structure and Ownership
Observations]{.smallcaps}**

-   Seller-funded DA providers, unlike traditional non-seller-funded DA
    providers which operate on a local level, are structured to process
    applications centrally. In most cases, facilities of seller-funded
    DA providers are not in close proximity to the homebuyers they
    serve. They work primarily through the mortgage broker or loan
    officer who is the facilitator of the transaction and have little to
    no contact with the homebuyer.

> Seller-funded DA providers "offer" or in other words make available
> borrower counseling and homeownership education to borrowers broadly.
> This offering is not a pre-requisite for receiving DA. Therefore, most
> borrowers who benefit from the counseling and education offered are
> not the same borrowers receiving the DA. The vast majority of
> seller-funded DA providers do not offer face-to-face counseling as
> they typically do not have the ability to deliver grassroots services
> based on local needs. In all but a couple of cases seller-funded DA
> providers that offer borrower focused services such as counseling and
> homeownership education provide the service through a web-based
> environment or over the telephone. While face-to-face counseling is
> not typically offered; the prominent seller-funded DA representatives
> indicated that it is the method that they have endorsed in the past
> and would prefer.
>
> []{.mark}
>
> There were two notable exceptions in the respondent pool. One regional
> seller-funded DA provider supplied documentation showing that they
> counseled nearly 4,500 prospective homeowners in 2003. Their
> face-to-face counseling program was part of a separate, affiliated
> business and was not part of their seller-funded DAP. When asked they
> could not confirm how many of these prospective homeowners receiving
> face-to-face counseling also received DA. In the other instance, the
> seller-funded DA provider [required]{.underline} counseling through a
> third party vendor but the counseling could be delivered by phone or
> over the internet. In this case, according to the provider, all
> homeowners receiving DA from their organization also received
> counseling.

Concentrance observations suggest that the primary purpose of the
seller-funded DA provider is to facilitate transfer of funds between
sellers and buyers. There does not appear to be a broader mission of
ensuring that the homebuyers are equipped to sustain the homeownership
opportunities afforded them through these programs. According to most
seller-funded DA providers the mortgage broker or loan officer has the
responsibility for ensuring that the homebuyer is prepared for
sustainable homeownership.

-   Many seller-funded DA executives reported that there were instances
    in the industry where the officers and directors of seller-funded DA
    provider were also owners and officers of for-profit marketing and
    gift application processing entities. These entities were captive
    vendors of the seller-funded DA provider and many of the executives
    were receiving compensation from both entities. Some of these
    entities admitted to owning marketing and processing entities, but
    no one admitted that their officers and executives were receiving
    compensation from both entities. Compensation and marketing expenses
    encompassed 93% of net income for one seller-funded DA provider. An
    analysis of seller-funded DA provider marketing and processing
    expenses can be found in Appendix V.

**[Default and Foreclosure Risk Observations]{.smallcaps}**

-   Seller-funded DA, as described by the participants in the study, is
    tantamount to 100% financing. Yet, seller-funded DA loans are
    underwritten using FHA underwriting criteria intended for loans
    where the borrower has a 3% investment in the transaction from
    either their own funds or a gift from a party disinterested in the
    transaction. Disinterested parties are defined as a relative,
    employer or other party independent of the transaction such as a
    charitable organization. The study participants indicated that
    borrowers participating in these programs do not have an investment
    in the transaction or equity in the property. In fact, earnest money
    deposits made by borrowers at contract signing are often returned at
    settlement.

-   A key characteristic of seller-funded DAPs is that the assistance
    from the non-profit is contingent upon a written guarantee of
    reimbursement by the seller. Research shows that the sellers'
    willingness to commit to this arrangement is based upon an increase
    in the sales price. The amount of the increase is equivalent to the
    reimbursement amount plus any other costs charged by the
    seller-funded DA provider. Therefore, the seller-funded DA provider
    is not independent because there is a *de facto* financial
    relationship with the seller. Furthermore, the increase in sales
    price results in a financed downpayment and, unless the buyer pays
    closing or other transaction costs equivalent to 3% of the sales
    price from their own funding sources, the borrower does not have any
    equity in the property.

-   Seller-funded DA providers increasingly report offering a MPPI
    policy at "no cost to the buyer." These policies promise to pay the
    borrower's mortgage payments in the event of default due to a
    lay-off or other circumstances beyond the borrowers' control.

> These programs are not really "free to the buyer." The seller must pay
> for them and the seller through an increase in the sales price recoups
> those charges. The seller-funded DA providers indicated that
> participation in the MMPI plan is limited.
>
> While these insurance plans are offered in order to mitigate default
> and foreclosure risk for the borrower and mortgage lender, their
> effectiveness is questionable as literature on these plans provided by
> a seller-funded DA provider shows exclusionary provisions where
> coverage would not be provided to the borrower. For instance, job loss
> due to medical reasons or disability is excluded from coverage.
> Therefore, the MPPI policy does not cover two of the leading reasons
> cited by the mortgage industry for default and foreclosure.

-   Both mortgage company executives and underwriters report that credit
    quality for loans with seller-funded DA is inferior to other loans
    as measured by FICO scores and loan performance. Underwriters also
    reported that the risk of default is exacerbated by the layering of
    risk, lack of personal investment in the transaction, higher than
    average debt ratios, bruised credit and, until recently, the use of
    temporary interest rate buydown accounts.

> Inadequately funded real estate tax escrows for newly constructed
> homes also added to the credit risk. Newly constructed homes are
> initially assessed based on the value of the unimproved land. Real
> Estate Settlement Procedures Act (RESPA) regulations require that
> mortgage lenders only escrow taxes based upon the current assessment.
> Therefore, when the property is reassessed based on the land and
> improvements, the borrowers' escrow payment increases dramatically in
> order to make up the shortage in their escrow account.

-   The lending and appraisal communities are confused about HUD
    policies regarding the treatment of downpayment gifts provided by DA
    providers receiving contributions from the seller. The HUD Handbook
    4155.1 REV-5 appears to be unclear on the treatment of these funds.
    Respondents indicate they are unsure whether they should treat these
    funds as a traditional gift, seller contribution or concession. The
    described absence of a definitive position from HUD is said to
    contribute to inconsistent appraisal practices in determining the
    fair market value of the property and thus increasing collateral
    risk. According to some appraisers, the HUD HOCs are actively
    placing appraisers on the Limited Denial of Participation list (LDP)
    who are identified during quality assurance reviews as making
    mistakes that the appraisers claim are solely due to confusion
    around this issue.

-   Builder/Seller sales contracts are not transparent relative to
    options and features, thus seller-funded DA is not clearly
    identified. This presents a particular problem for appraisers, when
    attempting to accurately estimate market value using these sales as
    comparables, as the terms of sale, including the seller-funded DA,
    are often not disclosed.

-   Some of the major mortgage lending executives interviewed reported
    that they applied risk mitigation processes to their own
    conventional portfolio that would benefit their FHA portfolio;
    however, they did not feel empowered to implement these processes
    for FHA loans. These lenders felt these processes would be
    particularly helpful for property valuation because the appraisals
    for their conventional product lines are ordered centrally and the
    appraiser in some cases is not provided the sales price.

-   All subjects agreed that borrower counseling and/or homebuyer
    education was an important step to ensure sustainable homeownership.
    Underwriters, builders and real estate agents felt that most of the
    buyers receiving seller-funded DA were much less prepared for
    homeownership than the typical buyer. They described the typical
    homebuyers in this category as first-time buyers, single parents and
    minorities. Most of these buyers did not fully understand the terms
    of the home purchase and financing transaction and had not fully
    considered the costs and responsibilities of homeownership as they
    transitioned from a rental situation. Many of the buyers interviewed
    indicated that their purchase decisions were rather spontaneous.

> Real estate agents indicated that an educated buyer would make their
> jobs easier because some of the burden for education falls upon them
> as they assist the borrower through the process. Underwriters
> hypothesized that an educated buyer would be more sensitized to the
> costs of homeownership. They felt that a borrower who received
> counseling and/or homeownership education would be better prepared for
> the expected and unexpected costs associated with homeownership if
> they appreciated the importance of budgeting and understood how to
> budget. Homebuyers did not state directly how counseling and/or
> homeownership education would have helped them; however, we sensed
> that many of them encountered "surprises" at different points in the
> process including at closing, after closing, and even during the focus
> group discussions. Our sense is that, armed with this knowledge in
> advance, they may have managed their circumstances differently. They
> may have made the same purchase decision but at least they would have
> made an informed purchase decision or better prepared for the
> consequences of the purchase decision. For example, they could have
> saved or budgeted for increases in the mortgage payment at the end of
> the temporary interest buydown or better anticipated property tax
> increases on new construction. Other respondents did not offer
> specifics relative to the additional benefits borrower counseling
> and/or homeownership education might offer.
>
> No borrower that participated in our focus group sessions reported
> receiving counseling from the seller-funded DA provider that funded
> their downpayment. The majority of the borrowers who reported
> receiving counseling said they sought out the assistance prior to
> starting the home purchase process using the internet to search for
> information. A few borrowers mentioned receiving less formal direction
> or guidance from their real estate agent or loan officer.
>
> The counseling and homeownership education offered (i.e., made
> available to the general public) by most seller-funded DA providers is
> web-based or conducted over the telephone. The lack of recognition by
> most borrowers of the seller-funded DA provider, the absence of
> contact between the parties and the structure and timing of the
> settlement transaction creates a problem in matching the information
> needs of the borrower with the borrower focused services of the
> seller-funded DA providers.

# Iii. Methodology

The Concentrance team was charged with gathering qualitative data from
participants in the housing and housing finance process on the
intricacies of transactions involving DA. In conducting this examination
of DAPs, Concentrance, in accordance with the SOW, focused primarily on
programs that involved contributions from property sellers. Due to the
confidential nature, as well as perceived professional risks of the
issues discussed, the team provided assurances of privacy and
confidentiality to all interviewees. This assurance of confidentiality
increased the comfort level of the participants and created an
environment for open dialogue resulting in more forthcoming interview
responses. Although individual quotes are used for emphasis, we did not
identify the individual or entity making the statement except to
identify which subject group was represented by the response. Field
interviews were conducted after detailed preparation including the
gathering of background information from publicly available sources, the
development of a research plan and strategy and an assessment of
feasibility relative to the successful execution of the research plan.
The following sub-sections detail the preparation, sample selection and
location, and the execution and analysis approaches used to conduct this
examination. Limitations of this study are also explained.

**Preparation**

In order to gain an in-depth understanding of the program features,
operations and ownership characteristics of non-profit organizations
that provide DA on FHA-insured mortgages, Concentrance used a four-stage
process. First, a Public Documents Survey was conducted during which
Concentrance gathered information (e.g., websites, printed media,
brochures, IRS Form 990, etc.) on ten selected seller-funded DA
providers. Seller-funded DA providers were selected based on volume and
geographic considerations. We performed a preliminary assessment of
program design and function. Information provided in the IRS Form 990
illustrated financial records for the seller-funded DA providers which
Concentrance used in order to determine the growth of the major players
in the industry. The Public Documents Survey also provided insights on
the seller-funded DA industry regarding its size and the market-driven
sales techniques used by its members to garner market share and
customers.

Next, leveraging the insights gleaned from the survey of public
documents, we developed a Research Plan and a timeline for the
completion of the various tasks. Within the plan, the research
objectives were defined and the interview questions and coding forms
were developed. In order to understand the perspectives of each of the
target participant groups in the homebuying process, the team identified
key research objectives by subject group. In addition, key objectives
were developed for the overall examination. The knowledge, experience
and sensitivities of the participants were considered in formulating
these objectives and associated questions. The research objectives as
well as the lines of inquiry can be found in Appendices I and II
respectively.

The third step in the preparation phase was to conduct a feasibility
study to determine the probability of success in arranging and
completing interviews with the subject participants. HUD provided the
Concentrance team with a file containing information on all loans
insured by FHA where the Computerized Home Underwriting Mortgage System
(CHUMS) indicated that the DA came from a non-profit entity and the loan
was endorsed in the FY2000-2003 period. The property securing these
loans is located in the ten subject SMSAs. A detailed breakdown of the
sample data by SMSA is shown below in Figure 3.1. The ten subject SMSAs
were identified as having a high concentration of DA loans and were
representative on a geographic basis. Each record included information
on the homebuyer, property address, appraiser, mortgage lender and
underwriter as well as a flag indicating whether the property was new
construction. We considered all properties without the new construction
flag to be existing construction. The team conducted tests to determine
the likelihood of identifying homebuyer and seller contact information
using a third party vendor. After examining the results, we concluded
and the HUD GTM agreed that due to the difficulty in finding the new
location and phone numbers of sellers, greater success would be derived
from areas where the concentration of transactions was relatively high.
Therefore, it was decided that home seller focus groups would be
conducted in three SMSAs: Atlanta, Indianapolis and Salt Lake City. We
conducted homebuyer focus groups in all ten SMSAs. The feasibility study
results showed a high probability of success in arranging and completing
interviews with the remaining subject groups as outlined in the research
plan.

> **Figure 3.1**

  ------------------------ ---------------------- ----------------------- --------------------- ---------------------
  **[SMSA]{.smallcaps}**   **[No. of              **[Percentage of Total  **[Percentage of      **[Percentage of New
                           Cases]{.smallcaps}**   Sample]{.smallcaps}**   Existing Construction Construction in the
                                                                          in the                smsa]{.smallcaps}**
                                                                          smsa]{.smallcaps}**   

  **Atlanta**              23,884                 27.57                   78.71                 21.29

  **Charlotte**            6,007                  6.93                    36.36                 63.64

  **Dallas**               6,347                  7.33                    61.67                 38.33

  **Denver**               9,965                  11.50                   90.19                 9.81

  **Detroit**              2,580                  2.98                    99.15                 0.85

  **Indianapolis**         12,675                 14.63                   37.28                 62.72

  **Phoenix**              11,030                 12.73                   66.07                 33.93

  **Riverside**            3,762                  4.34                    92.74                 7.26

  **Salt Lake City**       6,108                  7.05                    88.59                 11.41

  **Seattle**              4,271                  4.93                    93.42                 6.58

  **Total**                **86,629**             **100**                 **70.81**             **29.19**
  ------------------------ ---------------------- ----------------------- --------------------- ---------------------

**Selection and Location Methods**

The Concentrance team used quota sampling and volume-based selection
methods for determining individual study participants. In quota
sampling, a sample was selected that included a minimum number from each
specified subgroup in the population. Quota sampling was used for
subject groups where all potential participants were equally involved in
seller-funded DA transactions or their level of involvement in the
transactions was unknown. These subject groups included homebuyers,
sellers and real estate agents. Volume-based methods were used when data
was available on the specific level of relative transaction volume among
entities or individuals within the subject groups. This was the case for
mortgage lenders, appraisers and, to a more limited extent, non-profits.
The volume-based method involved selecting a proportionate share of
participants that were involved with seller-funded DA transactions at
high and moderate volume levels to ensure that these different
perspectives were captured.

To locate, contact and recruit the appropriate entities in each SMSA, we
employed a range of methods. An overview of the selection and location
techniques for each subject group is outlined below:

-   **DA Providers**

> Concentrance identified the top ten seller-funded DA providers in each
> SMSA according to the sample data provided by HUD. For the smaller
> organizations operating on a regional scale, further internet searches
> were successful in identifying those entities. We contacted the
> executive director for each non-profit and arranged an interview with
> those willing to participate.
>
> To locate non-seller-funded DA providers, internet searches generated
> positive results in every SMSA. Complementary to this strategy, state
> and local governments were also contacted. Those individuals
> responsible for administrating the non-seller-funded DAPs were eager
> to participate in this study.

-   **Mortgage Lenders and Underwriters**

> The Concentrance team targeted mortgage lenders and Direct Endorsement
> (D.E.) underwriters. Concentrance uses the term mortgage lender to
> broadly describe all parties interviewed that were responsible for
> mortgage loan production. Production personnel interviewed included
> executive management, loan officers, brokers and branch managers. At
> times these individuals are identified specifically when the research
> team concluded that these personnel had different or unique
> perspectives on a particular subject area. To locate these parties,
> the Concentrance team leveraged the sample data provided by HUD. Those
> mortgage lenders originating the most loans with seller-funded DA and
> underwriters shown in the data sample with the highest volume of
> seller-funded loans assigned to their underwriter ID were identified
> for each SMSA. Within the mortgage lender organizations, the chief
> underwriters were contacted and those willing to participate were
> interviewed. In other cases, where the chief underwriter was not
> available, individual underwriters or the branch manager was
> interviewed.

-   **Homebuyers and Sellers**

> Concentrance used the SMSA sample data provided by HUD to locate and
> arrange interviews with homebuyers and individual sellers.
> Concentrance contracted the services of a third party vendor to locate
> the telephone numbers of the homebuyers and sellers using their name
> and address information. Furthermore, Concentrance hired focus group
> facilitators to recruit the homebuyers and the sellers once the
> telephone numbers were returned. Part of the recruitment process
> involved contacting the buyers and seller and verifying that they
> participated in a DA transaction. If they answered affirmatively, they
> were asked to participate in the focus group. Focus groups were held
> at the focus group vendors' facility and cash incentives were paid
> ranging from \$50 to \$60 to the participants. This recruiting
> strategy was successful for nine out of the ten SMSAs. The focus group
> facility in Riverside was not successful in recruiting homebuyers.
> This was primarily due to the small sample size, geographic dispersion
> of the targeted homebuyers and the absence of a centralized location
> to hold the focus group. In an attempt to remedy this situation, the
> HUD GTM provided Concentrance with information on an additional 564
> FHA loan records from FY2003 and FY2004 which were not only more
> recent but centrally located as well. The focus group facility was
> still unsuccessful in convening a focus group, so the team of
> researchers visited the homes of individual homebuyers that received
> DA and conducted one-on-one interviews.

-   **Builders**

> Concentrance used several different techniques to contact builders.
> During the base period of this contract, Concentrance audited 8,294
> loans involving DA and coded the results into a database. From this
> data set, a limited number of builders were identified. The marketing
> or sales managers were contacted in each SMSA and the team arranged a
> meeting with those willing to participate in the study. The majority
> of the builders interviewed that participated in the DAPs were located
> using internet searches. Many seller-funded DA providers listed the
> builders that they partnered with on their website. Those builders
> were also contacted and a meeting was scheduled with the cooperative
> parties. Concentrance also contacted major nationwide builders. Their
> corporate executives were asked to participate in the study. This was
> a successful approach as most top executives were willing to
> participate and granted telephone interviews to share their
> experiences with the DAPs. Finally, to acquire hands-on knowledge of
> the sales techniques used at the builder's site and to better
> understand the product being offered to the homebuyer, the team of
> researchers traveled to actual communities that offered the
> seller-funded DAPs. The researchers were able to interview a number of
> onsite sales agents. This provided a better understanding of what the
> homebuyer experienced when he/she was shopping for a home. It also
> gave the researchers insights into the condition of the subdivisions
> and the quality of home construction.

-   **Real Estate Agents**

> The National Association of Realtors® (NAR) helped in the process of
> locating Realtors®. Concentrance was able to obtain an extensive list
> of Realtor® emails from the NAR website. These Realtors® were then
> contacted, soliciting responses from those who had experience in
> working with DA. Selections were made from those who responded to the
> email and they were invited to attend a luncheon and participate in
> interviews in a focus group setting. In addition, we used
> 'realtor.com' and local Realtor® boards to supplement the list of real
> estate agent emails. This strategy worked well for all of the SMSAs.
> In instances where a real estate agent confirmed attendance to the
> luncheon but was unable to attend, in most cases phone interviews were
> scheduled for a later date.

-   **Appraisers**

> Using the data provided by HUD, Concentrance identified those
> appraisers that had more experience in working with DA. A ranking was
> made to prioritize those who had appraised the most properties with
> seller-funded DA in each SMSA. The top appraisers were contacted and
> meetings with those willing to participate were arranged.

**Field Work Execution**

Concentrance deployed teams of researchers to the targeted cities to
conduct the interviews with the selected participants. Interviews were
conducted between April and July 2004. Visits to each SMSA lasted for
one-to-two weeks and the data gathered was promptly coded after each
interview. The specific subjects for primary research interviews
included executives of non-profit organizations, representatives of
other housing and mortgage market entities that regularly facilitate
such programs as well as homebuyers and sellers.

Focus group interviews were conducted with homebuyers, home sellers and
real estate agents. This method of data gathering was selected because,
particularly for homebuyers and sellers, the interaction amongst the
participants in this setting often provoked more candor and meaningful
comments than in an individual interview. In addition, there was not the
element of professional risk that may have been present for other
subject groups. The benefits of this approach accrued from group
interaction when focusing on a series of related topics[^1]. The focus
groups were, for the most part, attended by 4 to 11 respondents in an
in-person group discussion led by an experienced moderator. Respondents
were encouraged to comment on or react to the views of other
respondents. Focus groups with homebuyers and sellers included only one
individual per household.

Individual interviews were deemed best for DA providers, builders,
underwriters, mortgage lenders and appraisers because their responses
were more likely to be influenced by the presence of other people and
because of the level of professional risk associated with some of the
anticipated responses. One-on-one interviews were conducted with
homebuyers on rare occasions. In cases where individual builders,
underwriters or real estate agents could not be available for in-person
interviews, in-depth telephone interviews were conducted. Overall, only
29 individuals were interviewed by phone; this compromised approximately
7% of the total interviews conducted by the Concentrance team.

Interviews were also conducted with selected housing industry
organizations in order to gather information to assist in the
identification of key issues to address in the formulation of the
research questions. These organizations included Fannie Mae, Freddie
Mac, HUD HOCs, one major private mortgage insurance company and a
non-profit housing trade association.

**Analysis**

Data collected during in-person, telephone, and focus group interviews
were coded as specified in the research plan using interview guides
containing specific lines of inquiry and response categories. These
lines of inquiry are listed in Appendix II. All responses, including
qualitative data, were stored in a database for further analysis. In
addition, quotes from actual interviews were transcribed from audio
tapes of interview sessions and input into the database.

For each subject group, responses in the database were systematically
analyzed using the following approach to qualitative analysis[^2].
First, the data were read to identify common themes and relations that
were then coded. The data were then re-ordered to reflect these key
themes. The re-ordered data were then reviewed, enabling the analysts to
detect prevalent and anomalous arguments and illustrative quotations.

A summary of observations across all subject groups is presented in
Section IV, "Collective Assessment and Analysis." A summary of responses
and observations for each subject group is detailed in Section V,
"Interview Results and Analyses." In addition, tabulation of
closed-ended, multiple-choice questions is provided in Appendix III.
Throughout the report summary of responses and associated charts reflect
answers to questions where ranges for responses tabulate to 100%. Many
questions enabled respondents to select more than one response or to
select no response resulting in final tabulations that may be greater
than or less than 100%.

In order to understand the unique perspectives of each participant in
the homebuying process, we identified key research objectives for each
subject group. Each of these research objectives is associated with a
set of research questions that we investigated with each group and can
be seen in Appendix I.

Qualitative data, such as those collected in this study, helped to
increase understanding about behaviors and outcomes that could not be
directly observed and measured. Individuals may have been unwilling or
unable to answer questions when posed directly, particularly if the
issues were complex or perceived as private, proprietary or threatening.
Thus, information of this sort was better obtained from qualitative
methods, which allow respondents to answer open-ended questions. Using
these methods, respondents were permitted a wider-range of responses and
thus more flexibility. Qualitative data had more depth and greater
richness of context. Qualitative studies have smaller numbers of
respondents than quantitative studies, and do not have the same
properties as represented in larger-scale field studies.

The interviews and focus groups were used to collect data on program
characteristics, participant relationships, seller-funded DA provider
structure and ownership and default and foreclosure risk associated with
seller-funded DAPs. The findings resulting from this data collection
effort were then used to facilitate and support our analysis of the
following factors:

-   The design and function of DAPs for each non-profit organization;

-   Ways in which each documented program may have affected the
    incentives of various parties in the homebuying and mortgage
    underwriting processes;

-   Ways in which program designs have safeguards built-in to mitigate
    any increased default risk that may result from minimizing the
    direct equity investment of the homeowner; and

-   Ways in which program designs or incentives created by individual
    programs lessen the underwriting quality of mortgages and/or
    increase effective homeownership costs to downpayment gift
    recipients.

The analysis of data collected from in-person, phone and focus group
interviews includes qualitative summaries and systematic coding via
content analysis. Qualitative summaries were used to analyze focus group
data, and include direct quotation of group discussions, where the group
was the unit of analysis. Content analysis was used to analyze
individual interview data and this produced some numerical descriptions
based on the range and frequency of responses.

**Limitations**

There are several limitations that should be taken into account when
interpreting the observations presented in this study. These limitations
are largely due to the qualitative nature of the research as well as the
sampling procedure we implemented.

First, it is important to exercise caution when using qualitative
research to make generalizations or to draw conclusions. There is no way
to assure that the number of individuals who participated in the
research is representative of the larger population from which they are
drawn. Given this limitation, these results should be interpreted as
directional rather than definitive characterizations of DAPs.

Secondly, the interpretation of qualitative research is more subjective
than the interpretation of quantitative data because the basis of
qualitative analysis is largely open-ended, verbal responses rather than
numerical ratings or rankings. In order to maximize the reliability of
these results, interview data and observations were coded in detail
using pre-established categories. These data, including open-ended
responses, were coded and assessed by multiple researchers. Where
possible, observations were validated by comparing and contrasting
responses across subject groups.

A third limitation is that the sample sizes used in this study do not
permit the meaningful numerical description of observations. In some
cases there are fewer than 25 observations in a particular subject
group, however, this number represents a significant percentage of the
seller-funded DA loans in the FHA portfolio. This is the case because
the 10 SMSAs selected for the sample by HUD represented the bulk of the
DA transactions insured during FY2000-2003. Regardless, the percentage
statistics presented in this report are included to add richness to the
qualitative data and to clarify differences between subject groups.
These data are not appropriate for statistical inference, and they do
not necessarily reflect the distribution of responses in the population.

An additional limitation is posed by the use of a non-probability sample
based on quotas and researcher judgment. However, due to the unique
nature of the samples necessary for this study, this approach may be
more reliable and representative than a probability sample. The sample
design and data collection were not intended for statistical analysis of
various market or loan characteristics. Furthermore, this sampling
approach does not allow us to determine whether our results would differ
if based on members of the population who did not participate in the
study, including potential subjects in areas outside of the 10 selected
SMSAs.

# iv. Collective Assessment and cross sectional Analyses

This section provides results of a collective analysis of all interview
data collected across all subject groups. First, this section presents a
detailed overview of the seller-funded DA process as it occurs in the
existing and new-construction home markets. Second, a cross-sectional
analysis is presented that summarizes observations across all subject
groups regarding seller-funded DA providers, appraised home values,
prices, DA homebuyers and properties involved in seller-funded DA
transactions.

**How It Works**

The chart below depicts on a high level the typical transaction process
for loans involving a seller-funded DAP. A more detailed process flow
can be found in Appendix IV.

**Figure 4.1**

In a typical seller-funded DA transaction:

1.  The homebuyer and seller agree on an initial sales price and
    contract terms for the property, in most cases with the assistance
    of a real estate agent.

2.  The mortgage broker or loan officer qualifies the homebuyer for a
    mortgage under an eligible mortgage program.

3.  The contract is adjusted by the real estate agent if the mortgage
    broker or loan officer determines that the amount required for the
    downpayment is more than the amount specified in the original sales
    contract. In most cases, the seller will only provide the additional
    funds if there is an increase in the sales price.

4.  The mortgage broker or loan officer coordinates completion of the
    enrollment form and gift application with the seller's real estate
    agent and homebuyer's real estate agent, respectively, for
    submission to the seller-funded DA provider. The seller agrees to
    make a donation and pay a service fee to the seller-funded DA
    provider if a sale is consummated. The donation from the seller
    averages about 3.5%, excluding the service fee paid to the
    seller-funded DA provider. The seller-funded DA provider uses a
    pre-existing pool of funds, cash or a letter of credit, to fund the
    gift to the homebuyer. The actual gift provided to the homebuyer at
    closing comes from the seller-funded DAP, not directly from the
    seller. In a few cases, a maximum gift amount was not specified by
    the seller-funded DAP, but in all cases the seller donation was
    equal to the gift amount provided by the seller-funded DA provider
    to the homebuyer plus the service fee. The seller-funded DA provider
    transmitted the downpayment gifts to the closing agent by wire
    transfer.

5.  The loan closes and the closing agent disburses the seller donation
    and service fee to the seller-funded DA provider usually within 72
    hours. The service fee is revenue for the seller-funded DA provider.

6.  The net proceeds of the sale, after paying all outstanding liens and
    transaction costs, are disbursed to the seller and the homebuyer
    moves into his/her new home.

7.  The donation from the seller is added to a pool of funds the
    seller-funded DA provider maintains to provide gifts and defray
    marketing costs of the program.

8.  As required under IRS regulations of non-profit entities, most
    seller-funded DA providers donate a portion of their service fee
    income to other charitable organizations.

Note: A real estate professional may assist the seller in enrolling the
property in the program and/or the homebuyer in selecting a mortgage
lender or broker that participates in an eligible mortgage program.
There are no income or asset requirements imposed on the borrower and no
limit to the number of times the homebuyer may use the seller-funded
DAP.

**Cross Sectional Analysis**

All subject groups were asked questions about three major focus areas
based on their experiences with a seller-funded DAP: characteristics of
seller-funded DAPs; characteristics of homebuyers who received
seller-funded DA; and characteristics of properties involved in
seller-funded DA transactions. The following summarizes responses across
subject groups about these issues.

Seller-funded Downpayment Assistance Characteristics

> **[Highlights]{.smallcaps}**

Out of 272 interviews with real estate professionals, including
appraisers, builders, mortgage lenders, underwriters, seller-funded DA
providers, and real estate agents, 80% reported that seller-funded DAPs
affected or inflated the sales price of the home. Approximately 65% of
respondents agreed that seller-funded DAPs affected or inflated the
appraised value of the home.

Figure 4.2 below illustrates these proportions and compares the
responses of selected subject groups. For example, approximately 90% of
mortgage lenders and underwriters responded that participation in a
seller-funded DAP inflated the sales price, but only 56% of mortgage
lenders and underwriters reported that seller-funded DAPs inflated
appraised values. Similarly, 96% of appraisers reported that
seller-funded DAPs inflated prices, while only 62% claimed that
seller-funded DAPs inflated appraised values. Seventy percent of real
estate agents reported that seller-funded DAPs inflated both sales
prices and appraised values. Builders are not represented in Figure 4.2
because many builders did not report on the relationship between
seller-funded DAPs and appraised values. However, 62% of builders
believed that seller-funded DAPs inflated the sales price of the home.

**Figure 4.2**

When describing their experiences with seller-funded DA providers,
respondents were asked what other parties or professionals they worked
with in these transactions. Figure 4.3 below compares seller-funded DA
providers, builders and appraisers in terms of the parties they
partnered with. Each bar shows the proportion of each of these subject
groups that reported working with each of the parties listed on the
X-axis. For example, according to the first group of bars, approximately
2% of seller-funded DA providers reported that they partnered with
appraisers, compared to 30% of builders who reported that they partnered
with appraisers.

Eighty percent of builders, and over 80% of seller-funded DA providers
and 97% of appraisers reported that they worked closely with mortgage
lenders, and more specifically loan officers and brokers. This suggests
that loans officers and brokers played a central role in seller-funded
DAPs. In addition to partnering with mortgage lenders, a large share of
seller-funded DA providers, builders and appraisers reported that they
partnered with real estate agents. It is clear from these results that
appraisers rarely dealt with seller-funded DA providers directly.

**Figure 4.3**

Builders were asked why seller-funded DAPs were attractive to them.
Other subject groups were asked to speculate as to why seller-funded
DAPs were attractive to sellers and builders. Responses to this question
are reported in Figure 4.4 below for appraisers, builders, seller-funded
DA providers and mortgage lenders. Over 80% of respondents in these
subject groups reported that these programs were attractive to sellers
and builders because they help sell homes faster. However, only 20% of
appraisers and 30% of mortgage lenders reported that these programs were
attractive to sellers because they improved the sales price. One on-site
sales representative for a builder, representing a mere 3% of the
builders interviewed, reported that these programs were attractive to
them because they improved the sales price. In addition, very few
respondents reported that these programs were attractive to sellers and
builders because of the assistance, i.e., the services provided by the
seller-funded DA provider.

Tax benefits and charitable contributions which were amongst the options
respondents could choose are not shown here because no respondents
reported that these programs were attractive because of tax benefits or
charitable contributions.

**Figure 4.4**

Note: Seller responses were collected in focus group interviews and
could not be quantified.

Characteristics of DA homebuyers

> **[Highlights]{.smallcaps}**

In addition to questions about seller-funded DA providers, home prices
and appraised values, these subject groups were asked about
characteristics of typical DA homebuyers. Many respondents, including
mortgage lenders, real estate agents, builders and seller-funded DA
providers described the typical DA homebuyer as low-to-moderate-income.
In addition, many respondents pointed out that these homebuyers were
disproportionately members of minority groups, particularly
African-American and Hispanic. In some markets, respondents mentioned
that DA homebuyers often had lower credit scores than other homebuyers.
For example, one lender stated:

A seller-funded DA provider said:

Another lender stated:

Subject groups had somewhat different opinions about requirements for
homebuyers to participate in seller-funded DAPs. These are summarized
below in Figure 4.5. Mortgage lender, builder and seller-funded DA
provider respondents were likely to agree that seller-funded DA was for
first-time homebuyers. Builders, who responded from a lending
perspective, reported that homebuyers had to contribute a portion of
their own funds for the downpayment. On the other hand, mortgage lenders
were more likely to report that seller-funded DA is restricted to
homebuyers within certain income limits. Mortgage lenders were also more
likely to report that homebuyers had to meet 'other' criteria, which
most described in terms of qualifying for an FHA-insured mortgage. Less
than 20% of seller-funded DA providers, builders and appraisers reported
that homebuyer counseling was required for homebuyers to receive
seller-funded DA.

**Figure 4.5**

Characteristics of Properties with seller-funded da

> **[Highlights]{.smallcaps}**

Subject groups were asked about characteristics of homes and
neighborhoods involved in seller-funded DA sales. In some markets,
seller-funded DA was more common with newly constructed home sales than
in sales of existing homes. In other areas, seller-funded DA tended to
be used for both new and existing homes in the 'starter home'
market---in cases where the house price is below the maximum FHA loan
limit. According to real estate agents, in some markets, including
seller-funded DA was very much a standard practice when selling newly
constructed homes. For the resale market, seller-funded DA was more
common when the resale market was slow, when the sale needs to be
expedited or when several previous purchase contracts were cancelled.

Respondents were asked whether seller-funded DA home sales were more
likely to occur in urban, suburban, transitional, high growth, mixed
residential and commercial or depressed areas. Figure 4.6 compares
neighborhood characteristics cited by appraisers, builders and mortgage
lenders. Appraisers, builders and mortgage lenders were most likely to
report that seller-funded DA transactions occur in suburban areas.
However, mortgage lenders were more likely than appraisers or builders
to report that seller-funded DA was more common in high growth and
transitional areas.

Regarding the profile of homes involved in seller-funded DA
transactions, appraiser respondents said:

Similarly, mortgage lender respondents reported:

**Figure 4.6**

# V. Interview Results by subject group

The following sections summarize responses and observations of
interviews for each subject group. Unless otherwise noted, the summaries
are a representation of the majority response of the subject groups as
they relate to the specific research objectives applicable to the
subject group. In addition to the summary of responses, each section
also provides an interpretive qualitative analysis of observations for
each subject group. In both instances, quotes from respondents were used
for emphasis or to illustrate issues or recommendations. These
particular quotes were selected because they reflect the broad range of
popular opinions expressed during the interviews, and they serve to
validate the analysis. In the Researchers' Assessment subsection, the
information gathered was not a direct response to a question in the
interview guides, but provided depth and clarity to the issue being
discussed. This depth and clarity was essential in capturing the tenor
and scope of issues or recommendations made by group participants. In
some cases we were able to identify the level or degree of sentiment
being expressed by members of a particular group. In other instances,
this level of identification was not possible or was inconsistent with
our pledge of confidentiality to group members.

Each section begins with a brief description of the subject group
followed by subject group highlights based on both interview responses
and observations in the Researchers' Assessment. The next subsection,
Summary of Responses, responds to subject group objectives developed in
the research plan. The Researchers' Assessment completes the section.

## Non-Profits

We interviewed 41 non-profit organizations engaged in providing DA to
prospective homeowners in the ten-targeted SMSAs. The non-profits fell
into one of two categories, seller-funded or non-seller-funded. If the
non-profit received its funding for DA from the property seller it was
classified as a seller-funded DA provider. If the non-profit received
its funding from state, local or other charitable sources it was
classified a non-seller-funded DA provider. In instances where the
non-profit could fit into both categories, we classified the
organization as a seller-funded DA provider. Most of the seller-funded
DA providers we interviewed operated nationally and, although they had
local representatives in many of the markets we visited, we were limited
to interviewing the central headquarters management only. Concentrance
tried to contact field personnel but central headquarters management for
the seller-funded DA providers preferred answering our questions
directly. Some of the non-seller-funded DA providers were part of a
national network of non-profits; however, their programs were geared
towards the community in which they were located. Although a few of the
seller-funded DA providers interviewed with national operations had an
impressive portfolio of charitable projects; they limited these
charitable activities to the community in which they were located.
Several respondents discussed ongoing projects or plans to expand their
charitable activities for better alignment with sources of revenue. A
couple of seller-funded DA respondents permitted any party to the
transaction -- the buyer, seller, mortgage broker, loan officer or real
estate agent -- to designate a charity to receive a portion of the
application processing fee.

According to some of the traditional non-profits acting as seller-funded
DA providers returning resources generated from the downpayment
assistance program to the local community was one of the primary reasons
for their entrance into the seller-funded downpayment assistance arena.

**Seller-Funded DA providers**

These charitable organizations are classified under IRC Section 501 (c)
(3) of the Internal Revenue Service (IRS) Code. They are able to provide
DA to homebuyers through their relationship with mortgage lenders of all
types and sizes. These mortgage lenders are authorized to originate
and/or deliver loans for insurance endorsement directly to FHA/HUD or
through a variety of retail/wholesale networks or aggregators in the
industry. HUD underwriting guidelines outlined in Handbook 4155.1 REV-5
permit an outright gift of the cash investment to the borrower if the
donor is a charitable organization. Because seller-funded DA providers
meet HUD requirements for classification as charitable organizations,
mortgage brokers and wholesalers use them to provide the cash investment
for the borrower. Seller-funded DA providers charged an application fee
to provide the cash investment ranging from around \$300.00 up to .75%
of the sales price of the property. We carefully examined seller-funded
DAPs offered by twenty-two seller-funded DA providers. These providers
were responsible for 73.76%, or 63,895 of the 86,629 FHA-insured loans
with seller-funded DA in the ten SMSAs identified by HUD. These loans
were endorsed between FY2000-2003.The DA provider was indicated in only
5,900 or 6.81% of the remaining 22,734 loans. However, the research team
did not interview these DA providers. The top ten volume-based
seller-funded DA providers were responsible for 96% of the 63,895 DA
transactions accredited to the twenty-two providers interviewed.
Furthermore, the top three seller-funded DA providers were responsible
for 75% of these transactions. In nearly every interview the top three
seller-funded DA providers were mentioned as the industry leaders
relative to services or products offered. However, the smaller DA
providers tended to be at the forefront of driving down application
processing fees to current levels.

> **[Seller-Funded DA Provider Highlights]{.smallcaps}**

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 22 seller-funded DA
providers. There were five key research objectives for seller-funded DA
providers. Following are the objectives and corresponding results.

**Objective 1**

[]{.mark}

> []{.mark}
>
> []{.mark}
>
> []{.mark}

[]{.mark}

Results of interviews with seller-funded DA providers indicated that
they rarely worked directly with homebuyers or sellers. Instead,
seller-funded DA providers targeted real estate industry professionals,
such as mortgage lenders, real estate agents, and builders. For example,
79% of respondents reported that they partnered with mortgage lenders.
Forty-six percent partnered with real estate agents. Approximately 65%
of seller-funded DA providers reported that they partnered with
builders. A few seller-funded DA providers mentioned government agencies
and sellers as partners.

> []{.mark}

Many of the seller-funded DA providers interviewed offered homebuyer
counseling and/or homeownership education. However, the vast majority
did not require the homebuyer to participate in their counseling or
education program in order to receive DA. In all but a couple of cases
DA providers that offer counseling and homeownership education provide
the service through a web-based environment or over the telephone.
Individualized homebuyer counseling programs tended to focus on the
particular issues in the borrowers' profile; credit, assets and
capacity, while homeownership education tended to focus on global
mortgage principals and practices. There was only one seller-funded DA
provider interviewed who [required]{.underline} counseling. This
provider indicated that:

[]{.mark}

[]{.mark}

[]{.mark}

Several seller-funded DA providers offered MPPI policies covering
involuntary loss of job for homebuyers. A few seller-funded DA providers
also offered loss mitigation services. When asked if seller-funded DA
providers were informed of borrower defaults, the majority of them
(i.e., 86%) reported that they received no information about loan
performance from their mortgage lender partners after settlement.

[]{.mark}

A seller-funded DA provider commented:

[]{.mark}

> []{.mark}
>
> []{.mark}
>
> []{.mark}

**Objective 2**

Results of interviews with seller-funded DA providers indicated that
they rarely work directly with homebuyers or individual sellers.
Seller-funded DA providers identified potential sellers and homebuyers
through their partners, directly from mortgage brokers and lenders and
indirectly from home builders/sellers and real estate agents.

According to seller-funded DA providers, homebuyers and sellers most
commonly found out about their seller-funded DAPs from mortgage lenders
and real estate agents. Beyond these sources, homebuyers found out about
seller-funded DAPs through word-of-mouth from previous clients and media
advertisements, including brochures and billboards. The following are
specific quotes from seller-funded DA providers:

The seller-funded DA providers also cited their own outreach and
networking activities as ways to attract homebuyers and sellers.

[]{.mark}

Seller-funded DA providers stated:

**Objective 3**

Most of the seller-funded DA providers reported that they targeted
mortgage lenders as their primary customer. These organizations also
often partnered with builders. There was no reported partnering between
real estate agents and seller-funded DA providers; however, some
seller-funded DA providers conducted training on their programs for real
estate agents. These parties were in the best position to explain how
the program worked for prospective homebuyers and sellers. As stated
above, 79% of the seller-funded DA representatives interviewed responded
that they partnered with mortgage lenders. These results strongly
suggest that the key relationship for the seller-funded DA provider is
with the mortgage lender, and not necessarily with any of the other
parties. The one exception to this suggestion is the builder. In some
cases, the seller-funded DA provider forms a direct relationship with
builders, but in most cases the mortgage lender is part of the same
ownership entity as the builder. Thus, even in these cases, the mortgage
lender is still the key participant and decision maker in the
seller-funded DA provider selection and market share equation.

> []{.mark}

None of the seller-funded DA providers mentioned working directly or
indirectly with appraisers in seller-funded DA transactions.

**Objective 4**

Seventy percent of seller-funded DA representatives interviewed reported
that participation in the seller-funded DAP does inflate the sales price
of the home. Respondents gave a mix of answers when asked whether
seller-funded DA affected the appraised value of the home.

Seller-funded DA providers said:

**Objective 5**

Almost all of the non-profits interviewed answered "yes" when asked if
current seller-funded DAPs were a good way to expand homeownership
opportunities.

These respondents offered several comments and recommendations about
existing programs.

They said:

Although this respondent did not have a specific recommendation, he
commented that:

**[Researchers' Assessment]{.smallcaps}**

The seller-funded DA process is described in the "How It Works" Section
of this report. Most seller-funded DA organizations were created solely
to act as a conduit between the seller and the homebuyer to indirectly
convert a contribution from the seller into a gift for the homebuyer. As
outlined in "How It Works," the money does not flow directly from the
seller to the homebuyer. When we spoke to the seller-funded DA
providers, who agreed to be interviewed, some of them went to great
lengths to try to distinguish themselves from other seller-funded DA
providers. When asked which other seller-funded DA providers they would
consider partnering with to provide oversight to the seller-funded DA
community, only a few organizations were mentioned repeatedly. Only one
seller-funded DA provider allowed us to speak with a field
representative. Even in this instance, the field representative was
selected as a replacement for management. This company's management
refused to meet with the research team. The inability to meet with both
management and field personnel prevented the research team from fully
exploring the similarities and/or differences in program design and
actual program operation.

Most of the seller-funded DA providers suggest that *in lieu* of
reducing the sales price, the DA is best accommodated by continuing to
market the property at the "full list price". Basically if the purchaser
is willing to pay "full list price" the seller agrees to offer DA. The
seller-funded DA providers reason that the seller was going to lower the
sales price anyway, but offering seller-funded DA allows them to receive
the "full list price" for the property and also support homeownership.
They also point out that the seller is not adding the DA to the sales
price, they are simply selling the property at the "full list price"
which generates the funds for the seller-funded DA. The sellers' other
option is to lower the sales price and receive less in sales proceeds.
They suggested that paying the "full list price" is a tradeoff the
purchaser is willing to make for the seller providing the DA. Although
this transaction design structure was supported by most of the
seller-funded DA providers, research respondents reported that the
seller-funded DA is a reactive part of the transaction much more often
than it is a proactive part of the transaction. That is, the
seller-funded DA cost was added to the sales price after the seller was
notified of a pending purchase offer from a purchaser that needed or
wanted DA.

While some seller-funded DA providers have field representatives that
work as independent marketing contractors in most major markets, they
typically do not have the ability to deliver grassroots services based
on local needs. Therefore, providing comprehensive, in-person services
such as counseling or homeownership education is either not practical or
logistically feasible given their current centralized organizational
structure. Borrowers who reported receiving counseling/education, in
most cases did not receive it from the seller-funded DA provider. In
other words, the counseling/borrower education was not a pre-requisite
for receiving seller-funded DA. In all but a couple of cases
seller-funded DA providers that offer counseling and homeownership
education provide the service through a web-based environment or over
the telephone. Only one small, seller-funded DA provider said they
[required]{.underline} internet-based borrower pre-purchase counseling
through a third party vendor. Another regional seller-funded DA provider
supplied documentation showing that they counseled nearly 4,500
prospective homeowners in 2003. Their face-to-face counseling program
was part of a separate, affiliated business - not part of their
seller-funded DAP. When asked, they could not confirm how many of these
prospective homeowners receiving face-to-face counseling also received
DA.

[]{.mark}

In spite of these observed impediments many of the seller-funded DA
providers insisted that counseling and borrower education were a missing
aspect of the current seller-funded DAP model. They recalled a time when
counseling was a requirement for DA. However, as the program evolved
over time, competition for business and the avalanche of new entrants
into the program gradually eroded their ability to require counseling as
a pre-requisite for receiving seller-funded DA. A couple of
seller-funded DA providers also mentioned HUD's shift in policy when
they abolished incentives for borrowers receiving pre-purchase
counseling. Also, most of the seller-funded DA providers said it did not
help that the mortgage lenders did not require counseling or structure
the settlement transactions to facilitate counseling prior to
settlement. They said that the average lead-time from notification of
transaction settlement to funding was 24 to 72 hours. They stated that
this is not nearly enough time to contact the borrower and arrange or
complete a counseling program. Most of the high volume seller-funded DA
providers added that the counseling and borrower education they offered
was available to the general public. The collateral materials explaining
the seller-funded DAP and detailing any other services they offered was
geared primarily to their industry partners, not to individual
borrowers. It was their understanding and expectation that the mortgage
lenders used the information to prepare the borrower for sustainable
homeownership. Several seller-funded DA providers were adamant about not
interjecting themselves into the role of determining what eligibility
criteria the borrower had to meet to quality for FHA-insured mortgage
financing. They seemed very amenable to leaving that determination to
the mortgage lender. Their stated primary role in the seller-funded DA
transaction was to provide the funds for the downpayment.

When we tried to determine the actual size of the seller-funded DA
industry, no one could tell us how many seller-funded DA providers were
approved by mortgage lenders to provide DA. They estimated as few as one
hundred and as many as five to six hundred. But they all agreed that the
industry needed guidance and regulation from HUD. Some of the
seller-funded DA providers were established, well-known charitable
organizations. Their primary motivation for becoming a seller-funded DA
provider ranged from fundraising to support their other charitable
activities to a moral defense against national seller-funded DA
providers taking money out of their community without helping to meet
any local charitable needs.

The biggest point of contention among the interview participants was how
market share was being contested. It appeared that seller-funded DA
providers were in the middle of a price war based on the application
processing fee charged. Some seller-funded DA providers said they
attempted to distinguish themselves by customer service, not price,
while others were resolved to compete on price alone. Customer service
was generally defined as timely funding of gift requests,
state-of-the-art automated application processing and training support
for mortgage brokers, loan officers and real estate agents. Mortgage
lenders in every market related that if one seller-funded DA provider
lowered its fee and they asked the other seller-funded DA providers to
match that price, they usually did. We received the same type of
feedback from builder/sellers. Several of the larger seller-funded DA
providers expressed concern about the rapid descent in the gift
application processing fee charged by some of the smaller seller-funded
DA providers. In a number of cases the seller-funded DA providers
offered the builder/seller a volume discount. Discounts and other
premiums were also cited as factors in the movement of market share from
one seller-funded DA provider to another. Several high-volume
seller-funded DA providers complained that some competitors were "buying
the market" which meant the individual in a position to determine which
seller-funded DA provider was used may have been influenced by
incentives provided.

Most seller-funded DA providers reported in their website program
material that the seller, mortgage lender, homebuyer or real estate
agent could pay the gift application processing fee but our field
research confirmed that the fee was always a part of the donation by the
seller.

Most of the seller-funded DA providers have created elaborate centrally
located processing programs designed to reduce the number of employees
needed to meet volume demands and reduce cost. Staffing varied greatly
among seller-funded DA providers. A few seller-funded DA providers
directly employed only one employee and contracted for all other
services through affiliates or subsidiaries. These contracted services
included staffing, marketing and application processing. We were told
that the actual cost to process an application (including associated
marketing costs) ranged from a low of \$.12 cents of every dollar
collected to as high as \$.93 cents of every dollar collected. Several
seller-funded DA providers used their revenue from DA application
processing fees to fund other charitable activities. The chart in
Appendix V shows revenue for several seller-funded DA providers and the
percent of the revenue devoted to marketing and processing expenses. The
relationship between the seller-funded DA provider (i.e., non-profit)
and the marketing arm varied from group to group but it was not uncommon
for the principals of the marketing company to also be executives or
directors of the seller-funded DA provider. In some cases these
executives and directors received compensation from both the
seller-funded DA provider and the for-profit marketing group.

Seller-funded DA providers increasingly report offering payment
protection plans at "no cost to the buyer" that promise to pay the
borrower's mortgage payments in the event of default due to job loss or
other circumstances beyond the borrower's control. These programs are
not really "free to the buyer." The seller must pay for them and the
seller through an increase in the sales price recoups those charges. The
seller-funded DA providers indicated that participation in the MPPI
program is limited.

MPPI, as described by seller-funded DA providers, offers little
protection to the mortgage lender or borrower. Respondents reported that
these policies had too many exclusionary provisions. Although these
exclusionary clauses are the industry standard they offer little
protection to the mortgage lender or the borrower. In addition, we were
unable to identify a clearly defined claims process for borrowers to
follow. The lack of a process for claims adds to the ineffectiveness of
the policy as a risk mitigation tool. Examples of these exclusions
include:

-   A vesting period of two months in which the borrower must remain
    employed,

-   A requirement that loss of employment must be involuntary and the
    borrower is not eligible to receive any benefits unless unemployment
    has persisted for at least 30 days,

-   An exclusionary clause that excludes coverage for job loss due to
    medical reasons or disability.

In addition to the exclusions outlined above other limiting conditions
of this type of insurance include, a \$1,800 cap on the maximum monthly
mortgage payment covered and a maximum of six payments during the
twelve-month coverage term. Seller-funded DA providers suggested that
the claims rates on these policies are very low and complained that the
claims paid by the MPPI provider were disproportionately small compared
with the premiums paid for the insurance. Some seller-funded DA
providers confided that the MPPI policies were more of a marketing tool
than a risk mitigation benefit.

The MPPI was designed initially to offset the impact of early payment
defaults to the mortgage lender. However, the mortgage lender plays no
role in ensuring that the borrower files a claim for benefits in the
event of default. One major mortgage lender stated that they did not
want to be involved with promoting these policies or with advising
delinquent borrowers on the possibility of benefits because they did not
want to be perceived as an endorser of such policies. According to most
respondents in the industry the MPPI is not a cost-effective risk
mitigation tool.

**Non-Seller-Funded da providers**

> Most of the non-seller-funded DA charitable organizations, classified
> under IRC Section 501 (c) (3) of the Internal Revenue Service (IRS)
> Code, received their funding from state, local and other charitable
> sources. They primarily focused on providing a myriad of services
> targeted to low and moderate-income families in the surrounding
> community. Some of these non-profits were part of a national network
> of non-profits and moved easily between conventional lending programs
> and government-funded programs. Several of the organizations were
> approved by HUD to act as a mortgagor, provide secondary financing and
> purchase HUD Homes at a discount for resale to low-income first-time
> purchasers.
>
> **Non-Seller-Funded DA Provider Highlights**

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 19 non-seller-funded
non-profits. There were five key research objectives for
non-seller-funded DA providers. Following are the objectives and
corresponding results.

Non-seller-funded DA providers operate programs sponsored and funded by
state and local government housing organizations. These programs provide
DA funds for homebuyers but sellers do not contribute the funds. In many
cases, the funds are provided by HUD Community Development Block Grant
(CDBG) funds, HOME funds, Federal Home Loan Bank (FHLB) funds, and local
government sources such as general revenue and bond funds, and
contributions from banks, foundations and community development
organizations. In one government program example, the loan has an
interest rate tied to the appreciation rate of the home. When the loan
is repaid, the majority of interest received by the provider agency is
reinvested in the loan pool.

**Objective 1**

Non-seller-funded DA providers offered pre- and post-purchase counseling
and homeownership education programs. Because DA provided in these cases
was not funded by seller contributions, these organizations did not
provide any information to home sellers or builders.

**Objective 2**

Non-seller-funded DA providers did not rely on sellers in the provision
of DA. These organizations recruited homebuyers through a variety of
community outreach activities including media advertisements, homebuyer
fairs, brochures, flyers and through other community organizations.

Compared to seller-funded DAPs, non-seller-funded DAPs were more likely
to have location restrictions. Also, these programs were often
restricted to first-time homebuyers or required that homebuyers have
low- to moderate-incomes. In addition, funds provided for DA were often
in the form of a forgivable second mortgage. In these cases, homebuyers
were required to live in the home for a pre-determined number of years,
after which they did not have to repay the second loan. In one example,
a local government-sponsored program provided 5% closing cost assistance
as a 'soft' second mortgage which was forgivable after 10 years.

In another example, homebuyers were given a \$10,000 forgivable loan,
(up to \$15,000 for police officers). If the owner moved within the
first 5 years, they had to pay the loan back at a 3% interest rate. Each
year thereafter, 20% of the loan principal was forgiven. Like most of
these programs, participation was governed by both income and location
restrictions. After the 10th year, the loan was fully forgiven. Only
individuals living in certain areas were allowed to participate.

Some programs also required that homebuyers contribute a certain amount
of their own funds. For example, one such program required the homebuyer
to put in \$1,000. They were not permitted to take out a cash advance on
their credit card to cover the cash requirement. If the borrower met all
other program requirements, they were then given a one-year forgivable
note for the balance of the downpayment and closing costs.

Respondents in this group noted several disadvantages of seller-funded
DAPs.

> []{.mark}

They said:

In particular, respondents reported that many seller-funded DAPs did not
require counseling or homeownership education. They believed that this
creates a pool of unprepared homebuyers. To address this problem, these
respondents recommended that seller-funded DA providers should also be
required to provide pre- and post-purchase counseling and/or
homeownership education.

**Objective 3**

All of the non-seller-funded DA providers said they left all the
underwriting issues to the mortgage lender. Their primary concern was
getting the homebuyer ready for sustainable homeownership through pre-
and post-purchase counseling and debt management training. Interviewees
indicated that there was some limited contact with the real estate agent
but almost no contact with the appraiser. Furthermore, the appraiser
works for the mortgage lender and was therefore part of the underwriting
process. Non-profits described their role as that of an intermediary to
make sure the borrower was prepared both financially and emotionally to
assume the responsibilities of homeownership and the purchase price of
the property reflected fair market value for similar properties in the
market. Several non-seller-funded DA providers said they employed
personnel familiar with the valuation process.

Loan performance defines success for these programs; it drives their
ability to attract funding and sustain program operations. In addition,
the better the loan performance the easier it becomes to get mortgage
lenders to look at different underwriting options to expand
homeownership.

**Objective 4**

These respondents suggested that the structure of seller-funded DAPs
caused house prices to be artificially inflated. As a result, borrowers
were often in a negative equity position. In the non-seller-funded DAPs,
respondents said there was no relationship between the DA and sales
price. The borrower was in a much better position to negotiate a fair
price for the property.

Most of the non-seller-funded DA participants that were interviewed
indicated that they employed staff familiar with the appraisal process
as part of their quality control to make sure the property reflected
prices in the market. They felt that this insured that the borrower was
not overpaying for the property. Since the borrowers' assistance was
need-based, the more a particular borrower needed in assistance the
fewer borrowers the program could reach. Participants also said that,
unlike the seller-funded DAPs, their borrowers had real equity in the
home.

Several respondents added that sellers had a tendency to attempt to
increase the sales price of the property because they viewed the
borrower DA as "free money" the borrower has to use. A non-seller-funded
DA provider expressed the sellers' feelings as:

A city agency official operating a non-seller-funded DAP cited ways to
ensure the sales price was fair to the homebuyer. She commented that:

**Objective 5**

Non-seller-funded DAP executives recommended that in order for DAPs to
work, homebuyers should be required to contribute their own funds and
attend counseling and/or homeownership education. These respondents also
recommend that DA be provided in the form of a forgivable second loan
rather than an upfront gift.

For example, one respondent stated:

**[Researchers' Assessment]{.smallcaps}**

We interviewed non-seller-funded DA providers in each of the targeted
SMSAs. The programs they offered to assist prospective homeowners always
included some form of counseling and/or homeownership education offered
directly or indirectly. The funding sources they used to provide the DA
usually required counseling but did not always specify a method of
delivery. Several non-seller-funded DA providers suggested (and most
mortgage lenders agreed) that face-to-face counseling was the most
effective way to prepare first-time homebuyers for the rigors of
homeownership. They said that the homebuying process includes many
arcane terms not used in everyday life and both new and repeat
homebuyers were awed by the homebuying process. They suggested that
every effort should be made to prepare borrowers for sustainable
homeownership.

Real estate agents also supported the non-profits' position that the
failure to adhere to this simple commitment to borrower education will
adversely affect future business opportunities. They indicated that it
is much harder to sell a house in a declining community if the decline
is caused by the presence of vacant and boarded homes. Both real estate
agents and appraisers reasoned that non-seller-funded DA was preferable
because it greatly reduced the probability that sales price or appraised
value of the home would be inflated.

## Mortgage Lenders and Underwriters

As outlined in the "Methodology" section of this report, we initially
sought to interview underwriters only. However, our preliminary
fieldwork indicated that mortgage lenders (i.e., production employees)
played a more significant role in seller-funded DAPs. In most cases, the
loan officer or mortgage broker selected the seller-funded DA provider
and potentially influenced the valuation process according to interview
responses from appraisers. Some appraisers stated that loan officers and
mortgage brokers exerted considerable influence over their work and
often exerted undue pressure with threats to withholding payment from
appraisers unable or unwilling to match the sales price. Underwriters
also reported situations where lender management tended to encourage
more flexibility in the underwriting process to assuage concerns raised
by high production loan officers. All respondents reported that loan
officers were commission-based employees. Their compensation was
directly related to their production levels whereas underwriters were
salaried employees and their continued employment was tied to loan
performance. In several instances lender management installed controls
and procedures designed to separate the role of the loan officer,
underwriter and loan processor.

> **Mortgage Lender and Underwriter Highlights**

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 30 mortgage lending
professionals including 16 underwriters and 14 mortgage lenders (i.e.,
mortgage executives and other production personnel). They were selected
based on the number of loans with seller-funded DA. These mortgage
lenders represent 24% of the 86,629 loans in the sample. Underwriters
were responsible for 22% of the 38,672 loans in the sample that were
identified by underwriter ID. A number of mortgage lenders declined to
participate in the study. There were three key research objectives for
mortgage lenders and underwriters. Following are the objectives and
corresponding results.

**Objective 1**

Mortgage Company executive and underwriter respondents reported that
risk profiles of homebuyers receiving seller-funded DA were often
different from other homebuyers, particularly conventional borrowers. In
general, they pointed out that homebuyers receiving seller-funded DA
typically had lower FICO scores than other borrowers.

One mortgage lender reported that:

However, mortgage lenders had differing opinions about whether the
credit profiles of seller-funded DA homebuyers differ from other FHA
borrowers.

For example mortgage lenders stated that:

While underwriters indicated that:

Mortgage company executives who stressed seller-funded DA homebuyers had
similar risk profiles to other borrowers said:

**Objective 2**

In general, underwriters reported that they treated seller-funded DA
loans differently than other loans. There were often additional
requirements for seller-funded DA transactions that were designed to
offset potential added risk.

Examples from underwriters included:

Several mortgage company executives mentioned that they recommend and,
in some cases, required that seller-funded DA borrowers participate in
homebuyer counseling. They also reported that they did not allow a 2-1
temporary interest rate buydown in conjunction with seller-funded DA.

One respondent indicated:

**Objective 3**

Mortgage company executives and underwriter respondents expressed mixed
emotions about seller-funded DAPs as a way to provide sustainable
homeownership opportunities and made a number of recommendations for
ways to improve these programs.

Some underwriters' comments included:

Underwriters and mortgage company executives also mentioned problems
with the program related to the appraisal process and the lack of
borrower equity:

Several mortgage company executives recommended that HUD provide more
guidance and enforcement in its underwriting guidelines about
seller-funded DA gifts. Others compared seller-funded DA to other 100%
financing programs.

[]{.mark}

[]{.mark}

Some mortgage company executives suggested that:

In addition, mortgage company executives mentioned that borrower
counseling should be required for these programs.

In their opinion:

**[Researchers' Assessment]{.smallcaps}**

The initial research design called for interviews with DE underwriters
only. However, our fieldwork revealed that commission-based mortgage
brokers and loan officers played a more significant role in the
seller-funded DA process than indicated from the Public Documents
Survey. As a result of their increased role, we decided to augment our
DE underwriter interviews by adding participants from the production
side of the business, namely mortgage brokers, loan officers or mortgage
company executives. Underwriters provided insights about the quality of
the borrower and related issues about appraised property value. They
spoke of their frustrations due to a perceived lack of support from
management for them acting as the gatekeeper for loan quality as
required by their DE designation. In several cases, underwriters said
that if they did their jobs too well, which meant they either questioned
too many loans or appraised values or rejected too many loans or
appraised values, the loan officer or mortgage broker complained to the
mortgage company executive management and they were usually asked to
show more flexibility. In instances where the appraised value was
questioned, most appraisers said that underwriters generally sided with
them.

In most of the mortgage lender operations that we observed during our
examination, loan officers were allowed to exert influence or control
over the collateral and underwriting processes. We encountered a number
of situations where appraisers said that mortgage brokers or loan
officers either withheld payment or conditioned payment on a certain
appraisal outcome. This was reported to be less likely if the loan
officer worked for a wholesale or correspondent lender versus a mortgage
broker.

Underwriters told us of other situations where they did not feel
supported by management if they challenged an appraised value on a
property with seller-funded DA. They explained that this lack of support
was not limited to loans with seller-funded DA but the pressure was more
intense on these loans because seller-funded DA was used as a marketing
tool. Underwriters reported that it was much harder to detect the upward
pressure that seller-funded DA had on appraised values with new
construction when compared to existing construction. They said the
market value "stretch" on existing construction was present but it was
less pronounced (i.e., the market value range was not as wide).

We interviewed at least one high volume FHA mortgage company executive
who took the initiative to separate these functional areas. They changed
the orientation of quality control to compliance. They removed the
opportunity for the loan officers to exert pressure on the appraiser to
"bring in the value." They also created a different reporting
relationship for the loan processor thus eliminating another opportunity
for the loan officer to circumvent the process by wielding control over
the person with direct responsibility for ordering the appraisal and
approving payment. Another mortgage company executive used a slightly
different but effective approach to the problem. They simply better
defined the roles of all parties in the loan production process. The
defined role of the loan officer was to produce product (i.e., originate
loans) and they should not be encumbered by any of the other operational
processes in production or underwriting. Taking time to talk to
appraisers was considered an encumbrance to production.

Mortgage company executives spoke more globally about seller-funded DA,
market share and selection criteria for seller-funded DA provider. Very
few mortgage company executives actually expressed a favorable
impression of the seller-funded DA providers. The said they used the
program because it was approved by HUD but would prefer to use a program
that did not require a downpayment or one of the many competitive
conventional products on the market. In most instances they expressed
very little confidence that the seller-funded DAP was going to survive
introduction of the zero downpayment program proposed by the
Administration.

Most mortgage company executives expressed awareness of the potential
for adding the seller-funded DA to the sales price of the home but said
they relied on the appraiser to independently determine a fair market
value for the property. One executive said that based on examination of
performance data provided by their principal investor, they implemented
more stringent requirements for loans with seller-funded DA versus their
regular FHA-insured loans. Another builder/seller mortgage company
executive said that an earlier analysis showed that the seller-funded DA
loans performed worse than their regular FHA-insured book of business.
The executive said she was optimistic that the recently implemented
underwriting changes and operational controls improved performance of
the seller-funded DA loans; however, no additional analysis was
conducted to determine if performance actually improved.

Most mortgage company executives spoke about their conventional suite of
products as a viable outlet for some FHA type borrowers. These products
were used exclusively to serve this population of borrowers or used in
conjunction with non-seller-funded DA. When asked about the difference
between the credit profiles of their first-time or starter homebuyers,
most mortgage company executives said their borrowers tended to have a
higher average FICO score than the FHA-insured borrowers. In fact, the
general processing approach was to try to fit the borrower into a
conventional product first and if that didn't work see if they qualified
for FHA. As a last resort, some mortgage company executives said they
used a sub-prime product to assist the borrower.

As noted earlier in the "How It Works" Section of this report, the
mortgage lender (i.e., mortgage broker or loan officer) has considerable
power in determining the level of participation for various parties in
the transaction. In addition to selecting these parties, they can
potentially control the flow of compensation to these participants in
the process: the appraiser; the seller-funded DA provider; and, to some
extent, the real estate agent. Appraisers reported that mortgage brokers
or loan officers routinely conditioned receipt of payment or additional
work on their ability and willingness to "bring in the value." In a
related conversation, real estate agents said that although they
understood the role of their mortgage broker or loan officer in
determining how much money the borrower needed for the transaction, they
complained about these individuals telling borrowers about seller-funded
DA when the borrower did not need the assistance. Several non-profits
acknowledged that the mortgage broker or loan officer either selected
the seller-funded DA provider or played a major role in selecting it.
Mortgage company executives also acknowledged that the loan officer or
mortgage broker could have a regional seller-funded DA provider added to
their list of approved seller-funded DA providers. Contrary to our
initial determination based on publicly available data, the mortgage
broker or loan officer is the key driver in the seller-funded DA
process, not the seller-funded DA provider as initially indicated by the
public documents survey. We even found one mortgage lender with an
internal or affiliated seller-funded DA provider.

A number of mortgage company executives interviewed made positive
statements about the benefits of counseling. No one provided a detailed
rationale for this opinion but they appeared to recommend
counseling/borrower education for intuitive reasons; i.e., it couldn't
hurt! Some mortgage company executives also hypothesized that
counseling/homebuyer education could improve loan performance.

## Homebuyers

[]{.mark}

Homebuyers participated in facilitated focus group sessions in nine of
the ten SMSAs. The team encountered a problem in Riverside due to the
small sample size, geographic dispersion of the targeted homebuyers and
the absence of a centralized location to hold the focus group. The
geographic dispersion of the limited Riverside SMSA pool of homebuyers
forced the team to conduct face-to-face interviews. Therefore, as
outlined in the "Methodology" Section, we used FY2003 and FY2004 data to
select recent purchasers in three Riverside SMSA markets to conduct
one-on-one interviews.

> **Homebuyer Highlights**
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 95 homebuyers who
received seller-funded DA and FHA-insured mortgage financing. There were
three key research objectives for homebuyers. Following are the
objectives and corresponding results.

**Objective 1**

This objective was included in the study to test whether or not
borrowers receiving seller-funded DA had to meet "standard underwriting
requirements" in order to qualify for mortgage financing. Based on focus
group and individual interviews with homebuyers who received
seller-funded DA, Concentrance determined that most of these homebuyers
described requirements similar to those inherent in the typical FHA or
conventional loan program. In particular, participants in these
interviews mentioned providing proof of income, employment records and
other financial information. Some participants mentioned a required
minimum credit score. Others described having to pay off outstanding
debts before having loans approved. A number of participants mentioned
having a history of credit problems. Some of these homebuyers also
mentioned that those outstanding debts had been 'rolled into' their
mortgage loans.

In limited cases, homebuyers reported meeting a requirement to complete
borrower counseling or homeownership education seminars. These were
offered in the form of homebuyer training videos or reading materials. A
few were told they had to pass a test on this material but none of the
participants mentioned anything about this requirement being enforced.
These educational programs were most often offered by real estate agent
boards or mortgage brokers and taught by real estate agents or mortgage
professionals such as loan originators. Some homebuyers named non-profit
community organizations as the source or provider of their pre-purchase
counseling. However, these organizations were not the same entities that
provided the seller-funded DA gifts.

Homebuyers said:

However, the majority of homebuyers said:

It should be noted that when the seller-funded DAP was initiated
counseling was required. Also, HUD did not eliminate the reduced Upfront
Mortgage Insurance Premium (UFMIP) incentive for first-time homebuyers
who obtained housing counseling until January 1, 2001. Many of the
borrowers participating in the focus groups received their FHA-insured
loans prior to January 1, 2001.

**Objective 2**

> "I never had a manual to study."

[]{.mark}

[]{.mark}

With few exceptions, homebuyers reported having no contact with the
seller-funded DA provider, either directly or indirectly. Very few
homebuyers could name the organization or entity that provided their DA.
Many homebuyers were not aware of the source of their downpayment gift.
Still others indicated that they were unaware that a gift had been
provided until they were recruited to participate in this study.

Some homebuyers reported having received newsletters from the
seller-funded DA providers. Additionally, a few homebuyers reported
receiving information advising them about their MPPI policy. In sum,
very little information and assistance, other than the downpayment
funds, was actually provided to homebuyers by the seller-funded DA
provider. Instead, homebuyers revealed that much of the information and
assistance provided to them came from the mortgage broker, loan officer,
real estate agent, and in new construction cases, from the builder's
sales agent.

One key discovery was that most homebuyers who participated in these
focus groups had very little awareness or knowledge about the financial
aspects of their home purchase. These homebuyers were often seriously
mistaken or misinformed about their mortgages and their terms. In some
markets, homebuyers had 2-1 temporary interest rate buydown options that
they did not understand, and were unpleasantly surprised when their
payments increased. An even more common problem occurred for homebuyers
with new construction. These homebuyers claimed that they were not
forewarned about scheduled and predictable increases in property tax
assessments; some of these homebuyers were struggling to afford their
increased payments. Furthermore, there were several homebuyer
participants who had tried to sell their homes because they were
over-burdened, only to realize that they owed more than the house was
worth.

Homebuyers said:

Homebuyer participants were often confused about the role of DA in their
home purchase transaction. Even participants who were knowledgeable
about the real estate industry or who had bought and sold multiple homes
were unclear about the nature of the seller-funded DA gift. For example,
some participants could vaguely explain that they thought the seller
made a contribution to a non-profit, which in turn provided funds to
cover the homebuyer's downpayment and closing costs. At the same time,
many of these participants would argue whether the downpayment and
closing costs were added to the mortgage. In other words, some believed
that these funds were an outright gift or grant; others believed that
they had essentially bought a house with zero down and that they had
financed the entire amount. In general, most participants could not
resolve this discrepancy or explain whether or not they had actually
financed their downpayment.

Homebuyers said:

There was a widely held belief among these homebuyers that the
downpayment had been provided by "government funds" and that these funds
were reserved for first-time, low-income, or single-parent homebuyers.

Homebuyers said:

Homebuyers who purchased newly constructed homes seemed to know
significantly less about their financing than purchasers of existing
homes. Many of the new homebuyers mentioned receiving incentives of
\$20,000 to \$40,000, which included appliances, upgrades and other
options, as well as seller-funded DA and closing costs. Because these
incentives were presented as a lump sum, these homebuyers were unclear
about the amount of the seller-funded DA provider contribution relative
to the builder incentives/costs.

A homebuyer said:

In several focus groups homebuyers reported receiving cash at closing.
In some examples, these homebuyers were told to bring money and
subsequently told at closing that their funds were not needed. In other
cases, homebuyers put no money down and were still given extra money at
closing to take home. These homebuyers claimed that they were given
anywhere from several hundred to a couple of thousand dollars at
closing.

Homebuyers said:

In terms of the appraisal, many homebuyers felt that the initial
appraised values were surprisingly high. Many also suggested that the
relationship between the mortgage broker or loan officer and appraiser
was the key to getting the loan approved. For example, one participant
was told by his real estate agent that: "...the wrong appraiser came
out" and that he would make sure that "a good appraiser would reevaluate
the property." This second appraisal was equal to the sales price.

In several cases, homebuyers who had tried to refinance reported that
their houses were appraised for less than the original sales price. In
one example, a homebuyer claimed that his house was now worth \$20,000
less than he originally paid. This homebuyer also mentioned that many
people in his subdivision were "walking away." In a couple of markets,
borrowers reported purchasing a new home in a subdivision for thousands
of dollars less than previous owners paid.

**Objective 3**

In general, most homebuyer participants had positive things to say about
seller-funded DA and cited examples where they had recommended the
program to other prospective homebuyers. Since these homebuyers rarely
knew who the seller-funded DA provider was, they could not recommend
specific programs.

Most homebuyers believed that they would not have been able to afford to
buy a home without DA. Others expressed that they may have been able to
purchase a home later but not at that time.

Many homebuyers expressed remorse about not asking more questions or
gathering more information before purchasing their home. Many homebuyers
recommended that pre-purchase counseling or homeownership education
become a mandatory requirement for participation in seller-funded DAPs.

Several homebuyers pointed out that many people had been encouraged to
buy homes before they were really ready. But there were several
homebuyers in each focus group who had used information from the
worldwide web to better prepare for the purchase and homeownership.

**[Researchers' Assessment]{.smallcaps}**

Concentrance concluded from the observation of, and comments from
borrowers that most of them were uninformed about the homebuying process
in general and their individual situation in particular. For the most
part, they were very pleased to be homeowners. However, a few were
experiencing difficulties making the mortgage payment because, in their
view, everyone in the process failed to adequately explain a couple of
key terms or events in the ever-evolving homeownership process. Many of
the borrowers spoke glowingly about their real estate agent and a few
even had good things to say about their mortgage broker or loan officer.
In general, even the repeat owners in the group or borrowers with
knowledge of the mortgage industry left the focus group indicating that
they felt more informed.

The 2-1 temporary interest rate buydown process was a complete mystery
to most and vaguely understood by others. In addition, none of the new
home purchasers were aware of the difference between taxes on vacant
land versus taxes on their new home. This was an acute problem in
Indianapolis where taxes are paid in arrears.

New home subdivisions varied by location. In markets such as Charlotte,
Atlanta and Indianapolis, all or a substantial portion of the homes were
sold with seller-funded DA provided by the builder. In other markets
only a limited number of downpayment-assisted homes were dispersed
throughout the subdivision. In the words of one national builder, "it
helps to achieve an income mix in the subdivision." The research team
visited subdivisions in nearly every market to get a feel for the
quality of construction, age and current condition of homes in the
subdivision. For the most part, the quality and condition of homes in
the subdivision were indistinguishable from other subdivisions and homes
in the area. However, in one subdivision in Atlanta the homes were
clearly inferior to homes in the general market and there appeared to be
a number of abandoned homes in the subdivision. In Indianapolis, a
borrower said the value of their home had declined by nearly 40% based
on a new appraisal. The research team visited the borrower's subdivision
and could not identify any apparent adverse conditions in the
subdivision. The team also visited a subdivision on the west coast where
seller-funded DA was first used approximately 8 years ago. Homes in this
subdivision that originally sold for approximately \$60,000 were now
selling for nearly \$176,000.

Universally, borrowers expressed joy in becoming homeowners but wished
they were given more information about the process. The Seattle
homebuyer Focus Group expressed the least amount of concern about the
homebuying process even though they were not the most informed group.
They were very pleased with the program and relieved that they could buy
a house in the high cost Seattle market. The Atlanta and Denver groups
were well informed but over half the participants in the Atlanta group
expressed concerns about the gift being included in their mortgage.

The design of the research data gathering process was intended to elicit
participant responses to questions about what they remembered about the
process and from whom or where they received that information. Since
some of the borrowers bought their homes up to five years prior to the
focus group it was hard to determine if they ever knew the information
or whether they had simply failed to retain the information. In the
Riverside SMSA, we specifically targeted recent borrowers but the
information gathering process was from face-to-face interviews and not
in a focus group setting. The focus group setting allowed participants
to continually compare their situation to others as the conversation
evolved; however, the Riverside participants demonstrated no discernable
difference in their level of knowledge than that of the focus group
participants in other SMSAs. Most homebuyers expressed no
dissatisfaction with the program although one participant did have
concerns about the condition of her property. She reported that the
house did not have any plumbing when she purchased the home and all the
windows were broken. The research team did not enter the home but from
the sidewalk interview, several broken windows were clearly visible.

In our interviews and discussions with a number of participant groups we
detected that some individuals resented seller-funded DA recipients who
were not first-time homebuyers or lower-income individuals. One of the
universal recommendations for ways to improve the seller-funded DAPs was
to adopt some of the non-seller-funded DAP requirements around income
and asset restrictions.

Most respondents mentioned counseling/borrower education as a benefit
and some seller-funded DA providers said that counseling/borrower
education should be a program requirement. We found that if a borrower
wanted to understand more about the homebuying process and mortgage
requirements, there were plenty of outlets available for information. It
was easy to understand why some of the parties in the mortgage
transaction espoused the virtues of counseling/borrower education. The
real estate agents were very explicit in their endorsement of
counseling/borrower education. They reasoned that a more informed buyer
was easier to work with (i.e., it decreased their hand-holding time and
created opportunities to serve other clients.) The remaining parties in
the transaction appeared to recommend counseling/borrower education for
intuitive reasons (i.e., it couldn't hurt!). Most buyers expressed
similar sentiments when they said they wished they would have had more
information prior to making their purchase. By most accounts they would
have still made the purchase decision but with more information to help
them sustain homeownership.

## Individual Sellers

We interviewed individual property sellers in a facilitated focus group
setting. In addition to interviewing these individual sellers, the
research team interviewed builder/sellers. Responses and observations
from the builder/seller group are addressed later in the report.

> []{.mark}
>
> []{.mark}
>
> **Individual Seller Highlights**

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 34 individual sellers
in three SMSAs, Atlanta, Indianapolis and Salt Lake City. There were two
key research objectives for individual sellers. Following are the
objectives and corresponding results.

**Objective 1**

Participants in the seller focus groups, when asked about their
contribution to a seller-funded DA provider, knew the name of the
non-profit only in rare cases. Many of these sellers reported that they
first heard the name of the non-profit organization at closing. Some
sellers indicated that they were unaware that they made a contribution
until they were recruited for this study. Some homebuyers made similar
comments. With few exceptions, sellers in the three SMSAs said that at
no time during the transaction did they have any contact with the
seller-funded DA provider to whom they made a contribution. Overall, few
sellers understood the purpose or role of the seller-funded DA provider
in the sales transaction.

A seller said:

Another seller said:

Results of focus group interviews with sellers suggest that real estate
agents often assure these sellers that their donation to a seller-funded
DA provider will expedite the sale of the home. Furthermore, many
sellers reported that their agents assured them that the full amount of
the DA would be incorporated in the sales price, and they would receive
their expected net proceeds at closing. One seller, for example, noticed
that the offer was higher than the asking price and was told after the
fact by his real estate agent that a seller-funded DA gift would be
involved in the transaction.

Various sellers made the following quotes:

These results also suggested that once the seller-funded DA gift was
included in the transaction, sellers often amended the sales contract to
reflect a higher sales price. In these cases, the higher sales price was
often increased by the full amount of the seller-funded DA gift.

A seller explained:

With respect to appraised values, many sellers in these focus groups
were under the impression that the appraiser, upon the mortgage broker
or loan officer's suggestion, would provide an appraised value in
whatever amount was necessary to complete the deal.

[]{.mark}

In general, sellers also believed that offering seller-funded DA not
only facilitated the sale of their homes, but that due to the
assistance, they had been able to obtain a higher price than they
otherwise would within that sales timeframe. Some seller participants
believed that they could have ultimately gotten the same sales price if
they had been willing to leave the house on the market for a longer time
period.

One seller surmised:

Many sellers expressed concerns that the appraisal supported the sales
price.

One seller expressed the concern this way:

Some other sellers had a different experience with the appraised value
of the home not matching or coming in below the sales price.

One disappointed seller stated:

In several instances, sellers mentioned declining values and low
appreciation in the neighborhoods they left behind. A number of sellers
were aware of vacancies and foreclosures in these areas and attributed
these to inflated values and homebuyers who could not afford to maintain
these properties.

**Objective 2**

Seller respondents did not offer particular recommendations for
enhancements to seller-funded DAPs. The vast majority of seller focus
group participants were satisfied with the outcome of contributing to a
seller-funded DA provider. Many felt that this process helped them sell
their home and most were satisfied that they were able to recover their
contributed funds through a higher price. However, when asked if they
would recommend using a seller-funded DAP to prospective homebuyers,
most sellers felt that seller-funded DA caused homebuyers to overpay for
homes.

**[Researchers' Assessment]{.smallcaps}**

The seller played an insignificant role in the seller-funded DA
transaction. They abdicated their role to their real estate agent and
relied on him/her to "get the number they had in mind," or to the
mortgage broker or loan officer who determined how much DA was needed.
Most individual sellers said they did not know or want to know what the
real estate agent had to do to get the "number." The number refers to
the amount of net proceeds they wanted or needed to consummate the
transaction. Some expressed a concern for the borrower having to repay
the "gift" back over the life of the mortgage but felt it was a fair
tradeoff to becoming a homeowner. To justify their participation in this
type of transaction, sellers said they assumed the mortgage broker or
loan officer made sure the borrower was prepared for homeownership as
evidenced by the approval of the loan and hired an appraiser to make
sure the house was worth the sales price.

Sellers participating in the seller-funded DAP said they were encouraged
by their real estate agent to add the DA to the sales price to guarantee
a certain profit level. This increase in sales prices, as reported by
appraisers and underwriters, is problematic for the valuation process.

## 

## 

## 

## 

## 

## 

## 

## 

## 

## 

## 

## 

## 

## Builders

[]{.mark}

Builders, or builder/sellers, provided seller-funded DA in each of the
targeted SMSAs the research team visited. Their level of participation,
program design and implementation strategies varied by location. Areas
with the highest and most visible builder activity included Charlotte,
Indianapolis, Dallas, Phoenix and Atlanta. The construction mix in the
HUD gift loan sample was 71% existing construction and 29% newly
constructed homes. The Charlotte and Indianapolis SMSAs had the highest
concentration of new homes at 64% and 63%, respectively.

Builders and individual sellers had different ways of recouping the cost
of the DA provided. Although most individual sellers cited multiple
reasons for offering seller-funded DA, they cited only one approach.
Individual sellers said they worked through a real estate agent who
normally included the donation in the sales price. They also said that
they conditioned their participation on receiving a pre-determined
amount in net sales proceeds. They also indicated that they were
motivated to participate in the DAP because they thought they were
helping a deserving first-time purchaser achieve homeownership.

Builders cited multiple ways they participated in seller-funded DAPs.
Although they cited similar economic and altruistic motivations for
participation, they used a variety of marketing techniques to dispense
the DA. A more detailed explanation of these marketing techniques is
provided in the Researchers' Assessment sub-section.

[]{.mark}

> **Builder Highlights**
>
> []{.mark}
>
> []{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 38 builders. There
were two key research objectives for builders. Following are the
objectives and corresponding results.

**Objective 1**

Overall, interview results suggested that builders in the ten
metropolitan areas, particularly in the 'starter home' market segment,
made contributions to seller-funded DA providers with the expectation
that these funds would be fully recovered in the sales price. These
seller-funded DA gifts to the homebuyer are typically bundled with
additional incentives. These incentives can include appliances, property
additions and even cash provided to the homebuyer to pay off bills or to
furnish the new home. Sixty-two percent of builders interviewed reported
that seller-funded DAPs inflated the sales price of the home. With the
remaining 38% of builders, we speculate that there is a close
correlation between them and those builders who said they have "one
price" and spread the cost of DA throughout all of the homes in the
subdivision, rather than increasing the price of each home with DA. In
each of the cases we examined, the addition of the seller-funded DA to
the sales price was used to facilitate the contribution to the
seller-funded DA provider. In only one instance a respondent said that
the increase in the sales price was an incentive for the builder to use
the seller-funded DAP. In either case we found no evidence that the
increase in net sales price increased the sales proceeds to the builder.

[]{.mark}

[]{.mark}

Regarding the relationship between seller-funded DA and price, builders
stated:

In terms of seller-funded DA as a part of builders' incentives, builders
commented:

Many builders also suggested that seller-funded DA is an expected part
of the sales transaction in some markets and that without it they would
be unable to sell their homes for a profit:

Most builders interviewed reported that they worked closely with
mortgage brokers and loan officers in downpayment assisted transactions,
in addition to partnering with seller-funded DA providers and real
estate agents. Some regional as well as national builders indicated that
they had an ongoing relationship with seller-funded DA providers on a
corporate level and many of these builders operate nationwide.

It is important to note that, in many cases, these builder organizations
are parents or subsidiaries of the mortgage company to whom they refer
all new home sales for financing.

One builder said:

Furthermore, in some markets, builder's sales agents perform the
marketing and processing of these sales transactions, thereby precluding
the involvement of independent real estate agents.

A builder mortgage company executive stated:

**Objective 2**

Most builders interviewed were very positive about seller-funded DAPs.
Several mentioned that these programs provide homeownership
opportunities for first-time and lower income homebuyers, as well as for
people with a history of credit problems. Some builders recommended
requiring homebuyer education. There were no other recommendations aside
from homebuyer education; however, some additional comments from builder
included:

**[Researchers' Assessment]{.smallcaps}**

Unlike individual sellers, builder/sellers were intimately involved in
every aspect of the DAP and homebuying process. As mentioned earlier in
the report, in nearly every SMSA but particularly in the Charlotte,
Indianapolis, Dallas, Phoenix and Atlanta SMSAs, most builder/sellers
were affiliated with a mortgage company. These mortgage companies were
either owned by the builder or were part of a joint venture with the
builder. Some mortgage companies had branch offices that worked
exclusively with the builder to process seller-funded DA loans. In many
instances, we were told that the builder actually selected the
appraiser. Executives of several mortgage companies associated with
national builders told us that branch mangers were responsible for
selecting the appraiser, the seller-funded DA provider and managing the
loan production and underwriting process. When asked about controls to
ensure compliance with FHA guidelines, we were told about their risk
management guidance, training and oversight of the branch managers by a
regional manager who reported to the president of the mortgage company.
If the branch office resources were not exclusively dedicated to the
builder, these resources processed loans from other sources similar to
any other independent mortgage broker operation.

Many of the builder/sellers we interviewed operated nationally and, even
though they had local representatives in many of the markets we visited,
in most cases we were limited to interviews with central headquarters
management staff only. We were either told we could not speak with local
representatives or the local representatives refused to speak with us.
In several instances the local representatives referred us to the
central office management. When we contacted builder/sellers directly,
most of them said that the mortgage company side of the business set
their mortgage guidelines and they exclusively focused on construction
and sales.

To acquire hands-on knowledge of the sales techniques used at the
builder's site and to better understand the product being offered to the
homebuyer, the team of researchers traveled to actual communities that
offered the seller-funded DAPs. The researchers were able to interview
several onsite sales agents. This provided a better understanding of
what the homebuyer experienced when he/she was shopping for a home. It
also gave the researchers insights into the condition of the
subdivisions and the quality of home construction.

Builder/sellers or their mortgage company representatives described
various marketing techniques to dispense seller-funded DA. Below is
sampling of the various methods used;

-   In most instances, seller-funded DA was included in the sales price
    of the home purchased. There was one price if seller-funded DA was
    offered and another price if the purchase was all cash or financing.
    To confirm this approach, a mortgage broker in the Charlotte SMSA
    explained that if two identical homes in similar locations were
    appraised at completion of construction/sale, the likely scenario
    would be that the house with the seller-funded DA would be appraised
    at \$140,000 while the comparable house without the seller-funded DA
    would be appraised at \$135,000. The mortgage broker pointed out
    that appraisers had to be "continuously encouraged" if the needed
    value was to be achieved.

-   In the Indianapolis SMSA, a couple of builder/seller mortgage
    company representatives insisted that there was only one sales price
    for homes in the subdivision. They said that the homebuyer was given
    a \$5,000 incentive package. Specifically, builders indicated that:

-   Another builder/seller mortgage company representative in the
    Indianapolis SMSA reported that the assistance was need-based.

When asked if the assistance impacted the price of the home the mortgage
company representative replied, "No."

-   In the Detroit SMSA one builder/seller executive said:

> He went on to point out that the seller-funded DAP was a good way to
> help first-time homeowners. The executive said that all loans with the
> assistance were processed through one of their mortgage companies.

-   In the Atlanta SMSA, we encountered several builder/sellers who said
    they offer seller-funded DA on every home in the subdivision. They
    pointed out that the cost of the assistance was included in the
    marketing costs of the subdivision and was included in the price of
    every home sold. The builder/sellers explained that they did not
    have different prices for homes with seller-funded DA.

-   We spoke with builder/sellers or their mortgage company
    representatives in several markets who said seller-funded DA was
    just one part of a suite of product offerings they have to attract
    and capture purchasers. They pointed out that their marketing
    objective was to get the homebuyer into the sales trailer and not
    allow them to leave until they committed to purchase a home. Their
    representatives said they would use conventional, government and
    even some sub-prime products to close the sale. Builders agreed that
    one of the most important things was to get the traffic in the door.
    Furthermore, they mentioned that in a market like Charlotte, if they
    did not offer seller-funded DA, they would not be competitive.

## Real estate agents

> []{.mark}
>
> Real estate agents that responded to an email inquiry about their
> experience with seller-funded DAPs were invited, on a first-come
> first-serve basis, to attend a focus group session. We averaged nearly
> eight real estate agents per SMSA.
>
> **Real estate agent Highlights**
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}
>
> []{.mark}

[]{.mark}

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 77 real estate
agents. There were three key research objectives for real estate agents.
Following are the objectives and corresponding results.

**Objective 1**

According to real estate agents interviewed, few of them had a
relationship with specific seller-funded DA providers. Most real estate
agents reported maintaining relationships with certain mortgage brokers
or loan officers and these individuals tend to have particular
seller-funded DA providers or programs that they utilized. Most real
estate agents reported only dealing with homebuyers, sellers and
mortgage brokers or loan officers in these transactions. One real estate
agent in Atlanta, for example, is reluctant to refer particular
seller-funded DAPs because she believes that this is the role of the
mortgage broker or loan officer, who had more expertise and experience
dealing with home financing than a real estate agent. A few real estate
agents mentioned that they received literature and emails from
seller-funded DA providers.

Real estate agents commented that:

Similarly, these real estate agents reported that there was no
relationship, *per se*, between seller-funded DA providers and
appraisers. The mortgage broker typically selected the appraiser,
although many real estate agents reported having certain appraisers that
they dealt with on a regular basis. According to many of the real estate
agents interviewed, having "an appraiser who is flexible" was critical
in facilitating seller-funded DA deals. Many real estate agents agreed
that the role of the appraiser was to validate the purchase price. In
some cases, real estate agents had to call several appraisers until they
got a verbal agreement from the appraiser to "bring in the value."

For example, one real estate agent stated that:

A number of real estate agents mentioned cases where the appraised value
is lower than the sales price and the appraiser recommends that the
price that was originally listed in the local real estate multiple
listing service (MLS)[^3] be changed to match their appraised value.
This practice protects the appraiser in case he or she is audited.

**Objective 2**

Real estate agents representing homebuyers tended to rely on the
mortgage broker or loan officer to identify homebuyers needing DA. Real
estate agents who represented the seller \[listing agent\] tended to
recommend that their sellers market their homes using seller-funded DA
as an incentive in two types of situations: in markets where this was a
standard practice and in cases where the seller had difficulty selling
the property due to time constraints or other circumstances. According
to real estate agents, in some markets, including seller-funded DA was
very much a standard practice when selling newly constructed homes. For
the resale market, seller-funded DA was more common when the resale
market was slow, when the sale needed to be expedited or when several
previous purchase contracts were cancelled.

In markets where there is a high concentration of new construction such
as Charlotte, Indianapolis, Dallas, Phoenix and Atlanta, seller-funded
DA was an expected part of the transaction. Real estate agents in these
areas (Charlotte and Indianapolis in particular) reported that
seller-funded DA was necessary in order to sell homes in these
lower-priced, starter home markets.

There was a widely held belief among real estate agents that builders
would sell far fewer homes and perhaps be forced out of the business
without these programs.

One real estate agent put it this way:

For resale transactions, real estate agents cited specific examples
where they used seller-funded DA to sell homes. These examples included:
a) homes that had problems with the inspection, b) instances where
sellers had to sell quickly; and c) homes that had been on the market
for long periods of time.

In most cases, real estate agents believed that seller-funded DA was
most appropriate for first-time homebuyers or others in the starter home
markets that had insufficient cash for downpayment or closing costs.
Many real estate agents also mentioned that these homebuyers had FICO
scores that were too low for them to qualify for conventional low
downpayment programs. In many cases, real estate agents described the
typical seller-funded DA homebuyer as someone who would prefer to take
money up front rather than to have a second mortgage.

Many real estate agents acknowledged that seller-funded DA homebuyers
were unprepared and under-qualified for homeownership. In other words,
many of these homebuyers were not adequately educated about the
homebuying process or the financial burdens associated with
homeownership. While some real estate agents in our sample recommended
specific seller-funded DAPs to homebuyers, the vast majority deferred to
the mortgage broker's recommendation.

In the opinion of one real estate agent:

Real estate agents also emphasized that builders highlighted
seller-funded DAPs in their advertisements. These advertisements
increased awareness and expectation of the availability of DA on the
part of homebuyers. In some markets, 'zero down' homebuying
advertisements were specifically targeted to low-income families and
recent immigrants.

**Objective 3**

Real estate agents offered several recommendations for enhancements to
seller-funded DAPs. One recommendation was that seller concessions be
fully documented in the MLS, so that appraisers can better understand
the market value of the property.

Several real estate agents pointed out that HUD should increase
monitoring of real estate agents because in some states, real estate
agents are increasingly getting involved with mortgage lending
activities and this could pose a conflict of interest.

In addition, real estate agents suggested that HUD allow the downpayment
to come directly from the seller without the involvement of the
non-profit.

Another suggestion was that homebuyer education be required for
participants in seller-funded DAPs. Currently, this is neither required
nor enforced.

One real estate agent stated that:

In addition to these recommendations, real estate agents made a number
of comments about seller-funded DAPs in general. For example, real
estate agents in several markets believed that the provision of
seller-funded DA increases the potential to artificially inflate house
prices. These real estate agents argued that in some depressed markets,
seller-funded DA homebuyers end up with negative equity, which is bad
for homeowners, neighborhoods and taxpayers.

One real estate agent explained that:

Real estate agents also mentioned that the use of 2-1 temporary interest
rate buy downs in addition to little or no equity may pose undue risks.

A few real estate agents stated that the foreclosure process and the
assumption process should be streamlined. This would protect home values
in neighborhoods that are already at risk.

**[Researchers' Assessment]{.smallcaps}**

The level of real estate agent participation, awareness and knowledge of
DA in general, and seller-funded DA in particular, varied by market and
construction type. Real estate agents tended to be more aware of
seller-funded than non-seller-funded DAPs in every SMSA. More real
estate agents worked with homebuyers acquiring existing homes versus a
newly constructed home. In fact, Charlotte was the only
builder-concentrated market where real estate agents sold the majority
of homes available, about 70%. By contrast, although Indianapolis had
about the same builder concentration (i.e., 63% of loans with gifts),
the adversarial relationship between builders and real estate agents
produced very few sales by independent real estate agents.

In a static or weak existing sales market, real estate agents generally
viewed seller-funded DA as a necessary tool to broaden a property's
market appeal or as a crucial element for timely consummation of the
sale. On the other hand, in a stable-to-strong existing sales market
real estate agents preferred non-seller-funded DAPs.

Some of the reasons for the preference for the non-seller-funded DAPs
were:

-   Most national mortgage brokers offer competitive conventional,
    market rate products for borrowers with high FICO scores. These
    products had similar or lower downpayment requirements than FHA.

-   State and local need-based programs provided adequate assistance to
    close the gap between available borrower assets and the amount
    required by the mortgage broker or loan officer to approve the
    transaction. Real estate agents said it helped if the program was
    easy to use and both loan and grant approval occurred within a
    reasonable processing timeframe. Real estate agents tended to shy
    away from overly complicated programs that did not fit within the
    primary lender's mortgage approval and settlement timeframe.

-   Many programs offer terms and conditions for repayment of the grant
    or secondary financing that were favorable to the homebuyer.
    However, these programs may be less appealing in certain high cost
    areas as the repayment obligation may be extended for up to 45 years
    to preserve the property for affording housing.

-   The luxury to offer a fair purchase price for the client, based on
    the market, without feeling that the client's negotiating position
    is comprised because the seller is being asked to contribute to the
    seller-funded DA provider. It is often difficult to get the seller's
    agent and the seller on board with the seller-funded DA concept.
    Most real estate agents stated that a cash purchaser was in a much
    better negotiating position than a homebuyer asking for or needing
    assistance from the seller.

-   There was an increased likelihood that with non-seller-funded DAPs
    the negotiated price would be within the appraisers' "value range."
    This point was reinforced by comments from appraisers who stated
    time and time again that experienced real estate agents knew within
    a couple of thousand dollars what a property was worth.

Real estate agents also acknowledged that in non-seller-funded DA
transactions there was less pressure for the builder to add and inflate
the cost of optional items such as cable outlets, ceiling fans or
premium construction materials as a way to justify the higher sales
price. In these transactions, any incentives normally offered by the
builder could be used for upgrades or other costs. But, if the homebuyer
needed seller-funded assistance, the builder added the cost and
increased the number of these optional items hoping they would translate
into a dollar-for-dollar increase in the appraised value.

Real estate agents also expressed a preference for DAPs with counseling
as a requirement for participation, especially for first-time
purchasers. The most popular form of counseling delivery mentioned by
real estate agents was face-to-face. In their assessment, counseling
actually made the purchaser a better homebuyer, more aware and easier to
work with. Some real estate agents stated that if the non-seller-funded
programs required face-to-face counseling and had a lenient repayment
requirement, they presented a better opportunity for the borrower to
accumulate equity in the home.

Real estate agents acknowledged working very closely with homebuyers and
sellers to fashion an acceptable transaction. In some cases they were
less appreciative of the role or relationship with their mortgage broker
or loan officer. Although they clearly understood the role of these
individuals, making sure both the borrower and collateral met their
financial requirements for the mortgage, they felt as if mortgage
brokers and loan officers, who provided their borrower with information
about seller-funded DA in instances where they did not need it, made
them seem incompetent. In addition, if the mortgage broker or loan
officer determined that the amount needed from the seller was in excess
of the amount stated in the contract, the sales price was usually
renegotiated or the seller's contribution was reallocated and sometimes
resulted in a lower sales commission. Often times, lowering the sales
commission did not fully address the problem and in those instances a
different appraiser would be found who would "bring in a higher value."

As noted above, real estate agents in several markets, notably Atlanta
and Detroit complained that the borrower usually knew nothing about
seller-funded DA until he or she spoke with the mortgage broker or loan
officer. In nearly every market, real estate agents complained that loan
officers and mortgage brokers were the only unlicensed professionals in
a decision-making role in the transaction. The mortgage brokerage
company might be licensed but the individual mortgage broker or loan
officer was not. Real estate brokers and agents were licensed; the
appraiser was licensed by the state and approved by HUD to be on the FHA
Register; and HUD certifies DE underwriters to analyze and approve the
borrower and the appraised value of the property. They reasoned that,
given the amount of influence individual mortgage brokers and loan
officers had in the transaction and their ability to impact the work of
others in the transaction, the individual mortgage brokers and loan
officers should also be licensed.

##  

##  

## Appraisers

Appraisers were targeted by the research team as possible interview
candidates based on their level of participation in seller-funded DA.
Using the information on the 86,629 loans with DA provided by HUD,
Concentrance identified the top five highest volume appraisers in each
SMSA. Depending on whether the team was able to arrange an interview
with the leading appraisers, we augmented the group of candidates with
appraisers who were familiar with seller-funded DA but as a smaller
portion of their FHA-insured mortgage business. The team conducted
interviews with no fewer than five appraisers in any SMSA and as many as
sixteen appraisers in one SMSA. Appraisers interviewed represented
nearly 9% of the 86,629 loans in the HUD sample. Most appraisers were
very forthcoming in their responses and welcomed the opportunity to, in
the words of one appraiser, "help improve the program." Some appraisers
used the interview as an opportunity to provide unsolicited comments on
every other subject group in the transaction. They were particularly
critical of mortgage brokers, loan officers and real estate agents. In
the real estate agent section of this report it was reported that real
estate agents said that they rarely, if ever, spoke with appraisers. But
according to many of the appraisers we interviewed, they said the
mortgage brokers and loan officers used real estate agents to increase
the pressure on them to "deliver the value."

> **Appraiser Highlights**

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

**[Summary of Responses]{.smallcaps}**

The following results are based on interviews with 86 appraisers. There
were three key research objectives for appraisers. Following are the
objectives and corresponding results.

**Objective 1**

In most cases, the appraiser was aware that the property was being sold
through a seller-funded DAP. Approximately 87% of the appraisers
interviewed indicated that they were made aware when a property being
appraised was part of a downpayment-assisted sale.

A large share of appraisers, about 74%, reported that seller-funded DA
was revealed through a letter or addendum attached to the sales
contract. Appraisers also reported that seller-funded DA was sometimes
mentioned explicitly in the purchase agreement and that it is listed as
a percentage or as a dollar figure. In addition, some appraisers said
that they might not know the name of the non-profit providing the
seller-funded DA but they always knew the amount.

Several appraisers indicated that there was a letter attached to the
contract in some cases but sometimes they did not find out about the
seller-funded DA. A few reported that the loan officer or mortgage
broker informed them when seller-funded DA was involved. In one example,
an appraiser reported that most of the time he was not fully aware of
the seller-funded DA. The only time that he knew what was going on was
when he saw that the price was inflated \[the sales price was higher
than the list price\], or when he talked to the mortgage broker, loan
officer or the real estate agent.

> []{.mark}

Appraisers also mentioned feeling pressure from loan officers and/or
mortgage brokers to "bring in the value."

Appraisers commented that:

When asked if they knew when seller-funded DA was involved in the
transaction, some appraisers responded that they were not always aware
but may later find out when they encountered difficulty in meeting the
value that the mortgage broker or loan officer wanted.

One appraiser noted:

In another example, an appraiser commented:

Not a single appraiser in our sample reported that seller-funded DA had
nothing to do with the appraisal process. But all appraisers said that
they were able to reach a conclusion about the appraised value,
notwithstanding the difficulties and pressure challenges they faced.

**Objective 2**

Approximately 62% of appraisers reported that seller-funded DA affects
(appraised) values. Others responded that seller-funded DA did not
inflate the appraised value of the home or were unsure.

The following quote expresses the sentiments of the majority of
appraisers who suggested that seller-funded DA did influence appraised
values:

Some appraisers who disagreed indicated the following:

When asked whether seller-funded DA affects the sales price, appraisers
were more likely to report that seller-funded DA exerted 'upward
pressure' on the sales price. About 96% of appraisers answered 'yes'
when asked if seller-funded DA affected the sales price. For example,
appraisers said:

Many appraisers made distinctions between new construction and existing
homes in their discussions of the relationship between seller-funded DA
and sales price. In general, these appraisers argued that seller-funded
DA had a larger impact on sales price for new construction than for
existing homes.

Appraisers said:

**Objective 3**

Many of the appraisers interviewed reported that they received
insufficient guidance from FHA about how to handle seller-funded DA.
Appraisers also pointed out that the industry lacks standards on how
seller concessions, including seller-funded DA, should be dealt with in
the appraisal process. These standards vary widely across states and
markets.

One recommendation offered by appraisers was that seller concessions be
a required input to the property information in the MLS.

Another recommendation was to require a higher FICO score for homebuyers
receiving seller-funded DA.

The majority of appraiser respondents reported that they would
participate in a seller-funded DAP in order to sell their own home.
However, a much smaller share of respondents reported that they would be
willing to recommend a seller-funded DAP to a prospective homebuyer.

Appraisers stated:

**[Researchers' Assessment]{.smallcaps}**

Most of the appraisers interviewed had a negative opinion of
seller-funded DAPs but had a more positive view of non-seller-funded
DAPs. Some appraisers went so far as gathering information on the
borrower as a way to lessen their moral concerns about stretching the
appraised value of the property. If the borrower was considered a strong
homebuyer (i.e., good credit) or if the borrower was a repeat purchaser
(i.e., not a first-time purchaser) they said they were more willing to
"stretch" on the appraised value. They also reported that the loan
officers and mortgage brokers did not like for them to ask questions
about the borrower or talk to the borrower.

Appraisers spent considerable time explaining the rituals of the
valuation process. Most of them said that valuation is not an exact
science. They went on to point out that the appraised value of a
property relative to the appraised value of another similar property
falls within a range that is determined by the market. Some ranges are
narrower than others. For example, it might be common for appraised
values to have a 3% to 5% or higher range in an expanding, multiple
offer market. Conversely, in static, single-offer extended listing
period markets, the value ranges might be considerably smaller.
According to several appraisers, a known and respected practice in the
industry is that all appraisers are likely to use their professional
expertise and knowledge of the market to establish the initial value
range for the property. Then, based on what's needed for the particular
transaction, they will establish the appraised value for the subject
property. In the words of several appraisers, they are guided by their
moral convictions, hope of staying in business \[to provide for their
family\] and desire to stay out of jail. A number of appraisers in every
market knew someone who was either temporarily denied participation by
HUD or someone who went to jail because of an investigation into price
escalation (i.e., fraud). A commonly used definition of fraud by many
appraisers interviewed is based on the percent or range the appraiser
used in establishing the appraised value of the property. For example,
if the value range, based on appropriate comparables, was in the 20+%
range then the appraiser knows what he is doing\--committing fraud.

A number of appraisers expressed a disdain for appraisal review work. A
larger number of appraisers felt the review process should be enhanced
to offer earlier and more consistent feedback. Several appraisers said
waiting until a property defaulted was generally too late for the
guidance to have much impact on their everyday work. In addition, using
loan performance as a punishment tool was certainly not going to improve
appraisal skills. If anything, it would enhance an appraiser's ability
to disguise value inflation.

Appraisers, as a group, were very critical of loan officers and mortgage
brokers and the tactics they used to encourage them to "bring in the
value." One appraiser said she refused to take on new clients unless she
was paid on delivery. Another appraiser said he had to resort to sending
threatening collection letters in order to get paid.

All of the major mortgage company executives we interviewed said that
they had controls in place to prevent this type of undue
influence-peddling in their retail channel but did not or could not
extend the practices to their government business or loans originated by
their mortgage broker networks. Another safeguard or practice used by
these company executives was a centralized appraisal ordering system. In
some cases, the appraiser wasn't provided the sales price for the
property. When asked why these practices were not applied to HUD loans,
the company executives generally answered that it "wasn't required by
HUD." We got a similar reply from appraisers when asked about applying
best appraisal practices learned while appraising conventional loans.
Both mortgage company executives and appraisers were more comfortable
waiting for HUD direction and guidance before making adjustments to
their standard operating procedures.

Appraisers repeatedly expressed a need for more guidance from HUD on
whether to treat the seller-funded DA as a seller concession and whether
the gift is part of the 6% HUD seller concession limit. Several
appraisers stated that they would like for HUD to tell them when they
are doing things right in addition to when they are doing things wrong.
In their opinion, it would be helpful if the feedback, either good or
bad, were timelier. Also included on their wish list was better
enforcement by HUD of the Limited Denial of Participation (LDP) for
mortgage brokers. They expressed a belief that the majority of the
mortgage brokers are trying to do the right thing but a small minority
is allowed to operate under reconstituted entities committing the same
egregious acts over and over again. According to some appraisers they,
the offending mortgage brokers, simply move down the street and open up
for business, sometimes using the same phone numbers as the old
business.

One appraiser said that when HUD was in the area (locally based) they
knew who the good appraisers were and they knew who the bad appraisers
were. Now, everyone is suspect. One appraiser said:

The appraiser went on to point out that:

In related discussions with appraisers, real estate agents, loan
officers and mortgage brokers, we became intrigued with the process
referred to as "shopping for a value." This shopping happened in several
ways:

-   Perhaps the most popular form of shopping was telephone shopping. An
    appraiser would be called by the loan officer or mortgage broker who
    provided descriptive information about the subject property, asking
    the appraiser to provide a range for the appraised value or if the
    appraiser thought they could "bring in a value" within a specified
    range.

-   Another frequently used shopping technique involved the appraiser
    visiting the property and prior to starting or completing the
    appraisal, calling the loan officer or mortgage broker for further
    instructions based on the appraisers' initial value assessment. If
    the appraiser relayed that they could achieve an appraised value
    within the needed range, they were instructed to proceed with the
    job.

-   The other popular technique mentioned was appraiser switching:
    starting the appraisal as a conventional job and switching it to FHA
    when the appraised value is determined.

Irrespective of the shopping method used, the loan officer or mortgage
broker was free to select a different appraiser to complete the
appraisal even after assignment of an FHA case number and designation of
an appraiser by name and license number in HUD's FHA case assignment
system.

When we spoke to the HUD HOCs they confirmed that the lender was free to
select any appraiser on the FHA Register and they were also free to
change that appraiser, for any reason and at any time in the mortgage
approval process. However, if the transaction was cancelled, the lender
had to get a new appraisal but not necessarily a new appraiser.

Appraisers were more familiar and comfortable dealing with the normal
pressures associated with "bringing in the value" on non-seller-funded
transactions as opposed to the heightened pressure presented by
seller-funded transactions. Appraisers also said that they understood
that, in certain markets, sellers were asked to contribute toward
closing costs but acceptance of those costs is similar to acceptance of
the real estate sales commission. It's an institutional part of the real
estate transaction whereas the homebuyer getting their investment in the
property from the seller is new and not widely embraced or accepted in
the industry.

## Other Respondents 

After our initial conversations with the Government Sponsored
Enterprises (Fannie Mae and Freddie Mac) and representatives from the
Private Mortgage Insurance industry, we discovered that they played
little or no role with seller-funded DA. The GSEs allowed seller-funded
assistance to be used for closing costs but not for the downpayment.
According to a few seller-funded DA providers they provided DA to
borrowers with conventional financing in the infancy of the
seller-funded DAPs, however, the Private Mortgage Insurers (MIs) no
longer insure these loans. We were unable to confirm this information
with the MI industry.

Lenders said, and seller-funded DA providers confirmed, that
seller-funded DA is exclusively an FHA program.

# VI. analysis of findings and recommendations 

The Concentrance team conducted interviews with 401 respondents in ten
SMSAs. The respondents included representatives from non-profit
organizations involved in DAPs; real estate agents; appraisers; mortgage
company executives; loan officers; mortgage brokers; underwriters;
builders; homebuyers and sellers. The primary focus was on programs
administered by seller-funded DA providers. The examination objectives
were to analyze program characteristics, participant relationships,
structure and ownership of the seller-funded DA providers and default
and foreclosure risks caused by the program. After completing the
examination based on the research objectives, the Concentrance team
analyzed the findings with respect to three factors for analysis as
indicated in the contract SOW. These analysis factors focus on the
incentives and motivations of the different parties involved in the
transaction; the safeguards built-in to mitigate any increased default
risk; and the risks to underwriting quality that these programs may
pose.

This section addresses our findings and recommendations relative to each
of the factors. Each analysis factor is described, our findings are
summarized, the risk associated with each finding is identified and
options for mitigating these risks are recommended for HUD's
consideration.

**Factor #1:** Incentives

**Description:** Ways in which seller-funded DAPs affect the incentives
of various agents in the homebuying and mortgage underwriting process.

**Synopsis of Findings:**

We carefully examined seller-funded DAPs offered by twenty-two DA
providers. These providers were responsible for 73.76%, or 63,895 of the
86,629 FHA-insured loans with DA in the ten SMSAs identified by HUD for
FY2000-2003.The DA provider was indicated in only 5,900 or 6.81% of the
remaining 22,734 loans. However, the research team did not interview
these DA providers. The top ten volume-based seller-funded DA providers
interviewed were responsible for 96% of the 63,895 DA transactions
accredited to the top twenty-two providers. Furthermore, the top three
seller-funded DA providers were responsible for 75% of these
transactions.

To determine ways in which seller-funded DAPs affect the incentives of
various agents in the homebuying and mortgage underwriting process we
first, identified all the other mortgage professionals and their role in
these transactions; we then focused on their interactions and attempted
to identify the primary motivations or incentives that contributed to
the actions of each of these parties in the transaction.

[Seller Incentives]{.underline}

Concentrance has analyzed the study results and has concluded that
allowing these new organizations to flourish has increased the
percentage of FHA-insured households with relatively high probabilities
of default and foreclosure, and has done so in such a way that even more
credit risk is added because of the incentives of property sellers to
recoup their cost via a higher house sales price. The seller-funded DA
provider does not directly cause any of these outcomes; it is a
catalyst. According to 88% of appraisers, the presence of seller-funded
DA in a transaction does contribute to price inflation.

[Transaction Facilitator Incentives]{.underline}

Concentrance recognizes that there are natural tendencies in a
production driven environment to place volume as a first priority ahead
of loan quality. However, the seller-funded DAP exacerbates the
subjective motivations of the participants who facilitate the
negotiation, loan processing and risk management functions of the
transaction, placing the FHA Insurance Funds at increased risk of
mortgage defaults and foreclosures. HUD attempts to balance these
tendencies by requiring that qualified gatekeepers be in place, such as
underwriters and appraisers, to ensure that quality standards are
upheld.

A significant portion of the underwriters and appraisers interviewed
expressed concern about their ability to protect HUD's interest in this
regard due to pressures from production personnel, such as mortgage
brokers and loan officers, who control the process and have the power to
determine which appraisers get work. Transaction participants, such as
mortgage brokers, loan officers and real estate agents, earn their
commissions only if the transaction closes. While underwriters are
salaried and do not have volume based incentives, they report that they
are subject to rebuke by management or to being fired if they are too
effective at identifying high risk loans or inflated appraised values.

Feedback from respondents suggests that the risk control process that is
most vulnerable to compromise is the property valuation process.
Appraisers reported persistent pressure from mortgage brokers and loan
officers to "bring in the value." Sixty-two percent of respondents
agreed that seller-funded DAPs inflated the appraised value of the home.
Appraisers only receive income if they receive orders from the
production oriented mortgage broker or loan officer. When repeat
business is based on whether or not the valuation outcome facilitates
the consummation of the transaction versus the quality and accuracy of
the report, then the appraiser is subject to the same production driven
incentives as mortgage brokers, loan officers and real estate agents. In
those cases, objectivity in valuation is often compromised, as reported
by appraisers and underwriters. However, we do not know the extent to
which valuation decisions are compromised.

The production driven parties in the transaction have a financial
incentive to complete the transaction regardless of its shortcomings to
the borrower, lender, investor or FHA.

**Risk Implications:**

-   Risk management controls that customarily segregate duties and
    responsibilities necessary to ensure that each professional in the
    transaction is allowed the opportunity to act with prudence in
    carrying out their functions in the transaction are compromised.
    This increases the risk of insuring loans that pose a risk to the
    FHA Insurance Funds due to their compromised collateral assessment.
    In order to support the sellers' contribution to the seller-funded
    DA provider, the subsequent gift to the purchaser and the sellers'
    profit requirements, these parties rely on the appraiser to
    "stretch" the appraised value of the property.

-   Appraised values on properties with seller-funded DA are at greater
    risk of being inflated due to production pressures and lack of risk
    controls in appraisal ordering and payment processing. These
    production practices and lack of risk controls have the potential of
    increasing claim amounts and adversely affecting the FHA Insurance
    Funds.

**Risk Management Options:**

-   Work with the mortgage and appraisal industries to establish
    standards for documenting and adjusting property values, as
    necessary, for homes purchased with seller-funded DA and develop
    uniform control requirements for mortgage lenders to follow for
    ordering and managing the appraisal process. Most large mortgage
    lenders currently employ practices in their portfolio lending units
    that address the appraisal ordering and compensation issues observed
    in third party originator operations. Appraisal trade groups would
    also be a willing and valuable ally in identifying controls and
    remedies for behaviors that adversely impact their members.

-   Reinforce existing HUD guidelines requiring the separation of
    production and risk management personnel.

```{=html}
<!-- -->
```
-   Explicitly require mortgage lenders to implement controls that
    separate the ordering and receipt of appraisals from other
    processing and production functions for their internal and third
    party originations. Most wholesale mortgage lenders said they were
    incapable of setting requirements for their third party originators
    without the approval or concurrence of HUD. In addition, they said
    that in order for this change to be effective it has to be adopted
    throughout the mortgage industry.

```{=html}
<!-- -->
```
-   Reinforce existing underwriting guidelines in HUD handbook 4155.1
    REV -5 relative to the role of the underwriter in managing credit
    and collateral risk. Underwriters in the study reported that they do
    not feel supported in their role as the "gatekeeper" for loan
    quality. They report being under increased pressure when
    underwriting loans with seller-funded DA to support production goals
    at the expense of loan and collateral quality. Lender controls
    should be in place to ensure that the underwriter's determination of
    the reasonableness of the collateral, as well as the adequacy of
    borrower credit and capacity is not influenced or controlled by
    production pressures. One way HUD could accomplish this is by
    placing increased emphasis on lender controls relative to the
    separation of production and underwriting functions during lender
    examinations.

```{=html}
<!-- -->
```
-   Support a statutory change in underwriting policy to include the
    seller-funded DA in the 6% seller contribution limit. In examining
    data gathered during the base period of this Contract involving
    8,294 loans, we observed that the average seller contribution for
    loans in that sample with a gift was 3% of the sales price. The
    average seller-funded DA, excluding the application processing fee
    and any other transaction fees averaged about 3.5% of the sales
    price. Combined, the seller contribution and the seller-funded DA,
    excluding fees, was about 6.5% of the sales price. It is reasonable
    to theorize that limiting the total seller contribution to 6% has
    the potential to reduce the sales price and pressure to "stretch"
    appraised value. The other added benefit is clear articulation to
    mortgage lenders and appraisers on the treatment of all funds
    contributed by the seller. Supporting a statutory change in
    underwriting policy to include the seller-funded DA in the 6% seller
    contribution limit also clears up the confusion relative to whether
    these funds are "derived in any manner from a party to the sales
    transaction."

-   Better align the incentives of the production area with the risk
    management functions by adding a registration requirement for loan
    officers. Under this option, HUD would assign registration numbers
    to loan officers, thus enabling HUD to track performance by loan
    officer as they currently track performance by originating
    mortgagee. Whether this simple practice will alter long established
    behaviors is uncertain, but at a minimum, it will provide those in
    the industry with the measuring tools to improve program operations.
    HUD has several metrics they use to reward and punish mortgage
    lenders in general and individual professionals in particular.
    Appraisers are tracked and unacceptable performance (i.e., defaults
    in cases where HUD determines that the appraised value is not
    supported by market data) is the basis for sanctions. Likewise,
    underwriters are tracked to determine if sufficient controls are in
    place to manage and identify loans that pose an unacceptable risk to
    the FHA Insurance Funds. However, there are no controls or tracking
    mechanisms available to aid in identifying which loan officer
    originated these loans. Concentrance believes that there is benefit
    in having full accountability throughout the entire mortgage
    process.

**Factor #2:** Safeguards

**Description:** Ways in which program designs have safeguards built-in
to mitigate any increased default risk that may result from minimizing
the direct equity investment of the homeowner.

**Synopsis of Findings:**

Based upon our interviews, the overwhelming majority of seller-funded DA
providers did not offer any safeguards built into their program to
mitigate any increased default risk associated with the lack of direct
equity investment by the homeowner. Only one small DA provider had a
privately funded one-year mortgage payment protection program that
appeared viable. This program was in addition to the typical MPPI policy
offered by most of the other providers. A couple of mortgage lenders
described implementing underwriting requirements designed to manage risk
layering.

[Analysis of Seller-Funded DA Provider Safeguards]{.underline}

The most prominent safeguard reported by seller-funded DA providers,
touted as a risk advantage, was that the borrower had equity in the
property, unlike the 100% financing programs. However, parties to the
transaction overwhelmingly reported that the sales price was increased
to cover the seller's reimbursement to the seller-funded DA provider for
the assistance advanced to the borrower plus any processing fees or MPPI
premiums. This description of the structure of the seller-funded DA
differed markedly from the seller-funded DA providers' characterization
and the examples on most of their websites. The seller-funded DA
providers describe on their websites a process where the seller is
simply selling the property for "full list price." In fact, several
seller-funded DA providers stated that they will not do business with a
lenders or mortgage brokers that allow the DA to be added to the sales
price. Real estate agents and mortgage lender respondents based their
belief that the borrower had equity in the property on the premise that
the appraiser provided an appraised value that was equal to or greater
than the sales price.

Not withstanding the very firm opinions of the seller-funded DA
providers, the research strongly suggests that the seller-funded DA is
being added to the sales price. The seller is reimbursing the
seller-funded DA provider and the buyer is reimbursing the seller. This
circular process increases the sales price of the property and wipes
away any borrower equity in the property.

The seller-funded DA providers reported other safeguards such as
voluntary homeownership education, counseling programs and MPPI. While
some form of education and/or counseling programs are offered by most
seller-funded DA providers, the intended beneficiary, the buyer, is
generally not aware of the program. In fact, the seller-funded DA
providers reported having extremely limited contact with the borrower.
The loan officers, mortgage brokers and settlement agents were their
only contacts in the transaction. Unlike non-seller-funded DA providers,
the centralized structure of most seller-funded DA providers created a
logistical problem in providing comprehensive, face-to-face borrower
education and counseling services. Borrowers who reported receiving
counseling or homeownership education, in most cases did not receive it
from the seller-funded DA provider. In other words, for the most part,
the borrower counseling or homeownership education was not a
pre-requisite for receiving seller-funded DA. Only one small
seller-funded DA provider actually [required]{.underline} internet-based
borrower pre-purchase counseling through a third party vendor. Another
regional seller-funded DA provider supplied documentation showing that
they counseled nearly 4,500 prospective homeowners in 2003. Their
face-to-face counseling program was part of a separate, affiliated
business - not part of their seller-funded DAP. When asked, they could
not confirm how many of these prospective homeowners receiving
face-to-face counseling also received downpayment assistance.

[]{.mark}

MPPI, as described by seller-funded DA providers, offers little
protection to the investor or borrower. These policies were reported to
have many exclusionary provisions that lessen their risk mitigating
benefits. Examples of these provisions include:

-   A vesting period of two months where the borrower must remain
    employed,

-   A requirement that loss of employment must be involuntary and the
    borrower is not eligible to receive any benefits unless unemployment
    has persisted for at least 30 days, and

-   An exclusionary clause that excludes coverage for job loss due to
    medical reasons or disability.

In addition to the exclusions outlined above other limiting conditions
of this type of insurance include, a \$1,800 cap on the maximum monthly
mortgage payment and a maximum of six payments during the twelve-month
coverage term. Also, seller-funded DA providers suggested that the
claims rates on these MPPI policies are very low and complained that the
claims paid by the MPPI provider were disproportionately small compared
with the premiums paid for the insurance. Some seller-funded DA
providers confided that the MPPI policies were more of a marketing tool
than a risk mitigation benefit.

Seller-funded DA providers reported that MPPI policies were cost-free in
appearance only. The policy fee was initially paid by the seller but
recouped in the sales price paid by the buyer. Therefore, it is just
another cost paid by the seller and added to the purchase price of the
property. When asked about the level of participation in these MPPI
programs, seller-funded DA providers indicated that participation was
limited.

According to several respondents, the MPPI was designed initially to
offset the impact of early payment defaults to the mortgage lender.
However, the mortgage lender plays no role in ensuring that the borrower
files a claim for benefits in the event of default. One major mortgage
lender stated that they did not want to be involved with promoting these
plans or with advising delinquent borrowers on the possibility of
benefits because they did not want to be perceived as an endorser of
such plans.

[Analysis of Lending Safeguards]{.underline}

These loans are processed and underwritten in the same way that loans
with FHA's minimum 3% statutory investment are processed and
underwritten. Furthermore, there are no additional premiums charged to
compensate for the increased risk of these loans or to protect the FHA
Insurance Funds from potential losses. Yet, these loans are tantamount
to a zero downpayment mortgage (See Appendix VI), as most borrowers
clearly do not have a direct investment in the mortgage transaction. The
funds for the DA are borrowed. In fact, in those limited cases where the
borrower attempted to make an investment in the property, they reported
that they received their deposits back at settlement.

A couple of mortgage company executives reported that, because of the
lack of borrower investment and inferior credit quality, they required
additional underwriting criteria such as FICO scores within a certain
range or a cash investment by the borrower. Another mortgage company
executive would not allow a borrower receiving seller-funded DA to use a
temporary interest rate buydown account. HUD's Mortgagee Letter 2004-28
dated July 21, 2004 stated that "the Department is concerned with the
use of temporary interest rate buydown accounts on fixed-rate mortgages
and the ensuring payment shock...Consequently, FHA will no longer permit
*underwritting* at the buydown rate on fixed-rate mortgages." In making
this policy change, it appears that HUD recognized the potential
consequences that sudden, increased expenses can have on borrower
behavior and sustainable homeownership.

The few above-mentioned changes sponsored by mortgage company executive
management are the exception and not the rule. The majority of mortgage
company executives did not impose any additional requirements even if
they reported having higher delinquencies and defaults for loans with
seller-funded DA.

**Risk Implications:**

-   Loans with seller-funded DA, where the assistance is added to the
    sales price, result in 100% financing. In most cases the borrower
    has no equity in the property and the there is a strong likelihood
    that the appraised value of the property was "stretched to the upper
    end of the market range," or inflated. These loans are insured
    without any additional risk mitigating requirements or increased
    mortgage insurance premiums and pose an increased risk of potential
    losses to the FHA Insurance Funds.

**Risk Management Options:**

-   Require more stringent underwriting requirements or other
    eligibility criteria such as:

    -   Cash reserves or borrower investment equal to at least 1% of the
        sales price.

    -   A minimum credit threshold for approval (e.g., no delinquencies
        in the past 12 months or layering of risk).

    -   Lower income and/or debt ratios than those currently required
        for the FHA program.

> The information above is not an exhaustive list of underwriting
> requirements or eligibility criteria but rather several examples for
> consideration.

-   Apply the same enhanced, risk-based premium structure to these loans
    as in the proposed zero downpayment program. All zero downpayment
    programs should have the same risk management controls. Recognition
    of the seller-funded DA as 100% financing levels the playing field
    and allows added protections to the FHA Insurance Funds. Currently,
    the FHA Insurance Funds are being placed at increased risk of
    potential losses without these prescribed risk management
    protections. Borrowers are misinformed about the level of equity
    they have in the property. These loans with seller-funded DA, at
    100% financing levels, are being serviced similar to the way loans
    are serviced with an investment by the borrower.

-   Implement the proposed zero downpayment program. Because of the
    incentives to raise the property sales price to cover the cost of
    the downpayment assistance, seller-funded DA creates an illusion of
    equity.

**Factor #3:** Underwriting Quality and Homeownership Costs

**Description:** Ways in which program designs, or incentives created by
individual programs, lessen the underwriting quality of mortgages and/or
increase effective homeownership costs to downpayment gift recipients.

**Synopsis of Findings:**

Interviews with transaction participants revealed that the level of
readiness and the credit profile of borrowers that receive seller-funded
DA are inferior to those borrowers that do not. In addition,
underwriters cited certain financing features used to facilitate
borrower qualification for the mortgage as having an adverse affect on
the loan quality. These features such as temporary interest rate
buydowns accounts, when added to the seller-funded DA were reported to
have risk-layering effects that increase the risk of potential losses to
the FHA Insurance Funds. Furthermore, costs that are ultimately incurred
by these borrowers for the seller-funded DA processing fees and the MPPI
premiums are unnecessary. The seller-funded DA provider adds no
additional value or other protections to the investor or borrower and
the MPPI is not a cost-effective risk mitigation tool.

[Borrower Credit Profiles]{.underline}

Underwriters report that loans with seller-funded DA tend to have more
credit issues than other FHA loans. In addition, some major mortgage
company executives reported that these loans had higher delinquencies
than their overall FHA portfolio. In new construction markets with high
concentrations of seller-funded DA, builders reported that the
prevalence of seller-funded DA had depleted the market of qualified
starter home purchasers. One builder reported taking as many as 20
applications to qualify one purchaser. They said that this was one of
the adverse effects of seller-funded DA in the market over an extended
period of time. In this particular market, Charlotte, builders reported
that being competitive in the starter home market meant you had to offer
DA. Although several builders raised these concerns, we observed several
subdivisions with homes under construction advertising the availability
of DA.

Another impact of this market entrenchment of seller-funded DA is that
borrowers reported that the prospect of "no money down" influenced them
to make a spontaneous decision to purchase. This, so called, purchase
spontaneity is not an innocent self propagating activity. Builder sales
agents in the Charlotte market said they used seller-funded DA as a
marketing tool because they were aware of its "no money down" allure to
borrowers. One agent commented that "if we get them in the \[sales\]
trailer we don't let them leave until they buy a house. We can then use
our complete suite of sales tools to close the deal."

In the above instances the borrower literally has no time to prepare for
the responsibilities of homeownership. Once the sales contract is signed
the entire lending process is triggered with one objective in mind
"doing whatever it takes to add the deal to the monthly office
production numbers." This production driven process has the inherent
potential of approving borrowers for loans that are ill-prepared for
homeownership and thus pose an increased risk to the FHA Insurance
Funds.

[Transaction Structure]{.underline}

Underwriters reported that in order to qualify many of the borrowers
from an income perspective, they needed loan terms that involved many
layers of risk. These risk layers include combinations of maximum
ratios, temporary interest rate buydowns, and premium interest rates in
addition to the "financed" seller-funded DA. Compounding the risk of the
loan structure is the typical borrower credit profile. Underwriters
describe the typical borrower profile as "first time purchaser, lack of
credit or old bruised credit with a lack of savings."

Most respondents say the success of the seller-funded DAP design is
predicated upon adding the DA to the sales price thus increasing
homeownership costs; while seller-funded DA providers see the situation
a little differently. They say the success of the seller-funded DAP is
based on not reducing the sales price, but selling the property at the
"full list price." Regardless of which argument you accept the borrower
ends up financing the contribution by the seller to the seller-funded DA
provider in their FHA-insured mortgage. In addition to the downpayment,
the borrower finances the processing fee and, in some cases, the MPPI
premiums. While these borrowers have minimal assets and cannot avoid
financing the downpayment, the results of the study suggest that the
fees and premiums incurred by the borrower are unnecessary. The entities
receiving these payments either do not add any value to the transaction
or do not offer a solution that is cost effective.

The ability of the seller-funded DA providers to act as a conduit for
the DA is rooted in the misperception that the seller, acting in the
capacity as a contributor to the DA provider, is not also acting as an
"interested party" to the sales transaction. As noted earlier, HUD's
underwritting standards clearly prohibit any party to the sales
transaction from being the source of the downpayment, directly or
indirectly. The MPPI appears to offer more value as a marketing tool. It
gives the impression that the borrower, mortgage lender and FHA are
protected in the event of default, but in reality, the plan offers very
little protection for any party in the transaction.

**Risk Implications:**

The influence of seller-funded DA is causing unprepared borrowers to
commit to homeownership without fully understanding the financial
impacts. This leads to increased borrower costs, poor loan performance
and the potential for increased losses to the FHA Insurance Funds due to
default and foreclosure.

**Risk Management Options:**

-   Allow the seller to provide DA directly to the borrower without the
    seller-funded DA providers as an intermediary. This policy change
    would solve the confusion around whether or not the seller-funded DA
    is a seller contribution or concession. It adds clarity to the
    valuation process. Appraisers reported being clear on the treatment
    of "seller contributions" in the valuation process. This proposal to
    allow the seller to provide DA directly to the borrower without the
    seller-funded DA provider reinforces their existing training and
    understanding.

-   Acknowledge that downpayment funded by the seller is a valid risk
    factor that must be considered in underwriting. These loans share
    the same risk profile of loans that would be eligible under the
    proposed zero downpayment program. Therefore, the same risk controls
    and underwriting requirements proposed for loans originated under
    the proposed zero downpayment program should be applied to
    seller-funded DA loans.

-   Explore risk-mitigating options to better prepare borrowers
    receiving seller-funded DA for sustainable homeownership. It is
    clear based upon our interviews that borrowers receiving downpayment
    assistance are not as prepared for the responsibilities of
    homeownership as those who do not. Options to consider to better
    prepare borrowers include but are not limited to the use of
    pamphlets, courses, marketing campaigns and housing fairs to
    increase borrower awareness and to sensitize them to the importance
    of understanding the responsibilities of homeownership. In addition,
    real estate agents, lenders and seller-funded DA providers should be
    encouraged to make borrowers receiving DA more aware of counseling
    and homeownership programs available. HUD has an entire network of
    trained and experienced counseling organizations that are available
    to assist borrowers in becoming more aware of the responsibilities
    of homeownership.

# Appendix I

## Research Objectives

### 

+-----------+----------------------------------------------------------+
| **Target  | **Research Objective**                                   |
| Group**   |                                                          |
+-----------+----------------------------------------------------------+
| **All**   | -To determine if there are program enhancements that     |
|           | should be made to ensure the effectiveness of            |
|           | seller-funded DAPs                                       |
+-----------+----------------------------------------------------------+
| **App     | -To determine whether appraisers are made aware that     |
| raisers** | properties are part of seller-funded DAPs                |
|           |                                                          |
|           | -To determine if there is a relationship between         |
|           | appraised values, participation in seller-funded DAPs,   |
|           | and seller donations to the non-profit                   |
+-----------+----------------------------------------------------------+
| **B       | -To determine whether there is a relationship between    |
| uilders** | builder contributions, donations to the non-profit and   |
|           | the sales price                                          |
+-----------+----------------------------------------------------------+
| **Hom     | -To determine what requirements these homebuyers face,   |
| ebuyers** | compared to other lending programs                       |
|           |                                                          |
|           | -To determine what types of information and assistance   |
|           | are provided to homebuyers by seller-funded DA providers |
+-----------+----------------------------------------------------------+
| **Non-    | -To understand what information seller-funded DA         |
| Profits** | providers make available to sellers and homebuyers       |
|           |                                                          |
|           | -To understand how seller-funded DA providers identify   |
|           | or recruit potential sellers and homebuyers              |
|           |                                                          |
|           | -To understand the nature of the relationship between    |
|           | the seller-funded DA provider, the real estate agent,    |
|           | and the appraiser                                        |
|           |                                                          |
|           | -To understand the relationship between seller donations |
|           | and sales prices                                         |
+-----------+----------------------------------------------------------+
| **Real    | -To understand the relationship between the real estate  |
| Estate    | agent, the seller-funded DA provider, and the appraiser  |
| Agents**  |                                                          |
|           | -To understand how real estate agents identify potential |
|           | sellers and homebuyers                                   |
+-----------+----------------------------------------------------------+
| **        | -To determine whether there is a relationship between    |
| Sellers** | seller contributions, donations to the seller-funded DA  |
|           | providers and the sales price                            |
+-----------+----------------------------------------------------------+
| **Under   | -To determine whether the risk profile of homebuyers in  |
| writers** | seller-funded DAPs differs from other homebuyers         |
|           |                                                          |
|           | -To determine whether seller-funded DA funds are treated |
|           | differently than other downpayment sources               |
+-----------+----------------------------------------------------------+

#  {#section-23 .Style-Heading-1-+-Left .unnumbered}

#  {#section-24 .Style-Heading-1-+-Left .unnumbered}

# 

# 

# 

# 

# 

# 

# 

# 

# 

# 

# 

# Appendix II

## Lines of Inquiry

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Appr   | Program      | -   In your community, are you aware of    |
| aisers** |              |     any programs that provide              |
|          | Cha          |     seller-funded DA for homebuyers?       |
|          | racteristics |                                            |
|          |              | -   Who administers or sponsors these      |
|          |              |     programs in your community? (List      |
|          |              |     organizations)                         |
|          |              |                                            |
|          |              | -   Are you aware of whether a property    |
|          |              |     being appraised is part of a           |
|          |              |     downpayment-assisted sale? Is so, how  |
|          |              |     do you find out that this is the case? |
|          |              |                                            |
|          |              | -   Are the requirements of these          |
|          |              |     transactions \[involving seller-funded |
|          |              |     DA\] different from the requirements   |
|          |              |     of other appraisals? In what way?      |
|          |              |                                            |
|          |              | -   Are the requirements of these          |
|          |              |     transactions \[involving seller-funded |
|          |              |     DA\] different from the requirements   |
|          |              |     of other DA transactions? In what way? |
+----------+--------------+--------------------------------------------+
|          | Sellers      | -   In your opinion, why is this program   |
|          |              |     attractive to sellers/builders? Can    |
|          |              |     you describe the typical home sold     |
|          |              |     through seller-funded DAPs, or in what |
|          |              |     kinds of neighborhoods this assistance |
|          |              |     is most common?                        |
|          |              |                                            |
|          |              | -   If you are aware that the home being   |
|          |              |     appraised is enrolled in a             |
|          |              |     seller-funded DAP, does that affect    |
|          |              |     the value of the home?                 |
|          |              |                                            |
|          |              | -   If you were shown this agreement       |
|          |              |     before performing an appraisal, how do |
|          |              |     you think the seller-funded DA         |
|          |              |     outlined in the agreement would affect |
|          |              |     the value of the home?                 |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Appr   | Closing      | -   If you were selling your home, would   |
| aisers** |              |     you participate in a seller-funded DAP |
|          |              |     where you could provide a contribution |
|          |              |     to the non-profit of up to 6% of the   |
|          |              |     sales price of the property? Why or    |
|          |              |     why not?                               |
|          |              |                                            |
|          |              | -   Would you recommend seller-funded DAP  |
|          |              |     to a prospective homebuyer? Why or why |
|          |              |     not                                    |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Bu     | Program      | -   In your community, are you aware of    |
| ilders** |              |     programs that provide seller-funded DA |
|          | Cha          |     for homebuyers?                        |
|          | racteristics |                                            |
|          |              | -   Who administers or sponsors these      |
|          |              |     programs in your community? (List      |
|          |              |     organizations)                         |
|          |              |                                            |
|          |              | -   About how many, and what percentage of |
|          |              |     home sales involved seller-funded      |
|          |              |     DAPs?                                  |
|          |              |                                            |
|          |              | -   Would you say that you have seen a     |
|          |              |     larger number or smaller number of     |
|          |              |     these downpayment-assisted sales over  |
|          |              |     time?                                  |
|          |              |                                            |
|          |              | -   At what stage of the construction      |
|          |              |     process do you enroll the property, or |
|          |              |     properties in the seller-funded DAP?   |
|          |              |                                            |
|          |              | -   Can you describe briefly how           |
|          |              |     seller-funded DAPs you work with       |
|          |              |     assist you in the sales effort? What   |
|          |              |     other parties or professionals do you  |
|          |              |     partner with in order to sell these    |
|          |              |     homes?                                 |
+----------+--------------+--------------------------------------------+
|          | Homebuyers   | -   Now I want to ask about homebuyers. Do |
|          |              |     you know how homebuyers find out about |
|          |              |     these seller-funded DAPs? *In other    |
|          |              |     words, is it through referrals,        |
|          |              |     advertising, direct mail, or some      |
|          |              |     other way?*                            |
|          |              |                                            |
|          |              | -   Can you describe the typical homebuyer |
|          |              |     or borrower who participates in        |
|          |              |     seller-funded DAPs? In other words,    |
|          |              |     what are some of the general           |
|          |              |     requirements they have to meet to      |
|          |              |     receive the DA?                        |
|          |              |                                            |
|          |              | -   How do seller-funded DAPs affect the   |
|          |              |     sales price of your homes?             |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Bu     | Sellers      | -   How do you find out about the          |
| ilders** |              |     potential to sell homes through these  |
|          |              |     seller-funded DAPs?                    |
|          |              |                                            |
|          |              | -   What do you \[as a builder\] have to   |
|          |              |     do to participate in these             |
|          |              |     seller-funded DAPs? In other words,    |
|          |              |     what requirements do you have to meet? |
|          |              |                                            |
|          |              | -   Why are these seller-funded DAPs       |
|          |              |     attractive to you?                     |
+----------+--------------+--------------------------------------------+
|          | Closing      | -   When are these seller-funded DAPs most |
|          |              |     effective for you?                     |
+----------+--------------+--------------------------------------------+
| **Home   | Program      | -   Before we get started, I'd just like   |
| buyers** | Cha          |     everyone to introduce him or herself.  |
|          | racteristics |     Please use only your first name. And   |
|          |              |     if you would, tell us what             |
|          |              |     organization sponsored the DAP or gift |
|          |              |     that helped you buy your home? And how |
|          |              |     long have you owned your home?         |
|          |              |                                            |
|          |              | -   Think back to the time you seriously   |
|          |              |     started your efforts to buy a home.    |
|          |              |     Who helped you start the process?      |
|          |              |                                            |
|          |              | -   How did you first find out about the   |
|          |              |     DAP that helped you buy your home?     |
|          |              |     Probe: Did you see an ad? Did you      |
|          |              |     attend a homebuyer seminar? From a     |
|          |              |     real estate agent or broker?           |
|          |              |                                            |
|          |              | -   What were you told about how the DAP   |
|          |              |     could help you buy a home?             |
|          |              |                                            |
|          |              | -   What were you told about the source of |
|          |              |     the downpayment funds given to you? In |
|          |              |     other words, where did the money come  |
|          |              |     from?                                  |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Home   | Homebuyers   | -   Now I have a few questions about the   |
| buyers** |              |     process you went through to get a      |
|          |              |     mortgage. What did you have to do in   |
|          |              |     order to participate in your program?  |
|          |              |     What requirements did you have to      |
|          |              |     meet?                                  |
|          |              |                                            |
|          |              | -   Were you required to attend some sort  |
|          |              |     of homebuyer counseling or training or |
|          |              |     seminar before you bought your home?   |
|          |              |                                            |
|          |              |     -   Describe this counseling or        |
|          |              |         training.                          |
|          |              |                                            |
|          |              |     -   Was this helpful? Why or why not?  |
|          |              |                                            |
|          |              | -   During the mortgage process, were you  |
|          |              |     given choices? For example, did you    |
|          |              |     have a choice between FHA and other    |
|          |              |     types of loans, fixed versus           |
|          |              |     adjustable interest rates? What about  |
|          |              |     other options?                         |
|          |              |                                            |
|          |              |     -   Did the lender/broker do a good    |
|          |              |         job of explaining the terms of     |
|          |              |         your mortgage to you; the interest |
|          |              |         rate, the amount of the total      |
|          |              |         payment, when the first payment    |
|          |              |         was due, etc?                      |
|          |              |                                            |
|          |              | -   Do you think you could have qualified  |
|          |              |     for other types of mortgages, with     |
|          |              |     other terms?                           |
|          |              |                                            |
|          |              | -   Now that you have moved into your      |
|          |              |     home, what kind of follow-up contact   |
|          |              |     or feedback have you received from the |
|          |              |     non-profit that sponsored the DAP?     |
|          |              |     Have they called you or sent you any   |
|          |              |     information?                           |
|          |              |                                            |
|          |              | -   What were you told to do if you ever   |
|          |              |     had a problem making a payment on      |
|          |              |     time? Has this ever happened to you?   |
|          |              |                                            |
|          |              | -   Since you got this mortgage, has the   |
|          |              |     amount of your payments changed at     |
|          |              |     all? In other words, have your         |
|          |              |     payments gone up or down? Explain.     |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Home   | Sellers      | -   Now, I would like to know something    |
| buyers** |              |     about how you found your home. Do you  |
|          |              |     feel that you had a good selection of  |
|          |              |     properties to choose from? Explain.    |
|          |              |                                            |
|          |              | -   What do you remember about the         |
|          |              |     property appraisal? Was the appraised  |
|          |              |     value more or less than you expected?  |
|          |              |     Was the appraised value more or less   |
|          |              |     than the sales price, or was it about  |
|          |              |     the same?                              |
+----------+--------------+--------------------------------------------+
|          | Closing      | -   Would you recommend your DAP to        |
|          |              |     another homebuyer? Why or why not?     |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **       | Program      | -   Are you familiar with programs that    |
| Mortgage | Cha          |     provide seller-funded DA for           |
| L        | racteristics |     homebuyers?                            |
| ender/** |              |                                            |
|          |              | -   Who administers or sponsors these      |
| **Under  |              |     programs in your community? (List      |
| writer** |              |     organizations)                         |
|          |              |                                            |
|          |              | -   Describe your experience or            |
|          |              |     involvement with seller-funded DAPs.   |
|          |              |                                            |
|          |              |     -   Roughly, how many of these loans   |
|          |              |         have you underwritten (what        |
|          |              |         percent is that of your overall    |
|          |              |         work?)                             |
|          |              |                                            |
|          |              |     -   What is your accept/reject rate    |
|          |              |         with these loans?                  |
|          |              |                                            |
|          |              |     -   How does that compare to your      |
|          |              |         accept/reject rate for other       |
|          |              |         FHA-insured loans?                 |
+----------+--------------+--------------------------------------------+
|          | Homebuyers   | -   What do homebuyers have to do to       |
|          |              |     participate in these seller-funded     |
|          |              |     DAPs?                                  |
|          |              |                                            |
|          |              | -   Can you describe the typical           |
|          |              |     homebuyer/borrower who participates in |
|          |              |     these programs? How do their credit    |
|          |              |     profiles differ from other borrowers?  |
|          |              |                                            |
|          |              | -   In your role, you examine quality of   |
|          |              |     credit and collateral to make an       |
|          |              |     underwriting decision. How does the    |
|          |              |     overall quality of these loans differ  |
|          |              |     from other loans you underwrite? If    |
|          |              |     so, how?                               |
|          |              |                                            |
|          |              | -   Does your firm provide any feedback to |
|          |              |     non-profit housing organizations about |
|          |              |     the performance of these loans with    |
|          |              |     seller-funded DA?                      |
|          |              |                                            |
|          |              | -   Can you describe the typical home that |
|          |              |     is sold through a seller-funded DAP?   |
|          |              |     Can you identify what kinds of         |
|          |              |     properties and neighborhoods are most  |
|          |              |     common?                                |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **       | Sellers      | -   Why do you think this program is       |
| Mortgage |              |     attractive to home sellers?            |
| L        |              |                                            |
| ender/** |              | -   In your opinion, does participation in |
|          |              |     seller-funded DAPs affect the sales    |
| **Under  |              |     price of the home? Why or why not?     |
| writer** |              |                                            |
|          |              | -   In your opinion, does participation in |
|          |              |     seller-funded DAPs affect the value of |
|          |              |     the property? Why or why not?          |
+----------+--------------+--------------------------------------------+
|          | Closing      | -   Do you think that seller-funded DAPs   |
|          |              |     are a good way to provide sustainable  |
|          |              |     homeownership opportunities? Why or    |
|          |              |     why not?                               |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **DA     | Program      | -   Does your organization offer programs  |
| Pro      | Cha          |     that provide DA for homebuyers funded  |
| viders** | racteristics |     by sources other than the seller?      |
|          |              |                                            |
|          |              | -   Can you describe briefly how your DAP  |
|          |              |     works? What other parties or           |
|          |              |     professionals do you partner with in   |
|          |              |     order to create home ownership         |
|          |              |     opportunities?                         |
+----------+--------------+--------------------------------------------+
|          | Homebuyers   | -   How do homebuyers find out about your  |
|          |              |     program? In other words, is it through |
|          |              |     referrals, advertising, direct mail,   |
|          |              |     or some other way?                     |
|          |              |                                            |
|          |              | -   What do you require of homebuyers who  |
|          |              |     participate in your DAP? In other      |
|          |              |     words, are there standards they must   |
|          |              |     meet to qualify for DA?                |
|          |              |                                            |
|          |              | -   Can you briefly describe the typical   |
|          |              |     homebuyer who participates in your     |
|          |              |     DAP? For example, are they familiar    |
|          |              |     with the homebuying or mortgage        |
|          |              |     process or they were unable to save    |
|          |              |     for a downpayment? What are some of    |
|          |              |     the characteristics of these           |
|          |              |     homebuyers; first-time homebuyers,     |
|          |              |     families, single individuals, low- to  |
|          |              |     moderate income, etc.                  |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **DA     | Sellers      | -   Can you describe the typical seller    |
| Pro      |              |     who participates in your DAP?          |
| viders** |              |                                            |
|          |              | -   Now, I would like to know something    |
|          |              |     about the sellers who enroll their     |
|          |              |     property in your program. How do home  |
|          |              |     sellers/builders find out about your   |
|          |              |     program?                               |
|          |              |                                            |
|          |              | -   What do sellers/builders have to do to |
|          |              |     participate in your program? In other  |
|          |              |     words, what requirements do they have  |
|          |              |     to meet?                               |
|          |              |                                            |
|          |              | -   Why is your program attractive to      |
|          |              |     sellers/builders?                      |
|          |              |                                            |
|          |              | -   In your opinion, does participation in |
|          |              |     the DAP affect the sales price of the  |
|          |              |     home? Does it affect the "value"       |
|          |              |     (i.e., how much the house is worth) of |
|          |              |     the home? Why or why not?              |
|          |              |                                            |
|          |              | -   What kind of information or feedback   |
|          |              |     do you receive from lenders about the  |
|          |              |     performance of loans that received     |
|          |              |     your DA?                               |
+----------+--------------+--------------------------------------------+
|          | Closing      | -   Do you think that current              |
|          |              |     seller-funded DAPs are a good way to   |
|          |              |     expand homeownership opportunities? If |
|          |              |     so, why or why not?                    |
|          |              |                                            |
|          |              | -   Do you have any suggestions to         |
|          |              |     increase the likelihood that           |
|          |              |     participants will be able to maintain  |
|          |              |     homeownership over the long term?      |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Real   | Program      | -   Before we get started, tell us what    |
| Estate   |              |     organizations you are familiar with    |
| Agents** | Cha          |     that sponsor DAPs.                     |
|          | racteristics |                                            |
|          |              | -   How did you first become involved with |
|          |              |     these programs? Do you have an ongoing |
|          |              |     relationship with a particular         |
|          |              |     non-profit housing organization?) In   |
|          |              |     your experience, how do these DAPs     |
|          |              |     work?                                  |
|          |              |                                            |
|          |              | ```{=html}                                 |
|          |              | <!-- -->                                   |
|          |              | ```                                        |
|          |              | -   What is the source of the downpayment  |
|          |              |     funds?                                 |
|          |              |                                            |
|          |              | ```{=html}                                 |
|          |              | <!-- -->                                   |
|          |              | ```                                        |
|          |              | -   What do you \[the agent\] have to do   |
|          |              |     to participate in this program? In     |
|          |              |     other words, what requirements do you  |
|          |              |     have to meet?                          |
|          |              |                                            |
|          |              | -   So you-the real estate agent, the      |
|          |              |     seller-funded DA provider, and a       |
|          |              |     homebuyer are all involved. What other |
|          |              |     parties or organizations work with you |
|          |              |     to make these transactions happen?     |
|          |              |                                            |
|          |              | -   Why are the programs you work with     |
|          |              |     attractive to you as a real estate     |
|          |              |     agent?                                 |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Real   | Homebuyers   | -   Now, I would like to know something    |
| Estate   |              |     about your involvement with assisted   |
| Agents** |              |     homebuyers. Do you work directly with  |
|          |              |     the non-profit housing organization or |
|          |              |     the homebuyer, or both?                |
|          |              |                                            |
|          |              | -   How do homebuyers find out about       |
|          |              |     seller-funded DAPs? Have you           |
|          |              |     recommended specific programs to       |
|          |              |     clients?                               |
|          |              |                                            |
|          |              | -   What do homebuyers have to do to       |
|          |              |     participate in seller-funded DAPs? In  |
|          |              |     other words, what eligibility          |
|          |              |     requirements do they have to meet?     |
|          |              |                                            |
|          |              | -   Can you describe a typical homebuyer   |
|          |              |     who participates in seller-funded      |
|          |              |     DAPs? For example, are they familiar   |
|          |              |     with the mortgage process, first-time  |
|          |              |     homeowners, low- to moderate income,   |
|          |              |     etc.? (Probe: Are they different than  |
|          |              |     other homebuyers? In what ways?)       |
+----------+--------------+--------------------------------------------+
|          | Sellers      | -   Can you describe the typical home sold |
|          |              |     with seller-funded DA? In your         |
|          |              |     experience, what kinds of properties   |
|          |              |     and/or neighborhoods are most common?  |
|          |              |                                            |
|          |              | -   In your opinion, why is this kind of   |
|          |              |     assistance program attractive to the   |
|          |              |     sellers/builders?                      |
|          |              |                                            |
|          |              | -   Do you think that seller-funded DAPs   |
|          |              |     affect the sales price of the          |
|          |              |     property? Explain. (Probe: can the     |
|          |              |     seller still provide the donation to   |
|          |              |     the non-profit without receiving full  |
|          |              |     asking price for the property?)        |
|          |              |                                            |
|          |              | -   Do you think that seller-funded DAPs   |
|          |              |     affect the value of the property?      |
|          |              |     (Probe: do appraisers take             |
|          |              |     seller-funded DA into account? If not, |
|          |              |     should they?)                          |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **Real   | Closing      | -   Do you today recommend specific        |
| Estate   |              |     seller-funded DAPs to your homebuyers? |
| Agents** |              |     Why or why not?                        |
+----------+--------------+--------------------------------------------+
| **S      | Program      | -   About how long ago did you sell your   |
| ellers** |              |     home? And if you can remember, tell us |
|          | Cha          |     what organization sponsored the DAP    |
|          | racteristics |     you participated in.                   |
|          |              |                                            |
|          |              | -   Think back to the time before you sold |
|          |              |     your home. Who helped you put your     |
|          |              |     house on the market? How did you find  |
|          |              |     this agent or organization?            |
|          |              |                                            |
|          |              | -   How did you first find out about the   |
|          |              |     seller-funded DAP? What were you told  |
|          |              |     about how the seller-funded DAP could  |
|          |              |     help you sell your home? (Probe: What  |
|          |              |     made you decide to sell your house     |
|          |              |     through this program?)                 |
|          |              |                                            |
|          |              | -   Did you ever have to change your       |
|          |              |     contract? What happened?               |
+----------+--------------+--------------------------------------------+

+----------+--------------+--------------------------------------------+
| *        | **Question   | **Question**                               |
| *Subject | Category**   |                                            |
| Group**  |              |                                            |
+----------+--------------+--------------------------------------------+
| **S      | Homebuyers   | -   Now let me ask about the               |
| ellers** |              |     homebuyer\--Who helped you find the    |
|          |              |     homebuyer of your home? About how long |
|          |              |     did this take?                         |
|          |              |                                            |
|          |              | -   Do you think you would have gotten the |
|          |              |     same sales price for your home if you  |
|          |              |     had not participated in the            |
|          |              |     seller-funded DAP?                     |
|          |              |                                            |
|          |              | -   Have you ever spoken with or gotten    |
|          |              |     any communication from the             |
|          |              |     seller-funded DA provider or           |
|          |              |     organization that you made the gift    |
|          |              |     through?                               |
|          |              |                                            |
|          |              | -   I am not sure that I understand        |
|          |              |     seller-funded DA gifts. Explain to me  |
|          |              |     how these programs work.               |
+----------+--------------+--------------------------------------------+
|          | Sellers      | -   What do you remember about the         |
|          |              |     property appraisal ordered by the      |
|          |              |     homebuyer's lender? Was the appraised  |
|          |              |     value more or less than you expected?  |
|          |              |     (Probe: Was the appraised value more   |
|          |              |     or less than the sales price, or was   |
|          |              |     it about the same?)                    |
+----------+--------------+--------------------------------------------+
|          | Closing      | -   Would you recommend the seller-funded  |
|          |              |     DAP you used to someone else who was   |
|          |              |     selling his or her home? Why or why    |
|          |              |     not?                                   |
|          |              |                                            |
|          |              | -   If you had another home to sell, would |
|          |              |     you work with the seller-funded DAP    |
|          |              |     again? Why or why not?                 |
+----------+--------------+--------------------------------------------+

# Appendix III

## Quantifiable Interview Results

**QUANTIFIABLE INTERVIEW RESULTS**

The following tabulations are based on responses to categorical or
closed-ended questions posed during interviews with appraisers,
builders, mortgage lenders, underwriters, and DA providers. Data
collected from interviews with other subjects, including real estate
agents, homebuyers and sellers, were all qualitative, and not
appropriate for quantitative analysis.

Please note the following when reading this appendix:

1.  Only positive or 'yes' responses are reflected in the tabulation for
    those questions where 'yes' or 'no' answers were requested.

2.  Answers to questions that reflect ranges for responses tabulate to
    100%.

3.  All other questions enabled respondents to select more than one
    response or to select no response resulting in final tabulations
    that may be greater than or less than 100%.

**APPRAISERS**

+------+-------------------------------------------------------+------+---+
|      | **Appraisers n=86**                                   | *    |   |
|      |                                                       | *Per |   |
|      |                                                       | cent |   |
|      |                                                       | of   |   |
|      |                                                       | Samp |   |
|      |                                                       | le** |   |
+======+=======================================================+======+===+
|      | In your community, are you aware of any programs that | 9    |   |
|      | provide seller-funded DA for homebuyers?              | 7.6% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | Who administers or sponsors these programs in your    |      |   |
|      | community?                                            |      |   |
+------+-------------------------------------------------------+------+---+
|      | -   AMERICAN FAMILY FUNDS                             | 1.1% |   |
+------+-------------------------------------------------------+------+---+
|      | -   AMERIDREAM, INC                                   | 1    |   |
|      |                                                       | 8.7% |   |
+------+-------------------------------------------------------+------+---+
|      | -   BUYERS FUND INC                                   | 8.2% |   |
+------+-------------------------------------------------------+------+---+
|      | -   CHAFA                                             | 7.1% |   |
+------+-------------------------------------------------------+------+---+
|      | -   CHBA                                              | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      | -   CURTILAGE INC                                     | 1.1% |   |
+------+-------------------------------------------------------+------+---+
|      | -   GENESIS                                           | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      | -   HOMEBUYERS ASSISTANCE FOUNDATION, INC.            | 1.6% |   |
+------+-------------------------------------------------------+------+---+
|      | -   HOMESTAR                                          | 2.7% |   |
+------+-------------------------------------------------------+------+---+
|      | -   HOUSING ACTION RESOURCE TRUST                     | 7.7% |   |
+------+-------------------------------------------------------+------+---+
|      | -   JEWISH VOCATIONAL SERVICE                         | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      | -   NEHEMIAH CORPORATION                              | 4    |   |
|      |                                                       | 0.1% |   |
+------+-------------------------------------------------------+------+---+
|      | -   NEIGHBORHOOD GOLD                                 | 9.3% |   |
+------+-------------------------------------------------------+------+---+
|      | -   PARTNERS IN CHARITY INC                           | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | Are you aware of whether a property being appraised   | 8    |   |
|      | is part of a downpayment assisted sale?               | 7.2% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | If so, how do you find out that this is the case?     |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  Letter attached to the contract                   | 7    |   |
|      |                                                       | 4.4% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  Sometimes there is a letter attached to the       | 1    |   |
|      |     contract, sometimes I don't find out about        | 2.8% |   |
|      |     seller-funded DA                                  |      |   |
+------+-------------------------------------------------------+------+---+
|      | c.  Seller-funded DA has nothing to do with appraisal | 0.0% |   |
|      |     process                                           |      |   |
+------+-------------------------------------------------------+------+---+
|      | d.  My client, the lender, told me that the property  | 7.0% |   |
|      |     was part of a seller-funded DAP                   |      |   |
+------+-------------------------------------------------------+------+---+
|      | e.  Never find out about seller-funded DA             | 1.2% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  Other                                             | 7.0% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | Are the requirements of these transactions            | 2    |   |
|      | \[involving seller-funded DA\] different from the     | 5.6% |   |
|      | requirements of other appraisals?                     |      |   |
+------+-------------------------------------------------------+------+---+
|      | About what percentage of your business involves       |      |   |
|      | seller-funded DA gifts?                               |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  0 to 10%                                          | 4    |   |
|      |                                                       | 1.1% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  11 to 20 %                                        | 1    |   |
|      |                                                       | 5.1% |   |
+------+-------------------------------------------------------+------+---+
|      | c.  21 to 40 %                                        | 2    |   |
|      |                                                       | 8.8% |   |
+------+-------------------------------------------------------+------+---+
|      | d.  41 to 60 %                                        | 5.5% |   |
+------+-------------------------------------------------------+------+---+
|      | e.  61 to 80 %                                        | 4.1% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  81 - 100 %                                        | 5.5% |   |
+------+-------------------------------------------------------+------+---+
|      | Total                                                 | 10   |   |
|      |                                                       | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | About what percentage of your appraisals are for FHA  |      |   |
|      | mortgages?                                            |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  0 to 10%                                          | 4    |   |
|      |                                                       | 6.6% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  11 to 20 %                                        | 1    |   |
|      |                                                       | 3.7% |   |
+------+-------------------------------------------------------+------+---+
|      | c.  21 to 40 %                                        | 1    |   |
|      |                                                       | 1.0% |   |
+------+-------------------------------------------------------+------+---+
|      | d.  41 to 60 %                                        | 6.8% |   |
+------+-------------------------------------------------------+------+---+
|      | e.  61 to 80 %                                        | 1    |   |
|      |                                                       | 9.2% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  81 - 100 %                                        | 2.7% |   |
+------+-------------------------------------------------------+------+---+
|      | Total                                                 | 10   |   |
|      |                                                       | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | In your opinion, why is this program attractive to    |      |   |
|      | sellers/builders?                                     |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  Helps sell home faster                            | 9    |   |
|      |                                                       | 8.8% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  Helps families achieve homeownership              | 3    |   |
|      |                                                       | 4.9% |   |
+------+-------------------------------------------------------+------+---+
|      | c.  Improvers home value for buyers                   | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | d.  Improves sales price                              | 2    |   |
|      |                                                       | 0.9% |   |
+------+-------------------------------------------------------+------+---+
|      | e.  Tax benefits/charitable contribution              | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  Because of assistance provided by non-profit      | 1    |   |
|      |                                                       | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      | g.  Other                                             | 1.2% |   |
+------+-------------------------------------------------------+------+---+
|      | Can you describe the typical home sold through        |      |   |
|      | seller-funded DAPs, or in what kinds of neighborhoods |      |   |
|      | this assistance is most common?                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  New                                               | 5    |   |
|      |                                                       | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  Urban                                             | 4    |   |
|      |                                                       | 3.0% |   |
+------+-------------------------------------------------------+------+---+
|      | c.  Suburban                                          | 7    |   |
|      |                                                       | 6.7% |   |
+------+-------------------------------------------------------+------+---+
|      | d.  Depressed                                         | 8.1% |   |
+------+-------------------------------------------------------+------+---+
|      | e.  Changing                                          | 1    |   |
|      |                                                       | 0.5% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  High growth area                                  | 2    |   |
|      |                                                       | 2.1% |   |
+------+-------------------------------------------------------+------+---+
|      | g.  Mixed residential and commercial                  | 0.0% |   |
+------+-------------------------------------------------------+------+---+
|      | h.  Other                                             | 1    |   |
|      |                                                       | 8.6% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | As an appraiser, do you work directly with any other  |      |   |
|      | parties to complete these transactions?               |      |   |
+------+-------------------------------------------------------+------+---+
|      | a.  Real estate agents                                | 4    |   |
|      |                                                       | 8.8% |   |
+------+-------------------------------------------------------+------+---+
|      | b.  State or local government housing authorities     | 1.2% |   |
+------+-------------------------------------------------------+------+---+
|      | c.  Non-profit housing organizations                  | 1.2% |   |
+------+-------------------------------------------------------+------+---+
|      | d.  Mortgage lenders or brokers                       | 9    |   |
|      |                                                       | 7.7% |   |
+------+-------------------------------------------------------+------+---+
|      | e.  Builders                                          | 3    |   |
|      |                                                       | 0.2% |   |
+------+-------------------------------------------------------+------+---+
|      | f.  Sellers                                           | 1    |   |
|      |                                                       | 9.8% |   |
+------+-------------------------------------------------------+------+---+
|      | g.  HOCs                                              | 3.5% |   |
+------+-------------------------------------------------------+------+---+
|      | h.  Closing agents                                    | 1.2% |   |
+------+-------------------------------------------------------+------+---+
|      | i.  Other                                             | 2.3% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | Does seller-funded DA affect values                   | 6    |   |
|      |                                                       | 2.0% |   |
+------+-------------------------------------------------------+------+---+
|      |                                                       |      |   |
+------+-------------------------------------------------------+------+---+
|      | Does seller-funded DA affect the sales price?         | 95.  |   |
|      |                                                       | 6.0% |   |
+------+-------------------------------------------------------+------+---+

+------+-------------------------------------------------------+-------+
|      | **Builders n=38**                                     | **Pe  |
|      |                                                       | rcent |
|      |                                                       | of    |
|      |                                                       | Sam   |
|      |                                                       | ple** |
+------+-------------------------------------------------------+-------+
|      | In your community, are you aware of any programs that | 1     |
|      | provide seller-funded DA for homebuyers?              | 00.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Who administers or sponsors these programs in your    |       |
|      | community?                                            |       |
+------+-------------------------------------------------------+-------+
|      | -   AMERIDREAM, INC.                                  | 22.8% |
+------+-------------------------------------------------------+-------+
|      | -   BUYERS FUND, INC.                                 | 7.0%  |
+------+-------------------------------------------------------+-------+
|      | -   CHAFA                                             | 3.5%  |
+------+-------------------------------------------------------+-------+
|      | -   COLORADO CARES                                    | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   CURTILAGE INC                                     | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   FAMILY HOME PROVIDERS INC                         | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   FUTURES HOME ASSISTANCE PROGRAMS                  | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   GENESIS                                           | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   HABITAT FOR HUMANITY OF INDIANA, INC.             | 3.5%  |
+------+-------------------------------------------------------+-------+
|      | -   HELPING HANDS                                     | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   HOMEBUYERS ASSISTANCE FOUNDATION, INC.            | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   JEWISH VOCATIONAL SERVICE                         | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   MARICOPA COUNTY PROGRAM (GOVT BONDS)              | 1.8%  |
+------+-------------------------------------------------------+-------+
|      | -   NEHEMIAH CORPORATION                              | 29.8% |
+------+-------------------------------------------------------+-------+
|      | -   NEIGHBORHOOD GOLD                                 | 15.8% |
+------+-------------------------------------------------------+-------+
|      | -   PARTNERS IN CHARITY, INC.                         | 1.8%  |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | About what percentage of your business involves       |       |
|      | seller-funded DA gifts?                               |       |
+------+-------------------------------------------------------+-------+
|      | a.  0 to 10%                                          | 29.4% |
+------+-------------------------------------------------------+-------+
|      | b.  11 to 20 %                                        | 11.8% |
+------+-------------------------------------------------------+-------+
|      | c.  21 to 40 %                                        | 23.5% |
+------+-------------------------------------------------------+-------+
|      | d.  41 to 60 %                                        | 23.5% |
+------+-------------------------------------------------------+-------+
|      | e.  61 to 80 %                                        | 8.8%  |
+------+-------------------------------------------------------+-------+
|      | f.  81 - 100 %                                        | 2.9%  |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Would you say that you have seen a larger number or   |       |
|      | smaller number of these downpayment assisted sales    |       |
|      | over time?                                            |       |
+------+-------------------------------------------------------+-------+
|      | a.  I see about the same number.                      | 29.4% |
+------+-------------------------------------------------------+-------+
|      | b.  I see more of these than I used to.               | 64.7% |
+------+-------------------------------------------------------+-------+
|      | c.  I see fewer of these than I used to.              | 2.9%  |
+------+-------------------------------------------------------+-------+
|      | d.  Missing                                           | 2.9%  |
+------+-------------------------------------------------------+-------+

+-----+---+-------------------------------------------------------+-------+
|     |   | **Builders n=38**                                     | **Pe  |
|     |   |                                                       | rcent |
|     |   |                                                       | of    |
|     |   |                                                       | Sam   |
|     |   |                                                       | ple** |
+-----+---+-------------------------------------------------------+-------+
|     |   | At what stage of the construction process do you      |       |
|     |   | decide to include seller-funded DA in the marketing   |       |
|     |   | process?                                              |       |
+-----+---+-------------------------------------------------------+-------+
|     |   | a.  Before construction begins                        | 76.5% |
+-----+---+-------------------------------------------------------+-------+
|     |   | b.  Near completion of construction                   | 5.9%  |
+-----+---+-------------------------------------------------------+-------+
|     |   | c.  After the home has been on the market a while     | 5.9%  |
+-----+---+-------------------------------------------------------+-------+
|     |   | d.  Other                                             | 11.8% |
+-----+---+-------------------------------------------------------+-------+
|     |   | What other parties or professionals do you partner    |       |
|     |   | with in order to sell these homes?                    |       |
+-----+---+-------------------------------------------------------+-------+
|     |   | a.  Homebuyers                                        | 76.5% |
+-----+---+-------------------------------------------------------+-------+
|     |   | b.  Appraisers                                        | 29.4% |
+-----+---+-------------------------------------------------------+-------+
|     |   | c.  Realtors                                          | 50.0% |
+-----+---+-------------------------------------------------------+-------+
|     |   | d.  Other builders                                    | 0.0%  |
+-----+---+-------------------------------------------------------+-------+
|     |   | e.  State or local government agencies                | 2.9%  |
+-----+---+-------------------------------------------------------+-------+
|     |   | f.  Non-profit housing organizations                  | 38.2% |
+-----+---+-------------------------------------------------------+-------+
|     |   | g.  Lenders                                           | 79.4% |
+-----+---+-------------------------------------------------------+-------+
|     |   | h.  HOCs                                              | 0.0%  |
+-----+---+-------------------------------------------------------+-------+
|     |   | i.  Closing agents                                    | 11.8% |
+-----+---+-------------------------------------------------------+-------+
|     |   | j.  Others                                            | 2.9%  |
+-----+---+-------------------------------------------------------+-------+
|     | H |                                                       |       |
|     | o |                                                       |       |
|     | w |                                                       |       |
|     | d |                                                       |       |
|     | o |                                                       |       |
|     | y |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | f |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | d |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     | a |                                                       |       |
|     | b |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     | p |                                                       |       |
|     | o |                                                       |       |
|     | t |                                                       |       |
|     | e |                                                       |       |
|     | n |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | a |                                                       |       |
|     | l |                                                       |       |
|     | t |                                                       |       |
|     | o |                                                       |       |
|     | s |                                                       |       |
|     | e |                                                       |       |
|     | l |                                                       |       |
|     | l |                                                       |       |
|     | h |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     | e |                                                       |       |
|     | s |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | g |                                                       |       |
|     | h |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     | s |                                                       |       |
|     | e |                                                       |       |
|     | s |                                                       |       |
|     | e |                                                       |       |
|     | l |                                                       |       |
|     | l |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | - |                                                       |       |
|     | f |                                                       |       |
|     | u |                                                       |       |
|     | n |                                                       |       |
|     | d |                                                       |       |
|     | e |                                                       |       |
|     | d |                                                       |       |
|     | D |                                                       |       |
|     | A |                                                       |       |
|     | P |                                                       |       |
|     | s |                                                       |       |
|     | ? |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | a |                                                       | 23.5% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | r |                                                       |       |
|     | e |                                                       |       |
|     | l |                                                       |       |
|     | a |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | s |                                                       |       |
|     | h |                                                       |       |
|     | i |                                                       |       |
|     | p |                                                       |       |
|     | s |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | w |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | n |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | - |                                                       |       |
|     | p |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | f |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | / |                                                       |       |
|     | h |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | s |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | g |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     | g |                                                       |       |
|     | a |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | z |                                                       |       |
|     | a |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | b |                                                       | 11.8% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | p |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | s |                                                       |       |
|     | p |                                                       |       |
|     | e |                                                       |       |
|     | c |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | v |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | h |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     | e |                                                       |       |
|     | b |                                                       |       |
|     | u |                                                       |       |
|     | y |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | s |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | c |                                                       | 11.8% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | n |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | - |                                                       |       |
|     | p |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | f |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | ' |                                                       |       |
|     | s |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     | r |                                                       |       |
|     | e |                                                       |       |
|     | a |                                                       |       |
|     | c |                                                       |       |
|     | h |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | c |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     | m |                                                       |       |
|     | u |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | y |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | d |                                                       | 0.0%  |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | b |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | c |                                                       |       |
|     | h |                                                       |       |
|     | u |                                                       |       |
|     | r |                                                       |       |
|     | e |                                                       |       |
|     | s |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | f |                                                       |       |
|     | l |                                                       |       |
|     | y |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | s |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | a |                                                       |       |
|     | b |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | n |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | - |                                                       |       |
|     | p |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | f |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | / |                                                       |       |
|     | h |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | s |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | g |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     | g |                                                       |       |
|     | a |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | z |                                                       |       |
|     | a |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | e |                                                       | 2.9%  |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | a |                                                       |       |
|     | d |                                                       |       |
|     | v |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | s |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | g |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | a |                                                       |       |
|     | n |                                                       |       |
|     | d |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | p |                                                       |       |
|     | u |                                                       |       |
|     | b |                                                       |       |
|     | l |                                                       |       |
|     | i |                                                       |       |
|     | c |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | y |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | a |                                                       |       |
|     | b |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | n |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | - |                                                       |       |
|     | p |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | f |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | / |                                                       |       |
|     | h |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | s |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | g |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     | g |                                                       |       |
|     | a |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | z |                                                       |       |
|     | a |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | f |                                                       | 14.7% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | T |                                                       |       |
|     | h |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | g |                                                       |       |
|     | h |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | w |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     | d |                                                       |       |
|     | - |                                                       |       |
|     | o |                                                       |       |
|     | f |                                                       |       |
|     | - |                                                       |       |
|     | m |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | g |                                                       | 0.0%  |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | F |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | i |                                                       |       |
|     | n |                                                       |       |
|     | t |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | n |                                                       |       |
|     | e |                                                       |       |
|     | t |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | h |                                                       | 2.9%  |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | T |                                                       |       |
|     | h |                                                       |       |
|     | r |                                                       |       |
|     | o |                                                       |       |
|     | u |                                                       |       |
|     | g |                                                       |       |
|     | h |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | c |                                                       |       |
|     | o |                                                       |       |
|     | m |                                                       |       |
|     | m |                                                       |       |
|     | u |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | t |                                                       |       |
|     | y |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | o |                                                       |       |
|     | r |                                                       |       |
|     | g |                                                       |       |
|     | a |                                                       |       |
|     | n |                                                       |       |
|     | i |                                                       |       |
|     | z |                                                       |       |
|     | a |                                                       |       |
|     | t |                                                       |       |
|     | i |                                                       |       |
|     | o |                                                       |       |
|     | n |                                                       |       |
|     | s |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | i |                                                       | 47.1% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | L |                                                       |       |
|     | e |                                                       |       |
|     | n |                                                       |       |
|     | d |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
|     | s |                                                       |       |
+-----+---+-------------------------------------------------------+-------+
|     | j |                                                       | 14.7% |
|     | . |                                                       |       |
|     |   |                                                       |       |
|     |   |                                                       |       |
|     | O |                                                       |       |
|     | t |                                                       |       |
|     | h |                                                       |       |
|     | e |                                                       |       |
|     | r |                                                       |       |
+-----+---+-------------------------------------------------------+-------+

+-----+-------------------------------------------------------+-------+
|     | In your opinion, why is this program attractive to    |       |
|     | sellers/builders?                                     |       |
+-----+-------------------------------------------------------+-------+
|     | a.  Helps sell home faster                            | 85.3% |
+-----+-------------------------------------------------------+-------+
|     | b.  Helps family achieve home ownership               | 58.8% |
+-----+-------------------------------------------------------+-------+
|     | c.  Improvers home value for buyers                   | 0.0%  |
+-----+-------------------------------------------------------+-------+
|     | d.  Improves sales price                              | 2.9%  |
+-----+-------------------------------------------------------+-------+
|     | e.  Tax benefits/charitable contribution              | 0.0%  |
+-----+-------------------------------------------------------+-------+
|     | f.  Because of assistance provided by non-profit      | 8.8%  |
+-----+-------------------------------------------------------+-------+
|     | g.  Other                                             | 17.6% |
+-----+-------------------------------------------------------+-------+
|     |                                                       |       |
+-----+-------------------------------------------------------+-------+
|     | Can you describe the typical homebuyer or borrower    |       |
|     | who participates in these programs? In other words,   |       |
|     | what requirements do they have to meet to receive the |       |
|     | seller-funded DA?                                     |       |
+-----+-------------------------------------------------------+-------+
|     | a.  First-time homebuyers?                            | 82.4% |
+-----+-------------------------------------------------------+-------+
|     | b.  Meet income limits?                               | 23.5% |
+-----+-------------------------------------------------------+-------+
|     | c.  Property characteristics (size, new construction, | 8.8%  |
|     |     existing construction, etc.?                      |       |
+-----+-------------------------------------------------------+-------+
|     | d.  Community/property location?                      | 14.7% |
+-----+-------------------------------------------------------+-------+
|     | e.  Homebuyer counseling participation?               | 11.8% |
+-----+-------------------------------------------------------+-------+
|     | f.  Need downpayment funds?                           | 58.8% |
+-----+-------------------------------------------------------+-------+
|     | g.  Need funds for closing?                           | 23.5% |
+-----+-------------------------------------------------------+-------+
|     | h.  Other requirements?                               | 14.7% |
+-----+-------------------------------------------------------+-------+
|     |                                                       |       |
+-----+-------------------------------------------------------+-------+

  ------- ------------------------------------------------------- -----------
          **Builders n=38**                                       **Percent
                                                                  of Sample**

  ------- ------------------------------------------------------- -----------

+-----+-------------------------------------------------------+--------+
|     | **Builders n=38**                                     | **P    |
|     |                                                       | ercent |
|     |                                                       | of     |
|     |                                                       | Sa     |
|     |                                                       | mple** |
+-----+-------------------------------------------------------+--------+
|     | Does seller-funded DA affect the sales price?         | 62.0%  |
+-----+-------------------------------------------------------+--------+
|     |                                                       |        |
+-----+-------------------------------------------------------+--------+
|     | When are these downpayment assistance programs most   |        |
|     | effective for you?                                    |        |
+-----+-------------------------------------------------------+--------+
|     | a.  In an Urban area                                  | 11.8%  |
+-----+-------------------------------------------------------+--------+
|     | b.  In a suburban area                                | 61.8%  |
+-----+-------------------------------------------------------+--------+
|     | c.  In a transitional neighborhood                    | 11.8%  |
+-----+-------------------------------------------------------+--------+
|     | d.  In a revitalizing neighborhood                    | 14.7%  |
+-----+-------------------------------------------------------+--------+
|     | e.  When the property has been on the market for more | 2.9%   |
|     |     than 120 days                                     |        |
+-----+-------------------------------------------------------+--------+
|     | f.  When a buyer needs the assistance to purchase the | 58.8%  |
|     |     property                                          |        |
+-----+-------------------------------------------------------+--------+
|     | g.  Don't know                                        | 2.9%   |
+-----+-------------------------------------------------------+--------+

+-------------------------------------------------------------+--------+
| How do homebuyers find out about these seller-funded DAPs?  |        |
+-------------------------------------------------------------+--------+
| a.  From non-profit's outreach in the community             | 2.9%   |
+-------------------------------------------------------------+--------+
| b.  From brochures or flyers about the non-profit's program | 29.4%  |
+-------------------------------------------------------------+--------+
| c.  From real estate agents or brokers                      | 58.8%  |
+-------------------------------------------------------------+--------+
| d.  From local lenders, such as banks, credit unions        | 64.7%  |
+-------------------------------------------------------------+--------+
| e.  From advertisements or publicity about the non-profit   | 26.5%  |
+-------------------------------------------------------------+--------+
| f.  Through word-of-mouth from other homebuyers             | 8.8%   |
+-------------------------------------------------------------+--------+
| g.  From the Internet                                       | 2.9%   |
+-------------------------------------------------------------+--------+
| h.  From sellers or builders                                | 55.9%  |
+-------------------------------------------------------------+--------+
| i.  Through other community organizations                   | 0.0%   |
+-------------------------------------------------------------+--------+
| j.  Other                                                   | 2.9%   |
+-------------------------------------------------------------+--------+
|                                                             |        |
+-------------------------------------------------------------+--------+

+------+-------------------------------------------------------+------+
|      | **Seller-Funded DA Providers n=22**                   | *    |
|      |                                                       | *Per |
|      |                                                       | cent |
|      |                                                       | of   |
|      |                                                       | Samp |
|      |                                                       | le** |
+------+-------------------------------------------------------+------+
|      | Does your organization offer programs that provide DA | 2    |
|      | for homebuyers funded by sources other than the       | 2.0% |
|      | seller?                                               |      |
+------+-------------------------------------------------------+------+
|      | What other parties or professionals do you partner    |      |
|      | with in order to create home ownership opportunities? |      |
+------+-------------------------------------------------------+------+
|      | a.  Appraisers                                        | 2.3% |
+------+-------------------------------------------------------+------+
|      | b.  Realtors or real estate agents                    | 4    |
|      |                                                       | 6.5% |
+------+-------------------------------------------------------+------+
|      | c.  Home builders                                     | 6    |
|      |                                                       | 5.1% |
+------+-------------------------------------------------------+------+
|      | d.  State/local government housing agency             | 1    |
|      |                                                       | 4.0% |
+------+-------------------------------------------------------+------+
|      | e.  Non-profit housing organizations                  | 4.7% |
+------+-------------------------------------------------------+------+
|      | f.  Mortgage lenders or brokers, such as banks,       | 7    |
|      |     credit unions, savings and loans, mortgage        | 9.1% |
|      |     companies etc.                                    |      |
+------+-------------------------------------------------------+------+
|      | g.  Sellers                                           | 2    |
|      |                                                       | 0.9% |
+------+-------------------------------------------------------+------+
|      | h.  HUD Homeownership center representatives (HOCs)   | 2.3% |
+------+-------------------------------------------------------+------+
|      | i.  Others                                            | 1    |
|      |                                                       | 4.0% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | How do homebuyers find out about your program?        |      |
+------+-------------------------------------------------------+------+
|      | a.  From our employees and volunteers outreach in the | 9.3% |
|      |     community                                         |      |
+------+-------------------------------------------------------+------+
|      | b.  From brochures or flyers about our services,      | 7.0% |
|      |     including direct mailings                         |      |
+------+-------------------------------------------------------+------+
|      | c.  From the internet/our website                     | 1    |
|      |                                                       | 1.6% |
+------+-------------------------------------------------------+------+
|      | d.  From realtors or brokers                          | 7    |
|      |                                                       | 6.7% |
+------+-------------------------------------------------------+------+
|      | e.  From local lenders, such as banks, credit unions  | 9    |
|      |                                                       | 7.7% |
+------+-------------------------------------------------------+------+
|      | f.  Through word-of-mouth from previous clients       | 1    |
|      |                                                       | 1.6% |
+------+-------------------------------------------------------+------+
|      | g.  Through other community organizations             | 2.3% |
+------+-------------------------------------------------------+------+
|      | h.  Other                                             | 0.0% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | What do you require of homebuyers who participate in  |      |
|      | your DAP? In other words, are there standards they    |      |
|      | must meet to qualify for DA?                          |      |
+------+-------------------------------------------------------+------+
|      | a.  First-time homebuyers?                            | 3    |
|      |                                                       | 0.2% |
+------+-------------------------------------------------------+------+
|      | b.  Income?                                           | 3    |
|      |                                                       | 7.2% |
+------+-------------------------------------------------------+------+
|      | c.  Property characteristics?                         | 1    |
|      |                                                       | 4.0% |
+------+-------------------------------------------------------+------+
|      | d.  Community/property location?                      | 4.7% |
+------+-------------------------------------------------------+------+
|      | e.  Homebuyer counseling participation?               | 1    |
|      |                                                       | 6.3% |
+------+-------------------------------------------------------+------+
|      | f.  Have some downpayment funds?                      | 1    |
|      |                                                       | 6.3% |
+------+-------------------------------------------------------+------+
|      | g.  Have some funds for closing?                      | 1    |
|      |                                                       | 4.0% |
+------+-------------------------------------------------------+------+
|      | h.  Use a specific lender partner?                    | 4.7% |
+------+-------------------------------------------------------+------+
|      | i.  Other requirements?                               | 1    |
|      |                                                       | 6.3% |
+------+-------------------------------------------------------+------+

+------+-------------------------------------------------------+------+
|      | **Seller-Funded DA Providers n=22**                   | *    |
|      |                                                       | *Per |
|      |                                                       | cent |
|      |                                                       | of   |
|      |                                                       | Samp |
|      |                                                       | le** |
+------+-------------------------------------------------------+------+
|      | How do home sellers/builders find out about your      |      |
|      | program?                                              |      |
+------+-------------------------------------------------------+------+
|      | a.  from relationships with members of our            | 2    |
|      |     organization                                      | 5.6% |
+------+-------------------------------------------------------+------+
|      | b.  from the internet/our website                     | 1    |
|      |                                                       | 4.0% |
+------+-------------------------------------------------------+------+
|      | c.  from our employees and volunteers outreach in the | 3    |
|      |     community                                         | 0.2% |
+------+-------------------------------------------------------+------+
|      | d.  from brochures or flyers about our services       | 2.3% |
+------+-------------------------------------------------------+------+
|      | e.  from our media advertisements or public service   | 1    |
|      |     announcements in newspapers, billboards, posters, | 4.0% |
|      |     radio, or television                              |      |
+------+-------------------------------------------------------+------+
|      | f.  through word-of-mouth from previous clients       | 2    |
|      |                                                       | 3.3% |
+------+-------------------------------------------------------+------+
|      | g.  through other community organizations             | 0.0% |
+------+-------------------------------------------------------+------+
|      | h.  from a lender                                     | 2    |
|      |                                                       | 3.3% |
+------+-------------------------------------------------------+------+
|      | i.  from a realtor                                    | 1    |
|      |                                                       | 6.3% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | In your opinion, why is this program attractive to    |      |
|      | sellers/builders?                                     |      |
+------+-------------------------------------------------------+------+
|      | a.  Helps sell home faster                            | 8    |
|      |                                                       | 6.0% |
+------+-------------------------------------------------------+------+
|      | b.  Helps families achieve homeownership              | 5    |
|      |                                                       | 8.1% |
+------+-------------------------------------------------------+------+
|      | c.  Improvers home value for buyers                   | 0.0% |
+------+-------------------------------------------------------+------+
|      | d.  Improves sales price                              | 0.0% |
+------+-------------------------------------------------------+------+
|      | e.  Tax benefits/charitable contribution              | 0.0% |
+------+-------------------------------------------------------+------+
|      | f.  Other                                             | 4.7% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | Does seller-funded DA affect values?                  | 7    |
|      |                                                       | 0.8% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | Does seller-funded DA affect the sales price?         | 7    |
|      |                                                       | 7.8% |
+------+-------------------------------------------------------+------+
|      |                                                       |      |
+------+-------------------------------------------------------+------+
|      | What kind of information or feedback do you receive   |      |
|      | from lenders about the performance of loans that      |      |
|      | received your DA?                                     |      |
+------+-------------------------------------------------------+------+
|      | a.  We have a tracking system in place                | 1    |
|      |                                                       | 8.6% |
+------+-------------------------------------------------------+------+
|      | b.  We find out about loan performance through        | 2.3% |
|      |     homebuyer post-purchase counseling                |      |
+------+-------------------------------------------------------+------+
|      | c.  The lender often contacts us about loan           | 4.7% |
|      |     performance                                       |      |
+------+-------------------------------------------------------+------+
|      | d.  We receive no information from the lender after   | 8    |
|      |     origination                                       | 6.0% |
+------+-------------------------------------------------------+------+
|      | e.  Other                                             | 2.3% |
+------+-------------------------------------------------------+------+
|      | Do you think that your DAP is a good way to expand    | 9    |
|      | homeownership opportunities?                          | 3.0% |
+------+-------------------------------------------------------+------+

+------+-------------------------------------------------------+-------+
|      | **Mortgage Lending Professionals n=30**               | **Pe  |
|      |                                                       | rcent |
|      | **(Lenders n=14 Underwriters n=16)**                  | of    |
|      |                                                       | Sam   |
|      |                                                       | ple** |
+------+-------------------------------------------------------+-------+
|      | In your community, are you aware of any programs that | 1     |
|      | provide seller-funded DA for homebuyers?              | 00.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Who administers or sponsors these programs in your    |       |
|      | community?                                            |       |
+------+-------------------------------------------------------+-------+
|      | -   AFFORDABLE HOUSING CONCEPTS, INC                  | 3.3%  |
+------+-------------------------------------------------------+-------+
|      | -   ALLIANCE HOUSING AND SYSTEM PROGRAM               | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   AMERICAN ASSISTANCE FOUNDATION                    | 2.2%  |
+------+-------------------------------------------------------+-------+
|      | -   AMERIDREAM                                        | 10.0% |
+------+-------------------------------------------------------+-------+
|      | -   APOLLO                                            | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   BUYERS FUND INC                                   | 17.8% |
+------+-------------------------------------------------------+-------+
|      | -   CHAFA                                             | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   CURTILAGE INC                                     | 2.2%  |
+------+-------------------------------------------------------+-------+
|      | -   FAMILY HOME PROVIDERS INC                         | 6.7%  |
+------+-------------------------------------------------------+-------+
|      | -   FUTURES HOME ASSISTANCE PROGRAMS                  | 6.7%  |
+------+-------------------------------------------------------+-------+
|      | -   GENESIS                                           | 3.3%  |
+------+-------------------------------------------------------+-------+
|      | -   HABITAT FOR HUMANITY OF INDIANA INC.              | 3.3%  |
+------+-------------------------------------------------------+-------+
|      | -   HELPING HANDS                                     | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   HART FOOD BANK                                    | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   HOUSING ACTION RESOURCE TRUST                     | 6.7%  |
+------+-------------------------------------------------------+-------+
|      | -   KENRAY                                            | 1.1%  |
+------+-------------------------------------------------------+-------+
|      | -   NEHEMIAH CORPORATION                              | 26.7% |
+------+-------------------------------------------------------+-------+
|      | -   NEIGHBORHOOD GOLD                                 | 3.3%  |
+------+-------------------------------------------------------+-------+
|      | -   WESTMINSTER FOUNDATION                            | 1.1%  |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Roughly, how many of these loans have you             |       |
|      | underwritten                                          |       |
+------+-------------------------------------------------------+-------+
|      | a.  0-50                                              | 75.0% |
+------+-------------------------------------------------------+-------+
|      | b.  50-100                                            | 7.1%  |
+------+-------------------------------------------------------+-------+
|      | c.  \> 100                                            | 17.9% |
+------+-------------------------------------------------------+-------+
|      | Total                                                 | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | What percent is that of your overall work?            |       |
+------+-------------------------------------------------------+-------+
|      | a.  \<= 5 %                                           | 65.5% |
+------+-------------------------------------------------------+-------+
|      | b.  6 to 25%                                          | 13.8% |
+------+-------------------------------------------------------+-------+
|      | c.  \> 25 %                                           | 20.7% |
+------+-------------------------------------------------------+-------+
|      | Total                                                 | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+

+------+-------------------------------------------------------+-------+
|      | **Mortgage Lending Professionals n=30**               | **Pe  |
|      |                                                       | rcent |
|      | **(Lenders n=14 Underwriters n=16)**                  | of    |
|      |                                                       | Sam   |
|      |                                                       | ple** |
+------+-------------------------------------------------------+-------+
|      | What is reject rate with these loans?                 |       |
+------+-------------------------------------------------------+-------+
|      | a.  0 to 2 %                                          | 81.3% |
+------+-------------------------------------------------------+-------+
|      | b.  5%                                                | 9.4%  |
+------+-------------------------------------------------------+-------+
|      | c.  95%                                               | 3.1%  |
+------+-------------------------------------------------------+-------+
|      | d.  97%                                               | 6.3%  |
+------+-------------------------------------------------------+-------+
|      | Total                                                 | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      | About what percentage of your business involves       |       |
|      | seller-funded DA gifts?                               |       |
+------+-------------------------------------------------------+-------+
|      | a.  \<= 5 %                                           | 45.5% |
+------+-------------------------------------------------------+-------+
|      | b.  6 to 25%                                          | 18.2% |
+------+-------------------------------------------------------+-------+
|      | c.  26 to 50 %                                        | 15.2% |
+------+-------------------------------------------------------+-------+
|      | d.  \> 50 %                                           | 21.2% |
+------+-------------------------------------------------------+-------+
|      | Total                                                 | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      | About what percentage of your business is FHA?        |       |
+------+-------------------------------------------------------+-------+
|      | a.  \<= 5 %                                           | 38.7% |
+------+-------------------------------------------------------+-------+
|      | b.  6 to 25%                                          | 12.9% |
+------+-------------------------------------------------------+-------+
|      | c.  26 to 50 %                                        | 9.7%  |
+------+-------------------------------------------------------+-------+
|      | d.  \> 50 %                                           | 38.7% |
+------+-------------------------------------------------------+-------+
|      | Total                                                 | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      | What do homebuyers have to do to participate in these |       |
|      | programs? In other words, what requirements must they |       |
|      | meet for loans to be acceptable to FHA and/or other   |       |
|      | insurers and investors?                               |       |
+------+-------------------------------------------------------+-------+
|      | a.  Pay a fee?                                        | 0.0%  |
+------+-------------------------------------------------------+-------+
|      | b.  Be a First-time homebuyer?                        | 34.4% |
+------+-------------------------------------------------------+-------+
|      | c.  Meet Income limits?                               | 40.6% |
+------+-------------------------------------------------------+-------+
|      | d.  Property characteristics?                         | 12.5% |
+------+-------------------------------------------------------+-------+
|      | e.  Community/property location?                      | 6.3%  |
+------+-------------------------------------------------------+-------+
|      | f.  Participate in homebuyer counseling?              | 12.5% |
+------+-------------------------------------------------------+-------+
|      | g.  Have some downpayment funds?                      | 28.1% |
+------+-------------------------------------------------------+-------+
|      | h.  Have some funds for closing?                      | 25.0% |
+------+-------------------------------------------------------+-------+
|      | i.  Other requirements?                               | 78.1% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Does your firm provide any feedback to non-profit     | 6.5%  |
|      | housing organizations about the performance of these  |       |
|      | loans with seller-funded DA?                          |       |
+------+-------------------------------------------------------+-------+

+------+-------------------------------------------------------+-------+
|      | **Mortgage Lending Professionals n=30**               | **Pe  |
|      |                                                       | rcent |
|      | **(Lenders n=14 Underwriters n=16)**                  | of    |
|      |                                                       | Sam   |
|      |                                                       | ple** |
+------+-------------------------------------------------------+-------+
|      | Can you describe the typical home sold through        |       |
|      | seller-funded DAPs, or in what kinds of neighborhoods |       |
|      | this assistance is most common?                       |       |
+------+-------------------------------------------------------+-------+
|      | a.  New construction                                  | 34.5% |
+------+-------------------------------------------------------+-------+
|      | b.  Low income                                        | 31.3% |
+------+-------------------------------------------------------+-------+
|      | c.  Urban                                             | 62.5% |
+------+-------------------------------------------------------+-------+
|      | d.  Suburban                                          | 87.5% |
+------+-------------------------------------------------------+-------+
|      | e.  Depressed                                         | 3.1%  |
+------+-------------------------------------------------------+-------+
|      | f.  Changing                                          | 12.5% |
+------+-------------------------------------------------------+-------+
|      | g.  High growth area                                  | 25.0% |
+------+-------------------------------------------------------+-------+
|      | h.  Mixed residential and commercial                  | 0.0%  |
+------+-------------------------------------------------------+-------+
|      | i.  Other                                             | 6.3%  |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | In your opinion, why is this program attractive to    |       |
|      | sellers/builders?                                     |       |
+------+-------------------------------------------------------+-------+
|      | a.  Helps sell home faster                            | 1     |
|      |                                                       | 00.0% |
+------+-------------------------------------------------------+-------+
|      | b.  Helps families achieve homeownership              | 75.0% |
+------+-------------------------------------------------------+-------+
|      | c.  Improvers home value for buyers                   | 0.0%  |
+------+-------------------------------------------------------+-------+
|      | d.  Improves sales price                              | 31.3% |
+------+-------------------------------------------------------+-------+
|      | e.  Tax benefits/charitable contribution              | 0.0%  |
+------+-------------------------------------------------------+-------+
|      | f.  Because of assistance provided by non-profit      | 12.5% |
+------+-------------------------------------------------------+-------+
|      | g.  Other                                             | 9.4%  |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Does seller-funded DA affect values                   | 56.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Does seller-funded DA affect the sales price?         | 90.0% |
+------+-------------------------------------------------------+-------+
|      |                                                       |       |
+------+-------------------------------------------------------+-------+
|      | Do you think that DAPs are a good way to provide      | 84.4% |
|      | sustainable homeownership opportunities?              |       |
+------+-------------------------------------------------------+-------+

# Appendix IV

## Detailed Flow Chart of a Downpayment Assistance Transaction 

![](media/image5.jpeg){width="6.9222222222222225in"
height="8.210416666666667in"}

# Appendix V

## 2002 IRS Form 990 Highlights 

**2002 IRS Form 990 Highlights**

  ----------------- -------------------- -------------------- ----------------
  **Seller-Funded   **Gross Profit\***   **Marketing          **% of Gross
  DA Provider**                          Expense**            Profit**

  **A**             \$ 26,044,973        \$ 10,694,132        41%

  **B**             \$ 32,181,802        \$ 12,729,063        40%

  **C**             \$ 12,186,686        \$ 9,918,927         81%

  **D**             \$ 3,012,744         \$ 155,851           5%

  **E**             \$ 2,676,306         \$ 1,541,699         58%

  **F**             \$ 1,717,218         \$ 1,596,750         93%

  **G**             \$ 1,153,831         \$ 80,677            7%

  **H**             \$ 3,438,132         \$ 564,933           16%

  **I**             \$ 1,079,916         \$ 988,400           92%

  **J**             \$ 465,394           \$ 181,791           39%

  **K**             \$ 278,589           \$ 178,126           64%

  **L**             \$ 269,529           \$ 82,484            31%
  ----------------- -------------------- -------------------- ----------------

> \*Each seller-funded DA providers' Gross Profit was calculated by
> subtracting the amount given to homebuyers as downpayment assistance
> from the revenue generated from downpayment assistance activities.

Source: GuideStar.org, the National Database of Non-profit Organizations

The 2002 financial highlights in the above table are derived from IRS
Form 990 for twelve of the twenty-two seller-funded DA providers
interviewed by Concentrance. Although we interviewed twenty-two
seller-funded DA providers, only twelve are represented in the table
above because IRS Form 990 did not contain complete information for 2002
in the fields used to compile the information in the chart for the
remaining ten organizations. The information in the table is available
on GuideStar.org, the National Database of Non-profit Organizations.
Twenty-five percent of the organizations spent less than 20% of their
2002 Gross Profit on marketing expenses. On the other end of the
spectrum an equal percent (25%) of the organizations spent more than 80%
of their 2002 Gross Profit on marketing expenses. Thirty-three percent
of the organizations analyzed spent 41% or less of their 2002 Gross
Profit on marketing expenses. The remaining 17% spent between 58% and
64% of their Gross Profit on marketing expenses. Marketing expenses are
used to defray the cost of application processing, advertising and
collateral material production and fees paid to independent marketing
contractors. Some seller-funded DA providers used internal staff for
marketing while other outsourced the work to for-profits affiliated
marketing companies.

While seller-funded DA providers did not know the actual number on DA
applications processed annually, they did agree that monthly volume
ranged between 14,000 and 20,000 transactions per month. Thus, on an
annualized basis this translates to between 168,000 and 240,000
transactions.

# Appendix Vi

## Comparative Financing scenarios 

Seller-funded DA and Proposed Zero Downpayment Program

  ------------------ --------------- ----------------- -------------------
                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       

                                                       
  ------------------ --------------- ----------------- -------------------

The Table below illustrates three FHA-insured financing scenarios for a
property with a listing price of \$100,000. The first scenario
represents the typical way in which seller-funded DA operates today for
homebuyers with little or no liquid assets. The second scenario is the
zero-downpayment program proposed in the President's FY2005 and FY2006
budget submissions to the Congress, and the third scenario adds the
risk-adjusted premium of scenario two to the case shown in scenario one.

In all three scenarios, it is assumed that the borrower does not have
any funds to invest, thus ***the seller pays all borrower closing costs
and escrows.*** Among FHA-insured borrowers receiving downpayment
assistance today, around 55 percent pay their own closing costs while
property sellers pay (nearly all of) such costs for the other 45
percent.

Seller-funded DA loans are, in most cases, effectively zero-downpayment
loans where homebuyers finance their downpayments. Therefore, it would
be appropriate to charge them the higher risk-adjusted premiums proposed
in the President's budget for zero-downpayment FHA loans. There is no
net equity in seller-funded DA loans because property sellers generally
recapture their downpayment contribution in a higher sale price. Because
of that higher sale price, the final loan amount and monthly payment in
scenario (3) are both slightly higher than would be required under a
pure zero-downpayment program (scenario (2)). Utilizing a
zero-downpayment program would eliminate the pressure now placed on
property appraisers to add seller-funded downpayments to the appraised
value of the property to justify a higher sale price.

+-----------------------+-------------+-------------+-----------------+
| # T                   | **(1)**     | **(2)**     | **(3)**         |
| ransaction Components |             |             |                 |
|                       | **Typical   | **Proposed  | **Seller-Funded |
|                       | Loan with   | Zero        | DA with         |
|                       | Se          | Downpayment | risk-adjusted   |
|                       | ller-Funded | Program**   | premium**       |
|                       | DA**        |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Listed price for    | \$ 100,000. | \$ 100,000. | \$ 100,000      |
| property**            |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Contract sales      | 103,505.    | 100,000.    | 103,505         |
| price^a^**            |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **FHA minimum         | 3,105       | 0           | 3,105           |
| downpayment           |             |             |                 |
| requirement**         |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Mortgage amount     | 100,400     | 100,000     | 100,400         |
| before insurance      |             |             |                 |
| premium**             |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Up-Front FHA        | 1,506.      | 2,250.      | 2,259           |
| Premium^b^**          |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Total Loan Amount** | 101,906.    | 102,250.    | 102,659         |
+-----------------------+-------------+-------------+-----------------+
| **Monthly Mortgage    | 913         | 926         | 939             |
| Payment^c^**          |             |             |                 |
+-----------------------+-------------+-------------+-----------------+
| **Effective           | 102%        | 102%        | 103%            |
| Loan-to-Value Ratio** |             |             |                 |
+-----------------------+-------------+-------------+-----------------+

^a^Includes minimum 3% downpayment and seller-funded-DA processing fee
of \$400. The contract sales price is calculated as the listing price
plus \$400, divided by 0.97.

^b^The up-front, financed premium rate for all 203b programs is 1.5% of
the loan amount. For the proposed zero downpayment program, the up-front
premium is 2.25% of the base mortgage amount (before adding the financed
premium).

^c^Monthly payments are computed assuming: 6 percent mortgage interest
rate; 30-year amortization schedule; property taxes and hazard insurance
at 3 percent of the contract sale price per year; 0.50 percent annual
FHA insurance premium for the current seller-funded DA loan and 0.75
percent annual premium for the zero-downpayment and the risk-adjusted
seller-funded DA scenarios.

[^1]: Morgan, David L. (1988), *Focus Groups as Qualitative Research*,
    Qualitative Research Methods Series, Vol. 16, Newbury Park, CT: Sage
    Publications.

[^2]: Details on the use of this approach for qualitative data analysis
    are provided in Harvey, L. (1990). *Critical Social Research*.
    London: Unwin Hyman.

[^3]: MLS is the local multiple listing service that in print and online
    versions list properties available for sale, their locations,
    characteristics, some information about prior sales transactions,
    and the asking price.