Opinion ID: 3052582
Heading Depth: 2
Heading Rank: 1

Heading: HUD Requirements

Text: By insuring Federal Housing Administration (“FHA”) mortgages, HUD assists homebuyers who cannot otherwise afford to purchase homes. FHA mortgage insurance insures the mortgage for the lenders, and if the buyer cannot make payments, HUD pays off the loan and takes the property. By 10494 UNITED STATES v. PETERSON law, the buyer must meet three conditions before HUD will insure the loan: 1) sufficient income to make the monthly payments; 2) satisfactory credit rating; and 3) the ability to make a three-percent minimum cash investment in the property.1 See 12 U.S.C. §§ 1709, 1715b. Under HUD’s regulations and policies, the buyer is not required to have the down payment come out of his or her own pocket—he or she may receive the down payment as a gift from friends, relatives, or non-profit housing assistance organizations. However, the sellers of the property are not permitted to make direct gifts to the buyers. Despite this restriction on sellers, the seller was permitted indirectly to subsidize the down payment by providing money to a non-profit organization.2 Under the permissible indirect subsidy scheme, after the non-profit approved a buyer, the non-profit agreed to gift the down payment at closing. The gift was paid out of the non-profit’s own funds, and only after closing did the seller pay the non-profit a “service fee” equal to the gift from the proceeds of the sale. If the closing did not go through, the seller was not required to pay the service fee. The fee was used by the non-profit to provide gifts to future home purchasers. 1 Although the cash investment is not technically a down payment, we refer to it as such for simplicity’s sake. 2 In October 2007, HUD promulgated a new regulation providing that FHA will no longer insure loans originated with seller-funded down payment assistance, whether that assistance is direct or indirect. See Standards for Mortgagor’s Investment in Mortgaged Property, 72 Fed. Reg. 56,002, 56,002 (Oct. 1, 2007). Two district courts have concluded that HUD’s promulgation of the October 2007 regulation violated the Administrative Procedure Act. See Nehemiah Corp. of America v. Jackson, 546 F. Supp. 2d 830 (E.D. Cal. 2008); Penobscot Indian Nation v. United States Dep’t of Housing and Urban Dev., 539 F. Supp. 2d 40 (D.D.C. 2008). We express no view about the merits of those decisions or HUD’s subsequent attempt to promulgate similar regulations. See Standards for Mortgagor’s Investment in Mortgaged Property: Additional Public Comment Period, 73 Fed. Reg. 33,941 (June 16, 2008). UNITED STATES v. PETERSON 10495 Buyers who received the down payment money from an outside source, such as a family member, friend, or nonprofit, were required to submit a gift letter to HUD. The gift letter confirmed the source of the gift, the relationship of the donor to the donee, and the nature of the buyer’s down payment. A copy of the cashier’s check delivering the gifted funds to escrow was attached also to the gift letter. The gift letter was put into a binder compiling details on the loan. At the Petersons’ trial, the government’s expert, Travis Pham, Chief of the Insuring and Underwriting Division of HUD, testified that the government relied on the information in the binder, including the gift letter, to determine whether it would insure a loan and for auditing purposes. Pham was offered as an “expert on HUD regulations and policies related to underwriting” without objection by the Petersons. He said that HUD would not insure a loan if the binder contained a false gift letter: the down payment could come from the buyer’s friends, relatives, or a non-profit, but “money can’t go directly from the seller to the buyer.” Pham further testified that requiring buyers to put 3% down gave the buyer some interest in the property, making it less likely that he or she would default. He explained that the limitations on who may give the buyer money existed also to prevent the seller from increasing the price.