Washington Post Discovers IRS Crackdown on Down Payment Charities
Industry rise could be a case study in (mis)using the charity form to reap huge profits.
Months after you read it here, the Washington Post is reporting on the IRS decision that seller-funded groups that supply home buyers with down payment "grants" are not charities. The article says that the ruling was unexpected, although it notes that the Government Accounting Office and Sen. Charles Grassley had questioned the practice. (We reported on the IRS ruling back on May 5 and on the GAO report on March 18.)
The effect of seller-funded down payments is to put people into homes that are often overpriced and that the buyers cannot really afford. Of all mortgage lenders, only the FHA allows the practice of seller-funded down payments, but only when the grantor is a "charity." That's the loophole that the industry is built on. The "charity" idea was hatched with the best of intentions in the 1990s by Don Harris of Nehemiah Home Ownership (see previous articles mentioned above), who obtained the ruling from HUD, but then the idea was quickly picked up by the real estate and home building industries, so that there are now more than 200 charities offering such help, according to the Post.
The real news in the article is that the charities and the real estate industry are planning to fight back, asking the IRS to suspend the ruling and solicit comments in a formal rulemaking procedure.
They are likely to find one of the big differences between charities and other businesses: a regulated industry is entitled to formal rulemaking processes, but charities, being constitutionally protected from "regulation," are not. One of those fascinating paradoxes of the charity business.
Whenever profit (for the charity) is invloved it will drive the deal. I think seller concessions are fine as long as they fall under a reasonable range (6%). Collecting a fee off of brokering a concession from the seller only passes on those additional costs to the consumer who will be financing their downpayment and closing costs for the next thirty years. Let's help buyers be ready for homeownership by managing debt, encouraging savings, and locating grant programs to help with (not pay for) downpayments and closing costs. Those consumers will make better homeonwers and be less likely to be foreclosed on.
Posted by: John D. Murphy | June 03, 2006 at 11:10 AM