Upcoming IRS Ruling Reinforces FP Programs
Release Date:May 15th, 2006

Upcoming IRS Ruling Reinforces FP Programs

Fort Collins, CO, May 15, 2006 – Funding Partners, a non-profit Community Development Financial Institution (CDFI) operating throughout Colorado, is pleased to announce that is unaffected by an upcoming ruling from the Internal Revenue Service.  Through its House to Home Ownership (H2O) Down Payment Assistance Program® and the servicing of numerous programs on behalf of employers, local agencies and public authorities, FP has designed programs that are not dependent upon involved party transactions.

As reported by Michael Corkery of the Wall Street Journal on May 5, 2006, the IRS has determined that organizations that funnel money from a property seller or developer to low-income buyers in the form of a gift to be used as a down payment can no longer qualify for nonprofit status.  Such organizations known to many in the industry under the name Nehemiah Corporation, AmeriDream, Inc. and roughly 182 other entities, the programs in question rely on home pricing inflation to cover the costs of the buyers ‘gift’.  

In its ruling yesterday, the IRS said these aid groups funded largely by home builders and other sellers no longer qualify for tax- exempt status because the benefits of the programs are going to sellers and profit-making entities. In its statement, the IRS said it has found "that organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self- serving, circular-financing arrangements."

The IRS has objected to buyers not paying taxes on their gift, while organizations such as Nehemiah that facilitate the transaction remain tax-exempt.  Property sellers often deduct the reimbursement as well, creating a double benefit for both sides of a real estate transaction.   The practice has been under scrutiny since it was introduced nationally in 1997 by Nehemiah Corporation of Sacramento, CA, but under increased pressure since the release of two separate government reports in 2005 that demonstrated the practice makes housing more expensive to those who can least afford it since the down payment gift is added to the price of the home.  Additionally, the Department of Housing and Urban Development (HUD) has admitted that default rates on homes financed through such programs are substantially higher than those without assistance.  HUD, through the Federal Housing Administration (FHA) mortgage program, is one of the few sources for financing a home purchase using such assistance.

"The IRS is increasingly concerned with organizations that are taking advantage of homebuyers who need assistance for a down payment to realize the American dream of homeownership,"  IRS Commissioner Mark W. Everson said in a statement.

In contrast, Funding Partners offers down payment and closing cost assistance to first-time homebuyers that earn approximately $17 per hour, and less, that have demonstrated a capacity to accept the responsibilities of home ownership.  The H2O program and all other programs offered through Funding Partners, are secured by a subordinate deed of trust on the home being purchased and carry a promise to repay the funds when the home is sold, refinanced or upon loan maturity.  FP programs are funded through unrelated sources to the transaction that serve to promote economic and community development objectives.  H2O loans are typically repaid within 2 years of the home purchase, carry no monthly payment requirement and enjoy a 97% performance rating; meaning fewer than 3% of H2O loan volume is lost to foreclosure of the primary mortgage or bankruptcy of the home buyer.

“While we lament the loss of resources to those individuals that might actually benefit from these ‘Cost-Plus’ programs, Funding Partners has been steadfast in our objection to the way these programs have been marketed.  Just as the Interest-Only and Option ARM mortgage products were unleashed upon the market without consideration of whether the consumer was suited for such sophisticated vehicles, these programs have created a financial disaster that will have wide-ranging repercussions long after the salesman has moved on,” according to Joe Rowan, Executive Director of Funding Partners.     

With revenue reaching more than $100 million a year, Nehemiah Corporation is considering options that range from a legal challenge to restructuring its program to pay taxes on fees it generates. Other possibilities include making the down payment division of Nehemiah a for-profit center. The U.S. Department of Housing and Urban Development advised the firm it can continue its current practices for down payments already in the pipeline.

Contact Information:
Laura Jarvis
Marketing and Communications
Funding Partners