Nehemiah Corporation of America is a non-profit organization based in Sacramento, California specializing in homeownership, affordable housing and community development. It started in 1994 as a small organization, but grew to prominence later in the 1990s after it developed a program that allowed home buyers to make down payments on their purchases using funds that were derived from the home sellers. This program, the Nehemiah Program, became popular and was widely emulated, giving birth to what came to be known as the seller-funded down-payment assistance industry. The industry attracted criticism from U.S. federal agencies (particularly the Government Accountability Office and the Internal Revenue Service) and was ultimately shut down in 2008 by a change in federal law.
Since 2008, the Nehemiah Corporation has been operating as a social enterprise organization. Via its affiliates and subsidiaries, it has been providing real-estate development capital for low-income neighborhoods, as well as providing instructional and other resources related to individual finance and home ownership. It also sponsors management training for young adults.
The Nehemiah Program The Nehemiah Program is not to be confused with the Nehemiah Housing Opportunity Grants ("NHOP") program enacted in 1988 by Title VI of the Housing and Community Development Act of 1987. NHOP ceased operation in 1991 and was unrelated to the program described here.
Background When mortgage lenders consider whether to underwrite a particular loan, they look to factors such as the creditworthiness of the borrower and the amount of down payment the borrower will be making. The amount of the down payment required by the mortgage lender can be as high as 20% of the home's purchase price. In the United States, the down payment requirement can be substantially reduced if repayment of the mortgage is guaranteed by the Federal Housing Administration ("FHA"), an agency within the Department of Housing and Urban Development ("HUD"). The required down payment under such FHA insured loans has varied over time; in the 1990s it was 3% of the home's purchase price.Section 203(b)(9) of the National Housing Act, prior to its amendment by the Housing and Economic Recovery Act of 2008.
In its original form, the qualification requirements for an FHA insured loan called for the borrower to be his/her own source of funds for the down payment. In 1996, the U.S. Congress amended the statute to permit the down-payment funds to come from a family member of the borrower.Section 425(a) of Public Law 104-204, available here. However, HUD subsequently issued guidelines that considerably expanded the list of exceptions beyond that which appeared in the statute. The expanded list included, for example, the borrower's employer or labor union. The expanded list also included "charitable organizations". That guideline also noted that "As a rule, our concern is not with how the donor obtains the gift funds provided they are not derived in any manner from a party to the sales transaction".See the "Gift Funds" section of HUD Handbook 4155.1 REV-4, Change 1, as quoted on page 9 of the OIG 2000 report. In 1996, HUD issued Mortgagee Letter 96–18, stating "a nonprofit or other organization that provides bona fide gifts to eligible participants should not compel the beneficiary to purchase only properties owned by the donor of the funds. Such scenarios cloud the motivations of the purchaser/borrower as well as the donor".HUD Mortgagee Letter 96–18, as quoted on pages 9–10 of the OIG 2000 report.
Birth of the Nehemiah Program
In March 1997, the Nehemiah Progressive Housing Development Corporation filed for approval of its Nehemiah Program with HUD's Sacramento field office. (Here, "approval" means that lenders would have written assurance, via an "approval letter", that monies received by the borrower from the Nehemiah Program satisfied HUD's guidelines for gift funds.) Nehemiah received a provisional 60-day approval, followed by a six-month approval for a demonstration program. However, similar filings in other HUD field offices were not being approved, so Nehemiah filed for a nationwide approval at HUD's headquarters in Washington. When that approval was not forthcoming, Nehemiah sued HUD in a federal court.Pages 2 through 4 of the OIG 2000 report.The filing was in the United States District Court for the Eastern District of California and had case number S-97-1817-GEB/PAN. The named plaintiff was the Nehemiah Corporation of America. The filing took place in December 1997.
According to a report from HUD's Office of Inspector General, the Nehemiah Program operated as follows:Page 1 of the OIG 2000 report. Also see in that report the description at pages 10–11, as well as the charts on pages 14 and 42. Prospective recipients of Nehemiah funds made application to Nehemiah and agreed to purchase a home from a seller who also participated in the program. Shortly before the closing of the sale, Nehemiah wired funds to the closing agent. This amount was described as a gift to the homebuyer. Shortly after the sale, the closing agent wired funds to Nehemiah. These funds came from the seller's proceeds and typically exceeded the amount originally wired by Nehemiah. Originally, this amount was described as a service fee but, starting in August 1999, it was called a charitable contribution (to Nehemiah).Page 10 of the OIG 2000 report.
While the requested approval was pending in Washington, HUD asked its Office of General Counsel for a legal determination as to whether the Nehemiah Program satisfied its requirements for gifted funds. In April 1998, the General Counsel responded that the program did meet those requirements, finding that the funds given to the buyer were not "directly tied" to the seller.Page 30 of the OIG 2000 report. HUD then issued a letter of approval for the Nehemiah Program and the lawsuit between the two parties was settled out-of-court. In June 1998, HUD issued a memorandum to all of its field offices, informing them of their approval of the Nehemiah Program, as well as any other similar program.
With the receipt of the April 1998 approval letter, the Nehemiah Program became the first private nonprofit organization to receive such written approval for a seller-funded down payment assistance program.Page 1 of the OIG 2000 report.
Critiques of the Nehemiah Program
In May 1999, HUD's Office of Inspector General ("OIG") initiated an audit of HUD's treatment of down-payment assistance programs operated by private nonprofit organizations, doing so in response to what it described as "citizen concerns". The audit report, issued in March 2000 (herein, the "OIG 2000 report"), concluded that HUD had been allowing the organizations to operate their programs in a way that circumvented FHA requirements. The stated rationale for this conclusion was the OIG's finding that the assistance was not a "true gift", because the nonprofit organization was being reimbursed by the seller. The OIG also presented evidence that (i) the default rate for persons receiving the assistance was "significantly higher" than the average default rate for other FHA insured loans and (ii) some sellers were raising the sales price of their properties to cover the cost of the assistance, thus requiring the homebuyers to finance higher loan amounts.The audit results are set forth in the Executive Summary (pages iii–v) of the OIG 2000 report, and are discussed in detail throughout the entire report. Nehemiah had been given access to a draft version of the report, along with an opportunity to comment and respond. In its response, Nehemiah noted that its program did comply with FHA requirements (as determined by HUD). It also disputed the accuracy of OIG's assessment of the default risk of the program's participants, offering evidence that the "Nehemiah-assisted FHA borrowers are outperforming the FHA loan pool ... in every category of loan performance".Nehemiah's response, including attachments, comprises Appendix C (pages 46–63) of the OIG 2000 report. The quoted passage is from page 47 of that report.
In March 2001, HUD asked its OIG to re-examine the performance of FHA insured loans that received down-payment assistance from private nonprofit organizations. The OIG's report was published in September 2002 (herein, the "OIG 2002 report"). It found that the default rate for Nehemiah-assisted loans was about double that of other FHA insured loans. It also found that, although the number of loans that had received down-payment assistance from any private nonprofit organization (not just Nehemiah) was a relatively small percentage of the entire FHA pool (at about 4%), the percentage was increasing. For the most recent six months of the OIG's data collection, those loans represented about one in seven of all new FHA insured loans. The report also found that Nehemiah-assisted loans comprised about half of all private-nonprofit-assisted loans (in the full data period).These findings are all grouped under "Finding 1", at pages 5–10 of the OIG 2002 report.
The Milken Institute performed a study of the Nehemiah Program and published a report on it in April 2004 (herein, the "Milken study"). Although the report did not explicitly identify the parties who had commissioned the study, its Acknowledgement page listed the Nehemiah Corporation of America, the United States Conference of Mayors, and CitiesFirst.In the report, CitiesFirst was described only in terms of its mission. Its website offered more detail, describing itself as a "public/private partnership" between the Conference of Mayors and the Nehemiah Corporation. See its brochure here The study generally found that the nationwide surge in home prices in the United States "created additional wealth" for recipients of the Nehemiah ProgramPage 85 of the Milken study. and that an expansion of homeownership had "positive tax consequences" for the counties in which the recipients lived.Page 17 of the Milken study.