In Bid to Boost Black Homeownership, Rick Santorum Fueled Housing Bubble That Led to Financial Crisis

Charles C. Johnson, Big Government, February 27, 2012

One of the consistent refrains from the Rick Santorum campaign is that he opposes government bailouts, but as a senator, he supported the something-for-nothing policy most responsible for the housing bubble. Like George W. Bush and other “compassionate conservatives,” he was naively obsessed with affordable housing for low-income potential home buyers, a mismanaged cause that led to billions in loan defaults and which the IRS called a “scam.”

In his book It Takes A Family (2005), Santorum wrote at length and approvingly of the Nehemiah Project, a Sacramento faith-based nonprofit that helped mostly black low-income buyers get access to home ownership through its down-payment assistance program. (The name Nehemiah, who rebuilt Jerusalem, comes from the Bible.)

But as Jeff Horwitz and Dave Jamieson report from the Huffington Post’s Investigative Fund, down-payment aid programs like Nehemiah effectively “pav[ed] the way for even riskier subprime loans by private lenders.” How did this happen? Horwitz and Jamieson explained in 2009.

A home builder would agree to make a “gift” to the nonprofit in an amount equal to the down payment. The nonprofit would give the cash to the buyer, often earning a generous fee for its role as middleman. In less than a decade, nonprofits had arranged more than a million no-money-down house sales around the country. By 2008, they represented more than a third of all loans backed by the Federal Housing Administration (FHA).

The Santorum-endorsed Nehemiah Project and its nearest competitor, AmeriDream, according to Horwitz and Jamieson, helped set up 392,000 mortgages worth $54 billion, earning tens of millions in fees for itself—and nearly a billion dollars each for Centex, D.R. Horton, and Dominion Homes, the builders who made the donations that made the shaky mortgages possible. The loans to the buyers, which ended up with triple the default rate of other FHA loans, often required no down payment at all from them, something of which Rick Santorum specifically approved. Indeed, Santorum proudly worked with Senator Dianne Feinstein (recipient of $1000 from Nehemiah’s CEO in 2006) and other Democrats to protect the Nehemiah Project from oversight from the IRS and HUD.

Santorum wrote in It Takes a Family that until the project got underway in 1997, some of the experts at HUD considered buying a home without a down payment “unwise, even dangerous … They feared it would make it possible for so-called ‘unworthy’ people to buy homes, and, as a result, push up default rates.” (148)

But even as he scoffed at the old-fashioned idea, it was being vindicated. HUD had warned years before, in 2000, that borrowers who participated in the then-new Nehemiah Project had default rates well above average. Worse yet, a GAO investigation released in November 2005 concluded that the home builders who were part of the program were simply raising their prices to recoup the down-payment grants.

Santorum ignored such warnings. Borrowers through organizations like Nehemiah have since defaulted on $3 billion worth of loans, sticking the FHA insurance fund with $1 billion in losses. According to the Congressional Research Service, nonprofits like Nehemiah helped balloon the number of FHA loans from 2 percent in 2000 to nearly 38 percent in 2007, and these nonprofits’ revenues from the down-payment gifts increased from $18 million in 1994 to $162 million by 2002.

Those fees—after they were investigated by the IRS—dropped to $70 million in 2005, according to Horwitz and Jamieson, causing financial problems for these nonprofits.  At one point, Nehemiah had to let go of nearly all of its employees, thanks to President Bush’s decision to ban such organizations from serving as middlemen in October 2008. Unfortunately, President Obama gave these “nonprofits” a new lease on life when he signed the American Recovery and Reinvestment Act of 2009, which included a first-time home buyer’s grant of $8000. It was just the kick that Nehemiah needed to get back into business.

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{snip} In his book, he [Santorum] described visiting its Sacramento headquarters and meeting Nicole Learned, a down-payment assistance supervisor. Santorum’s naivete is clear from his own words:

The information on the screen in front of her includes data such as “income: $45,000; sales price: $150,000; # in house: 2; gift percent: 3; gift: $4,500; fee: $750.”

Without ever talking to that person making $45,000 a year buying that $150,000 home, and without ever talking to the lending institution, Nicole reviews the record in front of her, quickly whips her fingers across the keyboard, and makes what was the impossible possible: a new homeowner. In just a matter of moments, those keystrokes helped one American build wealth, wealth that just a few second earlier was beyond his reach. As Scott Syphax [CEO and president of Nehemiah] says, “America is blessed with an ever expanding pie. It’s getting people into the kitchen that’s the problem.

“Because property ownership is the primary asset development vehicle in this nation going back to its founding, by democratizing access to home ownership you are bringing more people into the civic and economic fabric of the United States,” he says. “Home ownership should not be a privilege reserved for those who merely had the good fortune to be born into a family of means who can loan or give them a down payment.”

And with that insight was born the down payment assistance program. Those numbers on the screen tell the story. The “3” next to “gift percent” means that Nehemiah is giving this homebuyer a gift of 3 percent of the purchase price, or $4,500. This gift goes right to the lending institution to pay all or some of the down payment. The fee of $750 refers to the amount the lender—not the homebuyer—will pay Nehemiah. That’s above the contribution the lender or builder will make to the Nehemiah Project for the exact same amount that Nehemiah paid for the down payment.

It is, frankly, just a circle of money, with Nehemiah ending up with a $750 fee and the homebuyer ending up with a home. The entire concept was created by the folks at Nehemiah to break down what they saw as one of the greatest barriers to wealth creation: the requirement that the homebuyer come up with a down payment. (159-160)

Santorum noted that after talking with Syphax, he, along with Senator Feinstein, helped pass the Down Payment Assistance Act in December 2003. The law, in Santorum’s words, allowed “down payment assistance programs like the Nehemiah Project that are directed toward low- or moderate-priced homes [to qualify as] permitted charitable activities under the IRS Code. This bill will ensure that the legitimate nonprofit assistance programs are protected while also providing some congressionally directed oversight to prevent abuses.”

The act provided more than $200 million, for fiscal years 2004-2008, in grants to low-income homeowners, further expanding the subprime housing bubble—a problem Santorum didn’t look into. Referring to Nehemiah, he said, “The good work being done here is happening without the government—and it is helping to stabilize the American family and provide for the common good.”

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