Nehemiah Corp. of America v. Jackson
| Decision Date | 03 March 2008 |
| Docket Number | No. CIV. S-07-2056 LKK/DAD.,CIV. S-07-2056 LKK/DAD. |
| Citation | 546 F.Supp.2d 830 |
| Parties | NEHEMIAH CORPORATION OF AMERICA, Plaintiff, v. Alphonso JACKSON, et al., Defendants. |
| Court | U.S. District Court — Eastern District of California |
Joseph S. Genshlea, Weintraub Genshlea Chediak, Sacramento, CA, David M. Souders, PHV, Weiner Brodsky Sidman Kider PC, Washington, DC, for Plaintiff.
Scott Risner, Christopher R. Hall, U.S. Department of Justice, Washington, DC, Bobbie J. Montoya, CV, United States Attorney's Office, Sacramento, CA, for Defendants.
Plaintiff Nehemiah Corporation of America ("Nehemiah") has brought this action against the Department of Housing and Urban Development and its Secretary Alphonso Jackson (collectively, "HUD") pursuant to the Administrative Procedures Act ("APA"), 5 U.S.C. § 551. Nehemiah alleges that HUD violated the APA when it adopted a rule barring the use of sellerfunded downpayment assistance for mortgages insured by the Federal Housing Administration ("FHA"), a component of HUD. In particular, Nehemiah claims that HUD failed to provide a reasoned analysis for the departure from its previous policy, ignored reasonable alternatives to the final rule, relied on data that it never produced for public comment, and prejudged the merits of the final rule. Pending before the court are cross-motions for summary judgment. The court resolves the motions after oral argument and upon the parties' initial papers and supplemental briefing. For the reasons explained below, plaintiffs motion is granted in part and denied in part, and defendants' motion is denied.
As authorized by the National Housing Act, 12 U.S.C. § 1701 et seq., the FHA insures mortgages, meaning that it agrees to protect mortgage lenders against the risk of losses caused by borrower nonpayment. As an insurer, FHA sets conditions on the types of mortgages it will insure. One such condition is the requirement that home buyers must make a downpayment of at least 3 percent of the total cost of acquisition. 12 U.S.C. § 1709(b)(9) (). HUD's policy has been to allow certain third-parties, such as family members and charities, to assist with the downpayment, but to disallow other third-parties, such as the home seller to the transaction, from doing so.
In the 1990s, organizations such as Nehemiah sprouted up and began exploiting what HUD describes as a loophole against the ban on downpayment assistance ("DPA") by sellers. They devised a form of transaction in which a charity would make a gift to the home buyer to satisfy the 3 percent downpayment requirement, with the understanding that the seller would make a donation to the charity after the sale was complete. Because this donation was not being used to fund the downpayment of the individual purchasing the seller's home — but rather would be used to fund a future home buyer's downpayment — it was not prohibited by HUD's policy against downpayment assistance by sellers. Sellers also paid a processing fee in addition to their "donations."
On October 1, 2007, HUD published a rule that would prohibit transactions such as those facilitated by Nehemiah. Standards for Mortgagor's Investment in Mortgaged Property, 72 Fed.Reg. 56,002, 56,007 (Oct. 1, 2007) (). The regulation provides that in order for FHA to insure a mortgage, the funds for a buyer's downpayment may not be provided by the seller or any entity that financially benefits from the transaction. The effect of the rule would be to bar indirect seller-funded DPA.1
Congress created the FHA through the National Housing Act of 1934. 48 Stat. 1246 (1934)., In 1965, FHA became a part of the Department of Housing and Urban Development and is still a component of HUD to this day. 42 U.S.C. § 3534(a). FHA was established primarily for the purpose of insuring mortgage lenders against default by borrowers. 48 Stat. 1246 (1934).
To accomplish this end, both HUD and FHA depend on the Mutual Mortgage Insurance Fund ("MMIF"). See 12 U.S.C. § 1708(a). The MMIF is a revolving fund that uses proceeds from insurance premiums, investment income, and foreclosure sales to provide funds for future mortgage insurance. Id. In other words, MMIF is self-sustaining. Aside from an initial $10 million appropriation from Congress, HUD has operated the MMIF using only the proceeds that the fund generates, without any other congressional appropriations. See generally Lee v. Kemp, 731 F.Supp. 1101, 1103-04 (D.D.C.1989).
If an FHA-insured mortgage has been in default for at least three months, or when the mortgage lender forecloses on a property, the lender is entitled to file a claim for insurance benefits from the MMIF. See 12 U.S.C. § 1710(a); 24 C.F.R. §§ 203.355 to 203.371. In order to receive benefits, the mortgage-holder must convey clear title to HUD. 12 U.S.C. § 1710(a)(1). According to HUD, loans originated with seller-funded DPA have much higher rates of default and foreclosure than other types of loans, and the continued increase of such loans threatens the solvency of the MMIF.2
Before FHA can insure a single-family home mortgage, the loan must first meet certain eligibility requirements set forth in the National Housing Act. 12 U.S.C. § 1709. One of these eligibility requirements involves the three percent downpayment of the home's acquisition cost. 12 U.S.C. § 1709(b)(9). The statute mandates that "the mortgagor" must be the individual to pay this sum. Id. () (emphasis added). But the statute also provides two exceptions: first, a family member may lend the required sum to the home buyer, and second, a corporation or person other than the borrower may pay the sum under certain circumstances not relevant here (e.g., when the borrower is 60 years of age or older, or when the mortgage covers a housing unit under the Homeownership and Opportunity Through HOPE Act). Id. These are the only exceptions to the three percent rule expressly stated in the statute. 12 U.S.C. § 1709(b)(9).
Nevertheless, HUD's policy has been to permit the downpayment to be financed by sources in addition, to a family member: these include the borrower's employer or labor union, a governmental entity, a charitable organization,3 and a close friend with a clearly defined and documented interested in the borrower.4 HUD Handbook 4155.1, Rev. 5, "Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties" (Def.'s Mot., Ex. 3). But HUD's policy prohibits the seller from financing the buyer's downpayment: "The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them." Id. The prohibition on direct financing of downpayments by sellers is also not challenged in this action.5
In the 1990s, organizations such as Nehemiah developed seller-funded DPA programs. Pl.'s Statement of Undisputed Fact ("SUF") ¶ 11. Nehemiah provides funds for downpayment and closing costs to home buyers. In exchange, the seller agrees to make a contribution to Nehemiah of one to six percent of the final contract sales price and to pay a processing fee. SUF ¶ 20. The contribution paid by the seller is not used specifically for the buyer's downpayment assistance. SUF ¶ 22. Instead, Nehemiah provides the funds to the home buyer from a pre-existing pool of funds. SUF ¶ 22. The seller then pays a contribution to Nehemiah only after the loan has successfully closed, SUF ¶ 23. The contributions collected from sellers replenish. Nehemiah's pool of funds for other home buyers. SUF ¶ 23.
In late 1997, HUD and Nehemiah engaged in litigation over the legality of Nehemiah's seller-funded down payment program. See Nehemiah Progressive Housing Corp. v. Andrew Cuomo, et al, Civ. S-97-1817-GEB/PAN (E.D.Cal.). This litigation ended in a settlement agreement whereby Nehemiah was permitted to continue operation of its DPA program. Administrative Record ("A.R.") 00884. HUD, however, "expressly reserve[d] the right to and may take [regulatory] actions with regard to down payment assistance programs generally." Id.
In 1999, HUD proposed a rule that would have accomplished the same effect as the present rule at issue. Sources of Homeowner Downpayment, 64 Fed.Reg. 49,956 (proposed Sept. 14, 1999). Under the proposed rule, a gift could not be used for the borrower's downpayment if the organization providing the gift received its funds either directly or indirectly from the seller of the property. Id. Following the receipt and review of public comments, the "overwhelming majority of [which] opposed the rule," HUD withdrew the proposed rule. Withdrawal of Proposed Rule on Sources of Homeowner Downpayment, 66 Fed.Reg. 2,851, 2,852 (Jan. 12, 2001).
In November 2005, the Government Accountability Office (GAO) issued a report expressing concerns that seller-funded DPA results in higher home prices without comparable increases in equity for buyers. A.R. 00545-46 (). Accordingly, buyers relying on seller-funded DPA possess less initial equity in their homes. The report also found that seller-funded DPA was associated with a greater likelihood of delinquency and default claims. A.R. 00549-50 ().6
Furthermore, the November 2005 GAO report recommended...
To continue reading
Request your trial
-
Pfeifer v. Countrywide Home Loans, Inc.
...a mortgage insured by the FHA. Congress created the FHA through the National Housing Act of 1934(NHA). (See Nehemiah Corp. of America v. Jackson (E.D.Cal.2008) 546 F.Supp.2d 830, 834.) In 1965, the FHA became a part of HUD and it is still a component of HUD. ( Nehemiah Corp., at p. 834, cit......
-
Norris v. PNC Bank
...non-payment. As an insurer, FHA sets conditions on the types of mortgages it will insure.” Nehemiah Corp. of America v. Jackson, 546 F.Supp.2d 830, 834 (E.D. Cal. 2008). [14] Plaintiffs have provided what appears to be the MSA, along with excerpts of a “Statement of Work” attached to the MS......
-
U.S. v. Peterson
...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 n......
-
Pfeifer v. Countrywide Home Loans
...mortgage insured by the FHA. Congress created the FHA through the National Housing Act of 1934 (NHA). (See Nehemiah Corp. of America v. Jackson (E.D. Cal. 2008) 546 F.Supp.2d 830, 834.) In 1965, the FHA became a part of HUD and it is still a component of HUD. (Nehemiah Corp., at p. 834, cit......
-
Thinking Like Thinkers: Is the Art and Discipline of an "attitude of Suspended Conclusion" Lost on Lawyers?
...may be a chilling effect that causes the public to refrain from submitting comments as an initial matter. Nehemiah Corp. v. Jackson, 546 F. Supp. 2d 830, 847 (E.D. Cal. 2008). 279. See, e.g., Restatement (Third) of the Law Governing Lawyers § 16 (2000). 280. Model Rules of Prof'l Conduct R.......