by Calculated Risk on 6/02/2006 02:11:00 AM

Last year I wrote about the proliferation of DAPs (Downpayment Assistance Programs). Now the IRS has ruled that these are "scams".

From the WaPo: IRS Ruling Imperils 'Gift Fund' Charities For Home Buyers

A ruling by the Internal Revenue Service threatens to extinguish a fast-growing -- but controversial -- charitable industry that has funneled hundreds of millions of dollars in cash to first-time home buyers for their down payments.
...
Under the system, sellers provide cash to the charities, which then give it to home buyers for their down payments. The sellers, who pay the charities a service fee, often recoup their money by charging a higher price for the homes -- usually 2 or 3 percent more, or an amount equal to the down payment, says a Government Accountability Office study.
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The IRS called the programs "scams" in its ruling last month and said that by providing down payments, the charities actually inflated home prices, making it more likely that homeowners would default on their loans.
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The charities say they move $500 million a year from sellers to buyers -- money that would disappear if many down payment assistance charities were put out of business.

Lets do the math: If $500 Million is 3% of the purchase price, then this represented downpayments on about $16 Billion in transactions last year. OK, about 7 million existing homes were sold in 2005 at an average price of around $270K. So less than 1% of the total value of transactions last year used DAPs (even less when we add in New Homes) - but these are still marginal deals.

"Almost anybody building for the first-time home buyer is using these programs," said David Ledford, staff vice president for housing finance and housing policy with the National Association of Home Builders. "Builders are concerned about what would happen not just in the future but for buyers who have already qualified and are going through a sale but who have not closed yet."