Last week, an audit released by HUD’s Inspector General’s Office found that Nova Financial and Investment Corporation had violated FHA guidelines by originating FHA loans with borrowers that received state government down-payment assistance. HUD’s OIG concluded that the down payment assistance was not a gift and thus represented an ineligible down-payment source for an FHA loan. Specifically, HUD’s OIG concluded that because down payment assistance loans were subjected to premium pricing which in turn resulted in higher priced mortgage backed securities whose proceeds then funded additional down-payment assistance, the assistance was not a gift. HUD OIG’s rationale was that borrowers paid for the assistance through premium rates and thus the assistance could not be considered a gift. As such, the loans would not be eligible for FHA insurance. HUD OIG’s decision, if upheld by HUD would essentially eviscerate bond programs. These down-payment assistance programs are already problematic for most lenders because lenders have to pay the same compensation to loan officers on bond and regular forward mortgages. Since lenders actually make substantially less on bond loans many lenders either have stopped doing bond loans or are seriously considering that option. Now, without a vehicle to close a loan requiring government assistance (since they are no longer FHA eligible according to HUD’s OIG), many lenders may simply decide not to facilitate funding through such programs. It should be noted that HUD OIG’s conclusions are not final and merely make recommendations that the agency need not adhere to. However, this is an important issue to watch to determine whether HUD will adopt a recommendation that may well spell the end to many down-payment assistance programs.