Peterson

BACKGROUND

A. HUD Requirements

By insuring Federal Housing Administration (“FHA”) mortgages, HUD assists homebuyers who cannot otherwise afford to purchase homes. FHA mortgage insurance insures the mortgage for the lenders, and if the buyer cannot make payments, HUD pays off the loan and takes the property. By 10494 UNITED STATES v. PETERSON law, the buyer must meet three conditions before HUD will insure the loan: 1) sufficient income to make the monthly pay- ments; 2) satisfactory credit rating; and 3) the ability to make a three-percent minimum cash investment in the property.1 See 12 U.S.C. §§ 1709, 1715b.

Under HUD’s regulations and policies, the buyer is not required to have the down payment come out of his or her own pocket—he or she may receive the down payment as a gift from friends, relatives, or non-profit housing assistance organizations. However, the sellers of the property are not permitted to make direct gifts to the buyers.

Despite this restriction on sellers, the seller was permitted indirectly to subsidize the down payment by providing money to a non-profit organization.2 Under the permissible indirect subsidy scheme, after the non-profit…