Oct. 31 (Bloomberg) -- A federal court temporarily stopped the Bush administration from canceling a down payment assistance program used by hundreds of thousands of low- and middle-income home buyers.

The U.S. Department of Housing and Urban Development ended the decade-old program earlier this month, saying it leads to higher prices and a disproportionate number of foreclosures. The program lets nonprofit organizations including AmeriDream Inc. and Nehemiah Corp. of America fund down payments and be reimbursed by the sellers of the homes.

``HUD failed to supply a reasoned analysis for its departure from its longstanding policy,'' the U.S. District Court for the District of Columbia said today in ordering a preliminary injunction. The agency, headed by Alphonso Jackson, also ``failed to consider reasonable proposed alternatives,'' the court said.

The suit was filed against HUD by Gaithersburg, Maryland- based AmeriDream and other nonprofit organizations seeking a permanent injunction. The court today ordered these proceedings to continue.

``We intend to abide by the court's decision,'' HUD spokesman Stephen O'Halloran said in a statement. He declined to say whether the government would appeal.

Congress's Objection

Jackson canceled the program over the objections of the U.S. House of Representatives, which passed legislation in July seeking to stop the administration from ending the program.

The administration's termination, ordered Oct. 1, was due to take effect today. The program was used by more than 100,000 consumers last year and accounted for a third of all Federal Housing Administration loans.

``This is fantastic news for the hundreds of thousands of low-to-moderate income families struggling to realize the dream of homeownership,'' Scott Syphax, president of Sacramento, California-based Nehemiah, said in an interview today.

Nehemiah, which is not a party to today's case, filed a separate complaint against HUD in Sacramento federal court earlier this month.

The next scheduled step in the proceeding is for both sides to file motions on Nov. 16 beginning arguments on the merits of the case, AmeriDream's lawyer, Matt Dolan of Baker & Hostetler in Washington, said in an interview. The judge has approved an agreement by both sides to try to end the case by Feb. 29, he said.

Raises Prices

Under the program, sellers sometimes try to recover the cost of the fee they pay nonprofits by raising the price of the house an average of 3 percent, a 2005 study by Congress's Government Accountability Office found. The higher prices contributed to doubling the rate of foreclosures on homes paid for with FHA-based assistance, agency audits found.

The program has become increasingly popular because it eliminates the buyer's responsibility to make the 3 percent down payment for a loan to be guaranteed by the FHA. The Internal Revenue Service said a year ago that groups providing down payment assistance did not qualify for tax exemptions.

To contact the reporter on this story: Neil Roland in Washington at nroland@bloomberg.net

Last Updated: October 31, 2007 17:06 EDT