May 8 (Bloomberg) -- The U.S. Department of Housing and Urban Development plans to seek a ban on down payment assistance programs that have grown sevenfold this decade and contributed to a surge in foreclosures of government-backed mortgages.

Nonprofit groups including Nehemiah Corp. of America and AmeriDream Inc. provide the down payment help and are then reimbursed by the seller. The programs are ``a contributing factor of increased risk in our portfolio'' of loans, HUD spokesman Lemar Wooley said in an e-mail.

HUD plans to propose the ban this month for public comment, possibly as early as this week, Wooley said. More than 100,000 low- and moderate-income consumers bought homes using such programs last year. The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.

``It's painted to be helping homeowners get into houses,'' HUD Inspector General Kenneth Donohue said in an interview. ``But it is circumventing good business practices, and you bet it has resulted in foreclosures.''

Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.

``Clearly there have been some problems, but we'd hate to see the whole thing eliminated out-of-hand,'' said David Ledford, a vice president of the National Association of Homebuilders. ``It's been a key ingredient to helping people achieve home ownership.''

Helping Buyers

The Washington-based group's 235,000 members include U.S. homebuilders D.R. Horton Inc., Lennar Corp., and Pulte Homes Inc. The companies are the three largest builders by market value, respectively. In 1999, HUD proposed a similar ban and withdrew it in 2001 following industry opposition.

Some nonprofit aid is provided to buyers without reimbursement from sellers. This type of assistance will not be forbidden under the upcoming proposal, Wooley said.

Under the program that HUD will try to ban, groups including Sacramento, California-based Nehemiah and AmeriDream Inc. in Gaithersburg, Maryland, give buyers an average of about $3,400 in down payment money. Sellers who reimburse them also pay a service fee. The arrangement was designed to circumvent U.S. rules that bar sellers from giving direct assistance.

Sellers have tried 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 nonpartisan Government Accountability Office found. The higher prices contribute to the increase in foreclosures by buyers who have no equity in the homes, the GAO found. Buyers' settlement costs also rise in some counties with rising housing prices.

Lack of Information

Most home buyers who received nonprofit assistance were happy with their houses and ignorant about how they were financed, a HUD-sponsored survey found.

``Universally, borrowers expressed joy in becoming homeowners but wished they were given more information about the process,'' Concentrance Consulting Group of Washington said in a 2005 survey of 95 home buyers in 10 U.S. cities.

HUD ruled the arrangements legal in 1998 in response to a request from Nehemiah. They have become increasingly popular with the growing awareness that nonprofit assistance eliminates the buyer's responsibility for the 3 percent down payment required under FHA loans.

``Anything that would limit and hurt the potential for homebuyers who have been locked out of homeownership, and that would decrease the potential in the economy, would not be good, no matter what action it would be'' said AmeriDream Chief Executive Officer Ann Ashburn, who has testified before Congress about the program.

The number of FHA-backed homes purchased with non-profit assistance has risen to 102,921 in 2006 from 14,603 in 2000, HUD data shows. While these payments accounted for only 2 percent of all FHA loans in 2000, they soared to 33 percent of the loans last year.

The FHA has been trying to compete with subprime loans that require no down payment from buyers with little or no credit history. Subprime mortgages have been particularly risky, often coming with ballooning monthly mortgage payments. Rising foreclosures have been fueled by cheating on mortgage applications, said Robert Russell, a senior U.S. Office of Thrift Supervision lawyer.

A year ago, the Internal Revenue Service held that groups providing down payment assistance did not quality for tax exemptions. It said it was examining the practices of 185 nonprofits that provide this type of assistance to see if they merit tax-exempt status.

AmeriDream and Nehemiah, two of the leading non-profits providing down payment aid, both said they are in talks with the IRS.

``I firmly believe our tax-exempt status is not in jeopardy,'' AmeriDream's Ashburn said. Nehemiah ``is in full compliance with IRS rules,'' said CEO Scott Syphax.

AmeriDream has served 200,000 homebuyers with $665 million in assistance since it was founded in 1999, said spokesman Philip Jones.

Donohue, who oversees internal HUD audits and investigations, said he has been trying for years to get HUD to ban nonprofit assistance. The agency acted only after the IRS issued its ruling a year ago, he said.

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

Last Updated: May 8, 2007 14:06 EDT