Arguably, this process involves sales price fraud, a seller concession (in contrast to the claimed "charitable gift"), unlicensed lending, money laundering, and defrauding the Federal government (the FHA has no way of knowing which loans have "real" downpayments and which are being paid by the seller through markups). The FHA, IRS, FBI, GAO, and Congress itself have all ruled against or reported critically on this practice. It’s enough to make you wonder if the Mob is involved. [1]
Hard hitting Doom friend Aaron, founder of the Implode-O-Meter site, like twist here at Doom, has been a long-time critic of residential real estate Down Payment Assistance (DPA). The other day he took robust exception to a recent Los Angeles Times article [2] generally supportive of the practice. Doomers are encouraged to examine Aaron’s detailed arguments [1] and and the further links in his post, and come to their own conclusions. DPA, especially the seller-funded (SFDPA) variety, could well be among the most damaging and insidious institutions at the heart of our present world-wide difficulties. That being said, it’s also a pretty hefty industry in its own right with its own online news/pressure sources, including here and here. One thing you can say about DPA — it’s hardly underground.
The Implode-O-Meter general statement on SFDPA is here (includes a link to their donations page — their opposition to this has not been without cost 
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[1]: "Subtly Misleading LA Times Article Distorts In Favor of Seller-Funded Downpayment Programs", Aaron Krowne, Implode-O-Meter, February 12, 2009.
[2]: "Down-payment aid program resurfacing", by Ralph Vartabedian, Los Angeles Times, February 7, 2009.
John-
DPA has resulted in artificially inflated prices, it has put folks who were not in a position to be homeowners in over their heads, and have added risk to banks by not making sure that people had some “skin in the game”.
DPA was great for builders and sellers, but has been bad for buyers and lenders.
There is a big problem that is not being considered by the administration. Houses were built for everyone and their dog in 2005. Many foreclosures are happening because homeowners and Fido could never really afford the home.
Tighter standards mean fewer people can qualify, driving the housing inventory up. To fill all those houses would require a tremendous loosening of standards. That’s why there’s a push to revive DPA. Those borrowers are no less risky now however.
That’s why no matter what they do to prevent foreclosures, it will fail. Excess inventory will continue to put downward pressure on prices.
As the government fears, the median price will not revert to the former norm, but will settle in a spot below that.
Until government accepts that and acts accordingly, they will continue to waste vast amounts of money trying to prevent a hurricane.
Twist,
Well said Twist, even Fido can see this (God bless Fido’s heart). I think the hurricane is coming fast and it is a category 5.