Over the last several years reports have surfaced stating that down-payment assistance exhibit “high rates of delinquency” as in the 2018 Department of Housing and Urban Development’s (HUD) report to Congress1,
“Mortgages with DPA generally exhibit higher rates of delinquency and default, and those with such assistance financed by self-identified governmental entities have higher rates of default than those with other forms of DPA.”
If you only look at that statement “High Rates of Delinquency,” you would clearly have the impression that ALL down payment assistance provides for “Unnecessary Risk.”
HUD is attempting to make the case that nationwide DPA programs generally are too risky because of their past experience with another type of nationwide DPA, which has been illegal since 2008.
HUD’s analysis has serious limitation because it fails to take account of other risk factors unrelated to down payment assistance, such as the borrower’s demographic attributes, including credit score, which could lead to poorly designed and racially punitive corrective action.
This view is likely the result of pre-crisis down payment assistance programs in which property sellers were allowed to pay the buyer’s down payment and raised the price of the property in order to cover the cost. Those seller-paid programs have been shut out of the market for years and are no longer an issue. Today’s programs must be economically viable without the help of a home seller. In recent years, loan performance on transactions in which the borrower received down payment assistance has been far better compared to loans under the former seller-paid programs.
According to the joint report from the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, Center for Community Capital at the University of North Carolina and Harvard Joint Center for Housing Studies, 2 receipt of down payment assistance is not significantly associated with default risk.
The study3 sheds light on the relationship between different forms of DPA and default risk using multivariate methods applied to a well-documented national affordable lending data set from the Community Advantage Program (CAP). Despite HUD’s stated concerns, “my colleagues and I find that the receipt of down payment assistance is not significantly associated with default risk.”
In the 10-year study researchers looked at 3,000 loans that were made under the Community Advantage Program (CAP) originating between the years of 1999 and 2000, authors concluded, “Our multivariate analysis indicates that the receipt of DPA (down payment assistance) is not significantly associated with default risk. In particular, while grant assistance from a government or community organization is marginally significant as a predictor of default risk in one of our model specifications, this effect disappears altogether when racial controls are incorporated in the model. Thus, the receipt of DPA appears to be unrelated to default risk.”
Down payment assistance has become an important component of mortgage finance for a growing segment of first-time homebuyers. Approximately 43 percent 2 of FHA first-time homebuyers relied on some form of down payment assistance.
Down payment assistance can take many forms. In many situations, family members provide relatives with the necessary funds for a down payment. But in the minority community, especially among African American families which have 1/10th the household net worth compared to whites, family members often lack the capital to help relatives with a home purchase. This is where government down payment assistance programs help bridge the gap.
The differences in the performance of FHA loans that receive DPA from governmental entities versus FHA loans that receive DPA from relatives may have little to do with questionable practices by government DPA providers. It may not be programmatic at all, but rather the simple fact that government programs help an entirely different set of people. Those who are helped by relatives are the beneficiaries of intergenerational wealth, while those that are helped by governmental entities are typically underserved borrowers who come from disadvantaged backgrounds.
It is not a simple coincidence that approximately 54% of families that CBC Mortgage Agency assists are minorities, including about 20% that are African American and about 30% that are Hispanic. Families that CBCMA assists do not typically come from generations of homeowners. Some are the first homeowners in their families, and many are lower income.
The truth is, everyone deserves to own a home. Some may have issues to address before they are ready, like poor credit histories or the need to secure stable employment, but such barriers can be overcome. The worth of every individual is great, and each among us deserves to enjoy the peace and security that come from homeownership.
We admonish HUD to not make decisions about DPA that will harm minorities by limiting DPA, which will do nothing to improve performance, and only shut people out of becoming homeowners.
1HUD: Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund…Fiscal Year 2019
2Harvard Joint Center for Housing Studies: A Cautionary Tale of How the Presence and Type of Down Payment Assistance Affects the Performance of Affordable Mortgage Loans
3 CBC Mortgage Agency: 2019 State of Down Payment Assistance Report
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