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Down Payment Assistance Programs are Not a Problem

The HUD Office of the Inspector General (OIG) has criticized a Federal Housing Administration (FHA) program which allows state housing finance agencies to offer down payment assistance to borrowers. A blog from the Urban Wire, however, argues that “these payment assistance programs are valuable and present minimal risk to FHA’s finances.” According to Urban Wire, the criticism is “perplexing”.

Borrowers pay for assistance through higher rates, in violation of FHA rules, according to the OIG, and additionally, these loans can pose an unnecessary economic risk to the mutual mortgage insurance fund.
A prior report from Urban Institute, however, shows that these claims are mistaken, and nothing indicates that these programs are a problem. Though borrowers participating in these programs tend to have rates than those who don’t, The Urban Institute lists a few reasonable explanations.

For example, borrowers who participate in down payment assistance programs are more likely to be higher risk. That, coupled with the fact that these borrowers are more likely to finance their costs, can lead to higher rates.
Additionally, State Housing Finance loans tend to be smaller than other FHA loans, leading to closing costs which make up a larger percentage of the loan amount. Urban Wire notes that these independent factors were not considered when the OID determined whether program participants were paying more due to their participation.

Even if there is a negative impact, it is tiny. Most mortgages originated from these programs had note rates within normal limits. The average rate on state down payment assistance loans was just .26 percent higher than those with no assistance, and less than 10 percent of the loans had rates .80 percent higher than the benchmark rate.

The OIG’s claims that these loans present an economic risk, though this appears to also be a mistake. A slightly higher risk does not pose an economic problem, as long as pricing covers that risk, according to the Urban Institute.
Read the full post from the Urban Institute here.

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