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Down Payment Assistance Program’s Impact on Loan Performance

GSE loansDown payment assistance programs have little impact on loan performance, according to a report released by the Harvard Joint Center for Housing Studies. The working paper, titled "A Cautionary Tale of How the Presence and Type of Down Payment Assistance Affects the Performance of Affordable Mortgage Loans," found that the performance of home loans was not significantly impacted when down payment assistance was used.

According to the study's authors, "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."

Harvard’s study also focused on minority homeowners, who disproportionately receive government-funded DPA. According to the study, while grant assistance from a government or community organization is marginally significant as a predictor of default riskin one of our model specifications, this effect disappears altogether when racial controls are incorporated in the model. Researchers conclude that with this in mind, the receipt of DPA appears to be unrelated to default risk.

Another white paper, published by CBC Mortgage Agency, found that more than 90% of down payment assistance recipients would not have been able to purchase a home without down payment assistance.

"Down payment assistance programs have come under attack lately, with some arguing that all down payment assistance is bad," stated Richard Ferguson, President of CBC Mortgage Agency. "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."

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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