The Office of the Inspector General (OIG) at the US Department of Housing and Urban Development (HUD) has renewed its criticism of a Federal Housing Administration (FHA) program that allows state housing finance agencies to offer down payment assistance to borrowers. But these down payment assistance programs are valuable and present minimal risk to FHA’s finances, so the criticism is perplexing.
The OIG continues to assert two points. First, it asserts that borrowers pay for the assistance through higher rates, in violation of FHA rules. Second, it asserts that these loans pose an unnecessary economic risk to the mutual mortgage insurance (MMI) fund. As we showed in our prior report, both these claims appear mistaken.
Nothing indicates these programs are a problem
Several factors make it reasonable that, on average, borrowers participating in these programs pay higher rates than those who don’t:
- These borrowers are more likely to be higher risk, which often leads to a higher rate.
- These borrowers are more likely to be cash constrained and more likely to finance their closing costs.
- State Housing Finance Agency loans tend to be smaller than other FHA loans, making the closing costs a larger percentage of the loan amount. For example, if a borrower is rolling closing costs of 2 percent into the rate, it can easily add 50 to 60 basis points (0.5 to 0.6 percent).
To determine whether participants in these programs pay higher rates because they are participating, one would need to parse out these independent factors. The OIG has not done this, instead inferring that the higher rates are attributable entirely to their participation. This is a mistake.
Moreover, the OIG appears to infer that because these loans present a higher risk, they are more economically problematic. This, too, is a mistake. Posing a slightly higher risk is not economically problematic, as long as pricing adequately covers that risk. The FHA Actuarial Report for 2016 scores government down payment assistance since 2011 as contributing positively to the MMI fund.
It remains unclear what problem the OIG finds in these programs, as the data do not suggest either that the higher rates paid by these borrowers are tied to the program or that these loans are economically problematic for the FHA.
If there is a negative impact, it is tiny
The HUD OIG wrote that between October 1, 2015, and September 30, 2016, 80,664 loans with an original balance of nearly $12.9 billion were originated with down payment assistance from a government source. The OIG said these 80,664 loans may have contained “questionable borrower-financed down payment assistance,” while admitting that the “amount could be lower given the limitations and lack of HUD data.”
Most of these mortgages had note rates well within “normal” limits. The FHA found the average rate on state down payment assistance loans in 2016 was 26 basis points (0.26 percent) over those with no such assistance, in line with our earlier results.
We found less than 10 percent of the loans had note rates at or above 80 basis points (0.8 percent) over the benchmark mortgage rate, versus 4 percent of the non–down payment assistance loans. So the number of loans the OIG is concerned about is at most a little over 8,000, but is likely closer to 4,800. Its suggestion that 80,664 loans may be at issue is incorrect.
Why does this matter?
This issue is important is because the program is important. Part of the FHA’s mission is to ensure that families the mainstream mortgage market does not well serve can become sustainable homeowners. Because the down payment is often the most significant barrier to entry for such families, programs that can help them in a manner that doesn’t pose unnecessary risk to them or the FHA should be supported. We fear that the OIG is instead undermining one.