March 17, 2017
Can Downpayment Assistance Work?
The HUD Inspector General issued a report on FHA-Insured Loan with Borrower-Financed Downpayment Assistance. Downpayment assistance has a long history of failure, a history that has led to big losses for the FHA and foreclosures for borrowers. The IG audited HUD’s oversight of FHA-insured loans that were originated with downpayment assistance. The Inspector General had already determined that “lenders allowed FHA borrowers to finance their own downpayments through an increase in their mortgage interest rate as part of programs administered through housing finance agencies.” (1)
The IG found that HUD
failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed downpayment assistance to ensure compliance with HUD requirements, putting the FHA Mortgage Insurance Fund at unnecessary risk. Between October 1, 2015 and September 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that may contain questioned assistance. While governmental entities are not prohibited sources of downpayment assistance, the assistance provided through these programs did not comply with HUD requirements. FHA borrowers were required to obtain a premium interest rate and, therefore, repaid the assistance through higher mortgage payments and fees. Despite the prohibition against similar seller-funded programs, HUD’s requirements appeared to have enabled the growth of these questioned programs. In addition, HUD did not adequately track these loans and review the funding structure of these programs. Despite concerns raised by OIG, HUD failed to protect FHA borrowers against the higher mortgage payments and higher fees imposed on them, which increased the risks to the FHA Insurance Fund in the event of default. (1)
The Urban Institute’s Housing Finance Policy Center has criticized the IG’s report on methodological grounds. I will defer to the Urban Institute’s critique because they have done a lot of work in this area.
But I do think that the IG is right to pay careful attention to downpayment assistance programs. Historically, they have proven too good to be true. One of the FHA’s biggest failures resulted from the downpayment assistance program that was set forth in the American Dream Downpayment Assistance Act of 2003.
The IG recommends that HUD
(1) reconsider its position on questioned borrower-financed downpayment assistance programs,
(2) develop and implement policies and procedures to review loans with downpayment assistance,
(3) develop requirements for lenders to review downpayment assistance programs,
(4) require lenders to obtain a borrower certification that details borrower participation,
(5) ensure that lenders enter all downpayment assistance data into FHA Connection, and
(6) implement data fields where lenders would be required to enter specific downpayment assistance information. (1)
The IG’s procedural recommendations all seem reasonable enough, whether you agree or disagree with the folks at the Urban Institute.