Summary
The U.S. Department of Housing and Urban Development (HUD), through its Federal Housing Administration (FHA), insures billions of dollars in home mortgage loans made by private lenders. FHA insures low down payment loans and a number of parties have made proposals to either eliminate or otherwise change FHA's borrower contribution requirements. GAO was asked to (1) identify the key characteristics of existing low and no down payment products, (2) review relevant literature on the importance of loan-to-value (LTV) ratios and credit scores to loan performance, (3) report on the performance of low and no down payment mortgages supported by FHA and others, and (4) identify lessons for FHA from others in terms of designing and implementing low and no down payment products.
FHA and many other mortgage institutions provide many low and no down payment products with requirements that vary in terms of eligibility, borrower investment, underwriting, and risk mitigation. While these products are similar, there are some important differences, including that FHA has lower loan limits, allows closing costs and the up-front insurance premium to be financed in the mortgage, and permits the down payment funds to come from nonprofits that receive funds from sellers. FHA also differs in that it does not require prepurchase counseling. A substantial amount of research GAO reviewed indicates that LTV ratio and credit score are among the most important factors when estimating the risk level associated with individual mortgages. GAO's analysis of the performance of low and no down payment mortgages supported by FHA and others corroborates key findings in the literature. Generally, mortgages with higher LTV ratios (smaller down payments) and lower credit scores are riskier than mortgages with lower LTV ratios and higher credit scores. Some practices of other mortgage institutions offer a framework that could help FHA manage the risks associated with introducing new products or making significant changes to existing products. Mortgage institutions may impose limits on the volume of the new products they will permit and on who can sell and service these products. FHA officials question the circumstances in which they can limit volumes for their products and believe they do not have sufficient resources to manage a product with limited volumes. Mortgage institutions sometimes require additional credit enhancements, such as higher insurance coverage; and sometimes require stricter underwriting, such as credit score thresholds, when introducing a new low or no down payment product. FHA is authorized to require an additional credit enhancement by sharing risk through co-insurance but does not currently use this authority. FHA has used stricter underwriting criteria but this has not included credit score thresholds.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
William B. Shear
Government Accountability Office: Financial Markets and Community Investment
(202) 512-4325
Matters for Congressional Consideration
Recommendation: If Congress authorizes FHA to insure no down payment products or any other new single-family insurance products, Congress may wish to consider a number of means to mitigate the additional risks that these loans may pose. Such means may include limiting the initial availability of such a new product, requiring higher premiums, requiring stricter underwriting standards, or requiring enhanced monitoring. Such risk mitigation techniques would serve to help protect the Mutual Mortgage Insurance Fund while allowing FHA the time to learn more about the performance of loans using this new product. Limits on the initial availability of the new product would be consistent with the approach Congress took in implementing the HECM program. The limits could also come in the form of an FHA requirement to limit the new product to better performing lenders and servicers as part of a demonstration program or to limit the time period during which the product is first offered.
Status: In process
Comments: Congress has not currently authorized a no-down-payment product or other new single-family insurance products.
Recommendations for Executive Action
Recommendation: If Congress provides the authority for FHA to implement a no down payment mortgage product or other products about which the risks are not well understood, the Secretary of HUD should direct the Assistant Secretary for HUD-Federal Housing Commissioner to consider incorporating stricter underwriting criteria such as appropriate credit score thresholds or borrower reserve requirements.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: Congress has not provided the authority for FHA to implement a no-down-payment product.
Recommendation: If Congress provides the authority for FHA to implement a no down payment mortgage product or other products about which the risks are not well understood, the Secretary of HUD should direct the Assistant Secretary for HUD-Federal Housing Commissioner to consider piloting the initial product or limiting its initial availability and asking Congress for the authority if HUD officials determine they currently do not have this authority.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: Congress has not provided the authority for FHA to implement a no-down-payment product.
Recommendation: If Congress provides the authority for FHA to implement a no down payment mortgage product or other products about which the risks are not well understood, the Secretary of HUD should direct the Assistant Secretary for HUD-Federal Housing Commissioner to consider utilizing other techniques for mitigating risks including use of credit enhancements and prepurchase counseling.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: Congress has not provided the authority for FHA to implement a no-down-payment product.
Recommendation: Regardless of any new products Congress may authorize, when making significant changes to its existing products or establishing new products, the Secretary of HUD should direct the Assistant Secretary for HUD-Federal Housing Commissioner to consider limiting the initial availability of the product and when doing so, the Commissioner should establish the conditions under which piloting should be used, the techniques for limiting the initial availability of a product, and the methods of enhanced monitoring that would be connected to predetermined measures of success or failure for the product.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: HUD officials say that they are not inclined to limit the availability of new products and that HUD already collects the information it needs to monitor a new product.
Recommendation: Regardless of any new products Congress may authorize, when making significant changes to its existing products or establishing new products, the Secretary of HUD should direct the Assistant Secretary for HUD-Federal Housing Commissioner to consider asking Congress for the authority to offer its new products or significant changes to existing products on a limited basis, such as through pilots, if HUD officials determine they currently lack sufficient authority.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: HUD officials say that they do not at the present time feel the need to request additional authority from Congress to conduct pilot programs.
