Summary
The Federal Housing Administration (FHA) permits borrowers to obtain down payment assistance from third parties; but, research has raised concerns about the performance of loans with such assistance. Due to these concerns, GAO examined the (1) trends in the use of down payment assistance with FHA-insured loans, (2) the impact that the presence of such assistance has on purchase transactions and house prices, (3) how such assistance influences the performance of these loans, and (4) FHA's standards and controls for these loans.
Almost half of all single-family home purchase mortgages that FHA insured in fiscal year 2004 had down payment assistance. Nonprofit organizations that received at least part of their funding from sellers provided assistance for about 30 percent of these loans and represent a growing source of down payment assistance. However, assistance from seller-funded nonprofits alters the structure of the purchase transaction. First, because many seller-funded nonprofits require property sellers to make a payment to their organization; assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance. Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down payment assistance have higher delinquency and claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance. Although FHA has implemented some standards and controls on loans with down payment assistance, stricter standards and additional controls could help in managing the risks these loans pose. FHA standards permit assistance from seller-funded nonprofits; in contrast, mortgage industry participants restrict such assistance. Further, government guidelines call for routine identification of risks that could impede meeting program objectives; however, FHA has not conducted routine analysis of the performance of loans with down payment assistance.
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
Recommendations for Executive Action
Recommendation: To better understand and manage risks posed by loans with down payment assistance, from any source, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to provide FHA with data that would permit the agency to identify whether down payment assistance is from a seller-funded down payment assistance provider, modify FHA's "gift letter source" categories to include "nonprofit seller-funded" and "nonprofit nonseller-funded" and requiring lenders to accurately identify and report this information when submitting loan information to FHA.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To better understand and manage risks posed by loans with down payment assistance, from any source, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to more fully consider the risks posed by down payment assistance when underwriting loans, including the presence and source of down payment assistance as a loan variable in FHA's Technology Open to Approved Lenders Mortgage Scorecard during the underwriting process.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To better understand and manage risks posed by loans with down payment assistance, from any source, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to ensure that FHA has an ongoing understanding of the impact that down payment assistance has on loan performance, implementing routine and targeted performance monitoring of loans with down payment assistance, including analyses that consider the source of assistance.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To better understand and manage risks posed by loans with down payment assistance, from any source, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to more accurately reflect the impact that down payment assistance has on loan performance, and continue to include the presence and source of down payment assistance in future loan performance models. To enhance the actuarial reviews' estimates of claims, the Secretary should also consider including in the annual review of actuarial soundness, the impact that the presence and source of down payment assistance has on claim severity.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To balance the goals of expanding homeownership and sustaining the actuarial soundness of the Fund by managing the risks associated with loans that involve "gifts" of down payment assistance from nonprofit organizations that receive funding from sellers, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to ensure that appraisers have the information necessary to establish the market value of the properties by requiring lenders to inform appraisers about the presence of down payment assistance from a seller-funded source.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To balance the goals of expanding homeownership and sustaining the actuarial soundness of the Fund by managing the risks associated with loans that involve "gifts" of down payment assistance from nonprofit organizations that receive funding from sellers, the Secretary of HUD should direct the Assistant Secretary for Housing (Federal Housing Commissioner) to revise FHA standards to treat assistance from seller-funded nonprofits as a gift from the seller and, therefore, subject to the prohibition against using seller contributions to meet the 3 percent borrower contribution requirement because down payment assistance provided by seller-funded entities is, in effect, a seller inducement.
Agency Affected: Department of Housing and Urban Development
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
