FHA Guidelines: FHA Down Payment Assistance On The Chopping Block?

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HUD is once again about to propose the rule banning down payment assistance programs and open it up for a 60 day comment period. You can find more about that at the link above.

HUD continues to use higher default rates associated with loans using DPA as their rationale for killing off the non-profit down payment assistance programs. However, you can’t use HUD’s raw statistics to say DPA causes a higher foreclosure rate, only to show that DPA is associated with a higher foreclosure rate. The reason is that these raw figures aren’t adjusted to account for other factors such as credit, debt ratio, time on the job, local economic conditions etc.

HUD supports their view with a study that was done several years ago in a few MSAs. If you actually read the study, you will note that the areas picked to gather the study data from either were at the time, or soon became, leading areas for mortgage fraud. So although other important factors were adjusted for, fraud was not adjusted for in the study because they had no way of knowing the true extent of it at the time.

Unfortunately, I know from management contacts with several lenders that the organized crime level fraud in those areas - i.e. the fraud where people went through whole subdivisions with straw buyers, fake W2s, and inflated appraisals - was also closely associated with the use of DPA. There’s almost no way to look at the statistics and know the true effects of DPA.

That being said, the recently announced figures from MBA show that FHA foreclosure rates are still going down in the middle of all the mess going on with real estate values, job layoffs etc. This sort of throws a wrench into the works of those who want to claim that DPA is bringing FHA down, since the use of DPA is as high or higher than it has ever been.

Some of the nonprofits that handle the DPA programs are saying that the statistics are wrong and some say that this push to ban down payment assistance is coming as a result of undue influence by the private mortgage insurance companies who would rather not have the competition from FHA. I don’t know about that, but it is certainly worth thinking about.

Sure a 20% down payment on its own makes a person less likely to walk away. Maybe even a 10% down payment would have the same effect. But I believe that job stability, debt ratio and area real estate values have more effect on whether someone walks away from a house than does an insignificant 3% down payment.

When I started in mortgages, the down payment on FHA was 5% minus $500 (although prices were considerably lower) so I’m not too worried about loan officers being able to get customers if people have to come in with a 3% down payment. But I would much rather those people kept that money in the bank as reserves, or used it to buy their furniture instead of adding debt after closing to furnish the house.

The fight happening here is something that almost always happens when bureaucracratic regulation and the free market get combined. The bureaucracy itself becomes another interest group and political considerations start taking precedence over true business decisions.