Down payment assistance (DPA) programs offered by cities and states make buying a home possible for many consumers who can't get financial help from family members. But for national lenders, tracking and monitoring the requirements for each state or local program can be cumbersome.
National programs, on the other hand, can make the process far more efficient, according to CBC President Richard Ferguson.
“State and local DPA programs have made it possible for many minority homebuyers to achieve the American dream,” Ferguson said. “However, a state-by-state approach is not realistic for large lenders who operate in multiple states.”
CBC Mortgage Agency, a nationally chartered housing finance agency and a leading DPA source, offers programs that enable correspondent lenders to operate with one set of DPA guidelines. This gives them the confidence to originate and close loans knowing that they will be purchased.
There’s a prevailing perception that if a prospective homebuyer doesn’t have a significant down payment, that the loan is riskier that it would be otherwise and/or the borrower is somewhat unworthy of or unfit for homeownership. The Harvard University Joint Center for Housing Studies released a report last fall on how the presence and type of down payment assistance affects the performance of affordable mortgages. In it, Harvard University JCHS Senior Research Fellow Michael Stegman wrote, “Despite HUD’s stated concerns, my colleagues and I find that the receipt of down payment assistance is not significantly associated with default risk.”
Approximately 43% of FHA first-time homebuyers relied on some form of DPA. Not only is the receipt of DPA programs not harmful, but they’re a big help to a segment of the population, especially minorities, who historically lack the intergenerational family wealth resources available to their non-minority counterparts—meaning that they’re unable to reach out to “the bank of mom and dad” for help with down payments on their first home. In these cases, state and local DPA programs are essential for these people to become homeowners.
Apart from intergenerational wealth, Ferguson says that rent prices have been increasing steadily since the Great Recession, and homebuyers are bearing the increasingly heavy burden of student loan debt. Ferguson understands the negative misconceptions around DPA programs, but says that these other factors need to be understood.
“Even when they may be successful in their career, when you take into account the amount of student debt and increasing rents that they have to pay, saving up for a down payment is increasingly difficult, and so it’s keeping these young people out of the homebuying market and preventing them from being able to enjoy the house appreciation that builds net equity and net worth that most folks have,” Ferguson said.
In the last decade, there’s been a greater increase in high leverage/low down payment and DPA lending, but Ferguson stresses that this isn’t the same kind of lending that took place leading up to the Great Recession. After the crash, the only way to get a loan (with the exception of FHA) was to have a sizeable down payment, and now the pendulum is swinging back to a healthy balance. There’s an entirely new regulatory regime of underwriting and best practices today that ensure these loans are done responsibly.
In fact, he continues, while the FHA has been attempting to limit the access to down payment assistance in the name of reducing risk to the FHA insurance fund, the bigger threat to the insurance fund is reverse mortgage programs. FHA jointly assesses forward and reverse mortgages to calculate a combined capital ratio, and the capital ratios for reverse are underwater—at the end of 2019, the Home Equity Conversion Mortgage (HECM) capital ratio, a measure reported to Congress by HUD and endorsed by actuarial firm Pinnacle Actuarial Resources, was estimated to be -9.22%, while the capital ratio of the forward mortgages were 5.44%, according to Reverse Mortgage Daily.
HUD Secretary Ben Carson addressed this issue at the most recent MBA conference, and Ferguson said that it’s an imbalance that needs to be fixed.
“It’s all wonderful that Trump is out there talking about economic development and how important it is and increasing home ownership, but on the other hand, you’ve got FHA that’s actually throwing cold water on that effort by trying to limit their footprint and in effect, limiting minority access to down payment assistance. They’re never going to limit the ability of mom and dad to provide a down payment, so white households and those who come from generational wealth, they’re going to be just fine,” Ferguson said. “If you take out the ability or limit the ability of government entities to provide down payment assistance, which is what minorities rely upon, you actually create a permanent renting underclass by not allowing these people to allow access to these mortgage loans.”
For national mortgage lenders, keeping up with the rules of each local and state program can make it difficult, if not impractical, to accommodate applicants utilizing DPA without help from companies like CBC. Another benefit from using national programs like CBC is that there are no restrictions on income, location or being a first-time homebuyer, Ferguson noted.
“In addition, DPA programs like the Chenoa fund often have better pricing and are easier to use," Ferguson added. "Plus, national programs create competition that breeds better programs, leading states to offer better pricing, terms and service.”
Last year, CBC Mortgage Agency filed a lawsuit against HUD and successfully forced it to rescind Mortgagee Letter 2019-06.