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Urban Institute: HUD watchdog is wrong on borrower-financed down payment programs

Says HUD-OIG misunderstands, overstates issue

house down payment

A recent report from the Office of Inspector General for the U.S. Department of Housing and Urban Development said that HUD does not have sufficient oversight of borrower-financed down payment assistance programs for Federal Housing Administration-insured loans, which puts borrowers and the FHA’s flagship insurance fund at “unnecessary risk.”

Analysts from the Urban Institute reviewed the report as well, and came to a different conclusion: HUD’s watchdog is wrong to call out the down payment assistance programs, and overstates the nature of the issue with HUD’s oversight.

The HUD-OIG report states that HUD “failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed down payment assistance to ensure compliance with HUD requirements.”

The assistance in question came in part from governmental entities, like state housing finance agencies. Under the down payment assistance programs, FHA borrowers are placed into a premium interest rate to pay for the assistance and, then repay the assistance through higher mortgage payments and fees.

HUD-OIG has a problem with this arrangement, stating that the programs put FHA borrowers and the FHA’s Mutual Mortgage Insurance Fund at a higher risk of default.

The Urban Institute disagrees, calling the OIG’s criticism of the down payment assistance programs “perplexing.”

In the report, Laurie Goodman, Jim Parrott, and Bing Bai write that the OIG is mistaken about the programs on several fronts.

“The OIG continues to assert two points,” they write. “First, it asserts that borrowers pay for the assistance through higher rates, in violation of FHA rules. Second, it asserts that these loans pose an unnecessary economic risk to the mutual mortgage insurance fund. As we showed in our prior report, both these claims appear mistaken.”

Goodman, Parrott, and Bai write that there are several “reasonable” factors that would cause the participants in these programs to have higher interest rates, including: the borrowers likely being riskier, which would lead to higher interest rate; the borrowers likely being more “cash constrained” and therefore more likely to finance their down payment; and the fact that State Housing Finance Agency loans tend to be smaller than other FHA loans, making the closing costs a larger percentage of the loan amount.

“To determine whether participants in these programs pay higher rates because they are participating, one would need to parse out these independent factors,” the Urban Institute analysts write (emphasis theirs). “The OIG has not done this, instead inferring that the higher rates are attributable entirely to their participation. This is a mistake.”

They add that the OIG report suggest that because the loans in question are higher risk, there are also “economically problematic.” Not true either, they write, citing HUD’s own actuarial report.

“Posing a slightly higher risk is not economically problematic, as long as pricing adequately covers that risk,” they write.

“The FHA Actuarial Report for 2016 scores government down payment assistance since 2011 as contributing positively to the MMI fund,” they continue. “It remains unclear what problem the OIG finds in these programs, as the data do not suggest either that the higher rates paid by these borrowers are tied to the program or that these loans are economically problematic for the FHA.”

The Urban Institute analysts also suggest that the OIG report overstates the number of questionable loans.

The OIG report stated that from Oct. 1, 2015 to Sept. 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that “may contain questioned assistance.”

The Urban Institute analysts dispute this figure.

The OIG report stated that said the 80,664 loans may have contained “questionable borrower-financed down payment assistance,” but admitted taht the “amount could be lower given the limitations and lack of HUD data.”

According to the Urban Institute analysts, most of these mortgages had note rates well within “normal” limits.

“The FHA found the average rate on state down payment assistance loans in 2016 was 26 basis points (0.26%) over those with no such assistance, in line with our earlier results,” they write.

They add that they found that less than 10% of the loans had note rates at or above 80 basis points (0.8%) over the benchmark mortgage rate, versus 4% of the non–down payment assistance loans.

“So the number of loans the OIG is concerned about is at most a little over 8,000, but is likely closer to 4,800,” they write. “Its suggestion that 80,664 loans may be at issue is incorrect.”

The Urban Institute analysts conclude by saying that the OIG report undercuts HUD’s stated goals.

“Part of the FHA’s mission is to ensure that families the mainstream mortgage market does not well serve can become sustainable homeowners,” the analysts conclude. “Because the down payment is often the most significant barrier to entry for such families, programs that can help them in a manner that doesn’t pose unnecessary risk to them or the FHA should be supported. We fear that the OIG is instead undermining one.”

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