The report from the Federal Reserve Bank of St. Louis has the term “cautionary tale” in its title: “A Cautionary Tale of How the Presence and Type of Down Payment Assistance Affects the Performance of Affordable Mortgage Loans.”
But, it’s not the type of warning you might expect a decade after risky lending resulted in about 10 million foreclosures. This is a report about the danger of restricting down payment assistance, or DPA.
“Our multivariate analysis indicates that the receipt of DPA is not significantly associated with default risk,” said the report from Michael Stegman, a senior fellow at the St. Louis Fed, Sarah Riley, a senior research economist at the University of North Carolina at Chapel Hill, and Roberto Quercia, a professor at the same university.
“In setting guidelines around down payment assistance, policymakers should take care not to close off opportunities to aspiring minority homebuyers,” it said.
Down payment programs are seeing “explosive growth,” the paper said, as first-time buyers with student loan debt and stagnant wages find it more difficult to find the money they need to get a mortgage.
Stegman, one of the authors, said in an email saving for a down payment is one of the biggest barriers to homeownership after years of home prices increasing at a faster pace than wages. In addition to being a senior fellow at the St. Louis Fed, he’s also a senior research fellow at Harvard University’s Joint Center for Housing Studies.
“What is most striking about this return to high-leverage home lending is the proliferation of more than 2,500 privately sponsored and government-funded down payment assistance programs across the country, which have the collective effect of reducing first-time homebuyers’ contributions from as little as 3% to something substantially less,” Stegman said.
The 64.8% share of American households that own their residences increased from 64.1% in the second quarter, the Census Bureau reported on Tuesday. The rate has been trending higher since reaching a five-decade bottom in 2016.