If recently introduced first-time homebuyer legislation were to be enacted as written, about 4.37 million people — roughly 10% of the nation’s renters — could be eligible for up to $25,000 in down payment assistance.
Advocates of the policy say the program’s thoughtful targeting would allow it to reach those who need it the most, while industry experts told HousingWire that a complex, heavily means-tested program could create compliance pitfalls.
A study conducted by the Urban Institute found that out of the potential eligible participants, 1.6 million are Black, 1.2 million are Hispanic and 1.3 million are white. In its analysis, the Washington, D.C.-based think tank defined eligible participants as renters who have not owned a home for three years, and whose parents have not owned a home for three years.
The Downpayment Toward Equity Act would allow first-time homebuyers, defined as those who have not owned a home in the prior three years — who are also first-generation homebuyers — to receive up to $25,000 in down payment assistance at closing. Eligible participants would receive a baseline of $20,000 toward closing, and those in a “socially and economically disadvantaged” group would receive $25,000. The program also limits the assistance to those who earn less than 120% of the area median income.
Compared to a proposal that President Biden floated during last year’s campaign, which would have offered a tax credit for first-time homebuyers of up to $15,000, the legislative proposal is quite narrow. The limited scope did not escape notice by Bose George, an analyst at Keefe, Bruyette and Woods, who called the first-time homebuyer program “fairly narrow and targeted.”
Mortgage insurers had been concerned, George wrote, that a broad first-time homebuyer tax credit — which Biden had hinted at during his presidential campaign — could reduce the need for mortgage insurance.
The program’s narrow scope, which allows less money overall to be targeted to applicants who most need assistance, could have some practical drawbacks, however. Additional conditions needed for a first-time homebuyer to qualify for the benefit results in the program being more complicated and expensive to implement.
“Many down payment assistance programs are unworkable and/or contrary to the best interest of home buyers, in my experience,” one California-based LO told HousingWire. “A grant at closing for first-time homebuyers, if properly managed and efficiently executed by the states, would be a welcome step. As always, the devil is in the details.”
It may also add to closing time, and add an additional layer of complexity for lenders to navigate. Lenders and sellers already have an aversion to complicated programs, especially if they tack on time needed to close, and even more so if there’s a simpler offer — like a cash buyer or investor.
“Operationalizing this is a challenge,” said Tim Rood, managing director and head of government and industry relations at SitusAMC. “You’re going to have to make it simple to incent participation instead of punishing misapplication.”
Lenders may also be wary of running afoul of a first-time homebuyer program intended to give disadvantaged borrowers a leg up. Any misstep could draw the attention of regulators which compliance experts say are not likely to show leniency. At a virtual panel presented by the Mortgage Bankers Association, attorneys said the agency is looking to “pin some heads on the wall.”
“The more complicated it is, the less people are going to be qualified, and the less lenders will use it. If you make these a program overly complex, you invite compliance issues, and you are more likely to inadvertently mess up,” said Rood. He noted that its complexity doesn’t necessarily mean it’s a bad policy.
Nikitra Bailey, the executive vice president at the Center for Responsible Lending, said that targeting the assistance to first-time, first-generation homebuyers will reach “a cohort that has been left out of homeownership.”
There is currently a 30-point homeownership gap between white and Black households, according to the Urban Institute.
Housing and Urban Development Secretary Marcia Fudge highlighted the issue at an address at the Mortgage Bankers Association’s spring conference. Fudge said that the homeownership gap between white and Black households is “wider today than it was in 1968, when banks could still legally discriminate against borrowers based on the color of their skin.”
Last year, after prolonged, forceful and widespread protests brought attention to racism, financial institutions made statements acknowledging the lending community’s role in propagating racial inequality.
In October 2020, JPMorgan Chase CEO Jamie Dimon called systemic racism a “tragic part of America’s history,” and said it is “long past time that society addresses racial inequities in a more tangible, meaningful way.”
Bailey said that because the first-time homebuyer downpayment assistance program ultimately depends on the participation of lenders, it’s an opportunity for them to make good on those promises.
“We’ve heard bold commitments from a lot of financial institutions,” Bailey said. “And now we have a tool that lenders can proactively choose to use.”
James Kleimann contributed reporting to this story.
Have thoughts to share? Senior Mortgage Reporter Georgia Kromrei can be reached at [email protected].