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Urban Institute defends FHA downpayment assistance


The Urban Institute says a federal watchdog agency drew faulty conclusions in a March audit that slammed state-level downpayment-assistance programs that help borrowers obtain Federal Housing Administration (FHA) loans.

The Washington, D.C.-based think tank said on Thursday that the U.S. Department of Housing and Urban Development’s Office of Inspector General (HUD OIG) has used fuzzy numbers in its claim that programs run by state finance agencies have been victimizing borrowers and putting the FHA insurance fund at risk for greater defaults.

mortggeratThe OIG and HUD have been at odds over the legality of downpayment-assistance programs since 2015. 

The issue is that borrowers could have been charged a higher interest rate on FHA loans in return for grant or a loan that covers the FHA’s 3.5 percent downpayment requirement, and thus are at higher risk of default and put the FHA insurance fund at risk.

OIG said as many as 80,000 loans in the last fiscal year could have been affected. The agency noted in the audit, however, that it didn’t have the data to confirm the actual number of borrowers who were charged higher rates. It could only confirm the number of loans that were originated with downpayment assistance through a government entity.    

In its analysis, however, the Urban Institute said likely less than 5,000 FHA borrowers in the past fiscal year paid higher rates as a result of receiving downpayment assistance through a state housing-finance agency program. That number would present no threat to the insurance fund. FHA guarantees over 800,000 purchase loans each year.

The Urban Institute has previously argued that the programs are good for borrowers, noting that an FHA actuarial report in 2016 had scored downpayment assistance as a net benefit since 2011 for the insurance fund.

“It is a tiny number of loans casting a pall over the whole program,” said Laurie Goodman, the Urban Institute’s co-director of the Housing Finance Policy Center. “For a very small number of loans, you threaten the program or you make lenders uncomfortable enough doing these loans that they choose not to,” she told Scotsman Guide News.

Goodman said borrowers who need a gift of downpayment assistance or a second loan might naturally be considered more risky, and have to pay a higher rate.

“All things being equal, higher rates mean more defaults, but you are still underwriting the borrower at the higher rate, so it is not clear how much a difference it would make,” Goodman said. “If you look at the default rates on these state downpayment-assistance loans, they are very low.”   

OIG has done three previous audits of similar programs in 2015, flagging thousands of FHA loans originated by NOVA Financial & Investment Corp. and loanDepot in conjunction with housing-finance agencies. The loans in question were offered in some 51 housing-finance agencies across 26 states. These loans were securitized and serviced by U.S. Bank.

In testimony before a congressional appropriations subcommittee on Thursday, HUD Inspector General David A. Montoya referred to the funding mechanism as “a scheme.”  


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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