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