State and Local Down Payment Assistance is Important

One of the Federal Housing Administration’s (FHA) important functions is to provide insurance on low down payment mortgages. The majority of FHA-financed mortgages have a down payment of 3.5%. A homebuyer can get assistance for the down payment from a relative, an employer-sponsored program, or a state or local government sponsored program. Recently, the FHA’s inspector general has called into question the legality of down payment assistance programs threatening an important source of down payment funding for some borrowers.

In 2014, 27.2% of borrowers who financed their mortgage with support from the FHA received help from a relative for their down payment. Another 2.4% received help from a government source, 0.2% got help from an employer program, and the remainder, 70.2%, provided their own down payments. Most state housing finance agencys (HFAs) provide assistance for down payment and closing costs. This assistance can be in the form of a forgivable loan or a loan for the full amount that has a slightly higher rate than market. The FHA inspector general argued in a recent case that the later form of assistance is illegal as the consumer is paying for the assistance through a higher rate. The HFAs argue that the higher rate allows them to recoup the cost of the program and to provide services to other borrowers. Furthermore, the head of the FHA, Principle Deputy Assistant Secretary for Housing Ed Golding, reaffirmed the FHA’s support for certain down payment assistance programs like those run by  HFAs.

What impact do these programs have on the market? The share of FHA purchase mortgages with government down payment assistance rose steadily from 1.5% in 2012 to 2.4% in 2014. Government down payment assistance programs accounted for 3.4% of mortgages financed by the FHA in the first four months of 2015.

Certain areas are more dependent on government sponsored down payment assistance programs. In 2014, many of the counties with the highest utilization rates, 15% or more, of government assisted down payments on FHA financed mortgages were concentrated in Nevada and Arizona, but Illinois, Texas, South Dakota, Kansas, and Colorado. More than a quarter of the nearly 1,800 FHA purchase mortgages originated in El Paso county Colorado received government funded down payment assistance, while Shawnee and Osage counties in Kansas had similar shares. New Orleans was also a hot spot. While the utilization rate per county was below 5% across most of California, Florida, Washington, Oregon, and Maryland, all of these states had a high share of counties per state where government down payment assistance was utilized.

Oversight is an important part of the efficiency and effectiveness of government programs. However, it is important to differentiate between programs that benefit consumers while using sustainable financing from others. A reduction or elimination of government assisted down payment programs may have a small effect nationally, but the local impact would be large.