Conversation: DPA Doesn’t Cause Loans to Default.

Despite the focus of the world largely being on COVID-19 and quarantines right now, the battle for down payment assistance (DPA) continues to rage quietly in the background. In the most recent instance, HUD has expressed intent to limit (or shut down) national down payment assistance programs, which would effectively create regulatory monopolies in every state. Lack of competition only creates a worse product; therefore, efforts to limit national DPA programs will harm borrowers. (To be clear, when I speak of DPA here, I’m referring to government- or nonprofit-funded DPA, not DPA provided by family or friends.)

 

One of the arguments behind limiting DPA is the idea that DPA carries with it extra default risk, which is the perspective of FHA and HUD (page 12). To be fair, HUD does back up its claims with some data, but this data has been proven to not consider all risk factors at play (see: A Cautionary Tale of How the Presence and Type of Down Payment Assistance Affects the Performance of Affordable Mortgage Loans). For example, a risk factor that HUD fails to account for is race; blacks are significantly more likely than whites to receive DPA (as explained in the paper summary for the just-mentioned paper) and are also slightly higher risk. When controls for race are factored into risk models, the slightly increased risk disappears, showing that “DPA appears to be unrelated to default risk” (page 12).

 

This data is significant. For one thing, it suggests that limiting access to DPA will harm minority groups, the exact groups HUD is trying most to help. For another, if DPA is unrelated to default risk then restricting DPA (including nationwide DPA programs) does little to nothing to mitigate risk.

 

The paper also mentions several benefits that come with DPA: (effective) forced savings for low-income households (page 3) and wealth accumulation from equity as markets rose (pages 12–13). Minority borrowers would be denied these benefits unfairly if DPA were restricted.

 

This information—DPA doesn’t impact default risk, DPA helps minorities and low-income earners, the many benefits DPA brings to the underserved—comes together to show that limiting DPA is not the solution HUD is looking for. Limiting DPA doesn’t protect loans, but it will harm minorities looking to break into homeownership.

 

Still, it’s necessary for HUD to monitor the marketplace. Richard Ferguson, President of CBC Mortgage Agency, and Michael Whipple, Vice President of CBC Mortgage Agency, have proposed an alternative course of action in their paper HUD’s Rulemaking on DPA: A Better Way for HUD to Manage Government DPA. Their suggestion is, essentially, to allow continued competition between DPA providers, which will drive forward innovation and consumer-friendly features, and to require transparency of information from all government DPA providers. HUD already has the tools in place for a robust DPA reporting system, so this shouldn’t be too difficult to implement.

 

In short, while the FHA fund does need to be protected, any action or policy intended to do so needs to be data-driven; furthermore, all policies ought to be very carefully examined to make sure that they don’t hurt the borrowers they are intended to help.

 

I highly encourage everyone who reads this to read fully A Cautionary Tale of How the Presence and Type of Down Payment Assistance Affects the Performance of Affordable Mortgage Loans and HUD’s Rulemaking on DPA: A Better Way for HUD to Manage Government DPA.