Currently, there are over 1300 governmental entities across the country that provide down payment assistance (DPA) to borrowers with mortgages from the Federal Housing Administration (“FHA”). In spite of the Trump administration’s policy to reduce regulation, the Department of Housing and Urban Development (HUD) appears determined to promulgate burdensome new rules relating to government provided DPA. In its most recent regulatory plan, HUD proposed changes to the regulation of government DPA, claiming they are necessary to “protect the taxpayer.” In addition, in a recent letter to Tribal Leaders [link] HUD expressed concerns that government programs might be benefiting too much from their efforts to help minority and low-income borrowers. But HUD’s proposed cure will do more harm than good because it focuses on the benefits that government programs receive rather than on the benefits received by borrowers.
In order to ensure that government programs are not benefiting too much, HUD proposes to set the amount that government programs charge to borrowers to a fixed amount above the cost of the DPA program (i.e. cost plus a small fee), while at the same time limiting competition between DPA providers by limiting government DPA programs to operating only within limited jurisdictional boundaries. This kind of heavy-handed government intervention of fixing prices and limiting competition has never been able to maximize benefits to consumers and often results in diminished services, poorly managed programs and fewer opportunities for assistance. A brief review of the historical impacts of communism on the provision of goods and services within an economy bears this out.
There are better options for HUD to employ to help ensure that borrowers are getting value from government DPA programs; and importantly, that the FHA loans that are connected with such assistance perform well so that taxpayers do not have to bail out HUD, which should be HUD’s principal concern.
The Monitored Marketplace
Both HUD’s interest in protecting the MMIF and the interests of the borrowers HUD is tasked with assisting are best served by the creation of a monitored marketplace for government DPA, which would include (1) identifying which government entity provides DPA on each FHA mortgage, (2) reporting the pricing and performance of DPA assisted FHA mortgages by governmental entity, (3) establishing minimum performance standards for the government assisted FHA mortgages, and (4) ensuring that there is a competitive market so that borrowers get the lowest costs and a variety of product offerings.
Identifying Which Government Entity Provides DPA on Each FHA mortgage
HUD can take some easy yet significant steps to identify government DPA programs that are overcharging borrowers or that are putting at risk the FHA Mutual Mortgage Insurance Fund (MMIF). Currently, HUD does not collect data that on FHA loans that would allow it to determine which DPA programs might be overcharging borrowers or which are performing well and which are not. The collection of such data is a necessary first step in developing regulation intended to protect borrowers and to reduce risk to taxpayers. Before HUD engages in rulemaking, it needs to collect a sufficient amount of this DPA source and performance data and use it to inform its regulation of government DPA providers. This is extremely easy for HUD to do, and something HUD has already done with DPA from non-profits.
HUD should require that for every FHA mortgagor that receives DPA from a governmental entity, originators enter an EIN or similar unique identifier into the FHA system. The fields for such data already exist in HUD’s system. (See the illustration below.) If HUD required originators to enter this data, it could determine how each government DPA program is performing or if any program is charging interest rates (pricing) on the FHA first mortgage that are above the average rates charged by similar government DPA programs. This would enable HUD to ensure that the government entity DPA programs are not increasing the costs to borrowers, but not the benefits.
Monitoring the Pricing and Performance of DPA Assisted FHA Mortgages by Governmental Entities
Once HUD identifies the governmental entity providing the DPA, it can monitor the pricing and performance of each government DPA program. Government DPA programs will then be able to have accurate performance information for their programs as well as their performance relative to their peers. This will allow them to more easily identify deficiencies in their programs and better track the effects of remedial measures they may elect to take. This would also permit HUD to see how specific government DPA programs affect the interest rates on the FHA first mortgage. HUD could then monitor and, if necessary, regulate programs to keep them from overcharging borrowers, particularly in those markets with few DPA providers.
Uniform Minimum Performance Standards for Government Assisted FHA Mortgages
By monitoring and reporting the performance of each governmental entities’ DPA program, HUD can set uniform performance standards. As an example, HUD could use compare ratios. If a government DPA program has a compare ratio to its peers of 150 or higher, it is placed on a ‘watch’ list. Government DPA programs could determine how best to keep their relative performance below 150, whether that is by credit requirements like credit score minimums and DTI maximums for borrowers receiving DPA, or increasing borrower support services such as pre-purchase education, post-purchase counseling, or some other form of down payment substitute. Most importantly, it would give governmental entities the opportunity to try alternative innovative practices to better assist underserved borrowers.
This type of monitoring and reporting will lead to improvement in the overall delinquency and default rates of governmental-assisted FHA mortgages. Performance measured improves, and performance measured and reported improves more rapidly. Once this data is available, HUD could then better assess what action, if any, may be necessary to ensure that the performance of DPA-assisted mortgages do not present a substantial risk of loss to the MMIF.
Sufficient Market Participants: Competition Protects Borrowers Better Then Price Fixing and Monopolies
HUD has noted that certain government DPA programs “appear to increase costs, but not benefits, to the borrower.” If this is true, then presumably these programs are in areas where there are not enough alternatives for borrowers who need DPA. Overpriced products are the inevitable result of monopoly pricing power. The solution is twofold: (1) Transparency in pricing, which could occur by making such information public or perhaps enhancing borrower disclosures, and (2) more alternatives for borrowers to obtain DPA (i.e. competition), which will ensure that governmental entities are pricing their programs at the optimal market rate, are efficient, and innovate in ways to improve their services to borrowers and provide greater benefits.
HUD’s focus should be less on the benefit to the government entity and more on the benefit to the borrower. Limiting government entities to recouping costs from operating a DPA program provides no incentive for programs to lower costs, especially when combined with monopoly pricing power. In fact, the result will be higher borrower costs and fewer product offerings. A competitive and transparent market would ensure that DPA providers control their costs and price their products at the margin of cost in order to remain relevant in the market. A competitive and transparent market would also result in more product offerings being made available. This is a huge win for borrowers.
Limiting government programs to their political jurisdictions creates regulatory monopolies and will do nothing more than limit options to borrowers, ensuring that they will pay more for less, and more importantly, will have no impact on lowering the risk to the MMIF. But measuring and reporting the performance of government DPA programs to identify which programs are not performing well will lead to less risk to the MMIF. It is important to note that governmental DPA programs that purchase the FHA first mortgage are financially accountable for the performance of these FHA loans. This financial liability is a far more meaningful form of accountability than indirect political accountability. For example, CBC Mortgage Agency (CBCMA), a national government DPA program, purchases the FHA first mortgages assisted by its secondary financing. CBCMA is very careful to ensure that borrowers are successful and imposes credit standards for borrowers receiving DPA, including credit score minimums, DTI maximums, reserves, etc . For all lower-FICO score borrowers, CBCMA requires that each borrower receive pre-purchase counseling from a HUD-approved counselor. CBCMA also provides one-year of post-purchase counseling to all of its borrowers. In addition, CBCMA offers a program to low- to moderate-income borrowers that provides instant equity by providing a second mortgage that is completely forgiven after the borrower makes 36 consecutive on time payments on the FHA first mortgage. This provides an incentive for the borrowers to prioritize making their FHA mortgage payment.
Regulators Should Tread Carefully in Limiting Governmental DPA
A recent study has established that minorities use government DPA at a higher rate than whites, and cautioned regulators to be careful in regulating government DPA, which the study found did not increase risk in low-down payment loans. Limiting government DPA in any form has a more significant impact on minority families and hampers efforts to close the racial wealth gap.
As an example of efforts to close the racial wealth gap, CBCMA is working through African-American churches, under the Uhousi initiative, to provide education to members of their congregations on the home buying process and a personalized review of each attendee’s qualifications to be eligible for a mortgage loan. Attendees receive a personalized financial plan that provides them with a roadmap to home ownership. The personalized financial plan gives those prospective home buyers the tools they need by identifying the steps they need to take to become a home buyer.
Conclusions
HUD has an important role to play in protecting taxpayers from poorly performing programs. Because HUD programs are directed at assisting the most vulnerable borrower populations, HUD should also be aware of the benefits that borrowers are receiving relative to the costs to such borrowers. HUD also has an obligation to be data driven in its policy making and choose those options that are the least destructive to government DPA providers and the most beneficial to borrowers. What HUD has indicated about how it intends to proceed with rulemaking regarding government DPA programs shows that HUD intends to do just the opposite: regulate without supporting data and create onerous requirements for government DPA programs that will inevitably lead to fewer options and less benefit to borrowers. HUD has much better options to manage DPA from government entities than creating monopolies of government DPA programs and fixing prices.
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CBCMA Does Not Originate Mortgage Loans. This is not an offer to lend money nor a solicitation of a mortgage application by CBCMA.