Saving up for a down payment, even a 3.5% down that FHA often requires, is an insurmountable struggle for a plethora of low-income, hard-working Americans.
But about 150,000 families without the cash still have become homeowners thanks to down payment assistance from a variety of state or federal housing finance agencies — commonly referred to as HFA’s.
Going forward, maybe not.
Last April, Federal Housing Administration Commissioner Brian Montgomery issued a bombshell directive that stopped many of the government down payment assistance providers in their tracks.
The directive came in the form of a “mortgage letter” that threatens an HFA’s ability to recoup the down payment funds it advances.
Under the typical HFA business model, assistance providers participate in the sale of the loan on the secondary mortgage market.
Lenders typically charge a higher interest rate for such loans, thereby getting a rebate on the sale that’s used to reimburse the down-payment assistance that HSA’s issue.
Montgomery’s directive would have taken away an HFA’s flexibility to recoup their money from those rebates.
It also sought to limit down payment assistance issued by Native American HSA’s to their own reservation.
Native American finance agencies like the Utah-based Cedar Band of Paiutes have been providing down payment assistance nationwide. The group’s Chenoa Fund, for example, has issued down payment assistance to 19,000 borrowers since 2014, including 2,000 in California.
What drives the thinking behind this directive at FHA and at its parent agency, the U.S. Department of Housing and Urban Development? The risk of defaults? Is it philosophical — that is, aimed at shrinking HUD’s footprint?
I don’t know. I didn’t get a response when I asked HUD for clarification.
What is clear is Montgomery’s directive is on hold.
The Cedar Band of Paiutes sued.
Separately, the National Council of State Housing Finance Agencies sent a letter to Montgomery imploring him to clarify himself.
“Several HFA’s have already suspended their down payment assistance programs in connection with FHA-insured mortgages because of this provision,” the letter said.
A federal judge in Utah granted an injunction delaying HUD’s implementation of these new rules, finding that Montgomery’s mortgagee letter likely violated the Administrative Procedures Act.
But the damage was already done. Chenoa Fund’s down payment assistance already has been cut in half, fund President Richard Ferguson said.
This is not Commissioner Montgomery’s first rodeo. When he was FHA Commissioner under President George W. Bush, he issued an earlier mortgagee letter affecting down payment assistance that also drew a lawsuit for violating the same Administrative Procedures Act.
“The hatred of HUD for down payment assistance is not a policy doctrine, it’s a religious theology,” said Scott Syphax, founder, president and chief executive of Nehemiah Corp., a down payment assistance provider that sued HUD during the Bush administration.
Some fear, however, default risk is higher for loans to borrowers who get down payment assistance.
Dave Stevens, a former FHA commissioner and retired president and chief executive of the Mortgage Bankers Association, noted that such down payment assistance often is coupled with high debt-to-income ratios and low FICO scores.
HUD’s annual report to Congress also raised concerns about the default insurance claims hitting 9.5% in 2019, the highest level since 2009.
“Risk layering is a recipe for default,” Stevens said.
Nonetheless, that same HUD report to Congress offers data for 2015-19 showing little difference in mortgage delinquencies for borrowers getting down payment assistance, whether they got it from the government, a private agency, a relative or an acquaintance.
Chenoa’s delinquency rate, for example, is a mere 1.7%.
Harvard issued a study on risks associated with down payment assistance last October, concluding in part that such assistance appears to be unrelated to default risk. The study also emphasized its importance to minority borrowers.
What better way to acquire household wealth than property appreciation?
A sampling of 5,015 loans shows total current equity of nearly $25,000 per house.
There has got to be some common ground here. How about increasing the minimum credit score or lowering the maximum debt-to-income ratio?
Commissioner Montgomery, please leave the down payment assistance world to do its good work for the sake of families, community stability and wealth building.
Everything will be ok.
Freddie Mac rate news: The 30-year fixed-rate averaged 3.6%, 5 basis points lower than last week. The 15-year fixed-rate averaged 3.04%, also 5 basis points lower.
The Mortgage Bankers Association reported a 1.2% decrease in loan application volume from one week earlier.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $510,400 loan, last year’s payment was $250 higher than this week’s payment of $2,321.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without cost: A 30-year FHA (up to $442,750 in the Inland Empire, up to $510,400 in Los Angeles and Orange counties) at 3.25%, a 15-year conventional at 3.375%, a 30-year conventional at 3.625%, a 30-year conventional high-balance ($510,401 to $765,600) at 3.875%, a 30-year jumbo (over $765,600) at 4.75%.
Eye-catcher loan program of the week: An asset utilization program that allows you to qualify by dividing your liquid assets over 36 months and calling that income. For example, $300,000 divided by 36 equals $8,333 per month.
Jeff Lazerson is a mortgage broker and adjunct professor at Saddleback College. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.
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