Mortgage Financing
Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance Gao ID: GAO-07-1033T June 22, 2007The Federal Housing Administration (FHA) differs from other key mortgage industry participants in that it allows borrowers to obtain down-payment assistance from nonprofit organizations (nonprofits) that operate programs supported partly by property sellers. Research has raised concerns about how this type of assistance affects home purchase transactions. To assist Congress in considering issues related to down-payment assistance, this testimony provides information from GAO's November 2005 report, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance (GAO-06-24). Specifically, this testimony discusses (1) trends in the use of down-payment assistance with FHA-insured loans, (2) the impact that the presence of such assistance has on purchase transactions and house prices, and (3) the influence of such assistance on loan performance.
The proportion of FHA-insured purchase loans that were financed in part by down-payment assistance increased from 35 percent to nearly 50 percent from 2000 through 2004. Assistance from nonprofit organizations that received at least part of their funding from property sellers accounted for much of this increase, growing from about 6 percent of FHA-insured purchase loans in 2000 to approximately 30 percent in 2004. More recent data indicate that in 2005 and 2006, the percentages of FHA-insured loans with down-payment assistance from all sources and from seller-funded nonprofits were roughly equivalent to 2004 levels. Assistance from seller-funded nonprofits alters the structure of the purchase transaction in important ways. First, because many seller-funded nonprofits require property sellers to make a payment to their organization, assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance. Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down-payment assistance have higher delinquency and insurance claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance and the homebuyers having less equity in the transaction.
GAO-07-1033T, Mortgage Financing: Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance
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Testimony:
Before the Subcommittee on Housing and Community Opportunity, Committee
on Financial Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Friday, June 22, 2007:
Mortgage Financing:
Seller-Funded Down-Payment Assistance Changes the Structure of the
Purchase Transaction and Negatively Affects Loan Performance:
Statement of William B. Shear, Director:
Financial Markets and Community Investment:
GAO-07-1033T:
GAO Highlights:
Highlights of GAO-07-1033T, a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
House of Representatives
Why GAO Did This Study:
The Federal Housing Administration (FHA) differs from other key
mortgage industry participants in that it allows borrowers to obtain
down-payment assistance from nonprofit organizations (nonprofits) that
operate programs supported partly by property sellers. Research has
raised concerns about how this type of assistance affects home purchase
transactions. To assist Congress in considering issues related to down-
payment assistance, this testimony provides information from GAO‘s
November 2005 report, Mortgage Financing: Additional Action Needed to
Manage Risks of FHA-Insured Loans with Down Payment Assistance (GAO-06-
24). Specifically, this testimony discusses (1) trends in the use of
down-payment assistance with FHA-insured loans, (2) the impact that the
presence of such assistance has on purchase transactions and house
prices, and (3) the influence of such assistance on loan performance.
What GAO Found:
The proportion of FHA-insured purchase loans that were financed in part
by down-payment assistance increased from 35 percent to nearly 50
percent from 2000 through 2004. Assistance from nonprofit organizations
that received at least part of their funding from property sellers
accounted for much of this increase, growing from about 6 percent of
FHA-insured purchase loans in 2000 to approximately 30 percent in 2004.
More recent data indicate that in 2005 and 2006, the percentages of FHA-
insured loans with down-payment assistance from all sources and from
seller-funded nonprofits were roughly equivalent to 2004 levels.
Assistance from seller-funded nonprofits alters the structure of the
purchase transaction in important ways. First, because many seller-
funded nonprofits require property sellers to make a payment to their
organization, assistance from these nonprofits creates an indirect
funding stream from property sellers to homebuyers. Second, GAO
analysis indicated that FHA-insured homes bought with seller-funded
nonprofit assistance were appraised at and sold for about 2 to 3
percent more than comparable homes bought without such assistance.
Regardless of the source of assistance and holding other variables
constant, GAO analysis indicated that FHA-insured loans with down-
payment assistance have higher delinquency and insurance claim rates
than do similar loans without such assistance. Furthermore, loans with
assistance from seller-funded nonprofits do not perform as well as
loans with assistance from other sources (see fig.) This difference may
be explained, in part, by the higher sales prices of comparable homes
bought with seller-funded assistance and the homebuyers having less
equity in the transaction.
Figure: Effect to Down-Payment Assistance on the Probability of
Delinquency and Claim:
[See PDF for Image]
Source: GAO.
Note: Loans without assistance are set at 100 percent. Data are from a
national sample of FHA-insured loans from 2000, 2001, and 2002; and the
analysis controlled for selected variables.
[End of figure]
What GAO Recommends:
In the report discussed in this testimony, GAO made recommendations
designed to better manage the risks of loans with down-payment
assistance generally and from seller-funded nonprofits in particular.
Consistent with our recommendations, HUD recently issued a proposed
rule that would prohibit the use of seller-funded down-payment
assistance with FHA-insured loans.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1033T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov
[End of section]
Madam Chairwoman and Members of the Subcommittee:
I am pleased to be here today to discuss issues concerning down-payment
assistance for homebuyers. Making a down payment on a mortgage can
benefit both the homebuyer and the mortgage provider. For example, a
down payment creates "instant equity" for the new homeowner, and we and
others have shown that mortgage loans with greater owner investment
generally perform better.[Footnote 1] However, many families have
difficulty saving sufficient funds for a down payment and loan closing
costs. One way to make homeownership affordable to more families is to
allow homebuyers to obtain these funds from third parties such as
relatives, employers, government agencies, and nonprofit organizations
(nonprofits).
Like many conventional lenders, the Federal Housing Administration
(FHA) of the Department of Housing and Urban Development (HUD) allows
down-payment assistance from third-party sources. One of the primary
goals of FHA, which insures single-family mortgages made by private
lenders, is to expand homeownership opportunities for first-time
homebuyers and other borrowers who would not otherwise qualify for
conventional mortgages on affordable terms. FHA borrowers often have
limited resources to meet the 3 percent borrower investment FHA
requires and many obtain down-payment assistance. Unlike other key
mortgage industry participants, FHA allows borrowers to obtain this
assistance from nonprofits that operate programs supported partly by
financial contributions and service fees from participating property
sellers.
My testimony today is based on a report we issued in November 2005 on
down-payment assistance used with FHA-insured mortgages.[Footnote 2] My
discussion will focus on (1) trends in the use of down-payment
assistance with FHA-insured loans, (2) the impact that the presence of
such assistance has on purchase transactions and house prices, and (3)
the influence of such assistance on loan performance.
In preparing our November 2005 report, we analyzed loan-level data from
HUD on single-family home purchase mortgages. These data included two
samples of FHA-insured loans from fiscal years 2000, 2001, and 2002--a
national sample and a sample from three metropolitan statistical areas
(MSA) with high rates of down-payment assistance--and performance data
on those loans as of June 30, 2005.[Footnote 3] We reviewed FHA reports
and guidance for loans with down-payment assistance and examined
practices used by other mortgage industry participants for loan
products that permit similar assistance. We also examined the sales
prices of homes by the use and source of down-payment assistance using
property value estimates derived from an Automated Valuation Model
(AVM).[Footnote 4] Finally, we interviewed real estate agents, lenders,
appraisers, and other key players involved in transactions with down-
payment assistance.
In summary, we found that:
* The proportion of FHA-insured purchase loans that were financed in
part by down-payment assistance from various sources increased from 35
percent to nearly 50 percent from 2000 through 2004, while the overall
number of loans that FHA insured fell sharply. Assistance from
nonprofit organizations funded by property sellers accounted for a
growing percentage of that assistance. More specifically, about 6
percent of FHA-insured loans in 2000 received down-payment assistance
from seller-funded nonprofits, but by 2004 nonprofit assistance had
grown to about 30 percent. More recent data indicate that in 2005 and
2006, the percentages of FHA-insured loans with down-payment assistance
from all sources and from seller-funded nonprofits were roughly
equivalent to 2004 levels.
* Down-payment assistance provided by a seller-funded nonprofit can
alter the structure of the purchase transaction in important ways.
First, when homebuyers receive such assistance, many of the nonprofits
require property sellers to make a payment to the nonprofit that equals
the amount of assistance the homebuyer receives, plus a service fee,
after the closing. This requirement creates an indirect funding stream
from property sellers to homebuyers that does not exist in other
transactions, even those involving some other type of down-payment
assistance. Second, according to mortgage industry participants and a
HUD contractor's study, property sellers that have provided down-
payment assistance through nonprofits then often raised the sales
prices of the homes involved in order to recover the required payments
to the organizations.[Footnote 5] Similarly, our analysis found that
FHA-insured homes bought with seller-funded nonprofit assistance were
appraised at and sold for about 2 to 3 percent more than comparable
homes bought without such assistance.
* Loans with down-payment assistance do not perform as well as loans
without down-payment assistance. This may be partially explained by the
homebuyer having less equity in the transaction. Holding other
variables constant, our analysis indicated that FHA-insured loans with
down-payment assistance had higher delinquency and insurance claim
rates than similar loans without such assistance. For example, we found
that the probability that loans with down-payment assistance from a
seller-funded nonprofit would result in insurance claims was 76 percent
higher in the national sample and 166 percent higher in the MSA sample
than it was for comparable loans without assistance. These differences
in performance may also be explained, in part, by the higher sales
price of comparable homes bought with seller-funded down-payment
assistance. Due partly to the adverse performance of loans with seller-
funded down-payment assistance, FHA has estimated that in the absence
of program changes its single-family mortgage insurance program would
require a subsidy--that is, appropriations--in 2008.
Our 2005 report made recommendations designed to better manage the
risks of loans with down-payment assistance generally and from seller-
funded nonprofits specifically. Consistent with our recommendations,
HUD, among other things, recently issued a proposed rule that would
prohibit the use of seller-funded down-payment assistance in
conjunction with FHA-insured loans.[Footnote 6]
Background:
Congress established FHA in 1934 under the National Housing Act (P.L.
73-479) to broaden homeownership, protect and sustain lending
institutions, and stimulate employment in the building industry. FHA's
single-family programs insure private lenders against losses from
borrower defaults on mortgages that meet FHA's criteria for properties
with one to four housing units. FHA historically has played a
particularly large role among minority, lower-income, and first-time
homebuyers. In 2006, 79 percent of FHA-insured home purchase loans went
to first-time homebuyers, 31 percent of whom were minorities.
In recent years, FHA's volume of business has fallen sharply. More
specifically, the number of single-family loans that FHA insured fell
from about 1.3 million in 2002 to 426,000 in 2006. To help FHA adapt to
recent trends in the mortgage market, in 2006 HUD submitted a
legislative proposal to Congress that included changes that would
adjust loan limits for the single-family mortgage insurance program,
eliminate the requirement for a minimum down payment, and provide
greater flexibility to FHA to set insurance premiums based on risk
factors. According to HUD, a zero-down-payment mortgage product would
provide FHA with a better way to serve families in need of down-payment
assistance.
As previously noted, some nonprofits that provide down-payment
assistance receive contributions from property sellers. When a
homebuyer receives down-payment assistance from one of these
organizations, the organization requires the property seller to make a
financial payment to their organization. These nonprofits are commonly
called "seller-funded" down-payment assistance providers. A 1998
memorandum from HUD's Office of the General Counsel found that funds
from a seller-funded nonprofit were not in conflict with FHA's
guidelines prohibiting down-payment assistance from sellers.[Footnote
7] FHA does not approve down-payment assistance programs administered
by nonprofits. Instead, lenders are responsible for assuring that down-
payment assistance from a nonprofit meets FHA requirements.
Purchase Loans with Seller-Funded Down-Payment Assistance Have Become a
Substantial Part of FHA's Portfolio and Are More Prevalent in Areas
with Lower House Price Appreciation:
Loans with down-payment assistance have come to constitute a
substantial portion of FHA's portfolio in recent years, particularly as
the number of loans without such assistance has fallen sharply. For
example, from 2000 to 2004, the total proportion of FHA-insured single-
family purchase loans that had a loan-to-value (LTV) ratio greater than
95 percent and that also involved down-payment assistance from any
source grew from 35 to nearly 50 percent.[Footnote 8] Assistance from
nonprofit organizations, about 93 percent of which were funded by
sellers, accounted for an increasing proportion of this assistance.
Approximately 6 percent of FHA-insured loans received down-payment
assistance from nonprofit organizations in 2000, but, by 2004 this
figure had grown to about 30 percent. FHA data for 2005 and 2006
indicate that the percentages of loans with down-payment assistance
from any source and from seller-funded nonprofits remained at roughly
2004 levels.
Growth in the number of seller-funded nonprofit providers and the
greater acceptance of this type of assistance have contributed to the
increase in the use of down-payment assistance. According to industry
professionals, relatives have traditionally provided such assistance,
but in the past decade or so other sources have emerged, including not
only seller-funded nonprofit organizations but also government agencies
and employers. The mortgage industry has responded by developing
practices to administer this type of assistance, for instance, FHA
policies require gift letters and documentation of the transfer of
funds. Lenders also reported that seller-funded down-payment assistance
providers have developed practices accepted by FHA and lenders. For
example, seller-funded programs have standardized gift letter and
contract addendum forms for documenting both the transfer of down-
payment assistance funds to the homebuyer and the financial
contribution from the property seller to the nonprofit organization. As
a result, for FHA-insured loans, lenders are increasingly aware of and
willing to accept down-payment assistance, including from seller-funded
nonprofits.
We found that states that have higher-than-average percentages of FHA-
insured loans with nonprofit down-payment assistance, primarily from
seller-funded programs, tended to be states with lower-than-average
house price appreciation rates.[Footnote 9] From May 2004 to April
2005, 35 percent of all FHA-insured purchase loans nationwide involved
down-payment assistance from a nonprofit organization, and 15 states
had percentages that were higher than this nationwide average. Fourteen
of these 15 states also had house price appreciation rates that were
below the median rate for all states. In addition, the eight states
with the lowest house price appreciation rates in the nation all had
higher-than-average percentages of nonprofit down-payment assistance.
Generally, states with high proportions of FHA-insured loans with
nonprofit down-payment assistance were concentrated in the Southwest,
Southeast, and Midwest.
Seller-Funded Assistance Affects Home Purchase Transactions and Can
Raise House Prices:
The presence of down-payment assistance from seller-funded nonprofits
can alter the structure of purchase transactions. When buyers receive
assistance from sources other than seller-funded nonprofits, the home
purchase takes place like any other purchase transaction--buyers use
the funds to pay part of the house price, the closing costs, or both,
reducing the mortgage by the amount they pay and creating "instant
equity." However, seller-funded down-payment assistance programs
typically require property sellers to make a financial contribution and
pay a service fee after the closing, creating an indirect funding
stream from property sellers to homebuyers that does not exist in a
typical transaction (see fig. 1).[Footnote 10]
Figure 1: Structure of FHA Individual Purchase Transaction, with
Nonseller-Funded Down-Payment Assistance and with Seller-Funded Down-
Payment Assistance:
[See PDF for image]
Source: GAO.
[End of figure]
Our analysis indicated, and mortgage industry participants we spoke
with reported, that property sellers often raised the sales price of
their properties in order to recover the contribution to the seller-
funded nonprofit that provided the down-payment assistance. Marketing
materials from seller-funded nonprofits often emphasize that property
sellers using these down-payment assistance programs earn a higher net
profit than property sellers who do not. These materials show sellers
receiving a higher sales price that more than compensates for the fee
typically paid to the down-payment assistance provider. Several
mortgage industry participants we interviewed noted that when
homebuyers obtained down-payment assistance from seller-funded
nonprofits, property sellers increased their sales prices to recover
their payments to the nonprofits providing the assistance. An earlier
study by a HUD contractor corroborates the existence of this
practice.[Footnote 11] Some mortgage industry participants we met with
told us that they viewed down-payment assistance from seller-funded
nonprofits as a seller inducement. However, FHA has not viewed such
assistance as a seller inducement and therefore does not subject this
assistance to the limits that it otherwise places on contributions from
sellers.
Some mortgage industry participants told us that homes purchased with
down-payment assistance from seller-funded nonprofits might be
appraised for higher values than they would be without this assistance.
Appraisers we spoke with said that lenders, realtors, and sellers
sometimes pressured them to "bring in the value" in order to complete
the sale. The HUD contractor study corroborates the existence of these
pressures. Our analysis of a national sample of FHA-insured loans
endorsed in 2000, 2001, and 2002 suggested that homes with seller-
funded assistance were appraised and sold for about 3 percent more than
comparable homes without such assistance. Additionally, our analysis of
more recent loans--a sample of FHA-insured loans settled in March 2005-
-indicated that homes sold with nonprofit assistance were appraised and
sold for about 2 percentage points more than comparable homes without
nonprofit assistance.[Footnote 12]
FHA-Insured Loans with Down Payment Assistance, Particularly from
Seller-Funded Nonprofits, Do Not Perform as Well as Similar Loans
without Assistance:
We found that FHA-insured loans with down-payment assistance do not
perform as well as loans without it. As part of our evaluation, we
analyzed loan performance by source of down-payment assistance,
controlling for the maximum age of the loan, as of June 30, 2005. We
used two samples of FHA-insured purchase loans from 2000, 2001, and
2002--a national sample and a sample from three MSAs with high rates of
down-payment assistance. We grouped the loans into the following three
categories: loans with assistance from seller-funded nonprofit
organizations, loans with assistance from nonseller-funded sources, and
loans without assistance. As shown in figure 2, in both samples and in
each year, loans with down-payment assistance from seller-funded
nonprofit organizations had the highest rates of delinquency and
insurance claims, and loans without assistance the lowest.
Specifically, between 22 and 28 percent of loans with seller-funded
assistance had experienced a 90-day delinquency, compared with 11 to 16
percent of loans with assistance from other sources and 8 to 12 percent
of loans without assistance. The claim rates for loans with seller-
funded assistance ranged from 6 to 18 percent, for loans with other
sources of assistance from 5 to 10 percent, and for loans without
assistance from 3 to 6 percent.
Figure 2: Delinquency and Claim Rates, by Maximum Age of Loan and
Source of Down-Payment Funds:
[See PDF for image]
Source: GAO.
Note: Analysis based on data from two samples of loans drawn for a file
review study funded by HUD and conducted by the Concentrance Consulting
Group. The sampled loans were purchase money loans endorsed in 2000,
2001, and 2002 with LTV ratios greater than 95 percent. The national
sample consisted of just over 5,000 loans, and the MSA sample consisted
of 1,000 loans for each of the three MSAs: Atlanta, Indianapolis, and
Salt Lake City.
[End of figure]
In addition, we analyzed loan performance by source of down-payment
assistance holding other variables constant. Here we found that FHA-
insured loans with down-payment assistance had higher delinquency and
claim rates than similar loans without such assistance (see fig. 3).
The results from the national sample indicated that assistance from a
seller-funded nonprofit raised the probability that the loan had gone
to claim by 76 percent relative to similar loans with no assistance.
Differences in the MSA sample were even larger; the probability that
loans with seller-funded nonprofit assistance would go to claim was 166
percent higher than it was for comparable loans without assistance.
Similarly, results from the national sample showed that down-payment
assistance from a seller-funded nonprofit raised the probability of
delinquency by 93 percent compared with the probability of delinquency
in comparable loans without assistance. For the MSA sample, this figure
was 110 percent.
Figure 3: Effect of Down-Payment Assistance on the Probability of
Delinquency and Claim, Controlling for Selected Variables:
[See PDF for image]
Source: GAO.
Note: Loans without down-payment assistance are set at 100 percent. The
results show the effect of a change in the variable on the odds ratio-
-that is, the probability of a claim (or delinquency) divided by the
probability of not experiencing a claim (or delinquency). However, the
probability of experiencing a claim or delinquency in any given quarter
is fairly small; so, the change in the odds ratio is very close to the
change in the probability. The analysis is based on data from two
samples of loans drawn for a file review study funded by HUD and
conducted by the Concentrance Consulting Group. The loans in the
samples were endorsed in 2000, 2001, and 2002 and had LTV ratios
greater than 95 percent. The national sample consisted of just over
5,000 loans and the MSA sample consisted of 1,000 purchase money loans
for each of the three MSAs: Atlanta, Indianapolis, and Salt Lake City.
The loan performance data (current as of June 2005) are from HUD's
Single-Family Data Warehouse.
[End of figure]
The weaker performance of loans with seller-funded down-payment
assistance may be explained, in part, by the higher sales prices of
homes bought with this assistance and the homebuyer having less equity
in the transaction. The higher sales price that often results from a
transaction involving seller-funded down-payment assistance can have
the perverse effect of denying buyers any equity in their properties
and creating higher effective LTV ratios. FHA has requirements which
have the effect of ensuring that FHA homebuyers obtain a certain amount
of "instant equity" at closing, but seller-funded down-payment
assistance effectively undercuts these requirements. That is, when the
sales price represents the fair market value of the house, and the
homebuyer contributes 3 percent of the sales price at the closing, the
LTV ratio is less than 100 percent. But when a seller raises the sales
price of a property to accommodate a contribution to a nonprofit that
provides down-payment assistance to the buyer, the buyer's mortgage may
represent 100 percent or more of the property's true market value. Our
prior analysis has found that, controlling for other factors, high LTV
ratios lead to increased claims.
The adverse performance of loans with seller-funded down-payment
assistance has had negative consequences for FHA. FHA has estimated
that its single-family mortgage insurance program would require a
subsidy--that is, appropriations--in 2008 in the absence of program
changes. According to FHA, the growing share of FHA-insured purchase
loans with seller-funded assistance has contributed to FHA's worsening
financial performance.
Our 2005 report made recommendations designed to better manage the
risks of loans with down-payment assistance generally and from seller-
funded nonprofits specifically. We recommended that FHA consider risk
mitigation techniques such as including down-payment assistance as a
factor when underwriting loans. We also recommended that FHA take
additional steps to mitigate the risk associated with loans with seller-
funded down-payment assistance, such as treating such assistance as a
seller inducement and therefore subject to the prohibition against
using seller contributions to meet the 3 percent borrower contribution
requirement.
Consistent with our recommendations, FHA is testing additional
predictive variables, including source of the down payment, for
inclusion in its mortgage scorecard (an automated tool that evaluates
the default risk of borrowers). Additionally, in May 2007 HUD issued a
proposed rule that would prohibit the use of seller-funded down-payment
assistance in conjunction with FHA-insured loans. FHA also has been
anticipating a reduction in the number of loans with down-payment
assistance from seller-funded nonprofit organizations as a result of
actions taken by the Internal Revenue Service (IRS). Citing concerns
about seller-funded nonprofits raised by our report and the 2005 HUD
contractor study, IRS issued a ruling in May 2006 stating that these
organizations do not qualify as tax-exempt charities, thereby making
loans with such assistance ineligible for FHA insurance. In a press
announcement of the ruling, IRS stated that funneling down-payment
assistance from sellers to buyers through "self-serving, circular-
financing arrangements" is inconsistent with operation as a charitable
organization. According to FHA, as of June 2007, IRS had rescinded the
charitable status of three of the 185 organizations that IRS is
examining.
Madam Chairwoman, this concludes my prepared statement. I would be
happy to answer any questions at this time.
Contacts and Acknowledgments:
For further information on this testimony, please contact William B.
Shear at (202) 512-8678 or shearw@gao.gov. Individuals making key
contributions to this testimony included Steve Westley (Assistant
Director), Emily Chalmers, Chris Krzeminski, and Andy Pauline.
FOOTNOTES
[1] For example, see GAO, Mortgage Financing: Actions Needed to Help
FHA Manage Risks from New Mortgage Loan Products, GAO-05-194
(Washington, D.C.: Feb. 11, 2005).
[2] GAO, Additional Action Needed to Manage Risks of FHA-Insured Loans
with Down Payment Assistance, GAO-06-24 (Washington, D.C.: Nov. 9,
2005).
[3] The data consisted of purchase loans insured by FHA's 203(b)
program, its main single-family program, and its 234(c) condominium
program. The three MSAs were Atlanta, Indianapolis, and Salt Lake City.
All years are fiscal years unless otherwise indicated.
[4] AVMs encompass a range of computerized econometric models that use
property characteristics and trends in sales prices to provide
estimates of residential real estate property values. AVMs are widely
used in the mortgage industry for quality control and other purposes.
[5] Concentrance Consulting Group, An Examination of Downpayment Gift
Programs Administered by Nonprofit Organizations, prepared for the U.S.
Department of Housing and Urban Development (Washington, D.C.: March
2005).
[6] See 72 Fed. Reg. 27048 (May 11, 2007).
[7] HUD Office of the General Counsel, April 7, 1998; Memorandum;
Subject: Nehemiah Homeownership 2000 Program--Downpayment Assistance.
[8] LTV ratio is the loan amount divided by the sales price or
appraised value of the property. The data sample we relied on included
only FHA-insured, single-family purchase loans with an LTV ratio
greater than 95 percent. Loans with an LTV ratio greater than 95
percent account for almost 90 percent of FHA's portfolio.
[9] We measured house price appreciation using data from Global
Insight, Inc., for the end of the fourth quarter of 2003 to the end of
the fourth quarter of 2004.
[10] Organizations commonly require property sellers to provide both a
financial payment equal to the amount of assistance paid to the
homeowner and a service fee.
[11] Concentrance Consulting Group, An Examination of Downpayment Gift
Programs Administered by Nonprofit Organizations.
[12] To perform this analysis, we contracted with First American Real
Estate Solutions to provide estimates of the value of homes in a sample
of FHA-insured loans. The values were calculated for the month prior to
the closing, using an AVM.
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