Harvard study debunks down payment assistance myth, supporters claim

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It was long believed down payment assistant programs were recipes for poor loan performance and future delinquencies, but that's not the case, according to a new report.

If anything, default rates among loans that used down payment assistance were low compared to other mortgage types, according to a joint report from the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, Center for Community Capital at the University of North Carolina and Harvard Joint Center for Housing Studies.

Loans under the Community Advantage Program — a lending program aimed at low- and moderate-income borrowers through a partnership of the Ford Foundation, Fannie Mae and Self-Help — had cumulative default rates of 7% after three years. Only prime loans with a 2% rate did better, while FHA mortgages were at 9%, LowFICO and subprime both hit 10% and alternative-A paper loans reached 11%.

The researchers looked at over 3,000 loans originated between 1999 and 2003 for a 10-year period.

"Our multivariate analysis indicates that the receipt of down payment assistance is not significantly associated with default risk," the report concluded. "In particular, while grant assistance from a government or community organization is marginally significant as a predictor of default risk in one of our model specifications, this effect disappears altogether when racial controls are incorporated in the model. Thus, the receipt of DPA appears to be unrelated to default risk."

Low or unstable income and insufficient credit history stand as blockades for prospective borrowers. In September, the Department of Housing and Urban Development pushed forward a policy to restrict down payment assistance.

"Down payment assistance programs have come under attack lately, with some arguing that all down payment assistance is bad," Richard Ferguson, president of CBC Mortgage Agency, said in a press release.

"This view is likely the result of precrisis down payment assistance programs in which property sellers were allowed to pay the buyer's down payment and raised the price of the property in order to cover the cost. Those seller-paid programs have been shut out of the market for years and are no longer an issue. Today's programs must be economically viable without the help of a home seller. In recent years, loan performance on transactions in which the borrower received down payment assistance has been far better compared to loans under the former seller-paid programs."

Along with the persistent shortage in housing supply, saving up for down payments remains one of the largest barriers to home buying and disproportionately affects people of color.

"When you work in housing, you realize the disparities are much bigger than they appear. Lower-income people, people of color, those whose families don't have wealth tend to have trouble overcoming those situations," Julia Gordon, president of National Community Stabilization Trust, said in an interview.

"With down payments, there was a decision made a long time ago that a borrower being in the first-loss position of the mortgage would result in better outcomes in terms of paying it back. There have been a number of studies and a lot of evidence that suggest it's actually not true. Maybe this down payment thing isn't working the way we think it is and it's just keeping people out who don't have an easy way to come up with a big chunk of change at the beginning."

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Down payments Housing affordability Mortgage defaults Policymaking Housing inventory Harvard HUD FHA