New Study: Down-Payment Assistance

Previous research had suggested that down-payment assistance (DPA) programs increased the odds of the borrower defaulting on their home loan. While all forms of down-payment assistance were reported to lead to higher default rates, “those with such assistance financed by self-identified governmental entities have higher rates of default than those with other forms of DPA,” the Department of Housing and Urban Development noted in its 2018 report on the FHA Mutual Mortgage Insurance Fund.

In the wake of those findings, HUD announced that it would implement new requirements on government entities that provide down-payment assistance.

But the new working paper suggests that providing help toward a down payment actually may not put a borrower at higher risk of falling behind on their mortgage. The researchers examined the loan performance for thousands of mortgages made through the Community Advantage Program, a partnership between the Ford Foundation, Fannie Mae and nonprofit lender Self-Help. The loans were originated in the lead-up to and following the 2008 financial crisis.

An initial look at the loan data showed higher default rates among borrowers who received down payment help, particularly those whose assistance came from a government entity such as a state housing finance agency. Borrowers who get down-payment aid from a governmental or community program are much more likely to be black and to have a lower credit score, as compared with people who receive help from friends or family.

When the researchers controlled for the race or ethnicity of the borrower, down-payment assistance program were not shown to increase the likelihood of a default whatsoever. The findings suggested that black and Hispanic borrowers are more likely to default in general, and not because they may have received down-payment assistance.

Other research has similarly shown that black and Hispanic borrowers tend to have worse mortgage outcomes — and that was especially the case during the Great Recession. During the housing crisis, nearly 10% of black and 8% of Hispanic borrowers became seriously delinquent on their home loans, compared with just 2.8% of whites.

A number of factors contribute to the higher default rates among minority borrowers. Black and Hispanic homeowners have a harder time getting approved for mortgages and are more likely to pay higher mortgage rates than white households, according to data from the Pew Research Center, making mortgages more expensive for them. In the lead-up to the housing crisis, black and Hispanic borrowers were more frequently pushed into riskier loans, including those with variable rates and balloon structures.

Other structural issues likely contribute to the poorer loan performance among borrowers of color, including disparities in average income and generational wealth.

Importantly, while down-payment assistance did not appear to elevate the risk of a default, it also didn’t negatively affect how much wealth a homeowner accumulated through home-price appreciation.

Owning a home is one the primary drivers of wealth creation in the U.S. As a result, down-payment assistance programs could help level racial disparities in wealth to the extent that they assist people of color.

“Households with DPA were as able to benefit financially from rising markets as those without DPA,” the researchers wrote. “In setting guidelines around down-payment assistance, policy makers should take care not to close off opportunities to aspiring minority home buyers.”