Earlier this month, Office of Inspector General (OIG)
for the Department of Housing and Urban Development (HUD) submitted a report to
the agency claiming it had "Failed to adequately oversee FHA-Insured loans with
Borrower Financed Downpayment Assistance." Now the Urban Institute (UI) has responded,
calling the OIG criticism "perplexing."
Apparently, this is not the first-time OIG has issued a negative report
on HUDs oversight nor the first pushback from UI.
The OIG questioned loans that are given to clients of state
and local housing finance agencies (HFA).
The HFAs, considered to be government agencies, provide homeownership
assistance, such grants (gifts) or secondary loans covering the usual minimum
3.5% FHA downpayment and borrower-paid closing costs. The loans are repaid through higher mortgage
payments. Traditionally HFAs used
mortgage revenue bonds to fund and administer their downpayment assistance
programs. However, since late 2011, HFAs utilized Government National Mortgage
Association (Ginnie Mae) mortgage-backed securities (debt obligations) to hedge
and fund their downpayment assistance programs.
OIG acknowledges that, although HUD does not approve
downpayment assistance programs, such programs and the lenders using the
programs must ensure that funds provided comply with FHA requirements and guidance.
However, the agency watchdog maintains that between October 1, 2015 and
September 30, 2016 (the 2016 Fiscal Year) HUD failed to adequately oversee more
than $12.9 billion in FHA loans that may have been originated with
borrower-financed downpayment assistance in order to ensure compliance with HUD
requirements. This, the report charges,
puts the FHA Mortgage Insurance Fund at unnecessary risk. "While governmental
entities are not prohibited sources of downpayment assistance, the assistance
provided through these programs did not comply with HUD requirements. FHA
borrowers were required to obtain a premium interest rate and, therefore,
repaid the assistance through higher mortgage payments and fees."
In addition, OIG said HUD did not adequately track
these loans and review their funding structure and failed to protect FHA
borrowers against higher mortgage payments and fees imposed on them, presenting
increased risks to the FHA insurance fund.
The OIG recommended that HUD, (1) reconsider its
position on these downpayment assistance programs, (2) develop and implement
policies and procedures to review the loans, (3) develop requirements for
lenders to review downpayment assistance programs, (4) require lenders to
obtain a borrower certification that details borrower participation, (5) ensure
that lenders enter all downpayment assistance data into FHA Connection, with
required data fields for information.
This week UI, in an opinion published on its Urban Wire blog, noted that the down payment assistance
programs are valuable and present minimal risk to FHA finances. It had earlier refuted earlier OIG assertions, that borrowers
pay for the assistance through higher rates in violation of FHA rules and that
the loans pose an unnecessary risk to FHA's Mutual Mortgage Insurance (MMI)
Fund. Nothing, UI says, indicates these programs are a problem and that several
factors make it reasonable that these borrowers should pay higher rates.
- They are more likely to be higher risk, which often
leads to a higher rate.
- They are more likely to be cash constrained and to finance
their closing costs.
- Loans issued through HFAs tend to be smaller than other
FHA loans and thus the closing costs a larger percentage of the loan
The OIG has not considered these independent
factors but instead concludes that the higher rates are solely due to their
participation in the down payment assistance programs. It then goes on to infer that, because these
loans present a higher risk, they are more economically unsound which is also,
UI says, a mistake. Posing a slightly
higher risk is fine as long as the pricing covers the risk. Finally, the independent actuarial report
issued annually on the MMI has, since 2011, scored down payment assistance as
contributing positively to the fund.
The OIG report reports that 80,664
loans with an original balance of $12.9 million were originated under the
program during FY2016. Although the
assistance was provided by government sources, OIG says it may have been "questionable"
while admitting that the amount could be lower "given the limitations and lack
of HUD data."
UI said most of these mortgages had
note rates well within "normal" limits. FHA's analysis found the average rate was
26 basis points (0.26 percent) over loans without assistance. UI found that less than 10 percent of the
loans had note rates at or above 80 basis points (0.8 percent) over the
benchmark rate, versus 4 percent of the non-down payment assistance loans. "So,
the number of loans the OIG is concerned about is at most a little over 8,000,
but is likely closer to 4,800. Its suggestion that 80,664 loans may be at issue
UI says it remains unclear what
problem the OIG finds in these programs, as the data do not suggest either that
the higher rates paid by these borrowers are tied to the program or that these
loans are economically problematic for the FHA.
UI says the assistance program is an
important part of FHA's mission to see more families that are underserved by
mainstream markets can become sustainable homeowners and the down payment is
often the most significant barrier to this happening. Programs that can help overcome that barrier
without imposing unnecessary risk to either them or the FHA should be
supported. "We fear" they conclude, "that the OIG is instead undermining one."