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 amount.

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 is incorrect."

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."