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Government Research Overstates Problems of FHA Loans with Nonprofit Down Payment Assistance (NPDA)

Independent analysis raises concerns about study data and methodology

Gaithersburg, MD – Results of an independent analysis of Federal government research strongly suggest that the performance problems of FHA loans with nonprofit down payment assistance have been overstated, as found by the George Mason University School of Public Policy.

The analysis raises concerns regarding the government studies’ data and methodology and conflicts with the argument that FHA loans with nonprofit down payment assistance present perform worse compared to FHA loans with other types of assistance.

“The fact is nonprofit down payment assistance loans perform at a 94 percent success rate, seasoned 3 years,” said Ann Ashburn, AmeriDream President and CEO. “The government studies try to assert that the use of nonprofit down payment assistance automatically lead to foreclosure. The evidence just does not support that assessment. Their conclusions fall short of their data and methodology. Amazingly, the government studies failed to include two key factors in their studies.”

The key findings are:

  • Two crucial factors that influence whether or not a loan is defaulted or goes to claim were absent in these studies: (i) the financial situation of the borrower and (ii) the economic conditions of the area in which the home is located.
  • The government studies provide no direct evidence that correlates higher home prices and the use of nonprofit down payment assistance to higher foreclosure rates.
  • When comparing claim (foreclosure) rates, as opposed to default rates, nonprofit down payment assistance has a success rate that is in line with other FHA loans: 94% success rate among loans with nonprofit down payment assistance, 95% success rate for loans with other assistance, and 97% success rate for loans with no assistance.

The purpose of the analysis was to review prior analyses used by the HUD Office of the Inspector General and the U.S. Government Accountability Office regarding the performance of home loans secured by buyers receiving down payment assistance from nonprofit DPA programs.

“This analysis raises concerns regarding the validity of research conclusions of three widely quoted reference documents on the performance of home loans of buyers receiving down payment assistance from nonprofit DPA programs,” said Stephen Fuller, Professor of Public Policy and Director of the Center for Regional Analysis, George Mason University. “The limited loan performance measures, unrepresentative samples, inconclusive statistical tests, and aggregated demographic profile of homeowners reduce these studies’ value in providing factual evidence regarding NDPA program’s performance.”

The Center’s analysis raised several methodological issues. One issue concerned the measure of loan performance. The government studies reported higher default rates for loans with certain types of nonprofit down payment assistance. However, according to the Center’s analysis, default may not be the most relevant measure of loan performance. The Center’s analysis suggest that claim rates, which are defined as a loan that has a claim submitted to the FHA for foreclosure, may be a better measure of loan performance.

When claim rates are used as a performance measure, loans with assistance from nonprofit DPA programs compared with loans with other types of gifts are not shown to be significantly worse.

A second issue related to the representatives of the data used in the studies. One government study used data from a small number of metropolitan areas. According to the Center’s analysis, because these markets have a relatively higher share of FHA loans receiving assistance from nonprofit DPA programs, they are likely to have very different housing market characteristics than other metropolitan areas. With the exception of the GAO multivariate analysis, the government studies did not attempt to account for how market characteristics could influence loan performance.

The most significant issue resulting from the Center’s review of the government studies was the lack of attention given to two key factors that influence whether or not a loan is defaulted or goes to claim: the financial situation of the borrower, and the economic conditions of the area in which the home is located.

Clearly, families in more precarious financial situations are probably more likely to be in default. Areas with poor economic conditions likely contribute to the instability of financially precarious families.

According to the Center’s analysis, the government studies do an insufficient job at accounting for home buyer characteristics that could influence whether or not a household experiences foreclosure, including the financial situation of the borrower. Loans with assistance from nonprofit DPA programs are different because they target potential home buyers who could not otherwise afford the down payment for a home. Consequently, these borrowers have different characteristics and are buying homes in different markets than borrowers with other FHA loans.

The Center concluded that any study of loan performance must do everything possible to account for borrower and market characteristics to ensure the results are not misleading.

To review the Center’s complete analysis, please visit http://www.ameridream.org/Newsroom/Reports

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About AmeriDream
Gaithersburg, Md.-based AmeriDream, Inc. is the nation’s leader in providing affordable housing opportunities. In support of this mission, AmeriDream, a non-profit organization, has helped more than 300,000 individuals and families buy and sell homes by granting over $500 million for down payment assistance, providing homebuyer education, and donating more than $2 million to charitable organizations nationwide.

Through its redevelopment program, AmeriDream builds new homes and renovates existing properties to create affordable housing opportunities at prices that accommodate low and moderate-income homebuyers. AmeriDream has invested more than $12 million in its redevelopment projects over the last six years. Current projects include affordable housing developments in Maryland, Washington, DC; and Florida.

About the Center for Regional Analysis
The George Mason University Center for Regional Analysis is housed in the School of Public Policy. The Center for Regional Analysis conducts research and analytical studies on economic, fiscal, demographic, and social and policy issues. Through its range of research and programs -- major economic impact studies, economic forecasts, fiscal analyses, conferences and seminars, publications, information services, and data products -- the Center's activities strengthen decision-making by businesses, governments, and institutions throughout the Greater Washington region and in communities throughout the U.S.