Before the 2008 housing crisis, home sellers would offer DPA to FHA borrowers and raise the sales price to cover the cost, creating exaggerated losses for the FHA program.
The housing environment is different today – where a lender has far less control over a home’s sales price and no control over the appraiser, according to a paper published by Ted Tozer, a non-resident fellow at Urban Institute and the former president and CEO of Ginnie Mae.
“By lifting this restriction to allow lenders to provide DPA, either through self-funding or through a grant program, policymakers could help remove the down payment obstacle for many families,” Tozer said.
Lenders could provide DPA through two channels — the first channel through self-funding offered on an unlimited basis.
The lender could charge the borrower a 1% higher interest rate to fund a 3.5% down payment, which would allow the lender to issue a Ginnie Mae–guaranteed mortgage-backed security (MBS) that would generate enough of a premium to fund the required down payment, Tozer explained.
These loans would still have access to all the features of the FHA streamline refinance program, allowing borrowers to reduce their payments if they stay on their new mortgage.
“Given the robustness of using premium-price Ginnie Mae MBS to fund the program, there wouldn’t be a need to limit its availability,” Tozer said.
The second channel would be through a grant provided by the lender’s corporate funds.
Since lender grants have limited funding, the programs could be restricted to specific income levels and priority markets, the paper noted.
Through this channel, borrowers would still have to pay mortgage insurance costs – which would come down to the difference between the private mortgage insurance that the GSE loans require and the 0.55% annual mortgage insurance premium required by the FHA.
“The FHA could work with Congress to amend the FHA Modernization Act so only entities that can affect the home’s sales price are banned from providing DPA,” Tozer said.
As an alternative solution, Tozer floated the idea of making the FHA program a zero-down-payment program – a proposal first made by the George W. Bush administration in 2004.
“If this change were made, the FHA program would join the other government-insured programs offered by the U.S. Department of Veteran Affairs and the U.S. Department of Agriculture that do not require a down payment,” Tozer noted.
The paper’s suggestion to amend the FHA Modernization Act comes amid affordability pressures on first-time homebuyers.
The lack of homes for sale is driving up home prices and the 30-year fixed rates have been hovering near 7% in the past two months.
“Housing affordability remains dangerously close to the 37-year lows reached late last year, despite the Federal Reserve’s attempts to cool the market,” said Andy Walden, Black Knight’s vice president of enterprise research.
