Industry debates risk of no-money-down loans

Until a couple of decades ago, home buyers were expected to save 20 percent of a home's price to use as a down payment. Requirements have loosened over the years, and now it is uncommon for a first-time buyer to put down 20 percent. FHA-insured loans are no different, and many borrowers put down just 3 percent to 5 percent.

When a home buyer's down payment is given to him, he has virtually no money invested in the house. It's no surprise that these loans are riskier, because the homeowners have little to lose: They didn't put up their own money.

The Department of Housing and Urban Development has conducted two studies which concluded that gifts from nonprofits made for riskier loans. But those loans are barely riskier than loans that were made possible with down-payment gifts from relatives, according to a just-published analysis commissioned by the Homeownership Alliance of Nonprofit Downpayment Providers, or HAND.

The industry group, which represents the biggest nonprofits, hired an accounting firm to analyze HUD data for FHA loans originated between October 1997 and the end of 2002. It concluded that homeowners who got a down-payment gift from a nonprofit were just as likely to lose the home to foreclosure as homeowners who got their down-payment money as gifts from relatives.

In both cases the foreclosure rate was 5.1 percent. People who got money from nonprofits were more likely to have fallen three months behind in their payments at some point (20.6 percent) than those who had received money from relatives (18.5 percent).

The study was a response to the two HUD studies that said that nonprofit down-payment assistance programs were too risky. HUD's inspector general recommended banning such gifts when the money comes indirectly from the home's seller or builder. Such a ban would shut down the nonprofit down-payment assistance industry.

According to HAND's study, about three-quarters of down-payment gift recipients get their money from relatives. About one-quarter get the money from nonprofit down-payment assistance providers such as HAND's members.

The government is very unlikely to ban monetary gifts from relatives. If that's the case, according to HAND, the government shouldn't ban monetary gifts from nonprofits, either.

A few borrowers got their down-payment money through federal programs. Twenty-four percent of those borrowers fell three months behind in their payments at some point, and 6.5 percent were foreclosed upon.

The study was conducted for HAND by the accounting firm of Reznick Fedder & Silverman. It reviewed 4.3 million FHA mortgages in 21 states. Those states had 92 percent of all loans involving down-payment assistance from nonprofits.

Of those states, California had the greatest percentage of gifts from nonprofits, at 13.1 percent, followed by Georgia, Indiana, Ohio, Nevada, Washington, Arizona, Texas, Utah, Florida, North Carolina, Illinois, Virginia, Tennessee, Alabama, Maryland, Oregon, Michigan, Colorado, Missouri and Idaho.