Industry debates risk of no-money-down
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
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
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.