Mortgage Financing: Seller-Funded Down-Payment Assistance Changes
the Structure of the Purchase Transaction and Negatively Affects 
Loan Performance (22-JUN-07, GAO-07-1033T).			 
                                                                 
The Federal Housing Administration (FHA) differs from other key  
mortgage industry participants in that it allows borrowers to	 
obtain down-payment assistance from nonprofit organizations	 
(nonprofits) that operate programs supported partly by property  
sellers. Research has raised concerns about how this type of	 
assistance affects home purchase transactions. To assist Congress
in considering issues related to down-payment assistance, this	 
testimony provides information from GAO's November 2005 report,  
Mortgage Financing: Additional Action Needed to Manage Risks of  
FHA-Insured Loans with Down Payment Assistance (GAO-06-24).	 
Specifically, this testimony discusses (1) trends in the use of  
down-payment assistance with FHA-insured loans, (2) the impact	 
that the presence of such assistance has on purchase transactions
and house prices, and (3) the influence of such assistance on	 
loan performance.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1033T					        
    ACCNO:   A71230						        
  TITLE:     Mortgage Financing: Seller-Funded Down-Payment Assistance
Changes the Structure of the Purchase Transaction and Negatively 
Affects Loan Performance					 
     DATE:   06/22/2007 
  SUBJECT:   Homeowners loans					 
	     Housing						 
	     Lending institutions				 
	     Mortgage loans					 
	     Mortgage programs					 
	     Nonprofit organizations				 
	     Prices and pricing 				 
	     Standards						 

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GAO-07-1033T

   

     * [1]Background
     * [2]Purchase Loans with Seller-Funded Down-Payment Assistance Ha
     * [3]Seller-Funded Assistance Affects Home Purchase Transactions
     * [4]FHA-Insured Loans with Down Payment Assistance, Particularly
     * [5]Contacts and Acknowledgments

          * [6]Order by Mail or Phone

Testimony

Before the Subcommittee on Housing and Community Opportunity, Committee on
Financial Services, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Friday, June 22, 2007

MORTGAGE FINANCING

Seller-Funded Down-Payment Assistance Changes the Structure of the
Purchase Transaction and Negatively Affects Loan Performance

Statement of William B. Shear, Director
Financial Markets and Community
Investment

GAO-07-1033T

Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today to discuss issues concerning down-payment
assistance for homebuyers. Making a down payment on a mortgage can benefit
both the homebuyer and the mortgage provider. For example, a down payment
creates "instant equity" for the new homeowner, and we and others have
shown that mortgage loans with greater owner investment generally perform
better.^1 However, many families have difficulty saving sufficient funds
for a down payment and loan closing costs. One way to make homeownership
affordable to more families is to allow homebuyers to obtain these funds
from third parties such as relatives, employers, government agencies, and
nonprofit organizations (nonprofits).

Like many conventional lenders, the Federal Housing Administration (FHA)
of the Department of Housing and Urban Development (HUD) allows
down-payment assistance from third-party sources. One of the primary goals
of FHA, which insures single-family mortgages made by private lenders, is
to expand homeownership opportunities for first-time homebuyers and other
borrowers who would not otherwise qualify for conventional mortgages on
affordable terms. FHA borrowers often have limited resources to meet the 3
percent borrower investment FHA requires and many obtain down-payment
assistance. Unlike other key mortgage industry participants, FHA allows
borrowers to obtain this assistance from nonprofits that operate programs
supported partly by financial contributions and service fees from
participating property sellers.

My testimony today is based on a report we issued in November 2005 on
down-payment assistance used with FHA-insured mortgages.^2 My discussion
will focus on (1) trends in the use of down-payment assistance with
FHA-insured loans, (2) the impact that the presence of such assistance has
on purchase transactions and house prices, and (3) the influence of such
assistance on loan performance.

In preparing our November 2005 report, we analyzed loan-level data from
HUD on single-family home purchase mortgages. These data included two
samples of FHA-insured loans from fiscal years 2000, 2001, and 2002--a
national sample and a sample from three metropolitan statistical areas
(MSA) with high rates of down-payment assistance--and performance data on
those loans as of June 30, 2005.^3 We reviewed FHA reports and guidance
for loans with down-payment assistance and examined practices used by
other mortgage industry participants for loan products that permit similar
assistance. We also examined the sales prices of homes by the use and
source of down-payment assistance using property value estimates derived
from an Automated Valuation Model (AVM).^4 Finally, we interviewed real
estate agents, lenders, appraisers, and other key players involved in
transactions with down-payment assistance.

^1For example, see GAO, Mortgage Financing: Actions Needed to Help FHA
Manage Risks from New Mortgage Loan Products, [7]GAO-05-194 (Washington,
D.C.: Feb. 11, 2005).

^2GAO, Additional Action Needed to Manage Risks of FHA-Insured Loans with
Down Payment Assistance, [8]GAO-06-24 (Washington, D.C.: Nov. 9, 2005).

In summary, we found that:

           o The proportion of FHA-insured purchase loans that were financed
           in part by down-payment assistance from various sources increased
           from 35 percent to nearly 50 percent from 2000 through 2004, while
           the overall number of loans that FHA insured fell sharply.
           Assistance from nonprofit organizations funded by property sellers
           accounted for a growing percentage of that assistance. More
           specifically, about 6 percent of FHA-insured loans in 2000
           received down-payment assistance from seller-funded nonprofits,
           but by 2004 nonprofit assistance had grown to about 30 percent.
           More recent data indicate that in 2005 and 2006, the percentages
           of FHA-insured loans with down-payment assistance from all sources
           and from seller-funded nonprofits were roughly equivalent to 2004
           levels.
           o Down-payment assistance provided by a seller-funded nonprofit
           can alter the structure of the purchase transaction in important
           ways. First, when homebuyers receive such assistance, many of the
           nonprofits require property sellers to make a payment to the
           nonprofit that equals the amount of assistance the homebuyer
           receives, plus a service fee, after the closing. This requirement
           creates an indirect funding stream from property sellers to
           homebuyers that does not exist in other transactions, even those
           involving some other type of down-payment assistance. Second,
           according to mortgage industry participants and a HUD contractor's
           study, property sellers that have provided down-payment assistance
           through nonprofits then often raised the sales prices of the homes
           involved in order to recover the required payments to the
           organizations.^5 Similarly, our analysis found that FHA-insured
           homes bought with seller-funded nonprofit assistance were
           appraised at and sold for about 2 to 3 percent more than
           comparable homes bought without such assistance.
			  
3The data consisted of purchase loans insured by FHA's 203(b) program, its
main single-family program, and its 234(c) condominium program. The three
MSAs were Atlanta, Indianapolis, and Salt Lake City. All years are fiscal
years unless otherwise indicated.

^4AVMs encompass a range of computerized econometric models that use
property characteristics and trends in sales prices to provide estimates
of residential real estate property values. AVMs are widely used in the
mortgage industry for quality control and other purposes.
			  
           o Loans with down-payment assistance do not perform as well as
           loans without down-payment assistance. This may be partially
           explained by the homebuyer having less equity in the transaction.
           Holding other variables constant, our analysis indicated that
           FHA-insured loans with down-payment assistance had higher
           delinquency and insurance claim rates than similar loans without
           such assistance. For example, we found that the probability that
           loans with down-payment assistance from a seller-funded nonprofit
           would result in insurance claims was 76 percent higher in the
           national sample and 166 percent higher in the MSA sample than it
           was for comparable loans without assistance. These differences in
           performance may also be explained, in part, by the higher sales
           price of comparable homes bought with seller-funded down-payment
           assistance. Due partly to the adverse performance of loans with
           seller-funded down-payment assistance, FHA has estimated that in
           the absence of program changes its single-family mortgage
           insurance program would require a subsidy--that is,
           appropriations--in 2008.

           Our 2005 report made recommendations designed to better manage the
           risks of loans with down-payment assistance generally and from
           seller-funded nonprofits specifically. Consistent with our
           recommendations, HUD, among other things, recently issued a
           proposed rule that would prohibit the use of seller-funded
           down-payment assistance in conjunction with FHA-insured loans.^6
			  
			  Background

           Congress established FHA in 1934 under the National Housing Act
           (P.L. 73-479) to broaden homeownership, protect and sustain
           lending institutions, and stimulate employment in the building
           industry. FHA's single-family programs insure private lenders
           against losses from borrower defaults on mortgages that meet FHA's
           criteria for properties with one to four housing units. FHA
           historically has played a particularly large role among minority,
           lower-income, and first-time homebuyers. In 2006, 79 percent of
           FHA-insured home purchase loans went to first-time homebuyers, 31
           percent of whom were minorities.
			  
^5Concentrance Consulting Group, An Examination of Downpayment Gift
Programs Administered by Nonprofit Organizations, prepared for the U.S.
Department of Housing and Urban Development (Washington, D.C.: March
2005).

^6See 72 Fed. Reg. 27048 (May 11, 2007).

           In recent years, FHA's volume of business has fallen sharply. More
           specifically, the number of single-family loans that FHA insured
           fell from about 1.3 million in 2002 to 426,000 in 2006. To help
           FHA adapt to recent trends in the mortgage market, in 2006 HUD
           submitted a legislative proposal to Congress that included changes
           that would adjust loan limits for the single-family mortgage
           insurance program, eliminate the requirement for a minimum down
           payment, and provide greater flexibility to FHA to set insurance
           premiums based on risk factors. According to HUD, a
           zero-down-payment mortgage product would provide FHA with a better
           way to serve families in need of down-payment assistance.

           As previously noted, some nonprofits that provide down-payment
           assistance receive contributions from property sellers. When a
           homebuyer receives down-payment assistance from one of these
           organizations, the organization requires the property seller to
           make a financial payment to their organization. These nonprofits
           are commonly called "seller-funded" down-payment assistance
           providers. A 1998 memorandum from HUD's Office of the General
           Counsel found that funds from a seller-funded nonprofit were not
           in conflict with FHA's guidelines prohibiting down-payment
           assistance from sellers.^7 FHA does not approve down-payment
           assistance programs administered by nonprofits. Instead, lenders
           are responsible for assuring that down-payment assistance from a
           nonprofit meets FHA requirements.
			  
^7HUD Office of the General Counsel, April 7, 1998; Memorandum; Subject:
Nehemiah Homeownership 2000 Program--Downpayment Assistance.

           Purchase Loans with Seller-Funded Down-Payment Assistance Have
			  Become a Substantial Part of FHA's Portfolio and Are More
			  Prevalent in Areas with Lower House Price Appreciation

           Loans with down-payment assistance have come to constitute a
           substantial portion of FHA's portfolio in recent years,
           particularly as the number of loans without such assistance has
           fallen sharply. For example, from 2000 to 2004, the total
           proportion of FHA-insured single-family purchase loans that had a
           loan-to-value (LTV) ratio greater than 95 percent and that also
           involved down-payment assistance from any source grew from 35 to
           nearly 50 percent.^8 Assistance from nonprofit organizations,
           about 93 percent of which were funded by sellers, accounted for an
           increasing proportion of this assistance. Approximately 6 percent
           of FHA-insured loans received down-payment assistance from
           nonprofit organizations in 2000, but, by 2004 this figure had
           grown to about 30 percent. FHA data for 2005 and 2006 indicate
           that the percentages of loans with down-payment assistance from
           any source and from seller-funded nonprofits remained at roughly
           2004 levels.

           Growth in the number of seller-funded nonprofit providers and the
           greater acceptance of this type of assistance have contributed to
           the increase in the use of down-payment assistance. According to
           industry professionals, relatives have traditionally provided such
           assistance, but in the past decade or so other sources have
           emerged, including not only seller-funded nonprofit organizations
           but also government agencies and employers. The mortgage industry
           has responded by developing practices to administer this type of
           assistance, for instance, FHA policies require gift letters and
           documentation of the transfer of funds. Lenders also reported that
           seller-funded down-payment assistance providers have developed
           practices accepted by FHA and lenders. For example, seller-funded
           programs have standardized gift letter and contract addendum forms
           for documenting both the transfer of down-payment assistance funds
           to the homebuyer and the financial contribution from the property
           seller to the nonprofit organization. As a result, for FHA-insured
           loans, lenders are increasingly aware of and willing to accept
           down-payment assistance, including from seller-funded nonprofits.

           We found that states that have higher-than-average percentages of
           FHA-insured loans with nonprofit down-payment assistance,
           primarily from seller-funded programs, tended to be states with
           lower-than-average house price appreciation rates.^9 From May 2004
           to April 2005, 35 percent of all FHA-insured purchase loans
           nationwide involved down-payment assistance from a nonprofit
           organization, and 15 states had percentages that were higher than
           this nationwide average. Fourteen of these 15 states also had
           house price appreciation rates that were below the median rate for
           all states. In addition, the eight states with the lowest house
           price appreciation rates in the nation all had higher-than-average
           percentages of nonprofit down-payment assistance. Generally,
           states with high proportions of FHA-insured loans with nonprofit
           down-payment assistance were concentrated in the Southwest,
           Southeast, and Midwest.

^8LTV ratio is the loan amount divided by the sales price or appraised
value of the property. The data sample we relied on included only
FHA-insured, single-family purchase loans with an LTV ratio greater than
95 percent. Loans with an LTV ratio greater than 95 percent account for
almost 90 percent of FHA's portfolio.

           Seller-Funded Assistance Affects Home Purchase Transactions
			  and Can Raise House Prices

           The presence of down-payment assistance from seller-funded
           nonprofits can alter the structure of purchase transactions. When
           buyers receive assistance from sources other than seller-funded
           nonprofits, the home purchase takes place like any other purchase
           transaction--buyers use the funds to pay part of the house price,
           the closing costs, or both, reducing the mortgage by the amount
           they pay and creating "instant equity." However, seller-funded
           down-payment assistance programs typically require property
           sellers to make a financial contribution and pay a service fee
           after the closing, creating an indirect funding stream from
           property sellers to homebuyers that does not exist in a typical
           transaction (see fig. 1).^10
			  
^9We measured house price appreciation using data from Global Insight,
Inc., for the end of the fourth quarter of 2003 to the end of the fourth
quarter of 2004.

^10Organizations commonly require property sellers to provide both a
financial payment equal to the amount of assistance paid to the homeowner
and a service fee.			  

Figure 1: Structure of FHA Individual Purchase Transaction, with
Nonseller-Funded Down-Payment Assistance and with Seller-Funded
Down-Payment Assistance

Our analysis indicated, and mortgage industry participants we spoke with
reported, that property sellers often raised the sales price of their
properties in order to recover the contribution to the seller-funded
nonprofit that provided the down-payment assistance. Marketing materials
from seller-funded nonprofits often emphasize that property sellers using
these down-payment assistance programs earn a higher net profit than
property sellers who do not. These materials show sellers receiving a
higher sales price that more than compensates for the fee typically paid
to the down-payment assistance provider. Several mortgage industry
participants we interviewed noted that when homebuyers obtained
down-payment assistance from seller-funded nonprofits, property sellers
increased their sales prices to recover their payments to the nonprofits
providing the assistance. An earlier study by a HUD contractor
corroborates the existence of this practice.^11 Some mortgage industry
participants we met with told us that they viewed down-payment assistance
from seller-funded nonprofits as a seller inducement. However, FHA has not
viewed such assistance as a seller inducement and therefore does not
subject this assistance to the limits that it otherwise places on
contributions from sellers.

Some mortgage industry participants told us that homes purchased with
down-payment assistance from seller-funded nonprofits might be appraised
for higher values than they would be without this assistance. Appraisers
we spoke with said that lenders, realtors, and sellers sometimes pressured
them to "bring in the value" in order to complete the sale. The HUD
contractor study corroborates the existence of these pressures. Our
analysis of a national sample of FHA-insured loans endorsed in 2000, 2001,
and 2002 suggested that homes with seller-funded assistance were appraised
and sold for about 3 percent more than comparable homes without such
assistance. Additionally, our analysis of more recent loans--a sample of
FHA-insured loans settled in March 2005--indicated that homes sold with
nonprofit assistance were appraised and sold for about 2 percentage points
more than comparable homes without nonprofit assistance.^12

^11Concentrance Consulting Group, An Examination of Downpayment Gift
Programs Administered by Nonprofit Organizations.

^12To perform this analysis, we contracted with First American Real Estate
Solutions to provide estimates of the value of homes in a sample of
FHA-insured loans. The values were calculated for the month prior to the
closing, using an AVM.

FHA-Insured Loans with Down Payment Assistance, Particularly from Seller-Funded
Nonprofits, Do Not Perform as Well as Similar Loans without Assistance

We found that FHA-insured loans with down-payment assistance do not
perform as well as loans without it. As part of our evaluation, we
analyzed loan performance by source of down-payment assistance,
controlling for the maximum age of the loan, as of June 30, 2005. We used
two samples of FHA-insured purchase loans from 2000, 2001, and 2002--a
national sample and a sample from three MSAs with high rates of
down-payment assistance. We grouped the loans into the following three
categories: loans with assistance from seller-funded nonprofit
organizations, loans with assistance from nonseller-funded sources, and
loans without assistance. As shown in figure 2, in both samples and in
each year, loans with down-payment assistance from seller-funded nonprofit
organizations had the highest rates of delinquency and insurance claims,
and loans without assistance the lowest. Specifically, between 22 and 28
percent of loans with seller-funded assistance had experienced a 90-day
delinquency, compared with 11 to 16 percent of loans with assistance from
other sources and 8 to 12 percent of loans without assistance. The claim
rates for loans with seller-funded assistance ranged from 6 to 18 percent,
for loans with other sources of assistance from 5 to 10 percent, and for
loans without assistance from 3 to 6 percent.

Figure 2: Delinquency and Claim Rates, by Maximum Age of Loan and Source
of Down-Payment Funds

Note: Analysis based on data from two samples of loans drawn for a file
review study funded by HUD and conducted by the Concentrance Consulting
Group. The sampled loans were purchase money loans endorsed in 2000, 2001,
and 2002 with LTV ratios greater than 95 percent. The national sample
consisted of just over 5,000 loans, and the MSA sample consisted of 1,000
loans for each of the three MSAs: Atlanta, Indianapolis, and Salt Lake
City.

In addition, we analyzed loan performance by source of down-payment
assistance holding other variables constant. Here we found that
FHA-insured loans with down-payment assistance had higher delinquency and
claim rates than similar loans without such assistance (see fig. 3). The
results from the national sample indicated that assistance from a
seller-funded nonprofit raised the probability that the loan had gone to
claim by 76 percent relative to similar loans with no assistance.
Differences in the MSA sample were even larger; the probability that loans
with seller-funded nonprofit assistance would go to claim was 166 percent
higher than it was for comparable loans without assistance. Similarly,
results from the national sample showed that down-payment assistance from
a seller-funded nonprofit raised the probability of delinquency by 93
percent compared with the probability of delinquency in comparable loans
without assistance. For the MSA sample, this figure was 110 percent.

Figure 3: Effect of Down-Payment Assistance on the Probability of
Delinquency and Claim, Controlling for Selected Variables

Note: Loans without down-payment assistance are set at 100 percent. The
results show the effect of a change in the variable on the odds
ratio--that is, the probability of a claim (or delinquency) divided by the
probability of not experiencing a claim (or delinquency). However, the
probability of experiencing a claim or delinquency in any given quarter is
fairly small; so, the change in the odds ratio is very close to the change
in the probability. The analysis is based on data from two samples of
loans drawn for a file review study funded by HUD and conducted by the
Concentrance Consulting Group. The loans in the samples were endorsed in
2000, 2001, and 2002 and had LTV ratios greater than 95 percent. The
national sample consisted of just over 5,000 loans and the MSA sample
consisted of 1,000 purchase money loans for each of the three MSAs:
Atlanta, Indianapolis, and Salt Lake City. The loan performance data
(current as of June 2005) are from HUD's Single-Family Data Warehouse.

The weaker performance of loans with seller-funded down-payment assistance
may be explained, in part, by the higher sales prices of homes bought with
this assistance and the homebuyer having less equity in the transaction.
The higher sales price that often results from a transaction involving
seller-funded down-payment assistance can have the perverse effect of
denying buyers any equity in their properties and creating higher
effective LTV ratios. FHA has requirements which have the effect of
ensuring that FHA homebuyers obtain a certain amount of "instant equity"
at closing, but seller-funded down-payment assistance effectively
undercuts these requirements. That is, when the sales price represents the
fair market value of the house, and the homebuyer contributes 3 percent of
the sales price at the closing, the LTV ratio is less than 100 percent.
But when a seller raises the sales price of a property to accommodate a
contribution to a nonprofit that provides down-payment assistance to the
buyer, the buyer's mortgage may represent 100 percent or more of the
property's true market value. Our prior analysis has found that,
controlling for other factors, high LTV ratios lead to increased claims.

The adverse performance of loans with seller-funded down-payment
assistance has had negative consequences for FHA. FHA has estimated that
its single-family mortgage insurance program would require a subsidy--that
is, appropriations--in 2008 in the absence of program changes. According
to FHA, the growing share of FHA-insured purchase loans with seller-funded
assistance has contributed to FHA's worsening financial performance.

Our 2005 report made recommendations designed to better manage the risks
of loans with down-payment assistance generally and from seller-funded
nonprofits specifically. We recommended that FHA consider risk mitigation
techniques such as including down-payment assistance as a factor when
underwriting loans. We also recommended that FHA take additional steps to
mitigate the risk associated with loans with seller-funded down-payment
assistance, such as treating such assistance as a seller inducement and
therefore subject to the prohibition against using seller contributions to
meet the 3 percent borrower contribution requirement.

Consistent with our recommendations, FHA is testing additional predictive
variables, including source of the down payment, for inclusion in its
mortgage scorecard (an automated tool that evaluates the default risk of
borrowers). Additionally, in May 2007 HUD issued a proposed rule that
would prohibit the use of seller-funded down-payment assistance in
conjunction with FHA-insured loans. FHA also has been anticipating a
reduction in the number of loans with down-payment assistance from
seller-funded nonprofit organizations as a result of actions taken by the
Internal Revenue Service (IRS). Citing concerns about seller-funded
nonprofits raised by our report and the 2005 HUD contractor study, IRS
issued a ruling in May 2006 stating that these organizations do not
qualify as tax-exempt charities, thereby making loans with such assistance
ineligible for FHA insurance. In a press announcement of the ruling, IRS
stated that funneling down-payment assistance from sellers to buyers
through "self-serving, circular-financing arrangements" is inconsistent
with operation as a charitable organization. According to FHA, as of June
2007, IRS had rescinded the charitable status of three of the 185
organizations that IRS is examining.

Madam Chairwoman, this concludes my prepared statement. I would be happy
to answer any questions at this time.

Contacts and Acknowledgments

For further information on this testimony, please contact William B. Shear
at (202) 512-8678 or [9][email protected] . Individuals making key
contributions to this testimony included Steve Westley (Assistant
Director), Emily Chalmers, Chris Krzeminski, and Andy Pauline.

(250351)

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Highlights of [17]GAO-07-1033T , a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services, House
of Representatives

June 22, 2007

MORTGAGE FINANCING

Seller-Funded Down-Payment Assistance Changes the Structure of the
Purchase Transaction and Negatively Affects Loan Performance

The Federal Housing Administration (FHA) differs from other key mortgage
industry participants in that it allows borrowers to obtain down-payment
assistance from nonprofit organizations (nonprofits) that operate programs
supported partly by property sellers. Research has raised concerns about
how this type of assistance affects home purchase transactions. To assist
Congress in considering issues related to down-payment assistance, this
testimony provides information from GAO's November 2005 report, Mortgage
Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans
with Down Payment Assistance (GAO-06-24). Specifically, this testimony
discusses (1) trends in the use of down-payment assistance with
FHA-insured loans, (2) the impact that the presence of such assistance has
on purchase transactions and house prices, and (3) the influence of such
assistance on loan performance.

[18]What GAO Recommends

In the report discussed in this testimony, GAO made recommendations
designed to better manage the risks of loans with down-payment assistance
generally and from seller-funded nonprofits in particular. Consistent with
our recommendations, HUD recently issued a proposed rule that would
prohibit the use of seller-funded down-payment assistance with FHA-insured
loans.

The proportion of FHA-insured purchase loans that were financed in part by
down-payment assistance increased from 35 percent to nearly 50 percent
from 2000 through 2004. Assistance from nonprofit organizations that
received at least part of their funding from property sellers accounted
for much of this increase, growing from about 6 percent of FHA-insured
purchase loans in 2000 to approximately 30 percent in 2004. More recent
data indicate that in 2005 and 2006, the percentages of FHA-insured loans
with down-payment assistance from all sources and from seller-funded
nonprofits were roughly equivalent to 2004 levels.

Assistance from seller-funded nonprofits alters the structure of the
purchase transaction in important ways. First, because many seller-funded
nonprofits require property sellers to make a payment to their
organization, assistance from these nonprofits creates an indirect funding
stream from property sellers to homebuyers. Second, GAO analysis indicated
that FHA-insured homes bought with seller-funded nonprofit assistance were
appraised at and sold for about 2 to 3 percent more than comparable homes
bought without such assistance.

Regardless of the source of assistance and holding other variables
constant, GAO analysis indicated that FHA-insured loans with down-payment
assistance have higher delinquency and insurance claim rates than do
similar loans without such assistance. Furthermore, loans with assistance
from seller-funded nonprofits do not perform as well as loans with
assistance from other sources (see fig.). This difference may be
explained, in part, by the higher sales prices of comparable homes bought
with seller-funded assistance and the homebuyers having less equity in the
transaction.

Effect of Down-Payment Assistance on the Probability of Delinquency and
Claim

References

Visible links
7. http://www.gao.gov/cgi-bin/getrpt?GAO-05-194
8. http://www.gao.gov/cgi-bin/getrpt?GAO-06-24
9. mailto:[email protected]
  10. http://www.gao.gov/
  11. http://www.gao.gov/
  12. http://www.gao.gov/fraudnet/fraudnet.htm
  13. mailto:[email protected]
  14. mailto:[email protected]
  15. mailto:[email protected]
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1033T
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1033T
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