Down Payment Assistance Under the Microscope

This piece originally appeared in the December 2023 edition of MortgagePoint magazine, online now.

Miki Adams is the President of CBC Mortgage Agency (CBCMA), a nationally chartered housing finance agency and a source of down payment assistance for first-time homebuyers. She joined the Cedar City, Utah-based company in November 2016 as EVP and was promoted to President in January 2021. She has 30 years’ mortgage lending experience and has managed companies through calm and tumultuous markets. Her background includes credit and collateral underwriting, secondary marketing and portfolio asset management, regulatory compliance, and regulatory audit and examination management.

Q: How has loan performance changed over the past 10 years on FHA-insured loans that were originated with DPA?
It’s pretty interesting. In 2013, when we launched CBC Mortgage Agency, the average serious delinquent rate on purchase money FHA loans was 8%, according to figures reported by HUD. At the time, HUD reported the DPA serious delinquency rate only on loans that had Seller-Funded DPA, which was 22.89% at the time.

Since then, FHA has added the delinquency rates and categories for Government Entity and Relative, which today are 5.03% for Government and 5.34% for Relative.

Another very significant change is in the cost of FHA’s Annual MIP, which is applied to the borrower’s monthly housing expense and impacts borrower total DTI. The decrease in the annual MIP from 1.35% in May of 2013 to .55% has a major impact on borrowers’ ability to qualify.

Q: What do you attribute the improvement to?
A big part of the improvement in serious delinquency rates came just prior to 2013, from restrictions HUD imposed on FHA transactions that prevented sellers from providing down payment assistance to buyers. While home sellers can still help fund certain costs for FHA borrowers, these contributions are now capped, and sellers can no longer contribute to the borrower’s down payment. Before this change, sellers in such transactions would typically increase the purchase price of their property to cover their DPA to buyers.

This led to inflated home values and loans that borrowers could not afford, so HUD put a stop to this practice. It is fair to say the drop in delinquency rates is at least partially attributable to greater scrutiny of loans originated with down payment assistance.

As for the change in the cost of FHA’s annual MIP, FHA periodically reevaluates MIP pricing based on the state of the MMI Fund and on housing and economic conditions, and the robustness of the MMI Funds capital ratio today was the catalyst for reducing the annual MIP fee to borrowers in 2023. In 2013, the MMI Fund capital ratio was -.11%. By FY2022, the capital ratio had reached a high of 11.11%.

Q: Does the source of DPA impact FHA loan performance?
Yes. While the average serious delinquency rate of FHA loans where government DPA provided was 5.03% in August for Government Entity, the average serious delinquency rate for loans in which a relative helped out with the borrower’s down payment was 5.34%. I think this reflects the stricter eligibility requirements and criteria that come with most government DPA programs, which borrowers must meet to qualify for assistance.

Q: How does CBCMA work to help FHA loan performance?
Yes. As a first priority, we make every effort to monitor the performance of our loans on a continual basis, noting any observable trends and adjusting our credit policy accordingly to mitigate poor loan performance. We are firm believers in borrower education and equipping everyone who receives DPA through the Chenoa Fund with the knowledge and skills they need to successfully navigate the complexities of homeownership. So, we pay for counseling.

Our pre-purchase homebuyer courses serve as a practical roadmap to homeownership and understanding the responsibility of owning a home, such as the need to create a budget and plan for ongoing maintenance costs and other needs. There’s a rich body of research that supports the fact that borrowers who complete these types of courses before taking out a mortgage are less likely to default down the road. Just as importantly, we also provide all our Chenoa Fund recipients post-purchase counseling through HUD-approved counselors through the first 18 months of homeownership, which we feel leads to more successful, sustainable outcomes in supporting borrowers in their homeownership journey.