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Study: Down Payment Help Doesn’t Raise Risk of Foreclosure

If a homebuyer receives help for their down payment, is there a higher risk they’ll later face foreclosure? According to a Fed working paper, the answer is no. The share of FHA-backed loans made with down payment help jumped from 30% in 2011 to almost 40% last year.

NEW YORK – According to a new working paper prepared for the Center for Household Financial Stability at the Federal Reserve Bank at St. Louis, a homeowner’s chance of mortgage default down the road doesn’t increase if they receive financial assistance toward the down payment.

There are more than 2,000 private- and government-sponsored down-payment assistance (DPA) programs across the country, and they’ve grown in popularity in recent years as home prices jumped. The share of Federal Housing Administration-backed loans made with DPA jumped from about 30% in 2011 to almost 40% last year.

Researchers examined the loan performance for thousands of mortgages made through the Community Advantage Program – a partnership between the Ford Foundation, Fannie Mae and nonprofit lender Self-Help – in the lead-up to and following the 2008 financial crisis. They found that borrowers who receive DPA from a governmental or community program are significantly more likely to be black and have a lower credit score, as compared with people who receive help from friends or family.

However, when the researchers controlled for the borrower’s race or ethnicity, DPA was not shown to increase the likelihood of a default whatsoever, suggesting that black and Hispanic borrowers’ default rates aren’t related to whether or not they received DPA.

In addition, DPA didn’t negatively affect how much wealth a homeowner accumulated through home-price appreciation.

“Households with DPA were as able to benefit financially from rising markets as those without DPA,” the researchers wrote. “In setting guidelines around DPA, policymakers should take care not to close off opportunities to aspiring minority home buyers.”

Source: MarketWatch (11/04/19) Passy, Jacob

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