Report: Most Non-Performing FHA Loans Start With Downpayment Gift From Relatives.

Business Editors

WASHINGTON--(BUSINESS WIRE)--Oct. 7, 2003

An independent study released today said that no matter what the downpayment gift source, about 5 percent of all mortgage loans guaranteed by the Federal Housing Administration come back to the agency as claims against its insurance fund.

The report found that downpayment gifts from relatives resulted in claims against the fund at a 5.1 percent rate. The family-provided downpayment gift category is 75 percent of the sample, compared to the nonprofit downpayment gift-assisted segment of 10 percent of the data, and the claims rate involving that source is also 5.1 percent, the report said.

The findings were released by the Homeownership Alliance of Nonprofit Downpayment Providers (HAND), a national association of charities that provide downpayment gifts to homebuyers who qualify for a mortgage but lack the cash for the downpayment.

In the past three years, HUD's Inspector General (IG) has issued two reports warning that downpayment assistance gifts from these charities were endangering the FHA insurance pool. Neither IG's reports addressed the claims rate against the insurance fund linked to downpayments from family members, although the number of claims from this one source is 75 percent of the data provided.

"HUD's data does not support that mortgages involving downpayment gift assistance from nonprofit organizations increases risk to the FHA insurance fund," the report declared. "It does show that the same rate of claims to the insurance fund occurs in comparable mortgages regardless as to whether a downpayment assistance gift originates with a relative or a non-profit organization."

Reznick, Fedder and Silverman (RFS), a Bethesda, MD-based regional accounting and business consulting firm, performed the analysis, basing its findings exclusively on data provided by the Department of Housing and Urban Development (HUD), under a Freedom of Information Act (FOIA) request.

HAND commissioned the study and the FOIA request to test the veracity of the IG's assertion that downpayment gift assistance from nonprofits was hindering the solvency of the FHA insurance fund.

The report found that the claims rate from nonprofit gifts was 5.1 percent, identical to that of the mortgages in which relatives provided the downpayment.

Default rates for nonprofit gift-enabled FHA mortgage loans was 20.6 percent, compared to 18.5 percent for loans in which relatives provided the downpayment. Defaults are notices of delinquency and give the borrower time to get current on mortgage payments. Claims against the FHA insurance fund only occur when a borrower fails to cure the default.

"This suggests that beneficiaries of nonprofit downpayment gift providers work harder to cure their delinquencies since more of them fall behind initially than those getting help from families. But our buyers catch up," said Joel S. Pate, HAND chairman. "In other words, homebuyers obtaining gift assistance from our members are a better risk than those who receive such aid from families," he continued.

RFS analyzed data on a total of 4,327,423 FHA mortgages that were opened between fiscal years 1998 and 2001. To insure the sampling was fair, the firm selected only those mortgages in the 21 states with the highest number of nonprofit-based downpayment gifts.

Another highlight of the report was the finding that "nonprofit assisted mortgages serve a higher proportion of Black/Non Hispanic American Indian or Alaskan borrowers than the full (FHA) portfolio" by 7 percent - 20.3 percent compared to 13.3 percent in the FHA portfolio. Moreover, the downpayment gift-assisted concept serves "a higher proportion of minority borrowers than the full (FHA) portfolio" by 40.7 percent to 37.2 percent, RFS reported.

Pate said this data shows that the downpayment gift programs offered by HAND members "clearly demonstrate that our outreach programs are working." Pate noted that the Bush Administration launched an effort last year to increase minority homeownership by 5.5 million families by the end of the decade. "We are more than doing our part in helping to achieve that objective," he said.

Among other findings in the study:

-- More than 99 percent of the nonprofit-assisted downpayments

were for new loans, compared with 23 percent of the FHA loans

that were refinancings.

-- First-time homebuyers represented 88 percent of the

downpayment-assisted portfolio, compared to only 63 percent in

this category in the FHA overall portfolio.

HAND members are: American Family Funds of Mobile, AL; AmeriDream, Inc., of Gaithersburg, MD; Consumer Debt Solutions, Inc., of Highland, NY; Fair Housing Assistance of Orem, UT; Family Home Providers of Cumming, GA; The Genesis Program of Austin, TX; Homes For All of North Ft. Myers, FL; Nehemiah Corporation of California; and Neighborhood Gold of Orem, UT.