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FHA-insured loans with down-payment assistance riskier.

FHA-insured loans with down-payment assistance have higher delinquency and claim rates than do similar loans without such assistance, according to an analysis by the Government Accountability Office (GAO).

The GAO study, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans With Down Payment Assistance, also found that loans from seller-funded nonprofit groups do not perform as well as loans with assistance from other sources.

From 2000 to 2004, the total proportion of FHA-insured loans with down-payment assistance grew from 35 percent to nearly 50 percent. Furthermore, approximately 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, reported GAO.

The GAO study noted that down-payment assistance provided by a seller-funded nonprofit group could alter the structure of the purchase transaction in two important ways.

First, when a homebuyer receives assistance from such a group, many nonprofits require the 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," said the report.

Second, GAO's analysis indicated that property sellers who provided down-payment assistance through nonprofits often raised the sales prices of the homes involved in order to recover the required payments that went to the organizations.

"We found that homes with seller-funded down-payment assistance were appraised and sold for about 2 [percent] to 3 percent more than comparable homes without such assistance," said GAO. "That is, homebuyers would have less equity in the transaction than would otherwise be the case."

Although FHA has implemented some standards and controls on loans with down-payment assistance, GAO observed that stricter standards and additional controls could help in managing risks from such loans.

To that end, the GAO report recommended that the HUD secretary direct the FHA commissioner to implement additional controls to manage the risks associated with loans that involved down-payment assistance and down-payment assistance from seller-funded nonprofits.
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Title Annotation:United States. Federal Housing Administration
Publication:Mortgage Banking
Geographic Code:1USA
Date:Feb 1, 2006
Words:353
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