Charities which provide downpayment assistance to cash-strapped home buyers are getting a bad rap, according to a new study which refutes government warnings that such gifts are putting the Federal Housing Administration's mortgage insurance pool in jeopardy.
The study, which was funded by the trade group representing nine charities, found that the claims rate was the same no matter what the source of the gift money.
Even when the funds came from Mom and Dad or another relative, the claims rate was identical to the 5.1 percent rate for loans in which part of the upfront cash needed to close came from a non-profit, according to an analysis of Department of Housing and Urban Development data by Reznick, Fedder and Silverman, a Bethesda, Md., accounting and consulting firm.
The study was performed on behalf of the Homeownership Alliance of Nonprofit Downpayment Providers, or HAND for short.
Over the past three years, HUD's Inspector General has issued two separate reports warning that assistance from these charities spells trouble for the insurance fund.
Charities get their money from sellers who donate about 4 percent of their selling prices. Typically, the charities give 3 percent to the buyer and keep the difference as an administrative fee to cover their costs and fund other works.
The IG's office and other detractors worry that sellers tend to inflate their asking prices to cover their benevolence. As a result, they fear the properties are sold for more than they are actually worth, leaving the FHA holding the bag if the borrower should default on his mortgage.
But the study found that HUD's data does not support that conclusion. Rather, it shows 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."
It also found that default rates are somewhat higher for non-profit gift-enabled FHA mortgages than for loans in which relatives provided the cash. 20.6% vs. 18.5%. But because the claims rates were identical, it concludes that borrowers getting their money from charities are a better risk.
The finding "suggests that beneficiaries of non-profit downpayment gift providers work harder to cure their delinquencies," said HAND Chairman Joel Pate. While more charity-aided borrowers fall behind, said Pate, "our buyers catch up."
The analysis covered 4.3 million loans originated in the fiscal years 1998-2001. To assure the sample was fair, the researchers said, only mortgages in the 21 states with the highest number of gifts from non-profits were tabulated.
The study also found that charities serve a higher portion of minorities than the full FHA portfolio, a fact that HAND's Pate said "clearly demonstrates that our outreach programs are working." In addition, more than 99 percent of the assistance provided by HAND members was for buyers. By comparison, 77 percent of the loans insured by the FHA during the study period were to buyers, with the remainder going to owners who were refinancing.
HAND members include: American Family Funds, Mobile, Ala.; AmeriDream, Gaithersburg, Md.; Consumer Data Solutions, Highland, N.Y.; Fair Housing Assistance, Orem, Utah; Family Home Providers, Cumming, Ga.; The Genesis Program, Austin, Tex.; Homes for All, North Ft. Myers, Fla.; Nehemiah Corp., Sacramento, Calif., and Neighborhood Gold, Orem, Utah.