For example,  from 2000 to 2004, the total proportion of FHA-insured single-family  purchase loans that had a loan-to-value (LTV) ratio greater than 95 percent  and that also involved down-payment assistance from any source grew  from 35 to nearly 50 percent. Assistance from nonprofit organizations,  about 93 percent of which were funded by sellers, accounted for an  increasing proportion of this assistance. Approximately 6 percent of FHA- insured loans received down-payment assistance from nonprofit  organizations in 2000, but, by 2004 this figure had grown to about 30  percent. FHA data for 2005 and 2006 indicate that the percentages of loans  with down-payment assistance from any source and from seller-funded  nonprofits remained at roughly 2004 levels. Seller-Funded Assistance Affects Home Purchase Transactions and Can Raise House Prices

The presence of down-payment assistance from seller-funded nonprofits  can alter the structure of purchase transactions. When buyers receive  assistance from sources other than seller-funded nonprofits, the home  purchase takes place like any other purchase transaction—buyers use the  funds to pay part of the house price, the closing costs, or both, reducing  the mortgage by the amount they pay and creating “instant equity.”  However, seller-funded down-payment assistance programs typically  require property sellers to make a financial contribution and pay a service  fee after the closing, creating an indirect funding stream from property  sellers to homebuyers that does not exist in a typical transaction   (see fig. Several mortgage industry  participants we interviewed noted that when homebuyers obtained down- payment assistance from seller-funded nonprofits, property sellers  increased their sales prices to recover their payments to the nonprofits  providing the assistance. Our analysis of a national sample of FHA-insured loans  endorsed in 2000, 2001, and 2002 suggested that homes with seller-funded  assistance were appraised and sold for about 3 percent more than  comparable homes without such assistance. FHA-Insured Loans with Down Payment Assistance, Particularly from Seller-Funded Nonprofits, Do Not Perform as Well as Similar Loans without Assistance

We found that FHA-insured loans with down-payment assistance do not  perform as well as loans without it. In addition, we analyzed loan performance by source of down-payment  assistance holding other variables constant. Here we found that FHA- insured loans with down-payment assistance had higher delinquency and  claim rates than similar loans without such assistance (see fig. The weaker performance of loans with seller-funded down-payment  assistance may be explained, in part, by the higher sales prices of homes  bought with this assistance and the homebuyer having less equity in the  transaction. According to FHA, the growing share of FHA-insured purchase  loans with seller-funded assistance has contributed to FHA’s worsening  financial performance.
Why GAO Did This Study

The Federal Housing Administration (FHA) differs from other key mortgage industry participants in that it allows borrowers to obtain down-payment assistance from nonprofit organizations (nonprofits) that operate programs supported partly by property sellers. Research has raised concerns about how this type of assistance affects home purchase transactions. To assist Congress in considering issues related to down-payment assistance, this testimony provides information from GAO's November 2005 report, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance (GAO-06-24). Specifically, this testimony discusses (1) trends in the use of down-payment assistance with FHA-insured loans, (2) the impact that the presence of such assistance has on purchase transactions and house prices, and (3) the influence of such assistance on loan performance.

What GAO Found

The proportion of FHA-insured purchase loans that were financed in part by down-payment assistance increased from 35 percent to nearly 50 percent from 2000 through 2004. Assistance from nonprofit organizations that received at least part of their funding from property sellers accounted for much of this increase, growing from about 6 percent of FHA-insured purchase loans in 2000 to approximately 30 percent in 2004. More recent data indicate that in 2005 and 2006, the percentages of FHA-insured loans with down-payment assistance from all sources and from seller-funded nonprofits were roughly equivalent to 2004 levels. Assistance from seller-funded nonprofits alters the structure of the purchase transaction in important ways. First, because many seller-funded nonprofits require property sellers to make a payment to their organization, assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance. Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down-payment assistance have higher delinquency and insurance claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance and the homebuyers having less equity in the transaction.