	Background

		Home Equity Building

A homeowner can build home equity immediately by making a down  payment on their home, assuming the down payment is not financed  separately as a loan. In the primary market, federal agencies provide homeownership  assistance programs and products intended for increasing access to and  affordability of homeownership. Federal Homeownership Assistance Programs Can Have Equity- Building Effects, but Are Not Specifically Designed to Accelerate Equity Building

Existing federal homeownership assistance programs use features and  mechanisms that can have equity-building effects, but the programs are  not specifically designed to accelerate equity building. The programs can  assist homeowners to build equity over time by providing access to  homeownership, but the programs do not have an explicit focus on  accelerating the ongoing pace of paying down the loan principal faster  than a 30-year fixed-rate mortgage. Among federal mortgage  insurance programs, FHA has the highest volume of mortgages insured. Examples of programs  include the following:
HUD’s HOME Investment Partnership Program is a block grant  program that provides funding to states and localities to be used  exclusively for affordable housing activities to benefit low-income  households. Eligible uses of home-buyer assistance include grants for down  payments and closing costs. Options and Mechanisms That Accelerate Equity Building Present Trade-offs for Homeowners and Lenders

Borrowers have options to accelerate equity building that include  obtaining shorter-term mortgages, making more frequent or additional  payments, or choosing a mortgage product available in the private  mortgage market designed to accelerate equity building. For example, home buyers can choose  a 15- or 20-year mortgage rather than a 30-year mortgage. A Recently Introduced Mortgage Product Accelerates Equity Building through Shorter Terms and Lower Interest Rates

The Wealth Building Home Loan (WBHL) is a relatively new private- sector mortgage product that incorporates a number of features  specifically designed to accelerate equity building (see fig. All else being equal, having more home equity also can help sustain  homeownership through a downturn in the housing market. For example,  default rates are generally higher for loans with higher loan-to-value (LTV)  ratios. Trade-offs for Home Buyers and Homeowners Include Limited Access to Shorter-Term Loans and Reduced Affordability

			Limited Access

Accelerated equity-building products, such as a 15-year fixed-rate  mortgage or a WBHL, may not be accessible for all borrowers, partly due  to tighter credit requirements. The higher monthly payments may make shorter-term loans unaffordable for many low- income home buyers or leave borrowers with less discretionary income to  cover other obligations, including paying off higher-interest debt, putting  some of them at greater risk of defaulting on monthly mortgage  payments. However, some research suggests that, depending on  market conditions and the risk appetite of a homeowner, purchasing a  house with a 30-year fixed-rate mortgage can provide a higher lifetime  return on investment compared to a 15-year fixed-rate mortgage because  the difference between the monthly payments can be invested at a rate of  return that likely would be higher than the difference in mortgage interest  rates between 30- and 15-year mortgages. Trade-offs for Lenders Include Market Uncertainty

For lenders, shorter-term mortgages generally reduce credit risk—the  likelihood of loss with default—compared with longer-term loans. Appendix I: Objectives, Scope, and Methodology

This report describes (1) how federal homeownership assistance  programs affect home equity building, and (2) options, including private- sector mortgage products, through which borrowers can accelerate home  equity building and the trade-offs of these options for both borrowers and  lenders. We  also conducted interviews with academics, experts, industry stakeholders  (including mortgage lenders and insurers), and organizations to discuss  advantages and trade-offs of accelerated equity-building products, and  the role of the secondary market in providing market liquidity for new  mortgage products.
Why GAO Did This Study

The federal government has a number of programs to help increase access to affordable homeownership for first-time buyers and lower-income households, including programs that provide guarantees for certain types of mortgages and funding that can be used for down-payment assistance. Generally, homeowners can build home equity by making payments on a mortgage to reduce the outstanding principal (assuming home value does not depreciate). Recently, there has been interest in mortgage products that accelerate home equity building.
GAO was asked to explore options for building equity through homeownership. This report discusses (1) how federal homeownership assistance programs affect home equity building; and (2) options, including private-sector mortgage products, through which borrowers can accelerate home equity building and the trade-offs of these options for both borrowers and lenders.
GAO analyzed relevant laws and program guidance of federal homeownership assistance programs. GAO attended housing conferences and interviewed relevant federal and state agency officials, academics, and industry stakeholders, including mortgage insurers and lenders, to identify existing and proposed accelerated equity-building products and mechanisms and to better understand the benefits and trade-offs of accelerated equity building. GAO also developed examples of mortgage scenarios to illustrate the trade-offs of accelerated equity building. Federal agencies provided technical comments, which were incorporated where appropriate.

What GAO Found

Federal homeownership assistance programs generally are not designed to accelerate equity building (home equity is the difference between the value of a home and the amount owed on a mortgage). For example, programs that offer grants for down-payment assistance can provide a one-time boost to home equity. However, these programs are not specifically designed to accelerate equity building—that is, increasing the pace of paying off principal more quickly than would be the case with a 30-year fixed-rate mortgage. Instead, the focus of federal programs is on providing affordable access to homeownership, including through grants, loans, and mortgage insurance or guarantees. For instance, federal mortgage insurance programs help provide market liquidity by protecting lenders from losses, in turn increasing access to credit and homeownership, and ultimately, the opportunity for equity building for home buyers.
Borrowers have options to accelerate equity building that include obtaining shorter-term mortgages, making more frequent or additional payments, or choosing a mortgage product designed to accelerate equity building. For example, a mortgage product introduced by private lenders in 2014—the Wealth Building Home Loan (WBHL)—has features designed to accelerate equity building, including shorter terms (15 or 20 years) and the option to buy down the interest rate. The product also allows for no down payment. However, these products have trade-offs, including the following:
Shorter-term loans build home equity (in terms of principal reduction) at a faster rate, but require higher monthly payments (see fig.). Payments for a 15-year fixed-rate mortgage can be more than 40 percent higher than for a 30-year fixed-rate mortgage.
Higher payments may make mortgages less affordable or limit access for lower-income borrowers. For example, higher payments may result in a higher debt-to-income ratio for some home buyers, which may prevent them from qualifying for a mortgage unless they buy a less expensive home.
In contrast, all else equal, loans with a shorter term generally have reduced credit risk—the likelihood of a home buyer defaulting on a mortgage—for lenders.
Note: Monthly mortgage payments do not include property tax or any type of insurance. Interest rates used are generally consistent with market rates in September and October 2017.