It is my observation that a lot of people have opinions about DC’s home loan assistance program, HPAP, but few people are actually knowledgeable about the program. As a result, there is a lot of misinformation, misinterpretation, and misunderstanding about the program and the people who qualify for an HPAP loan. In order to address this disconnect, I have taken the time to compile a list of opinions and beliefs about HPAP, and I will briefly address them with facts.
1. One opinion about HPAP is that the government should not make it easier for low income households to purchase homes they can’t afford.
Recipients of the HPAP program go through a stringent credit check, and home buyer education programs. They qualify for their first trust mortgage without HPAP, but they need help to be able to afford the full cost of the home including downpayment and closing costs. In short, HPAP helps residents afford their home, and get assistance from a zero interest second mortgage.
2. Some people have concerns about HPAP that stem from The Washington Post’s 2012 article. The article states that “Nearly one in five buyers participating in the city’s 35-year-old loan program for first-time homeowners is behind on mortgage payments, city officials said — a default rate at least three times higher than the overall rate in the region. Nearly 50 buyers have received notices of foreclosure in recent years, while more than 50 others have struggled with homeowner association or utility liens.”
It is likely that those statistics are inflated and misinterpreted. The Washington Post’s article, criticized HPAP for having a 1.8% foreclosure rate. However, FHA and Fannie Mae foreclosures on loans originated during the same timeframe are significantly greater than that, and reflect home buyers with higher incomes and greater household assets than the typical HPAP borrower. Furthermore, this less than 2% foreclosure rate is small compared to the District’s overall foreclosure rate of 8.5%.
In addition, the Post’s critiques of the program are misinformed. A lot of HPAP issues had to do with the HPAP loan servicer, not the HPAP borrower. At times, the loan servicer was late in sending out notices to inform people that it was time to begin repayments on their loan, and when notices were sent out, they didn’t have any mention of HPAP on them, so homeowners believed that the notices were a scam. There have also been instances of the servicer marking HPAP borrowers delinquent when they were in fact not delinquent. The attention regarding this issue misrepresented HPAP borrowers, and their ability to pay their loans. As a result, these matters have been brought up in numerous public hearings and meetings, in order to resolve these claims and address HPAP servicing issues.
3. There is also a concern of moral hazard in regard to HPAP. There is a fear that the easier we make it to borrow, the more people will borrow and the more difficulty they will have paying back bigger loans.
However, this isn’t necessarily the case. There are currently price caps created by HPAP ratio calculations and compensating factors; the maximum a person is able to borrow at this time is $50,000. HPAP allows people with the lowest incomes to borrow the most money because they have less money to begin with, and need more assistance to purchase their home. Currently, the City Council, along with raising the maximum loan amount to $80,000, is asking DHCD to come up with a different HPAP repayment plan for the lower income borrowers. Practices of other high-priced cities with larger purchase assistance amounts suggest that deferring repayment of purchase assistance loans until future resale or responsible cash-out-refinance is the best way to go.
The chart above outlines income, the maximum HPAP loan amount that income qualifies for and the potential maximum cost of a home; these numbers are based of a 38% housing to income ratio and a 5.5% interest rate assumption. If an HPAP loan plus someone’s own savings allow them to get a conventional loan (which provides a lower interest rate and no mortgage insurance), they will be able to responsibly afford a higher priced house. Per the chart above, there are limits to how much people are allowed to spend on their new home, set by HPAP guidelines and tightened private lending standards. Recipients don’t have the option of borrowing all the money they want.
4. Based on some people’s understanding of HPAP, they believe that in 5 years when the down purchase payment assistance loan comes due it will be unlikely that a household making $42,800 or as much as $50,000 will be able to afford a $248,255 house (in reference to the chart above).
This line of reasoning is incorrect. HPAP buyers start paying on their mortgage, insurance and any homeowner’s fees from day one. Also, when someone is purchasing using HPAP, most are also receiving a 5 year tax abatement, which is calculated in the original ratios for their first trust mortgage. So their ratios actually start off much lower than what HPAP allows, putting them in a place to afford their future property taxes (which will be lower due to the DC Homestead Deduction, which lowers someone’s tax assessed home value by over $72,000) and their HPAP payment.
Furthermore, under today’s underwriting guidelines, HPAP underwriters calculate the total monthly debt which includes: repayment to HPAP in year 6, the mortgage, taxes, insurance, and other monthly debts. If that total monthly debt exceeds the qualifying ratio (43% of the applicant’s monthly income of today’s salary) then the contract will most likely be denied. 43% is industry standard and is a ratio most lenders use. Since 2012, nonprofits, lenders, and real estate agents that have clients working with HPAP have advocated for changes to the program to ensure families are not placed in homes they cannot afford, including restructuring HPAP loan repayments for borrowers with lower incomes.
5. Another question that has arisen regarding HPAP recipients is how will they be able to afford maintenance of their home?
The required home inspection, which is performed by a HUD-certified inspector, is meant to minimize the risk of an HPAP buyer purchasing a home that will need any upfront maintenance work after purchase. The future cost of maintenance is discussed in the required HPAP 8-hour education course and many HPAP buyers come in with and build savings to cover the cost of maintenance over time. Just like all homebuyers, regardless of income, there are issues out of people’s control that may lead to financial hardship, but that doesn’t mean qualified and educated buyers should not be allowed to purchase a home. At a certain point, HPAP buyers may accumulate equity that they choose to use to help with the upkeep or upgrade of their homes.
6. It has been argued that HPAP is a great program, but at the end of the day, it won’t make a big difference.
In response to this belief, I would assert that the program certainly makes a difference to the over 13,500 that have purchased homes with HPAP loans and those that would like to purchase and stay in DC. Also, homeownership has been proven to reduce the wealth gap; If public policy successfully eliminated racial disparities in homeownership rates, so that Blacks and Latinos were as likely as White households to own their homes, median Black wealth would grow $32,113 and the wealth gap between Black and White households would shrink 31 percent, while median Latino wealth would grow $29,213 and the wealth gap with White households would shrink 28 percent. Homeownership allows people to gain equity, which they can use to better their family; students from low- and middle-income families are much more likely to enroll in college when their families experienced gains in housing wealth. Lastly, the ability of one first-time home owner to purchase has the power to change the lives of a family for generations and generations to come; children of homeowners have a 6% greater likelihood of completing a post-secondary education and are 9% less likely to receive welfare benefits between ages 24 and 28.
7. An additional misconception about the HPAP loan is that it is forgiven over five years.
However, in actuality, the loan is deferred for five years so people do not have to make their first payment until the sixth year and then they have 40 years to pay it off. There is discussion about going back to a structure when lower income folks with higher loan amounts won’t pay the loan back until they resell in the future – thus ensuring there is not a monthly payment burden on them.
8. Some people around the District hold the belief that HPAP has been an abject failure, because there are sellers that refuse to take offers made with HPAP due to the amount of time and money it may take to work through the HPAP process.
I would agree HPAP has administrative kinks that need to be worked out, but it is far from being a failure. So far, there have been over 13,500 homes purchased through HPAP. MANNA along with CNHED and other housing organizations and advocates have submitted recommendations to DHCD about ways that the program can be improved. It is true that one of the biggest deterrence from people selling to those with HPAP is that there was a second inspection, and it was costly for the seller, and for that reason, sellers were hesitant to sell to HPAP buyers. However, thanks to the advocacy work of the aforementioned groups, that second inspection is no longer required.
9. In conclusion, some people view HPAP as DC simply throwing more money at a problem.
Although it may be easy to jump to this conclusion, I believe that DC is actually promoting a solution rather than simply throwing money at a problem. All of the money lent through the pro-gram gets repaid and relent to new first-time buyers. HPAP is one DC program that addresses the affordable housing crisis. I will admit that HPAP alone won’t solve our affordable housing drought, but it is a step in the right direction towards addressing many of the issues in DC. Homeownership leads to greater educational attainment for homeowners and their families, a reduction in crime, increased political participation, increased family wealth and better physical and mental health. These are things that we would all like to see in DC, and increasing access to homeownership through HPAP is one solution to addressing many of the economic and social problems that exist in the District today.