According to a HUD report released June 25, homeowners who received downpayment assistance through the HOME and American Dream Downpayment Initiative (ADDI) programs are less likely to be foreclosed upon than buyers using the standard FHA program.
HUD conducted the study to address concerns that homeowners who receive direct assistance may be more prone to delinquency and foreclosures. Instead, the study found a lower foreclosure rate among those who purchased with HOME/ADDI funds than among FHA-insured borrowers overall. As of early 2008, the foreclosure rate for HOME/ADDI homebuyers who purchased in 2001 was 5.3%, compared to a 6.5% foreclosure rate for FHA-insured mortgages. The study also noted that both HOME/ADDI and FHA-insured homebuyers had significantly lower rates of foreclosures than those who purchased using a subprime mortgage.
The analysis also highlighted some of the key factors affecting foreclosure rates among HOME/ADDI homebuyers. For instance, the type of mortgage product used by the homebuyer affected foreclosure rates. Those homeowners who used an adjustable rate mortgage were 2.6 times more likely to experience a foreclosure. Jurisdictions that used credit scores in determining HOME/ADDI eligibility had 55% lower foreclosure rates than those that did not.
The study also found that homebuyers who had greater equity in their homes through downpayment assistance experienced lower foreclosure rates, showing that programs that are able to provide deeper levels of subsidy for homeowners may also reduce risks of foreclosure. For example, first-time homebuyers who received HOME/ADDI assistance equal to between 5% and 10% of the purchase price had foreclosure rates of 4.4%, higher than the foreclosure rate of 3.1% among homebuyers who received HOME/ADDI assistance equal to 20% of their purchase price.
To increase the number of observations, this research pooled HOME and ADDI data from jurisdictions eligible for both programs. The American Dream Downpayment Act established ADDI as an addition to the HOME program in 2003. While homeowner assistance is one potential use of HOME funds, ADDI is specifically intended to assist with downpayments, closing costs, and, if necessary, rehabilitation work done in conjunction with a home purchase. Each state receives an allocation of ADDI funding proportionate to its percentage of the national total of low income households residing in rental housing in the state, as determined by the most recently available U.S. census data. The funds are then dispersed to participating jurisdictions with a population of at least 150,000.
For each household assisted, HOME/ADDI funds are not to exceed $10,000 or six percent of the purchase price of the home, whichever is greater, and individuals qualifying for HOME/ ADDI assistance may not have incomes exceeding 80% of the area median income (AMI). The HOME program does not have a first-time homebuyer requirement, while ADDI recipients must not have owned a home three years prior to their purchase in order to be considered a first-time homebuyer.
The full report, Rates of Foreclosure in HOME and ADDI programs can be found at http://www.huduser.org/Publications/pdf/addi1.pdf.