HOMEOWNERSHIP
Information on
Mortgage Options and
Effects on
Accelerating Home
Equity Building
Report to the Honorable Richard Shelby,
U.S. Senate
March 2018
GAO-18-297
United States Government Accountability Office
United States Government Accountability Office
Highlights of GAO-18-297, a report to the
Honorable Richard Shelby, U
.S. Senate
March 2018
HOMEOWNERSHIP
Information on Mortgage
Options and Effects on
Accelerating Home Equity Building
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.
Principal Reduction Pace: 15-Year Fixed-Rate Wealth Building Home Loan (WBHL) versus 30-
Year Fixed-Rate Loan
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.
View GAO-18-297. For more information,
contact
Daniel Garcia-Diaz, 202-512-8678 or
GarciaDiazD@gao.gov
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.
Page i GAO-18-297 Homeownership
Letter 1
Background 3
Federal Homeownership Assistance Programs Can Have Equity-
Building Effects, but Are Not Specifically Designed to
Accelerate Equity Building 11
Options and Mechanisms That Accelerate Equity Building Present
Trade-offs for Homeowners and Lenders 18
Agency Comments 37
Appendix I Objectives, Scope, and Methodology 38
Appendix II CoreLogic Home Equity Data, by State 41
Appendix III GAO Contact and Staff Acknowledgments 43
Tables
Table 1: Examples of Federal Homeownership Assistance
Programs and Effects on Equity Building 12
Table 2: Examples of Mortgage Loan and Refinancing Fees and
Cost Estimates 20
Table 3: Examples of Different Mortgages’ Effects on Debt-to-
Income Ratio 31
Table 4: Example of Different Mortgage Type’s Effect on
Purchasing Power 33
Figures
Figure 1: Example of the Allocation of Monthly Mortgage Payment
to Interest and Principal, for a Selected 30-Year Fixed-
Rate Mortgage 6
Figure 2: Example of Home Equity Built over Time for a $225,000,
30-year Fixed-Rate Mortgage: Required Payment versus
Additional $100 Payment Each Month 19
Figure 3: Examples of the Effects of Select Refinancing Scenarios
on Home Equity 21
Contents
Page ii GAO-18-297 Homeownership
Figure 4: Comparison of Home Equity Built over Time: 15-year
Wealth Building Home Loan (WBHL) versus 15- and 30-
Year Fixed-Rate Mortgages 23
Figure 5: Overview of Monthly Payment Scenarios for Fixed-
Payment Cost-of-Funds Index (Fixed-COFI) Mortgage 26
Figure 6: Example of Loan-to-Value (LTV) Ratio over 5.5 years,
15-Year Fixed-Rate Mortgage (103 Percent LTV Ratio at
Origination), and 30-year Fixed-Rate Mortgage (80
Percent LTV Ratio at Origination) 28
Figure 7: Total Interest Paid on a $250,000 Mortgage under
Different Scenarios 29
Figure 8: Percentage of Residents with Less Than 20 Percent in
Home Equity, by State, as of First Quarter 2017 42
Page iii GAO-18-297 Homeownership
Abbreviations List
AHP Affordable Housing Program
ARM adjustable-rate mortgage
CDBG Community Development Block Grant
Dodd-Frank Dodd-Frank Wall Street Reform and Consumer
Protection Act
enterprises Fannie Mae and Freddie Mac
Federal Reserve Board of Governors of the Federal Reserve
FHA Federal Housing Administration
FHFA Federal Housing Finance Agency
FHLBanks Federal Home Loan Banks
Fixed-COFI Fixed-Payment Cost-of-Funds Index
HUD Department of Housing and Urban Development
LTV loan-to-value
QM qualified mortgage loans
RHS Rural Housing Service
USDA Department of Agriculture
VA Department of Veterans Affairs
WBHL Wealth Building Home Loan
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Page 1 GAO-18-297 Homeownership
441 G St. N.W.
Washington, DC 20548
March 15, 2018
The Honorable Richard Shelby
United States Senate
Dear Senator Shelby:
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.
1
Homeownership has long been perceived to
provide a number of financial and nonfinancial benefits. For example,
homeownership can build wealth through the accumulation and
appreciation of home equity—the difference between the value of a home
and the amount owed on the mortgage.
2
Home equity can serve as a
financial cushion in times of hardship or financial emergencies, especially
among lower-income households for whom housing generally constitutes
a larger percentage of assets than for higher-income households.
3
According to the U.S. Census Bureau, the homeownership rate was
about 64 percent at the end of the third quarter 2017, and according to
the Board of Governors of the Federal Reserve (Federal Reserve), the
total outstanding mortgage debt in the same period was $10.5 trillion. In
addition, more than 21 percent of homeowners had less than 20 percent
equity in their homes (see app. II for more information). According to our
analysis, for a borrower who bought a home with a 30-year fixed-rate
mortgage and a small down payment, it could take more than 8 years in
the current interest rate environment to achieve 20 percent equity in the
home (assuming the home’s value remained unchanged from loan
1
We use “lower-income” to refer to households for which federal homeownership
assistance programs are generally targeted, though many programs have specific income
eligibility requirements.
2
Although there are many ways to build equity and wealth—including saving and investing
in other types of financial assets—this report will focus on building equity through
homeownership.
3
Board of Governors of the Federal Reserve System, Survey of Consumer Finances
(Washington, D.C.: 2016).
Letter
Page 2 GAO-18-297 Homeownership
origination).
4
Homeownership can build wealth, but it also entails risks
(such as depreciating home values) and costs (such as for maintenance,
taxes, and insurance). Recently there has been some interest in
mortgage products designed to accelerate equity building—that is,
products that increase the ongoing pace of paying off the loan principal
compared to a traditional 30-year fixed-rate mortgage—and improve
access to homeownership.
5
You asked us to explore options for building equity through
homeownership.
6
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. You also asked us to include regional data
on equity building, which is included in an appendix to this report.
To address these objectives, we reviewed relevant literature, including
prior GAO reports on housing assistance and homeownership, housing
finance, and mortgage reforms.
7
We interviewed officials with knowledge
of federal homeownership assistance programs from the Department of
Housing and Urban Development (HUD), Federal Housing Finance
Agency (FHFA), Department of Agriculture (USDA), Department of
Veterans Affairs (VA), Fannie Mae, Freddie Mac, Federal Home Loan
Banks (FHLBanks), and state housing finance agencies. We attended
housing conferences and met with housing experts and stakeholders from
academia, housing advocacy organizations, and industry, including
mortgage lenders and insurers, selected because they made proposals to
increase homeownership or build home equity faster, wrote on
4
For this scenario, we assumed that a homeowner purchased a $250,000 home with 3
percent down and that the interest rate on the loan was 3.875 percent.
5
For purposes of our report, we are defining accelerated equity building as increasing the
ongoing pace of paying down principal, and not just a one-time extra payment towards
principal.
6
This review was conducted in response to a 2016 request from Senator Richard
Shelby—then Chairman, Senate Committee on Banking, Housing, and Urban Affairs.
7
For example, see GAO, Housing Assistance: Opportunities Exist to Increase
Collaboration and Consider Consolidation, GAO-12-554 (Washington, D.C.: Aug. 16,
2012); Housing Finance System: A Framework for Assessing Potential Changes,
GAO-15-131 (Washington, D.C.: Oct. 7, 2014); and Mortgage Reforms: Actions Needed to
Help Assess Effects of New Regulations, GAO-15-185 (Washington, D.C.: June 25,
2015).
Page 3 GAO-18-297 Homeownership
homeownership issues, were recommended by government officials, or
were involved in providing mortgage products designed to accelerate
equity building. From interviews with industry stakeholders and housing
conferences we attended, we were able to identify and review information
on two private-sector mortgage products—one existing and one
proposed—designed to accelerate home equity building. We used
examples from those products to illustrate effects and trade-offs on home
equity of select scenarios. See appendix I for more information on our
scope and methodology.
We conducted this performance audit from January 2017 to March 2018
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
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.
8
Throughout the life of a mortgage, homeowners
can continue to build equity (1) by making regular mortgage payments to
reduce the principal amount outstanding, (2) by making additional
payments to further reduce the principal amount outstanding, and (3)
through appreciation in their home’s value. Additionally, the components
of a mortgage (discussed below) may affect the pace of home equity
building.
Throughout this report, for the purposes of illustrating home equity
building, we assumed that a home’s value remained unchanged from the
time of the loan origination. However, home values are highly contingent
on market conditions and other factors that are beyond a homeowner’s
control. For example, although homes can appreciate in value, homes
also can depreciate in value, which can have a negative effect on
8
This assumes the homeowner purchased the home at or below the appraised market
value. If a homeowner paid more than the appraised market value, the homeowner might
have negative equity in the home.
Background
Home Equity Building
Page 4 GAO-18-297 Homeownership
homeowners’ equity. Homeowners also could lose money on their home if
they sold it shortly after purchasing because principal reduction in the
initial years of a mortgage is relatively small and the benefit of any home
value appreciation would be limited. Additionally, selling a home incurs
transaction costs, such as realtor commissions. To avoid losing money on
a home sale, homeowners would need to sell their home at an amount
higher than their purchase price plus transactions costs. For example, if a
homeowner buys a home for $250,000 (all fees included) and plans to
sell it 3 years later, assuming transaction costs of 10 percent (or
$25,000), the homeowner would have to sell the home for at least
$275,000 to break even, meaning an annual appreciation in home value
of more than 3 percent. If the home’s value did not appreciate at that rate,
or depreciated, the homeowner would lose money on the sale.
The majority of American families achieve homeownership by taking out a
loan—a mortgage—to cover at least some of the purchase price.
9
The
primary components of a mortgage loan are the following:
• Term (duration). The most common term is 30 years. According to
the Urban Institute, the 30-year fixed-rate mortgage represented
approximately 90 percent of the fixed-rate purchase mortgages (that
is, not for refinancing an existing mortgage) originated every month
from January 2010 through July 2017, and 15-year fixed-rate
purchase mortgages represented about 6 percent.
10
• Down payment. Most mortgage lenders require borrowers to make a
down payment (of 3 percent or more of the purchase price, depending
on the mortgage) that is applied to the purchase price of the home. A
down payment also helps a borrower build home equity, assuming the
down payment is not financed as a separate loan.
• Interest rate. Lenders charge borrowers a percentage of the
mortgage amount, in exchange for providing funds to buy a home. An
interest rate can be fixed or adjustable for the life of the mortgage
9
For purposes of this report, a mortgage or mortgage loan refers to both a promissory
note and a security interest. A promissory note evidences the debt and a borrower’s
agreement to make principal and interest payments to the lender for a period of time. To
secure the debt, lenders obtain a lien or security interest in the underlying property as
collateral against borrower default.
10
The 15-year fixed-rate mortgage is more commonly used for refinancing. Urban Institute,
Housing Finance at a Glance: A Monthly Chartbook (Washington, D.C.: October 2017).
Mortgage Loan
Components
Page 5 GAO-18-297 Homeownership
(adjustable-rate mortgage or ARM). Because a fixed-rate mortgage’s
interest rate does not change regardless of prevailing rates, a
borrower’s payments for principal and interest remain the same for the
life of the mortgage. In contrast, an adjustable-rate mortgage’s
interest rate, for which the initial interest is generally lower than for a
fixed-rate mortgage, will adjust at agreed-upon intervals.
11
As a result,
adjustable-rate mortgage payments can increase or decrease
depending on the changes in interest rates and terms of the loan.
• Payment frequency and amount. Payments are generally made on
a monthly basis. Fixed- and adjustable-rate mortgages generally have
fully amortizing payment schedules—that is, the regularly scheduled
payments will fully pay down the principal and interest over the life of
the mortgage, with the amounts allocated to reducing principal and
interest changing over time (see fig. 1).
11
Adjustments generally are based on a specific index rate, and the adjusted rate will fall
within an agreed maximum and minimum range.
Page 6 GAO-18-297 Homeownership
Figure 1: Example of the Allocation of Monthly Mortgage Payment to Interest and Principal, for a Selected 30-Year Fixed-Rate
Mortgage
Note: This scenario is based on an amortized monthly payment for a $225,000, 30-year mortgage
with a fixed annual interest rate of 3.875 percent. The monthly payment amount does not include
taxes, insurance, or any condominium or association fees.
Page 7 GAO-18-297 Homeownership
The U.S. markets for single-family housing finance include a primary
market, in which lenders make (originate) or refinance mortgage loans,
and a secondary market, in which mortgage loans are purchased from
lenders and packaged into securities—known as mortgage-backed
securities—that are sold to investors.
12
The federal government
participates in the primary and secondary mortgage markets.
In the primary market, federal agencies provide homeownership
assistance programs and products intended for increasing access to and
affordability of homeownership. Relevant federal agencies and a
government-sponsored enterprise that provide homeownership
assistance and their primary housing-related policy goals include the
following:
• Department of Housing and Urban Development provides housing
assistance to low-and moderate-income families and promotes urban
development.
• Federal Housing Administration (FHA) seeks to broaden
homeownership, strengthen the mortgage marketplace, and
increase access to credit by providing mortgage insurance.
• Public and Indian Housing helps ensure safe, decent, and
affordable housing through programs such as housing choice
vouchers.
• Community Planning and Development seeks to develop viable
communities and provide decent housing and a suitable living
environment through block grant assistance.
• Department of Veterans Affairs assists service members, veterans,
and eligible surviving spouses of veterans to become homeowners
through guaranteeing and issuing (in limited circumstances)
mortgages for home purchases.
• Rural Housing Service (RHS), which is an agency within USDA,
insures and guarantees housing loans for home purchases, repair,
and rental housing development.
12
In the secondary market, institutions purchase loans from primary market mortgage
originators and then hold the loans in portfolio or bundle the loans into mortgage-backed
securities that are sold to investors. According to FHFA officials, mortgage products,
including mortgage-backed securities, must have features attractive to investors for
securitizing and trading in the secondary market. For example, products must be scalable
in terms of volume, uniformity, and performance data.
The Federal Role in
Mortgage Markets
Page 8 GAO-18-297 Homeownership
• Federal Home Loan Banks help provide liquidity to each bank’s
member financial institutions to support housing finance and
community investment. FHLBank members include commercial
banks, thrifts, and credit unions. FHLBanks provide 10 percent of their
earnings for affordable housing programs, including grants for
affordable housing for households with incomes at or below 80
percent of the area median.
Federal homeownership assistance programs can be categorized in
terms of the products or services they offer or the mechanisms they use.
The categories include mortgage guarantees and insurance, down-
payment assistance, vouchers, and direct loans (discussed in more detail
later in this report). In addition to these categories of homeownership
assistance, tax expenditures, such as exclusions, exemptions, deductions
(including the mortgage interest deduction), credits, deferrals, and
preferential rates, can promote homeownership. For example,
homeowners can take advantage of tax deductions (by choosing to
itemize deductions on their tax returns) to help lower their taxable income.
Taxpayers who itemize deductions may deduct qualified interest they pay
on their mortgage. Taxable income may be reduced by the amount of
interest paid on first and second mortgages of up to $750,000 for homes
purchased generally after December 15, 2017.
13
Additionally, taxpayers
generally may deduct up to $10,000 for state and local taxes, including
property taxes paid by homeowners on their homes.
14
Participation in the secondary mortgage market occurs through the
following entities:
• Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are
government-sponsored enterprises (enterprises)—congressionally
chartered, for-profit, shareholder-owned companies. They are the two
13
For homes purchased on or before December 15, 2017, taxpayers can deduct interest
on the total mortgage, generally for debt up to $1 million. Prior to 2018, homeowners
generally could also deduct interest payments on up to $100,000 of home equity debt. For
2017, the mortgage interest deduction cost an estimated $64 billion in forgone income tax
revenue, according to the Joint Committee on Taxation. For taxable years beginning after
December 31, 2025, taxpayers may deduct interest on up to $1 million, regardless of
when the indebtedness is incurred.
14
Prior to 2018, there were no dollar limits on the amounts of property taxes that
homeowners could deduct. The new limitation is applicable to tax years beginning after
December 31, 2017, and before January 1, 2026. For 2017, the deduction of property
taxes for owner-occupied homes cost an estimated $33.3 billion in forgone income tax
revenue, according to the Joint Committee on Taxation.
Page 9 GAO-18-297 Homeownership
largest participants operating in the secondary mortgage market.
15
Generally, Fannie Mae and Freddie Mac purchase mortgage loans
that meet certain criteria for size, features, and underwriting
standards—known as conforming loans—from lenders.
16
In
purchasing loans, the enterprises provide market liquidity, so lenders
can provide more loans to borrowers.
• Ginnie Mae. Ginnie Mae is a wholly-owned government corporation.
Ginnie Mae guarantees the timely payment of principal and interest on
mortgage-backed securities supported by pools of loans backed by
government-insured mortgages, including mortgages insured by FHA,
VA, and USDA.
In a process called underwriting, mortgage lenders evaluate the
creditworthiness of potential borrowers in making mortgage loans, among
other things. Amid concerns that risky mortgage products and poor
underwriting standards contributed to the recent housing crisis, Congress
included mortgage reform provisions in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank
Act generally requires lenders to determine consumers’ ability to repay
home mortgage loans before extending credit and provides a
presumption of compliance with the ability-to-repay requirement for
qualified mortgages.
The ability-to-repay regulations set forth lenders’ responsibilities to
determine a borrower’s ability to repay a residential mortgage loan, and
special payment calculation rules apply for loans with balloon payments,
15
The FHFA is an independent agency responsible for oversight of Fannie Mae, Freddie
Mac, and the FHLBanks. FHFA has a statutory responsibility to ensure that these entities
operate in a safe and sound manner and that their operations and activities foster liquid,
efficient, competitive, and resilient national housing finance markets. On September 6,
2008, FHFA placed Fannie and Freddie into conservatorship, due to a substantial
deterioration in their financial condition.
16
The conforming loan limit for single-family homes in 2018 is $453,100 ($679,650 in high-
cost areas) in the contiguous United States, District of Columbia, and Puerto Rico. In
areas outside of the contiguous states, the limit is $679,650 ($1,019,476 in high-cost
areas). Mortgages that are larger than the conforming loan limit are known as “jumbo
loans.”
Mortgage-Related
Regulations
Page 10 GAO-18-297 Homeownership
interest only payments, or negative amortization.
17
The regulations
require lenders to make a reasonable and good faith determination of a
consumer’s reasonable ability to repay a loan. The regulations establish a
safe harbor and a presumption of compliance with the ability-to-repay rule
for certain qualified mortgage loans (QM). The rule generally prohibits
loans with negative amortization, interest-only payments, or balloon
payments from being qualified mortgages, and limits the points and fees a
lender may charge borrowers on a qualified loan.
18
The regulations
establish general underwriting criteria for qualified mortgages. For
example, under QM requirements borrowers generally cannot exceed a
maximum monthly debt-to-income ratio of 43 percent, unless the loan is
eligible for sale to an enterprise.
19
If a mortgage loan meets the
requirements of a QM loan, it is eligible for the safe harbor and the lender
is deemed to have complied with the ability-to-pay requirement unless the
loan is a higher priced mortgage loan. A higher priced mortgage loan that
otherwise meets the definition of a QM is presumed to have complied with
the ability-to-pay requirements, but the presumption can be rebutted if the
consumer proves that the lender did not make a good faith and
reasonable determination of the consumer’s ability to repay.
20
17
When making the ability-to-pay determination, lenders generally must consider at least
eight underwriting factors: (1) current or reasonably expected income or assets; (2)
current employment status; (3) the monthly payment on the covered transaction (the
monthly payment must be calculated based on any introductory rate or fully indexed rate
for the loan, whichever is higher, and substantially equal, fully amortizing monthly
payments); (4) the monthly payment on any simultaneous loan; (5) the monthly payment
for mortgage-related obligations; (6) current debt obligations, alimony, and child support;
(7) the monthly debt-to-income ratio or residual income; and (8) credit history.
18
A point is equal to 1 percent of the amount of a loan.
19
The rule provides for a temporary category of qualified mortgages that have a more
flexible underwriting requirement if they meet the general product feature prerequisites for
a qualified mortgage and are eligible to be purchased by the enterprises. The monthly
debt-to-income ratio represents the percentage of a borrower’s total monthly income that
goes toward total monthly debt obligations, including the mortgage payments,
simultaneous loans, mortgage-related obligations, current debt obligations, alimony, and
child support. A higher ratio is generally associated with a higher risk that the borrower will
have cash flow problems and may miss mortgage payments.
20
In general, a higher-priced mortgage has an annual rate exceeding the prime offer rate
by 1.5 percentage points or more for a first-lien transaction.
Page 11 GAO-18-297 Homeownership
Additionally, federal mortgage insurance is included in the determination
of whether an FHA-insured loan is a higher priced mortgage loan.
21
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. Rather, the overall focus of the
programs is on providing affordable access to homeownership, according
to officials of relevant agencies and entities and based on their mission
goals. For example, the goal of FHA’s mortgage insurance program is to
facilitate access to affordable mortgages for home buyers who might not
be well-served by the private market. FHA implements this goal by
providing insurance to lenders to facilitate access to mortgage financing
for lower-income home buyers.
See table 1 for examples of federal homeownership assistance programs,
by major program types and potential for affecting equity building, either
at a point in time or throughout the life of a mortgage.
21
Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family
Mortgages, 78 Fed. Reg. 75215 (December 11, 2013). Generally, HUD incorporated by
reference certain Bureau of Consumer Financial Protection’s rules and definitions, but
made a specific decision to allow for a higher annual percentage rate than that adopted by
the Bureau for the definition of a safe harbor qualified mortgage. This would remediate the
fact that some FHA loans would fall under the Bureau’s higher priced mortgage loan
definition as a result of the mortgage insurance premium. Including the mortgage
insurance premium in the calculation of the threshold that distinguishes the safe harbor
from the rebuttable presumption mortgage allows the threshold to float as the mortgage
insurance premium fluctuates. 78 Fed. Reg. 75235. HUD did not want the mortgage
insurance premium to be the factor that determines whether a loan is a higher-priced
mortgage loan. 78 Fed. Reg. 75235.
Federal
Homeownership
Assistance Programs
Can Have Equity-
Building Effects, but
Are Not Specifically
Designed to
Accelerate Equity
Building
Page 12 GAO-18-297 Homeownership
Table 1: Examples of Federal Homeownership Assistance Programs and Effects on Equity Building
Type of
homeownership
assistance
Implementing
entity(ies)
Examples of
programs
Potential equity-
building effects
Mortgage insurance
and loan guarantees
Federal Housing Administration
(FHA)
FHA: Single-family mortgage
insurance program
a
Help provide market liquidity with
equity loss protection to lenders,
in turn increasing access to credit
and to homeownership and
opportunity for home equity
building for home buyers.
Department of Veterans Affairs
(VA)
VA: Home Loan Guaranty
Program
b
Rural Housing Service
(RHS)
RHS: Single Family Housing
Guaranteed Loan Program
c
Down payment
assistance
d
Department of Housing and
Urban Development (HUD)
HUD: HOME Investment
Partnership Program, Community
Development Block Grants, and
self-help housing projects
Can immediately increase a
homeowner’s equity. Some down-
payment assistance programs
also allow assistance to be used
to buy down the mortgage interest
rate, which can have ongoing
equity-building effects. A lower
interest rate allows a greater
portion of each monthly mortgage
payment to be applied to the
mortgage principal.
Federal Home Loan Banks
(FHLBanks)
FHLBanks: Grants
provided through each FHLBank’s
members
(financial institutions)
RHS
RHS: Self-help
housing projects
e
Vouchers
HUD
HUD: Housing Choice
Voucher program
Can be used towards down
payment and monthly mortgage
payments, and increase
homeowner’s equity as payments
reduce the mortgage principal.
Direct loans
VA
VA: Direct loans for Native
American veterans
Can help targeted borrowers
access homeownership, which in
turn allows for home equity
building.
RHS
RHS: Single Family Housing
Direct Loan Program
Source: GAO analysis of agency documents. | GAO-18-297
a
FHA’s guarantee provides 100 percent coverage of eligible losses when borrowers default. This
guarantee covers the unpaid principal balance, interest costs, and certain costs of foreclosure and
conveyance.
b
VA guarantees vary, depending on the amount of the loan. At loan levels at or below $45,000, VA
guarantees 50 percent of the loan. Above $45,000 and up to and including $56,250, VA guarantees
$22,500. Above $56,250 and up to and including $144,000, VA guarantees the lesser of $36,000 or
40 percent of the loan. For loan levels above $144,000, the guarantee is the lesser of 25 percent of
the loan or the Freddie Mac conforming loan limit of $417,000 ($625,500 for high-cost areas), which
are adjusted yearly.
c
RHS guarantees are limited to borrowers in rural areas with incomes of less than 115 percent of the
area median income.
d
State and local housing finance agencies also provide down-payment assistance.
e
Self-help housing projects require future homeowners to help build their own houses, and their
“sweat equity” serves as a down payment to reduce the mortgage loan amount.
Page 13 GAO-18-297 Homeownership
Federal mortgage insurance and guarantee programs increase market
liquidity, which ultimately expands access to homeownership. The federal
government commits to pay part or all of a loan’s outstanding principal
and interest loss to a lender or other mortgage holder if the borrower
defaults. Because they obtain insurance or a guarantee against the
possibility of loss from borrower default, lenders are more willing to
provide loans to borrowers who might not otherwise be served by the
private market, allowing more homeowners—particularly lower-income
borrowers—an opportunity to build home equity.
22
FHA offers mortgage insurance and RHS and VA provide loan
guarantees. For example, FHA will insure loans with a down payment as
low as 3.5 percent from most borrowers, and conventional mortgages will
allow down payments as low as 3 percent.
23
FHA-insured loans also have
more lenient credit requirements that particularly benefit minority
households and first-time home buyers who might otherwise find it difficult
or more expensive to take out a mortgage.
24
Among federal mortgage
insurance programs, FHA has the highest volume of mortgages insured.
25
Federal and federally mandated programs that provide funding for grants
and loans for down-payment assistance can have equity-building effects.
Although accelerated equity building is not the policy goal of these
programs, down-payment assistance can lower the barrier to
homeownership for some lower-income home buyers so that the equity-
22
Mortgage insurance or guarantees are available to eligible home buyers. “Insurance”
and “guarantee” generally have the same meaning in the context of our review.
23
Conventional mortgages are mortgages that are not insured by FHA or guaranteed by
another government agency, such as VA or USDA. See Congressional Research Service,
FHA-Insured Home Loans: An Overview, RS20530 (Washington, D.C.: Dec. 23, 2016).
24
One-third of all FHA loans were obtained by minority households in fiscal year 2016. In
calendar year 2015, FHA-insured loans accounted for about 47 percent of all home
purchase mortgages obtained by African-American home buyers and 49 percent of all
home purchase mortgages obtained by Hispanic home buyers. In fiscal year 2016, 82
percent of FHA-insured mortgages for home purchases were obtained by first-time home
buyers. See Federal Housing Administration, Annual Report to Congress: The Financial
Status of the Mutual Mortgage Insurance Fund Fiscal Year 2016, (Washington D.C.:
November 2016).
25
According to Home Mortgage Disclosure Act data, FHA insured 865,897 purchase
mortgages for 1-4 family residences in calendar year 2016, RHS guaranteed 113,944
mortgages, and VA guaranteed 359,811 loans.
Federal Mortgage
Insurance and Loan
Guarantees Increase
Market Liquidity
Federal Down-Payment
Assistance Programs Can
Have Equity-Building
Effects
Page 14 GAO-18-297 Homeownership
building effects of homeownership can accrue. 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.
26
Funds can be used for down-payment assistance for
eligible low-income home buyers. According to HUD data, more than
75 percent of low-income home buyers who have received assistance
from the HOME program have used HOME funds for purchasing a
home (which includes down-payment assistance) since the program’s
inception in 1992, directly contributing to homeowner equity building.
• HUD’s Community Development Block Grant (CDBG) program also
provides funding to eligible states and localities for community and
economic development efforts, including housing assistance.
27
Eligible uses of home-buyer assistance include grants for down
payments and closing costs. In fiscal year 2016, CDBG funds
provided direct housing assistance for down payment and closing
costs to 2,483 households.
• FHLBanks contribute funding to the Affordable Housing Program
(AHP), which can provide grants for down-payment assistance
through either the AHP competitive or set-aside program.
28
Member
financial institutions of the FHLBanks can apply for the set-aside
funds and then distribute the funds as grants to eligible households.
Set-aside grants may be no greater than $15,000 per household, and
at least one-third of the FHLBanks’ annual set-aside allocation must
be used for eligible first-time home buyers. According to FHFA, the
FHLBanks funded about $77 million for down-payment or closing-cost
26
The HOME Investment Partnerships Program was authorized by the Cranston-Gonzalez
National Affordable Housing Act of 1990 (Pub. L. No. 101-625). Low-income households
are generally defined as households with income at or below 80 percent of area median
income.
27
The Housing and Community Development Act of 1974 created the CDBG program to
develop viable urban communities by providing decent housing and a suitable living
environment and by expanding economic opportunities, principally for low- to moderate-
income persons. See Pub. L. No. 93-383, tit. I, § 101(c), 88 Stat. 633, 634 (codified as
amended at 42 U.S.C. § 5301(c)).
28
The Federal Home Loan Bank Act requires each FHLBank to establish an Affordable
Housing Program. See 12 U.S.C. § 1430(j). An FHLBank may allocate a portion of its
annual AHP contribution to homeownership set-aside programs, which provides grants for
down-payment and closing-cost assistance as well as rehabilitation assistance in
conjunction with a home purchase. See 12 C.F.R § 1291.6(c)(4).
Page 15 GAO-18-297 Homeownership
assistance in 2016 (almost 90 percent of total set-aside program
funding). The down-payment assistance grants have an immediate
equity-building effect.
• RHS and HUD administer self-help grant programs that provide
opportunities for very-low and low-income home buyers to purchase
subsidized homes: Program participants help construct homes in
exchange for subsidies, including down-payment assistance.
29
RHS
officials told us that the home buyer’s labor serves as a down
payment for the home, providing the home buyer with equity at the
time of purchase. RHS’s program also includes a subsidized interest
rate determined by the home buyer’s income, as well as a 33-year
mortgage duration that can be extended up to 38 years, to reduce the
monthly mortgage payment and make the loan as affordable as
possible.
HUD officials raised concerns about the extent to which down-payment
assistance promotes home equity building. For example, some
mortgages with down-payment assistance can be associated with higher
delinquency rates. Specifically, HUD officials pointed to data indicating
that FHA has experienced higher loan delinquency rates for loans with
down-payment assistance.
30
As with any homeownership-assistance
programs or mortgages, the potential for home equity building requires a
homeowner to sustain and pay down the mortgage.
29
Participating families in RHS’s self-help program generally are required to contribute 65
percent of the construction labor. For households with more than one adult, HUD requires
a minimum of 100 hours of labor to participate in its self-help program.
30
According to HUD’s 2017 FHA Mutual Mortgage Insurance Fund Report, FHA-insured
new-purchase mortgages with down-payment assistance experienced higher rates of loan
delinquency than loans without assistance. See Department of Housing and Urban
Development, Annual Report to Congress Regarding the Financial Status of the FHA
Mutual Mortgage Insurance Fund, Fiscal Year 2017 (Washington, D.C.: Nov. 15, 2017). In
2005 GAO reported that FHA-insured loans with down-payment assistance had higher
delinquency and claim rates than similar loans without such assistance. See GAO,
Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans
with Down Payment Assistance, GAO-06-24 (Washington, D.C.: Nov. 9, 2005). In
particular, loans with seller-funded down-payment assistance performed more poorly than
those with assistance from other sources, such as government programs. However, seller-
funded down-payment assistance was prohibited for FHA loans by the Housing and
Economic Recovery Act of 2008, Pub. L. No. 110-289, § 2113, 122 Stat. 2654, 2831
(2008).
Page 16 GAO-18-297 Homeownership
In addition to down-payment assistance, HOME, CDBG, and AHP funds
can be used for buying down the mortgage interest rate.
31
Interest-rate
buy-downs have accelerated equity-building effects throughout the life of
the mortgage because a higher proportion of monthly mortgage payments
are applied to the mortgage principal. However, agency and enterprise
officials and housing experts with whom we spoke said the down payment
is the biggest barrier to homeownership, and in the current environment
of low interest rates, buy-downs of interest rates are not common.
In addition to federal programs, some state housing finance agencies also
provide down-payment assistance grants and loans that have accelerated
equity-building effects. For example, the Minnesota Housing Finance
Agency provides a monthly payment loan (in addition to the mortgage) of
up to $12,000 to be used for down payments or closing costs.
32
The
monthly payment loan has an interest rate equal to the rate on the
borrower’s first mortgage, and the loan can be paid back over a 10-year
period.
33
According to Minnesota Housing Finance Agency officials, by
making payments directly on the monthly payment loan, the borrower is
effectively accelerating equity building on that part of the home purchase
because of the shorter term compared to a 30-year mortgage.
HUD’s Housing Choice Voucher Program provides assistance in helping
a homeowner pay for monthly mortgage and other homeownership
expenses, which facilitate homeownership and equity building.
34
Vouchers are administered locally by public housing agencies, but not all
public housing agencies participate in the program. A home buyer would
have to apply for a housing choice voucher with a participating public
housing agency to use the funding for a mortgage instead of rent. First-
time homeowners who meet income limits and receive homeownership
31
Jurisdictions and FHLBanks have some discretion in how they implement HOME and
Affordable Housing Program.
32
The Minnesota Housing Finance Agency finances some of its lending activities through
the sale of tax-exempt and taxable bonds. Its loans are targeted to low-income borrowers.
33
The Minnesota Housing Finance Agency also offers a deferred down-payment
assistance loan, which is an interest-free loan of up to $8,000 that is repaid when the
property is sold, refinanced, or when the first mortgage becomes due. Although the
deferred payment loan does not accelerate equity building, the zero-interest loan
effectively subsidizes the cost of equity for that portion of the home purchase.
34
Monthly mortgage and homeownership expenses include mortgage principal and
interest, mortgage insurance premium, and real estate taxes and homeowner insurance.
Federal Voucher Program
Can Facilitate Equity
Building
Page 17 GAO-18-297 Homeownership
counseling can qualify for the program.
35
The payment assistance
generally continues as long as the family resides in the home, and the
maximum term for the assistance is 15 years if the home purchase is
financed with a mortgage longer than 20 years.
36
According to HUD,
about 11,000 homeowners were receiving assistance from the
Homeownership Voucher Program as of September 2017, about 0.5
percent of all vouchers.
RHS and VA both offer direct loans for home purchases to eligible
borrowers who may otherwise be unable to obtain financing in the private
marketplace, providing access to homeownership and equity building.
RHS offers direct loans to borrowers in rural areas with incomes of
generally not more than 80 percent of the area median income. Loan
funds can be used to build, repair, renovate, or relocate a home, or to
purchase and prepare sites, including providing water and sewage
facilities. RHS provided 7,089 direct loans for single-family homes in fiscal
year 2016.
VA provides direct home loans to eligible Native American veterans to
finance the purchase, construction, or improvement of homes on federal
trust land, or to refinance a prior direct loan to reduce the interest rate.
According to VA, 13 direct loans were provided to Native Americans in
fiscal year 2016.
35
Generally, except in the case of disabled families, the qualified annual income of the
adult family members who will own the home must not be less than the federal minimum
hourly wage multiplied by 2,000 hours. The local public housing agency also may
establish a higher minimum income requirement.
36
In all other cases, the maximum term for assistance is 10 years, with exceptions for
elderly and disabled homeowners. See 24 C.F.R. § 982.634.
Federal Direct Loans Can
Provide Access to
Homeownership
Page 18 GAO-18-297 Homeownership
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. These options
accelerate equity building by affecting the key components of a
mortgage—term (duration), down payment, interest rate, or payment
frequency or amount. The advantages of building equity faster can
include using home equity as a financial cushion in emergencies, like
unexpected medical expenses. However, there are trade-offs to these
options, such as higher monthly payments for shorter-term mortgages.
Additionally, stakeholders identified key trade-offs and considerations in
introducing new products and mechanisms for accelerating home equity
building that could affect the success of the products or mechanisms.
Home buyers and homeowners may take actions on their own to
accelerate home equity building. For example, home buyers can choose
a 15- or 20-year mortgage rather than a 30-year mortgage. The shorter-
term product will increase the relative pace of equity building. In July
2017, almost 6 percent of all new purchase mortgage originations were
for 15-year fixed-rate mortgages, according to the Urban Institute.
37
However, shorter-term loans may present trade-offs for borrowers, which
we discuss later in the report.
Homeowners also can make extra mortgage payments to further reduce
the principal balance, which can accelerate equity building and shorten
the mortgage term. For example, according to our analysis, a homeowner
making an extra monthly payment of $100 on a 30-year fixed-rate
mortgage for $225,000 would accelerate equity building and reduce the
mortgage duration by more than 4 years (see fig. 2). Homeowners
generally have the flexibility to make extra payments at their discretion
and could discontinue the extra payments at any time if they need the
funding for other priorities.
38
37
See Housing Finance at a Glance: A Monthly Chartbook (October 2017).
38
According to Black Knight, a financial services firm that analyzes the mortgage market,
borrowers made additional principal payments of about 1 percent of their mortgages in
September 2017. See Black Knight, Mortgage Market Monitor (September 2017).
Options and
Mechanisms That
Accelerate Equity
Building Present
Trade-offs for
Homeowners and
Lenders
Home buyers and
Homeowners May Take
Actions on Their Own to
Accelerate Equity Building
Page 19 GAO-18-297 Homeownership
Figure 2: Example of Home Equity Built over Time for a $225,000, 30-year Fixed-Rate Mortgage: Required Payment versus
Additional $100 Payment Each Month
Note: We compared equity building in two payment scenarios for a $250,000 home, bought with a 10
percent down payment: (1) Only required payments were made on a 30-year mortgage of $225,000
and a fixed annual interest rate of 3.875 percent, and (2) Additional monthly payments of $100
applied to the principal balance were made on the same mortgage. For illustration purposes, we
assumed the home’s value remained unchanged from the time of the origination of the loan.
Homeowners also can refinance their mortgage to take advantage of
lower interest rates, shorter mortgage terms or both. Lower-interest and
shorter-term loans can help build equity faster. About 27 percent of
mortgage refinances were for 15-year fixed-rate mortgages in October
2017, according to enterprise data reported by FHFA. However,
refinancing (similar to purchase loans) incurs transaction costs (see table
2).
39
A lender may offer low- or no-cost refinancing, but likely would
charge a higher interest rate in exchange for lowering or eliminating fees.
Additionally, other payments might be required at closing (which would be
39
Under the QM regulations, a lender cannot charge a borrower more than 3 percent in
total points and fees on most loans if a lender wants legal liability protection from
distressed borrowers. The cap varies for loan amounts less than $100,000, with a
maximum of 8 percent for a loan amount of less than $12,500.
Page 20 GAO-18-297 Homeownership
out-of-pocket expenses unless they were financed), including upcoming
mortgage insurance and property taxes.
Table 2: Examples of Mortgage Loan and Refinancing Fees and Cost Estimates
Type
Reason for charge
Estimated fee ranges
a
Application fee
To cover the initial costs of processing a loan request and
checking an applicant’s credit report.
$75–$640
Loan origination fee
To evaluate and prepare a loan.
0–1.5% of loan principal
Points
A point is equal to 1 percent of the amount of a loan.
(1) A loan-discount point is a one-time charge paid to
reduce the interest rate of a loan.
(2)
Some lenders also charge points to earn money on the
loan.
0–3.0% of loan principal
Appraisal fee
To pay for an appraisal of a home (to assure the lenders
that the property is worth at least as much as the loan
amount). If a homeowner is refinancing and has had a
recent appraisal, the homeowner can ask the lender to
waive the requirement for a new appraisal.
$225–$700
Survey fee
To confirm the location of the property and improvements
on the land. A loan applicant may not have to pay this fee
if a survey recently had been conducted for the property.
$150–$400
Inspection fee
To meet lender and governmental requirements. A lender
may require an inspection of the structural condition of the
property, and the state in which the property is located
may require additional, specific inspections.
$175–$350
Attorney review and closing fee
To pay for services of lawyers or other parties who
conduct the closing for the lender.
$500–$1,000
Title search and title insurance
To pay for search of property records to ascertain
ownership/clear legal title and check for liens. Title
insurance covers the lenders against errors in the results
of the title search. If a problem arises, the insurance
covers the lender’s investment in a mortgage.
$700–$900
Recording and transfer fees
To pay for filing by local government of official records of a
real-estate transaction.
0–3.0% of loan principal (costs vary
regionally)
Source: GAO analysis of Housing and Urban Development, Bureau of Consumer Financial Protection, and Federal Reserve documentation. | GAO-18-297
a
Estimates of fee ranges are drawn from mortgage settlement costs guides from HUD, Bureau of
Consumer Financial Protection, and the Federal Reserve.
Also, homeowners who refinance to take advantage of lower interest
rates could extend their mortgage term or choose to cash out some of the
existing home equity, thereby eliminating the potential for accelerated
equity-building effects in refinancing. See figure 3 for a comparison of
how different refinancing options can affect home equity building.
Page 21 GAO-18-297 Homeownership
Figure 3: Examples of the Effects of Select Refinancing Scenarios on Home Equity
Note: We compared equity building in three scenarios for a $250,000 home, bought with a 3 percent
down payment: (1) refinancing a 30-year fixed-rate (3.875 percent) mortgage after 5 years to a 15-
year mortgage with a lower interest rate (3.125 percent), with no cash out at refinancing, (2) a 30-year
fixed-rate (3.875 percent) mortgage with no refinancing, and (3) refinancing a 30-year fixed-rate (4
percent) mortgage after 5 years to a 30-year mortgage with the same interest rate (3.875 percent),
with $25,000 cash out at refinancing. For illustration purposes, we assumed the home’s value
remained unchanged from the time of the origination of the loan.
Page 22 GAO-18-297 Homeownership
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. 4). The WBHL,
which has been offered commercially on a limited basis for about 3 years,
has shorter mortgage terms (15 or 20 years), can have a fixed or
adjustable rate, and allows the interest rate to be bought down.
40
A lower
interest rate would allocate a greater portion of each monthly payment to
reduce mortgage principal and also reduce the amount of the monthly
payments.
41
Moreover, the WBHL allows for no down payment (including allowing the
financing of closing costs). The no down-payment feature is designed to
facilitate access to homeownership. According to lenders we spoke with
who offer WBHLs, allowing for no down payment is the key feature that
distinguishes the WBHLs from standard 15- or 20-year mortgage loans
available in the private-sector mortgage marketplace.
42
Consistent with
what we heard from lenders, officials from Fannie Mae and Freddie Mac
told us loans that do not require a down payment generally are not
available in the private-sector mortgage marketplace. Additionally,
because of the low or no down-payment features, lenders we spoke with
who offer WBHLs typically require private mortgage insurance, which is
provided by a major mortgage insurer.
40
This mortgage product was developed by Edward Pinto and Stephen Oliner of the
American Enterprise Institute, See, for example, Edward Pinto, A Housing Primer: Wealth
Building for the 21st Century (Washington, D.C.: 2015).
41
Developers of the loan envisioned borrowers using the funds available for a down
payment to buy down the mortgage interest rate. The developers of the loan also
recommend using VA’s credit underwriting guidelines, which include consideration of
residual income. VA’s residual income underwriting standards evaluate all of a borrower’s
sources of income and expenditures, including living expenses. According to VA officials,
the standard allows lenders greater flexibility in considering compensating factors in
making loan approval decisions.
42
Actual features of WBHLs may vary, depending on a lender’s product offerings and
terms.
A Recently Introduced
Mortgage Product
Accelerates Equity
Building through Shorter
Terms and Lower Interest
Rates
Page 23 GAO-18-297 Homeownership
Figure 4: Comparison of Home Equity Built over Time: 15-year Wealth Building Home Loan (WBHL) versus 15- and 30-Year
Fixed-Rate Mortgages
Note: We compared equity building for (1) a 15-year Wealth Building Home Loan for $250,000 with
no down payment and a fixed annual interest rate bought down to 2.5 percent, (2) a 15-year
mortgage for $225,000 with a $25,000 down payment and a fixed annual interest rate of 3.125
percent, and (3) a 30-year mortgage for $225,000 with a $25,000 down payment and a fixed annual
interest rate of 3.875 percent. For illustration purposes, we assumed the home’s value remained
unchanged from the time of the origination of the loan. Interest rates used for illustration purposes are
generally consistent with market rates in September and October 2017.
As shown in figure 4, the monthly mortgage payments of a WBHL can
increase substantially, compared with the payments of a 30-year fixed-
rate mortgage.
Some lenders we interviewed offer WBHLs with the option to buy down
the interest rate, and some require a minimum buy-down.
• One lender requires borrowers to pay 2 points (or 2 percent of the
mortgage loan amount), which buys down one-half of a percentage
point of the interest rate.
• Another lender offers a 15-year loan with an option to pay 3 points to
buy down the interest rate to 1.75 percent for the first 7 years. Rates
Page 24 GAO-18-297 Homeownership
increase to 5 percent for the remaining 8 years. The lender also offers
a 20-year loan with the option to pay 2 points to buy down the interest
rate to 2.99 percent for the first 7 years. Rates increase to 5.25
percent for the remaining 13 years.
Although the option to buy down the interest rate has been advanced as a
feature that accelerates equity building, some lenders we interviewed said
that borrowers tend to pay the minimum required points only, because
borrowers generally prefer to pay as little cash as possible at loan
origination. Additionally, some lenders and other stakeholders have said
that, in a low interest-rate environment, the incentive for borrowers to buy
down the mortgage interest rate is greatly reduced.
Another mortgage product that we identified during our review—the
Fixed-Payment Cost-of-Funds Index (Fixed-COFI) Mortgage—has been
proposed by two economists, but has not yet been offered by private-
sector lenders.
43
This type of mortgage is intended to provide another
option for consumers that encourages equity building and limits exposure
for borrowers and lenders to interest rate fluctuations. The Fixed-COFI
would allow borrowers with little or no money down to obtain an
adjustable-rate mortgage that features a fixed monthly mortgage payment
and an equity savings account.
44
Funds in the equity savings account
could be used to pay down the mortgage principal, thereby accelerating
home equity building. According to the economists of this proposed
product, the low to no down-payment feature may help individuals with
little to no savings access homeownership, particularly those who live in
high-cost areas where the rent payment is comparable to a mortgage.
In addition to the borrower’s fixed monthly payments, the Fixed-COFI
mortgage also would determine how the borrower’s fixed payments would
be allocated, including to the equity savings account. The borrower’s fixed
monthly payment would be fully amortizing and be calculated based on
43
This product was proposed by Wayne Passmore and Alexander H. von Hafften. See
Wayne Passmore and Alexander H. von Hafften, “Financing Affordable and Sustainable
Homeownership with Fixed-COFI Mortgages” (Washington, D.C.: 2017).
44
The authors define COFI as the nationwide average cost-of-funds index for the banking
system, which is equal to the total interest expenses of domestic commercial banks
divided by their total interest-bearing liabilities. They use quarterly data compiled by the
Federal Financial Institutions Examination Council to calculate the COFI rate, which is the
adjustable rate that underpins the mortgage. Because it is a short-term rate, it is generally
lower than the 30-year fixed mortgage rate.
A Proposed Mortgage
Product May Accelerate
Equity Building through an
Equity Savings Account
Page 25 GAO-18-297 Homeownership
prevailing rates for a 30-year fixed-rate mortgage at the time of loan
origination. But the interest portion of the payment due to the lender
would be separately calculated each month, based on a rate derived from
COFI plus a gross margin to account for lenders’ costs and insurance risk
premiums.
45
Each month, the difference between the borrower’s fixed
payment and interest due the lender based on the COFI rate plus a gross
margin would determine if any funds from the borrower’s payment would
be added to the equity savings account.
The funds allocated to the equity savings account are designed to be
used to pay down the principal. However, the ways in which the home
equity funds could be used to pay down mortgage principal depend on
the terms of each loan. If the home equity account were depleted, lenders
might cover any payment shortfalls and seek insurance reimbursements.
In addition, the accelerated equity-building effect of the Fixed-COFI
mortgage product would rely on the historical difference between the
COFI rate and 30-year fixed rate (see fig. 5). If the difference between the
rates narrowed, the savings allocated to the equity savings account would
lessen, and equity-building effects would be reduced. That is, in months
in which the COFI rate plus the gross margin was lower than the 30-year
fixed rate used to calculate the monthly payments, the difference between
the COFI-based and fixed amounts would be deposited into a home
equity savings account.
46
In months in which the fixed payment would not
cover the interest payment (because the COFI rate plus the gross margin
is higher than the 30-year fixed rate used to calculate the fixed monthly
payment), funds could be withdrawn from the equity savings account to
cover any shortfall. If the equity savings account had a zero balance, the
lender could seek an insurance payout.
45
The gross margin is constant over the life of a loan and covers servicing costs,
insurance against credit risk, a return on equity, and premiums for “payment shortfall”
insurance and “balloon payment” insurance. Payment shortfall insurance would cover any
monthly shortfalls over the life of the mortgage, and balloon payment insurance would
cover any outstanding mortgage principal after 30 years. Estimates of the gross margin
range between 1.75 percent and 2.5 percent.
46
In a recent update to the Fixed-COFI proposal (dated Nov. 15, 2017), Mr. Passmore and
Mr. von Hafften also proposed an “affordable” Fixed-COFI variation, in which the excess
funds can be rebated to homeowners, which may help lessen monthly financial burdens
for homeowners.
Page 26 GAO-18-297 Homeownership
Figure 5: Overview of Monthly Payment Scenarios for Fixed-Payment Cost-of-Funds Index (Fixed-COFI) Mortgage
Note: The excess funds allocated to the equity savings account (see scenario 1) can be used to pay
down the mortgage principal or can be rebated to homeowners.
According to the economists, some details of the Fixed-COFI contract can
be modified for different rules concerning refinancing and savings. For
example, a borrower and a lender can agree to how and when funds in
the home equity savings account could be applied to pay down the
mortgage principal. However, the Fixed-COFI mortgage contract would
place limits on a borrower’s options to refinance—for instance, only in the
Page 27 GAO-18-297 Homeownership
case of the loss of a job—because it is designed to protect borrowers and
lenders from fluctuations in interest rates.
47
If interest rates drop significantly, benefits from the rate decrease for a
borrower with a Fixed-COFI mortgage would be limited as compared with
the benefits of a borrower with a 30-year fixed-rate mortgage who
refinances. For example, the additional savings from lower interest rates
for the borrower with a Fixed-COFI mortgage could only be used to pay
down the mortgage principal. In contrast, although refinancing has costs,
borrowers with a traditional 30-year fixed-rate mortgage would be able to
refinance to take advantage of the lower rate and reduce their monthly
payment. They could use the resulting difference in monthly payments
from the new, refinanced loan to pay down mortgage principal, build up
savings, or for any other purposes.
For some homeowners, building home equity faster can provide financial
benefits. Home equity can serve as a financial asset to fund retirement,
education expenses, or absorb financial emergencies like the loss of a
job.
48
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.
Although some accelerated equity-building options are designed to be
originated with high LTV ratios (in some cases exceeding 100 percent),
the accelerated equity-building effect can lower the LTV ratio at a faster
pace than for a 30-year fixed-rate mortgage. As shown in figure 6,
according to our analysis, LTV ratios can converge after about 5 years for
a 15-year fixed-rate mortgage with a high LTV and a 30-year fixed-rate
mortgage with a higher down payment. More specifically, in about 5 years
47
In a traditional fixed-rate mortgage, a borrower compensates a lender or investor for the
option to prepay (or refinance) as part of the interest rate charged to borrowers. Borrowers
with a 30-year fixed-rate mortgage can experience savings if interest rates fall
substantially and they exercise their option to refinance to a lower rate. If interest rates do
not fall, or do not rise appreciably enough to cover the amount borrowers compensated
lenders or investors for the option to prepay, they would “lose” and the lenders or
investors would “win.”
48
Home equity generally can be accessed through a home equity line of credit or a home
equity loan. The costs associated with accessing home equity can include interest
expenses and transaction expenses. Additionally, borrowing against home equity would
deplete rather than build equity.
Advantages of Accelerated
Home Equity Building
Include a Financial
Safeguard
Page 28 GAO-18-297 Homeownership
a 15-year fixed-rate loan with an LTV ratio of 103 percent at origination
will reach the same LTV ratio as a 30-year fixed-rate loan with an LTV
ratio of 80 percent at origination. Borrowers under both mortgage
scenarios would have accrued close to 30 percent equity in about 5
years, assuming no change in the home’s value.
Figure 6: Example of Loan-to-Value (LTV) Ratio over 5.5 years, 15-Year Fixed-Rate Mortgage (103 Percent LTV Ratio at
Origination), and 30-year Fixed-Rate Mortgage (80 Percent LTV Ratio at Origination)
Note: For each scenario the home value is $250,000, and we assume the home’s value remains
constant. The 30-year fixed-rate loan has an interest rate of 3.875 percent, and at origination the
loan-to-value ratio is 80 percent (for a loan amount of $200,000). The 15-year fixed-rate loan has an
interest rate of 3.125 percent, and at origination the loan-to-value ratio is 103 percent (for a loan
amount of $257,500). Interest rates used for illustration purposes are generally consistent with market
rates in September and October 2017.
Lenders and proponents of accelerated equity building with whom we
spoke said that having substantial equity in a home provides more
options for remediation in the event the homeowner encounters difficulties
making mortgage payments. For instance, a lender with whom we spoke
said that having more equity in a home provides a borrower with a better
opportunity to refinance to get a better interest rate and also extend their
loan term, both of which would lower their monthly payment. Two lenders
with whom we spoke also said that accelerated equity-building options
Page 29 GAO-18-297 Homeownership
can provide financial discipline and serve as a forced savings mechanism
by, for example, paying additional principal on the mortgage. In addition,
proponents of accelerated equity building have suggested that
homeowners with more equity at stake may have more incentive to stay
in their home because they have more invested in the home.
In addition to building equity, borrowers with shorter-term mortgages or
those opting to make extra payments on 30-year mortgages would reduce
overall loan expenditures—relative to the interest they would pay on a 30-
year loan (see fig. 7). However, the overall higher mortgage payments
can make these options less affordable for lower-income borrowers or
limit financial flexibility, as discussed below.
Figure 7: Total Interest Paid on a $250,000 Mortgage under Different Scenarios
Note: The interest rate for the 30-year fixed-rate loan scenarios is 3.875 percent, and the interest rate
for the 15-year fixed-rate loan is 3.125 percent. Interest rates used for illustration purposes are
generally consistent with market rates in September and October 2017.
Page 30 GAO-18-297 Homeownership
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. Officials from a state housing finance
agency told us that minimum credit score requirements for some WBHLs
limit access for borrowers with lower credit scores, which includes many
lower-income borrowers. For example, a private mortgage insurer for
WBHLs requires a minimum credit score of 680, compared with the
minimum for the state housing finance agency of 640 for 30-year fixed-
rate mortgages. The average score for WBHLs insured by the private
mortgage insurer is 749.
Moreover, requirements for a minimum debt-to-income ratio may also
limit lower-income borrowers’ ability to access WBHLs or 15-year fixed-
rate loans. According to a private mortgage insurer, the average income
of borrowers for WBHLs it insures is 177 percent of county median
income. As mentioned previously, the QM rule generally requires home
buyers to have a debt-to-income ratio of 43 percent or less. As we
previously reported, although QM regulations are not expected to
significantly affect the overall mortgage market, some researchers have
estimated that QM regulations could adversely affect certain lower-
income home buyers, particularly those living in high-cost areas.
49
The
higher monthly payments of shorter-term loans can result in debt-to-
income ratios significantly above the 43 percent limit, as illustrated in
table 3.
49
See GAO-15-185.
Trade-offs for Home
Buyers and Homeowners
Include Limited Access to
Shorter-Term Loans and
Reduced Affordability
Limited Access
Page 31 GAO-18-297 Homeownership
Table 3: Examples of Different Mortgages’ Effects on Debt-to-Income Ratio
Mortgage
type
Loan amount
(dollars)
Interest rate
(percent)
Monthly payment
amount (dollars)
Gross monthly
income (dollars)
Debt-to-income
ratio (percent)
30-year fixed rate
200,000
3.875
940
2,187
43
20-year fixed rate
200,000
3.50
1,160
2,187
53
15-year fixed rate
200,000
3.125
1,393
2,187
64
Source: GAO analysis. | GAO-18-297
Note: Monthly payment amount does not include taxes, mortgage insurance, homeowner’s insurance,
or any condominium or association fees. For purposes of this illustration, the debt-to-income ratio
does not include any other debt, such as for an automobile or student loan. Interest rates used for
illustration purposes are generally consistent with market rates in September and October 2017.
Monthly payment amount and gross monthly income are rounded to the nearest dollar.
In areas where housing costs are high, research suggests that lower-
income home buyers are more likely to have high debt-to-income ratios.
Higher monthly payments for accelerated equity-building mortgages could
make some of these borrowers ineligible for those types of loans, or
essentially limit those borrowers to significantly smaller loans, as
discussed in the following section.
The biggest barrier to homeownership is affordability, which includes
having enough savings for a down payment as well as sufficient monthly
income to sustain a mortgage, according to agency officials and
stakeholders with whom we spoke. For example, 53 percent of adults
were unable to save any money in 2016 and 13 percent of adults had
difficulty paying their bills at least once in 2016 because of income
volatility, according to the Federal Reserve.
50
For the same loan amount,
the monthly payments of a 15-year mortgage can be more than 40
percent greater than the monthly payments of a 30-year mortgage,
depending upon the current market interest rates.
51
The higher monthly
50
Board of Governors of the Federal Reserve System, Report on the Economic Well-
Being of U.S. Households in 2016 (Washington, D.C.: May 2017). The report also notes
that income volatility disproportionately affects black and Hispanic individuals.
51
Proponents of WBHLs said that a 20-year WBHL can have similar monthly payments to
a 30-year fixed-rate mortgage. For the purchase of the same home, a home buyer would
have to buy down the interest rate on the 20-year WBHL to less than 1 percent to have
the same monthly payment (excluding mortgage insurance costs) compared to a
conventional 30-year fixed-rate mortgage with 97 percent LTV. At current rates and
assuming the cost of buying down the interest rate 0.25 percent is 1 point (the cost for one
lender in our study), a homeowner would have to pay more than 8 points on WBHLs to
have the same monthly payment as the 30-year fixed-rate mortgage, or purchase a less
expensive home. For example, for the purchase of a $250,000 home, 8 buy-down points
would cost a home buyer $20,000.
Reduced Affordability and
Financial Flexibility
Page 32 GAO-18-297 Homeownership
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.
The higher monthly payments of shorter-term loans thus reduce
homeowners’ financial flexibility. In contrast, experts and stakeholders
highlighted the greater flexibility a 30-year mortgage affords homeowners,
including for situations where individuals may experience instability or
fluctuations in their income. For example, though some home buyers may
have adequate income over the course of a year to afford monthly
mortgage payments, fluctuations in monthly income can affect a
homeowner’s ability to sustain a higher monthly mortgage payment.
However, a 30-year fixed-rate mortgage may enable a homeowner to
make additional payments to build equity faster and still maintain a lower
monthly payment than a 15-year mortgage.
52
As shown in the scenario in
figure 7 above, a homeowner could pay off a 30-year mortgage in 15
years by making additional monthly payments.
The higher monthly payment required of a shorter-term mortgage can
reduce a home buyer’s purchasing power. As seen in table 4, a longer-
term mortgage allows for a substantially higher home purchase price for
the same monthly payment for principal and interest.
52
Prepayment penalties generally do not apply if a homeowner makes additional mortgage
payments to be applied to the principal balance. Individual lenders could confirm if any
prepayment penalties would apply for additional mortgage payments.
Reduced Home Purchasing
Power
Page 33 GAO-18-297 Homeownership
Table 4: Example of Different Mortgage Type’s Effect on Purchasing Power
Mortgage
type
Monthly payment
amount (dollars)
Interest rate
(percent)
Loan amount
(dollars)
Loan-to-
value ratio
(percent)
Home purchase
price (dollars)
Change in
purchasing power
(percent
)
30-year fixed rate
1,000
3.875
212,659
97
219,236
-
20-year fixed rate
1,000
3.500
172,426
97
177,759
-19 (decrease)
15-year fixed rate
1,000
3.125
143,552
100
143,552
-35 (decrease)
Source: GAO analysis. | GAO-18-297
Note: Monthly payment amount does not include taxes, mortgage insurance, homeowner’s insurance,
or any condominium or association fees. Interest rates used for illustration purposes are generally
consistent with market rates in September and October 2017.
Borrowers are likely to qualify for smaller loan amounts for shorter-term
mortgages because of the effect of the higher monthly payments (of
shorter-term mortgages) on their debt-to-income ratio. Some proponents
of accelerated equity-building loans advertise that the monthly payment
amounts of shorter-term and 30-year fixed-rate mortgages are
comparable, with minimal loss in purchasing power. This might be the
case if the loan amount for the shorter-term mortgage were less than the
loan for the 30-year fixed-rate mortgage, as illustrated in table 4.
However, determining loss of purchasing power based on the monthly
payments of two mortgages with different loan amounts may not provide
an equivalent comparison.
Shorter-term mortgages can reduce lifetime wealth. This is because the
difference between the higher monthly payments and the monthly
payments of a 30-year mortgage could have been invested elsewhere to
produce a higher return—assuming an individual has the financial
knowledge and discipline to invest the funds.
53
The higher required
monthly payments of a 15-year mortgage can ensure a larger investment
in home equity. 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
53
Proponents of accelerated equity-building products suggest that more lifetime wealth
can be accumulated through shorter-term mortgage products. However, we believe that
such a comparison should include the scenario of homeowners investing the savings
resulting from the difference between the monthly payment amounts of a shorter-term
mortgage and a 30-year fixed-rate mortgage—a key assumption in estimating potential
lifetime wealth accumulation with a 30-year fixed-rate mortgage.
Potential Lower Lifetime
Wealth
Page 34 GAO-18-297 Homeownership
return that likely would be higher than the difference in mortgage interest
rates between 30- and 15-year mortgages.
54
In addition, homeownership may not always be the most effective means
of building household wealth. For example, in some circumstances
individuals may achieve greater household wealth through renting rather
than buying a home. Individuals for whom rental payments would be less
than mortgage payments for a comparable home can invest the
difference and build greater wealth—if the return on their investment
exceeded the return associated with the appreciation of the value of a
home.
55
However, factors such as an individual’s financial literacy and
risk tolerance, and overall market conditions can affect the success of any
investment strategy, including investing in a home or in any alternatives.
For lenders, shorter-term mortgages generally reduce credit risk—the
likelihood of loss with default—compared with longer-term loans. In
addition, lenders with whom we spoke said that borrowers choosing
shorter-term loans (such as WBHLs) generally have good credit and high
incomes, further reducing credit and default risk. However, market
uncertainties related to the lack of a secondary market and performance
data could limit lenders’ willingness to offer accelerated equity-building
products.
Products like WBHLs are not currently eligible for purchase by Fannie
Mae and Freddie Mac. According to Fannie Mae and Freddie Mac,
WBHLs are not currently traded in the secondary mortgage market
because of factors such as the low volume of transactions and the high
LTV ratio.
56
Lenders with whom we spoke who offer WBHLs generally have been
holding the loans in their own portfolio, which can expose them to credit
54
See, for example, John R. Aulerlich, “Effect on Net Worth of 15- and 30-Year Mortgage
Term,” Financial Counseling and Planning, vol. 15, no. 2 (2004). The comparison also
assumes that a homeowner consistently invests the difference in monthly payments
between a 30-year mortgage and a 15-year mortgage over the life of the loan.
55
See, for example, Federal Reserve Bank of Kansas City, The Effectiveness of
Homeownership in Building Household Wealth, Economic Review (Kansas City, Mo.:
2010).
56
The maximum LTV ratio for conforming loans eligible for purchase by Fannie Mae and
Freddie Mac is 97 percent.
Trade-offs for Lenders
Include Market Uncertainty
Lack of a Secondary Market
Page 35 GAO-18-297 Homeownership
risk and interest-rate risk.
57
Some of the lenders told us they only offer
adjustable-rate WBHLs, to reduce interest-rate risk.
58
But homeowners
could experience a rate shock when the interest rate adjusts. For
example, according to our analysis, if a WBHL for $250,000 adjusted the
interest rate after 7 years, the monthly payment could increase by more
than $200 (13 percent).
59
The rate adjustment also might increase credit
risk for lenders, because some borrowers then might be less able to
sustain the monthly payments.
60
Some lenders may be unwilling to take on these risks, which could limit
the availability of accelerated equity-building mortgages in the market.
However, lenders with whom we spoke have been exploring options to
sell loans that have “seasoned”—for example, after the LTV ratio of the
loan reached 97 percent—on the secondary market.
Mortgages with LTV ratios of 96.5 percent or more (those that have 3.5
percent or less in down payment) also would be ineligible for some
federal guarantee programs.
61
Generally, high-LTV loans have a greater
risk of default, and lenders with whom we spoke who offer WBHLs all
require private mortgage insurance for those loans. Lenders and private
mortgage insurers may price WBHLs at a premium—for example, through
higher fees, interest rates, or insurance premiums—to account for the
risk, which may add to the costs of monthly payments and make these
mortgages less affordable for some borrowers.
57
Credit risk is the risk that a borrower will default on a mortgage by failing to make timely
payments. Credit risk can vary based on borrower characteristics and the terms of the
mortgage. Interest-rate risk is the risk that an increase in interest rates will reduce the
value of a mortgage. Fixed-rate mortgages have greater interest-rate risk for lenders than
adjustable-rate mortgages.
58
For example, if a mortgage lender is funded by short-term deposits, and interest rates
rise, the cost of the lender’s funds increase. If the lender had previously made a long-term
fixed-rate mortgage at a lower rate, the difference between the interest the lender receives
from the mortgage payments and the interest the lender pays its depositors decreases. As
a result of the interest spread narrowing, the lender’s profits would decrease.
59
The increase may be less if the borrower was also paying mortgage insurance and
mortgage insurance was no longer required after the initial period.
60
For this comparison, the interest rate for the first 7 years is 1.75 percent. The interest
rate for the final 8 years is 5.00 percent. This scenario does not include taxes and
insurance costs, which would make monthly payments higher. If mortgage insurance was
no longer required after the initial period, the increase in monthly payment could be less.
61
The maximum LTV ratio for FHA loans is 96.5 percent. See 12 U.S.C. § 1709(b)(9)(A).
Risk Premium
Page 36 GAO-18-297 Homeownership
Because WBHLs are new (introduced in 2014) to the marketplace, there
are not enough data on loan performance to adequately assess payment
delinquency and default risk. The number of lenders currently offering
WBHLs is limited. According to the American Enterprise Institute, about
$100 million of WBHLs have been originated since 2014. Mortgage
insurers with whom we spoke provided a similar estimate.
Lenders told us that the performance of their WBHLs is strong but may
not offer a meaningful indicator of future performance if the loans were to
become more widely available (because WBHLs currently tend to attract
less-risky borrowers). According to lenders and housing experts with
whom we spoke, performance data on similar loans, such as fixed-rate
15-year mortgages, cannot be readily used to project performance for
WBHLs because WBHLS are not strictly comparable (they have higher
LTV ratios).
Stakeholders, including agency officials, also identified key trade-offs and
considerations in introducing new products and mechanisms to
accelerate equity building, such as how product complexity and reduced
market liquidity could affect the success and the costs to borrowers of the
products or mechanisms. These trade-offs and considerations apply to
proposed products such as the Fixed-COFI as well as to actions or
mechanisms for accelerating equity building, such as making mortgage
payments on a biweekly basis and paying off a percentage of the loan
principal in a shorter term (such as financing 20 percent of the principal in
5 years).
Some stakeholders said that new products that have unfamiliar or
complex features, such as the Fixed-COFI mortgage’s underlying
adjustable rate and equity savings account, could be difficult for lenders,
borrowers, and investors to understand, which could limit the promotion
and adoption of such products. In addition, administering new products or
mechanisms to accelerate equity building could have additional
complications, such as how to schedule and credit biweekly payments.
For example, lenders or servicers may not have a structure in place to
properly credit additional payments on a biweekly basis and may hold the
extra payment until the end of the month, negating the accelerated equity-
building effect of the extra payment. Moreover, a few stakeholders said
that lenders or servicers may charge additional fees for processing
biweekly mortgage payments.
Lack of Performance Data
Other Trade-offs Include
Limited Promotion and
Adoption Due to Product
Complexity
Page 37 GAO-18-297 Homeownership
Stakeholders and agency officials also noted that any new mortgage
product would not (at least initially) be eligible for securitizing and trading
in the secondary market. As a result, a new product would not be as liquid
as current products securitized and sold in the secondary market by
Fannie Mae or Freddie Mac, such as 30-year fixed-rate mortgages.
Because of the lack of market liquidity for new products, lenders may
charge a premium, making the products less affordable for lower-income
borrowers.
We provided a draft of this report to HUD, FHFA—and FHFA also
provided copies to Fannie Mae and Freddie Mac, FHLBanks, Agriculture,
and VA for their review and comment. HUD, FHFA, FHLBanks, and
Agriculture provided technical comments on the report draft, which we
incorporated where appropriate.
We are sending copies of this report to appropriate congressional
committees, the Secretary of HUD, the Director of FHFA—who provided
copies to the President and Chief Executive Officer of Fannie Mae and
the Chief Executive Officer of Freddie Mac, the President of the FHLBank
of Des Moines (coordinating for the FHLBanks), the Secretary of
Agriculture, the Secretary of Veterans Affairs, and other interested
parties. In addition, the report is available at no charge on the GAO
website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact
me at (202) 512-8678 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix III.
Sincerely yours,
Daniel Garcia-Diaz
Director, Financial Markets and Community Investment
Agency Comments
Appendix I: Objectives, Scope, and
Methodology
Page 38 GAO-18-297 Homeownership
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 define accelerated equity building as any mortgage product
or feature that accelerates the pace of principal reduction on a mortgage
debt, relative to a 30-year fixed-rate mortgage. We used the 30-year
fixed-rate mortgage as our point of comparison because it is the most
common type of mortgage product and represents the market standard.
To describe how federal homeownership assistance programs affect
home equity building, we reviewed relevant federal statutes, regulations,
and agency program policies and guides and other resources to identify
relevant homeownership assistance programs from the Departments of
Housing and Urban Development (HUD), Veterans Affairs (VA), and
Agriculture (USDA); and Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks (collectively, the enterprises). We reviewed prior GAO
reports on federal homeownership assistance programs and the U.S.
housing finance system.
1
We also reviewed relevant academic papers
and literature discussing homeownership and equity building.
We interviewed agency and enterprise officials to discuss the relevant
homeownership assistance programs and policy goals, including the
extent to which products or mechanisms used in the programs affect or
accelerate home equity building, and the role of the secondary mortgage
market in providing market liquidity for new mortgage products. In
addition to federal agencies and the enterprises, we interviewed officials
from two state housing finance agencies. Some stakeholders we
interviewed recommended the two state housing agencies because the
agencies likely placed a greater focus on accelerating home equity
building.
To describe the options (or mortgage products) borrowers have to
accelerate home equity building, including any trade-offs, we used
databases such as ProQuest and searched for and reviewed papers and
literature published from 2007 to 2017 by individuals who discussed
1
GAO, Housing Assistance: Opportunities Exist to Increase Collaboration and Consider
Consolidation, GAO-12-554 (Washington, D.C.: Aug. 16, 2012); Housing Finance System:
A Framework for Assessing Potential Changes, GAO-15-131 (Washington, D.C.: Oct. 7,
2014); and Mortgage Reforms: Actions Needed to Help Assess Effects of New
Regulations, GAO-15-185 (Washington, D.C.: June 25, 2015).
Appendix I: Objectives, Scope, and
Methodology
Appendix I: Objectives, Scope, and
Methodology
Page 39 GAO-18-297 Homeownership
options to accelerate home equity building. We also attended two housing
conferences and met with housing experts and stakeholders from
academia, housing advocacy organizations, and industry, including
mortgage lenders and insurers, selected because they made proposals to
increase homeownership or build home equity faster, wrote on
homeownership issues, were recommended by government officials, or
were involved in providing mortgage products designed to accelerate
equity building. From interviews with industry stakeholders and housing
conferences we attended, we identified two products: (1) the Wealth
Building Home Loan (WBHL), which has been introduced in the
marketplace, and (2) the Fixed-Payment Cost-of-Funds Index (COFI)
Mortgage, which has been proposed but is not currently offered by any
lenders.
We reviewed and analyzed relevant academic papers and literature on
the advantages and trade-offs of options to accelerate equity building. 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. We selected academics, experts, and industry
stakeholders and organizations who proposed accelerated equity-building
mortgage products, had written on homeownership and wealth building
issues, or whom officials of federal agencies and the enterprises or our
other interviewees recommended. We also attended housing
conferences, which provided additional suggestions for publications to
review and academics and stakeholders to interview.
Furthermore, to illustrate methods to accelerate home equity building and
compare the effects of different mortgage products on home equity
building, we developed hypothetical mortgage scenarios. For the
mortgage scenarios, we used Excel’s payment function to calculate the
amortization schedule of the mortgages in our hypothetical scenarios.
The payment function is a standard formula that calculates monthly
payment schedules based on inputting interest rate, number of payment
periods over the life of a mortgage, and the present value of the
mortgage. The scenarios we developed were only several possible
scenarios out of the many that we could have chosen. We identified
specific mortgage features in papers and literature by individuals who
proposed mortgage products designed to accelerate home equity
building. For illustration purposes, we used an average of the monthly
interest rates published in Freddie Mac’s Primary Mortgage Market
Survey for September and October 2017, as well as current market rates
Appendix I: Objectives, Scope, and
Methodology
Page 40 GAO-18-297 Homeownership
advertised by private mortgage lenders, to inform our selection of interest
rates for our scenarios.
We conducted this performance audit from January 2017 to March 2018
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Appendix II: CoreLogic Home Equity Data, by
State
Page 41 GAO-18-297 Homeownership
This appendix provides regional data on equity building that we obtained
from CoreLogic. CoreLogic is a publicly traded company that provides
data, analytics, technology, and services related to the mortgage industry,
among other things. The data in figure 8 show the percentage of
homeowners in each state who have 20 percent equity or less in their
homes. The level of home equity can be affected by a number of factors,
including the age of the loan, the amount of principal paid down, and
home market values. We did not assess the reliability of CoreLogic’s
data.
Appendix II: CoreLogic Home Equity Data,
by State
Appendix II: CoreLogic Home Equity Data, by
State
Page 42 GAO-18-297 Homeownership
Figure 8: Percentage of Residents with Less Than 20 Percent in Home Equity, by State, as of First Quarter 2017
Note: According to CoreLogic, Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia,
and Wyoming had insufficient data to determine the percentage of residents in each state who had
less than 20 percent in home equity.
Appendix III: GAO Contact and Staff
Acknowledgments
Page 43 GAO-18-297 Homeownership
Daniel Garcia-Diaz, (202) 512-8678 or [email protected]
In addition to the contact named above, Andrew Pauline (Assistant
Director), Kun-Fang Lee (Analyst in Charge), Steve Brown, Raheem
Hanifa, Jeff Harner, Jill Lacey, Barbara Roesmann, Jessica Sandler,
MaryLynn Sergent, Jena Sinkfield, Anne Stevens, and Jim Vitarello made
key contributions to this report.
Appendix III: GAO Contact and Staff
Acknowledgments
GAO Contact
Staff
Acknowledgments
(101356)
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