The bogeyman of the financial crisis is back. The use of down payment assistance programs, known as DAPs in the lending industry, doubled between 2013 and 2016, The Wall Street Journal said in a Sunday article that cited Freddie Mac analysis of the National Survey of Mortgage Originations.
The share of buyers using one of the more than 2,500 down payment assistance programs in the U.S. rose to 10% from 5%, the WSJ said. Also, about 13% of borrowers who used Federal Housing Administration mortgages in 2019’s first quarter got government help with down payments, up from 8.6% five years earlier, according to FHA data.
“Those who use down payment assistance start out with little or no skin in the game,” the WSJ said. “As a result, some economists and analysts worry that buyers have less incentive to keep making payments if times get tough. In recent years, those who used government down payment assistance for FHA loans were delinquent at a higher rate than those who didn’t.”
Down payment assistance programs were one of many factors that led to a spike in defaults during the real estate crash and mortgage meltdown that began in 2007. Homeowners who hadn’t put any of their own money into a property were more inclined to walk away when the value of their home dipped below the balance of the mortgage they were paying.
However, there were other risky practices as well that played a larger role, like “exploding ARMs,” meaning adjustable-rate mortgages that would reset at rates that could double after an initial period that often was two years. People got risky loans to get into a property with the belief that home values would rise and they could refinance into a safer mortgage before their rates reset. When that didn’t happen, they were stuck.
Stagnant wages over the last two decades and a strong labor market in recent years mean that many young families have the ability to pay a mortgage, but lack the resources to save for a down payment. While incomes are climbing from their post-recession bottom in 2011, the growth has been slow, especially when inflation-adjusted, said Gordon Green of Sentier Research.
“We are at a point now where real median household income is 3.5% higher than January 2000,” he said. “Not an impressive performance by any means over a period spanning almost two decades, but the overall trend line has been positive for about seven years.”
“It has definitely increased,” she told the WSJ.