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 EquityBuilding 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-toIncome 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 FixedRate 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 FixedPayment 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 lowerincome households, including programs that provide guarantees for 

certain types of mortgages and funding that can be used for downpayment 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. 

10The 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).

 11Adjustments 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.

 12In 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, downpayment 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 

 13For 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.

14Prior 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, 

 15The 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. 

16The conforming loan limit for single-family homes in 2018 is $453,100 ($679,650 in highcost 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

 17When 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. 

18A point is equal to 1 percent of the amount of a loan.

19The 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. 

20In 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.

 21Qualified 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 EquityBuilding 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 equitybuilding effects

Mortgage insurance 

and loan guarantees

Federal Housing Administration 

(FHA) 

FHA: Single-family mortgage 

insurance programa 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 

Programb

Rural Housing Service 

(RHS)

RHS: Single Family Housing 

Guaranteed Loan Programc

Down payment 

assistanced 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 downpayment 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 projectse

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 RHS RHS: Single Family Housing building. 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-

 22Mortgage insurance or guarantees are available to eligible home buyers. “Insurance”

and “guarantee” generally have the same meaning in the context of our review.

23Conventional 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).

24One-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).

25According 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 

 26The 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.

27The 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 moderateincome 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)).

28The 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.

 29Participating 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. 

30According 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, sellerfunded 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. Firsttime homeowners who meet income limits and receive homeownership 

 31Jurisdictions and FHLBanks have some discretion in how they implement HOME and 

Affordable Housing Program.

32The 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. 

33The 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.

34Monthly 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.

 35Generally, 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. 

36In 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 shorterterm 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

 37See Housing Finance at a Glance: A Monthly Chartbook (October 2017). 

38According 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 

 39Under 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 rangesa

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 privatesector 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.

 40This 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). 

41Developers 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. 

42Actual 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 fixedrate 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 privatesector 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 

 43This 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).

44The 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.

 45The 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. 

46In 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 

 47In 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.” 

48Home 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 fixedrate 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 fixedrate 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 lowerincome home buyers, particularly those living in high-cost areas.49 The 

higher monthly payments of shorter-term loans can result in debt-toincome ratios significantly above the 43 percent limit, as illustrated in 

table 3.

 49See 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 lowerincome 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 

 50Board of Governors of the Federal Reserve System, Report on the Economic WellBeing of U.S. Households in 2016 (Washington, D.C.: May 2017). The report also notes 

that income volatility disproportionately affects black and Hispanic individuals. 

51Proponents 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 lowincome 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 longerterm mortgage allows for a substantially higher home purchase price for 

the same monthly payment for principal and interest.

 52Prepayment 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-tovalue 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 

 53Proponents 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 

 54See, 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.

55See, for example, Federal Reserve Bank of Kansas City, The Effectiveness of 

Homeownership in Building Household Wealth, Economic Review (Kansas City, Mo.: 

2010).

56The 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.

 57Credit 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.

58For 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.

59The increase may be less if the borrower was also paying mortgage insurance and 

mortgage insurance was no longer required after the initial period. 

60For 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. 

61The 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 equitybuilding 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 GarciaDiazD@gao.gov. 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 privatesector 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 garciadiazd@gao.gov

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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