a

GAO

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives

November 2005 MORTGAGE 

FINANCING

Additional Action 

Needed to Manage 

Risks of FHA-Insured 

Loans with Down 

Payment Assistance

GAO-06-24
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2005 

MORTGAGE FINANCING 

Additional Action Needed to Manage 

Risks of FHA-Insured Loans with Down 

Payment Assistance 

Highlights of GAO-06-24, a report to the 

Chairman, Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, House of 

Representatives 

The Federal Housing 

Administration (FHA) permits 

borrowers to obtain down payment 

assistance from third parties; but, 

research has raised concerns about 

the performance of loans with such 

assistance. Due to these concerns, 

GAO examined the (1) trends in the

use of down payment assistance 

with FHA-insured loans, (2) the 

impact that the presence of such

assistance has on purchase 

transactions and house prices, (3)

how such assistance influences the 

performance of these loans, and (4)

FHA’s standards and controls for 

these loans. 

What GAO Recommends

The Secretary of Housing and 

Urban Development should direct 

the FHA Commissioner to 

implement additional controls to

manage the risks associated with

loans that involve down payment 

assistance. Such controls could

involve considering the presence

and source of down payment 

assistance when underwriting 

loans. Further, the FHA 

Commissioner should consider 

additional controls for loans with 

down payment assistance from 

seller-funded nonprofits. In written 

comments, HUD generally agreed

with the report’s findings. HUD 

also commented on certain aspects 

of selected recommendations. 

Almost half of all single-family home purchase mortgages that FHA insured 

in fiscal year 2004 had down payment assistance. Nonprofit organizations 

that received at least part of their funding from sellers provided assistance 

for about 30 percent of these loans and represent a growing source of down 

payment assistance. However, assistance from seller-funded nonprofits 

alters the structure of the purchase transaction. First, because many sellerfunded nonprofits require property sellers to make a payment to their 

organization; assistance from these nonprofits creates an indirect funding 

stream from property sellers to homebuyers. Second, GAO analysis indicated 

that FHA-insured homes bought with seller-funded nonprofit assistance 

were appraised at and sold for about 2 to 3 percent more than comparable 

homes bought without such assistance. 

Regardless of the source of assistance and holding other variables constant, 

GAO analysis indicated that FHA-insured loans with down payment 

assistance have higher delinquency and claim rates than do similar loans 

without such assistance. Furthermore, loans with assistance from sellerfunded nonprofits do not perform as well as loans with assistance from 

other sources. This difference may be explained, in part, by the higher sales 

prices of comparable homes bought with seller-funded assistance. 

Although FHA has implemented some standards and controls on loans with 

down payment assistance, stricter standards and additional controls could 

help in managing the risks these loans pose. FHA standards permit 

assistance from seller-funded nonprofits; in contrast, mortgage industry 

participants restrict such assistance. Further, government guidelines call for 

routine identification of risks that could impede meeting program objectives; 

however, FHA has not conducted routine analysis of the performance of 

loans with down payment assistance. 

Effect of Down Payment Assistance on the Probability of Delinquency and Claim 

No down

payment assistance

Nonseller-funded 

assistance

Seller-funded

assistance

Percentage

Source: GAO.

0

50

100

150

200

250

Relative delinquency probability Relative claim probability

Note: Loans without assistance are set at 100 percent. Data are from a national sample of FHAinsured loans from 2000, 2001, and 2002; and the analysis controlled for selected variables.

www.gao.gov/cgi-bin/getrpt?GAO-06-24.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William B. 

Shear at (202) 512-8678 or shearw@gao.gov. 
Page i GAO-06-24 Mortgage Financing

Contents

Letter 1

Results in Brief 3

Background 7

The Percentage of Purchase Loans in FHA’s Portfolio with Down 

Payment Assistance Has Been Increasing Since 2001 14

Seller-Funded Assistance Affects Home Purchase Transactions and 

Can Raise House Prices 19

FHA-Insured Loans with Down Payment Assistance, particularly 

from Seller-Funded Nonprofits, Do Not Perform as Well as Similar 

Loans without Assistance 26

Stricter Standards and Additional Controls Could Help FHA Manage 

the Risks Posed by Loans with Down Payment Assistance 34

Conclusions 41

Recommendations for Executive Action 43

Agency Comments and Our Evaluation 45

Appendixes

Appendix I: Objectives, Scope, and Methodology 48

Appendix II: Automated Valuation Model Analysis 52

Appendix III: Loan Performance Analysis 62

Appendix IV: Comments from the Department of Housing and Urban 

Development 89

Appendix V: GAO Contact and Staff Acknowledgments 92

Tables Table 1: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Nonprofit Down Payment Assistance, National 

Sample, Fiscal Years 2000, 2001, and 2002 57

Table 2: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Nonprofit Down Payment Assistance, MSA Sample, 

Fiscal Years 2000, 2001, and 2002 57

Table 3: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Nonprofit Down Payment Assistance, Atlanta MSA 

Sample, Fiscal Years 2000, 2001, and 2002 58

Table 4: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Nonprofit Down Payment Assistance, National 

Sample, March 2005 58
Contents

Page ii GAO-06-24 Mortgage Financing

Table 5: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Down Payment Assistance from Other Sources, 

National Sample, Fiscal Years 2000, 2001, and 2002 59

Table 6: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Down Payment Assistance from Other Sources, 

MSA Sample, Fiscal Years 2000, 2001, and 2002 60

Table 7: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Down Payment Assistance from Other Sources, 

Atlanta MSA Sample, Fiscal Years 2000, 2001, and 2002 60

Table 8: The Ratio of AVM Value to Appraisal Value and Sales 

Price—Down Payment Assistance from Other Sources, 

National Sample, March 2005 61

Table 9: Names and Definitions of the Variables Used in Our 

Regression Models 63

Table 10: Delinquency Regression Results—National Sample, Model 

Based on Augmented TOTAL Mortgage Scorecard 

Variables 71

Table 11: Delinquency Regression Results—National Sample, Model 

Based on TOTAL Mortgage Scorecard Variables 72

Table 12: Delinquency Regression Results—National Sample, 

Augmented GAO Actuarial Model 73

Table 13: Delinquency Regression Results—National Sample, GAO 

Actuarial Model 73

Table 14: Delinquency Regression Results—MSA Sample, Model 

Based on Augmented TOTAL Mortgage Scorecard 

Variables 74

Table 15: Delinquency Regression Results—MSA Sample, Model 

Based on TOTAL Mortgage Scorecard Variables 75

Table 16: Delinquency Regression Results—MSA Sample, 

Augmented GAO Actuarial Model 76

Table 17: Delinquency Regression Results—MSA Sample, GAO 

Actuarial Model 77

Table 18: Claim regression results – National Sample, Model Based 

on Augmented TOTAL Mortgage Scorecard Variables 78

Table 19: Claim Regression Results—National Sample, Model Based 

on TOTAL Mortgage Scorecard Variables 79

Table 20: Claim Regression Results—National Sample, Augmented 

GAO Actuarial Model 80

Table 21: Claim Regression Results—National Sample, GAO 

Actuarial Model 80

Table 22: Claim Regression Results—MSA Sample, Model Based on 

Augmented TOTAL Mortgage Scorecard Variables 81
Contents

Page iii GAO-06-24 Mortgage Financing

Table 23: Claim Regression Results—MSA Sample, Model Based on 

TOTAL Mortgage Scorecard Variables 82

Table 24: Claim Regression Results—MSA Sample, Augmented GAO 

Actuarial Model 83

Table 25: Claim Regression Results—MSA Sample, GAO Actuarial 

Model 83

Table 26: Prepayment Regression Results—Quarterly Conditional 

Probability of Prepayment, National Sample 85

Table 27: Prepayment Regression Results—Quarterly Conditional 

Probability of Prepayment, MSA Sample 86

Table 28: Loss Regression Results—Loss Rate Given Default, 

National Sample 87

Table 29: Loss Regression Results—Loss Rate Given Default, MSA 

Sample 88

Figures Figure 1: Number of FHA-Insured Single-Family Purchase Money 

Loans, Fiscal Years 2000 through 2005 9

Figure 2: Number of FHA-Insured Single-Family Purchase Money 

Loans and Percentage of Loans with Down Payment 

Assistance, by Source (Loans with LTV Ratio Greater 

Than 95 percent, Fiscal Years 2000-2005) 15

Figure 3: Percentage of FHA-Insured Single-Family Purchase 

Money Loans Using Nonprofit Down Payment Assistance 

and House Price Appreciation Rates, by State 18

Figure 4: Structure of FHA Individual Purchase Transaction, with 

Nonseller-Funded Down Payment Assistance and with 

Seller-Funded Down Payment Assistance 21

Figure 5: Generic Illustration of Addendum to the Sales Contract 

Completed Prior to Closing that Facilitates Seller’s 

Commitment to Providing Financial Payment to the 

Nonprofit Organization after Closing 22

Figure 6: Example of LTV Ratio Calculations for FHA-Insured 

Loans, by Source of Down Payment Funds 25

Figure 7: Delinquency and Claim Rates, by Maximum Age of Loan 

and Source of Down Payment Funds 28

Figure 8: Effect of Down Payment Assistance on the Probability of 

Delinquency and Claim, Controlling for Selected 

Variables 31
Contents

Page iv GAO-06-24 Mortgage Financing

Abbreviations

ARM adjustable rate mortgage

AVM Automated Valuation Model

CHUMS Computerized Homes Underwriting Management System

FHA Federal Housing Administration 

GSE government-sponsored enterprises

HAND Homeownership Alliance of Nonprofit Downpayment Providers

HUD The U.S. Department of Housing and Urban Development

IRS Internal Revenue Service

LTV loan-to-value

MSA Metropolitan Statistical Area

OIG Office of Inspector General

RHS U.S. Department of Agriculture’s Rural Housing Service

TOTAL Technology Open to Approved Lenders

VA Department of Veterans Affairs

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Page 1 GAO-06-24 Mortgage Financing

United States Government Accountability Office

Washington, D.C. 20548

A

November 9, 2005 Letr

The Honorable Bob Ney

Chairman

Subcommittee on Housing and Community Opportunity

Committee on Financial Services

House of Representatives

Dear Mr. Chairman: 

Mortgage insurance provided by the Federal Housing Administration 

(FHA) of the U.S. Department of Housing and Urban Development (HUD) 

insures billions of dollars in private home loans each year. One of FHA’s 

primary goals is to expand homeownership opportunities for first-time 

homebuyers and other borrowers who would not otherwise qualify for 

conventional mortgages on affordable terms. Homebuyers who receive 

FHA-insured mortgages often have limited funds and, to meet the 3 percent 

borrower investment FHA requires, may obtain down payment assistance 

from a third party, including not only a relative but also a charitable 

organization (nonprofit) that is funded by the property seller. A purpose of 

a down payment is to create “instant equity” for the new homeowner, and 

our work and others have shown that loans with greater owner investment 

generally perform better.1

 HUD’s Office of Inspector General (OIG) has 

raised concerns about the performance of FHA-insured loans with down 

payment assistance from seller-funded nonprofits.2

 In light of these 

concerns, you asked us to evaluate how FHA-insured home loans with 

down payment assistance perform compared with loans that are originated 

without such assistance. The insurance program is supported in part 

through insurance premiums that FHA charges its borrowers, and FHA 

estimates that the mortgage insurance fund operates at a profit. In 

1

GAO, Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the 

Fund Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 28, 2001). GAO, 

Mortgage Financing: FHA Has Achieved Its Home Mortgage Capital Reserve Target, 

GAO/RCED-96-50 (Washington, D.C.: Apr. 12, 1996). Dennis R. Capozza, Dick Kazarian, and 

Thomas A. Thomson. “Mortgage Default in Local Markets,” Real Estate Economics, vol. 25 

no. 4 (Winter 1997).

2

HUD Office of Inspector General, Final Report of National Audit; Down Payment 

Assistance Programs; Office of Insured Single Family Housing, 2000-SE-121-0001(Seattle, 

Wash.: Mar. 31, 2000); HUD Office of Inspector General, Follow Up of Down Payment 

Assistance Programs Operated by Private Nonprofit Entities, 2002-SE-0001 (Seattle, 

Wash.: Sept. 25, 2002).
Page 2 GAO-06-24 Mortgage Financing

response to your request, this report examines (1) trends in the use of 

down payment assistance in FHA-insured loans (e.g., volume and source), 

(2) the impact that the presence of down payment assistance has on the 

structure of the purchase transaction and the house price of FHA-insured 

loans, (3) the effect of down payment assistance on the performance of 

FHA-insured loans, and (4) the extent to which FHA standards and 

controls for loans with down payment assistance are consistent with 

government internal control guidelines and mortgage industry practices.

To describe trends in the use of down payment assistance with FHAinsured loans, we obtained loan-level data from HUD on single-family 

purchase money mortgage loans.3

 We analyzed the data by source of 

assistance to determine trends in loan volume and the proportion of loans 

with down payment assistance (including geographic variations). To 

examine the structure of the purchase transaction for loans with and 

without down payment assistance, we reviewed HUD policy guidebooks 

and reports and interviewed real estate agents, lenders, appraisers, and 

other key players involved in transactions with down payment assistance. 

To examine how down payment assistance impacted the house price of 

FHA-insured loans, we examined the sales prices of homes by the use and 

source of down payment assistance using property value estimates derived 

from an Automated Valuation Model (AVM).4

 To examine how down 

payment assistance influences the performance of FHA-insured loans, we 

obtained from HUD a sample of single-family purchase money loans 

endorsed in fiscal years 2000, 2001, and 2002 and performance data on 

those loans (current as of June 30, 2005).5

 To examine the extent to which 

FHA standards and controls for loans with down payment assistance were 

consistent with government internal control guidelines, we reviewed FHA 

regulations and guidelines for loans with down payment assistance and

3

Purchase money mortgage loans are used for the purchase of a home rather than to 

refinance an existing mortgage. In this report, we analyze purchase money mortgage loans.

4

Automated Valuation Model (AVM) is a broad term used to describe a range of 

computerized econometric models that are designed to provide estimates of residential real 

estate property values. AVMs may use regression, adaptive estimation, neural networking, 

expert reasoning, and artificial intelligence to estimate the market value of a residence. We 

assessed the reliability of the HUD and AVM data by discussing the data with knowledgeable 

HUD officials and staff from the contractor that provided the AVM data and, when possible, 

comparing the data with similar publicly available data. We determined that the data were 

sufficiently reliable for our analyses.

5

All years are fiscal years unless otherwise indicated.
Page 3 GAO-06-24 Mortgage Financing

compared these with certain internal control standards.6 We also 

interviewed mortgage industry participants about the controls they used to 

manage the risks associated with affordable loan products that permit 

down payment assistance and, as appropriate, compared their practices 

with FHA’s. We did not verify that these institutions did in fact use these 

controls. We selected these entities because they offered products intended 

to expand affordable homeownership opportunities in part by permitting 

down payment assistance. Appendix I provides a full description of our 

scope and methodology. We performed our audit work in Boston, 

Massachusetts, and Washington, D.C., from January 2005 to September 

2005 in accordance with generally accepted government auditing 

standards. 

Results in Brief The proportion of FHA-insured loans that are financed in part by down 

payment assistance from various sources has increased substantially in the 

last few years, while the overall number of loans that FHA insures has 

fallen dramatically. Assistance from nonprofit organizations funded by 

sellers has accounted for a growing percentage of that assistance.7

 From 

2000 to 2004, the total proportion of FHA-insured loans with down payment 

assistance grew from 35 to nearly 50 percent. Approximately 6 percent of 

FHA-insured loans in 2000 received down payment assistance from sellerfunded nonprofits, but by 2004 nonprofit assistance had grown to about 30 

percent. Our analysis showed that those states where the use of nonprofit 

down payment assistance, primarily from seller-funded nonprofits, was 

higher than average tended to have lower-than-average house price 

appreciation rates. 

6

GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001).

7

Seller-funded down payment assistance programs are supported, in part, by financial 

contributions and service fees collected by nonprofit organizations from participating 

property sellers.
Page 4 GAO-06-24 Mortgage Financing

Down payment assistance provided by a seller-funded nonprofit can alter 

the structure of the purchase transaction in important ways. First, when a 

homebuyer receives assistance from a seller-funded nonprofit, many 

nonprofits require the property sellers to make a payment to the nonprofit 

that equals the amount of assistance the homebuyer receives plus a service 

fee, after the closing. This requirement creates an indirect funding stream 

from property sellers to homebuyers that does not exist in other 

transactions, even those involving some other type of down payment 

assistance. Second, mortgage industry participants reported, and a HUD 

contractor study found, that property sellers who provided down payment 

assistance through nonprofits often raised the sales price of the homes 

involved in order to recover the required payments that went to the 

organizations.8

 Our AVM analyses found that homes bought with sellerfunded nonprofit assistance appraised at and sold for higher prices than 

comparable homes bought without assistance, resulting in larger loans for 

the same collateral and higher effective loan-to-value (LTV) ratios.9

 

Specifically, we found that homes with seller-funded down payment 

assistance were appraised and sold for about 2 to 3 percent more than 

comparable homes without such assistance. That is, homebuyers would 

have less equity in the transaction than would otherwise be the case. FHA 

requires lenders to inform appraisers of the presence and source of down 

payment assistance but does not require that lenders identify whether the 

down payment assistance provider receives funding from property sellers. 

Without this information, appraisers cannot consider the impact that such 

assistance could have on the purchase price of a home and potentially on 

the appraiser’s estimate of the home’s market value. 

Loans with down payment assistance do not perform as well as loans 

without down payment assistance; this may be explained, in part, by the 

homebuyer having less equity in the transaction. Holding other variables 

constant, our analysis indicated that FHA-insured loans with down 

payment assistance had higher delinquency and claim rates than similar 

loans without such assistance. These differences in performance may be 

explained, in part, by the higher sales prices of comparable homes bought 

with seller-funded down payment assistance.

8

Concentrance Consulting Group, An Examination of Downpayment Gift Programs 

Administered by Nonprofit Organizations, prepared for the U.S. Department of Housing 

and Urban Development (Washington D.C.: March 2005).

9

We define effective LTV ratio to equal the loan amount divided by the true market value of 

the home that would exist without the presence of down payment assistance.
Page 5 GAO-06-24 Mortgage Financing

FHA has implemented some standards and internal controls to manage the 

risks associated with loans with down payment assistance, but stricter 

standards and additional controls could help FHA better manage risks 

posed by loans with down payment assistance while meeting its mission of 

expanding homeownership opportunities. First, with regard to standards, 

like other mortgage industry participants, FHA generally applies the same 

underwriting standards to loans with down payment assistance that it 

applies to loans without such assistance. One important exception is that 

FHA, unlike others, does not limit the use of down payment assistance 

from seller-funded nonprofits. Some mortgage industry participants view 

down payment assistance from seller-funded nonprofits as a seller 

inducement to the sale and, therefore, either restrict or prohibit its use. 

FHA has not viewed such assistance as a seller inducement and, therefore, 

does not subject this assistance to the limits it otherwise places on 

contributions from sellers. Although FHA, like others, applies the same 

underwriting standards to loans with down payment assistance as it applies 

to loans without such assistance, because FHA’s portfolio is heavily 

weighted toward loans with down payment assistance, stricter standards 

may be warranted for such loans. Second, with regard to controls, FHA has 

taken steps to assess and manage the risks associated with loans with 

down payment assistance, but additional controls may be warranted. For 

example, FHA has conducted ad hoc loan performance analyses of loans 

with down payment assistance and contracted for two studies to assess the 

use of such assistance with FHA-insured loans, but FHA has not routinely 

assessed the impact that the widespread use of down payment assistance 

has had on loan performance. Also, FHA has targeted monitoring of 

appraisers that do a high volume of loans with down payment assistance, 

but FHA has not targeted its monitoring of lenders that do a high volume of 

loans with down payment assistance, even though FHA holds lenders, as 

well as appraisers, accountable for ensuring a fair valuation of the property 

it insures.

We make recommendations designed to better manage the risks of loans 

with down payment assistance generally and more specifically from sellerfunded nonprofits. Overall, we recommend that in considering the cost and 

benefit of its policy permitting down payment assistance, FHA also 

consider risk mitigation techniques such as including down payment 

assistance as a factor when underwriting loans or monitoring more closely 

loans with such assistance. With regard to down payment assistance 

providers that receive funding from property sellers, we recommend that 

FHA take additional steps to mitigate the risk associated with these loans. 
Page 6 GAO-06-24 Mortgage Financing

These controls include treating such assistance as a seller contribution 

and, therefore, subject to existing limits on seller contributions. 

We provided a draft of this report to HUD, and the Assistant Secretary for 

Housing—Federal Housing Commissioner provided written comments, 

which are discussed later in this report and reprinted in appendix IV. HUD 

generally agreed with the report’s findings, stating that the report 

confirmed its own analysis of loan performance and the findings of an 

independent contractor hired by FHA to evaluate how seller-funded down 

payment assistance programs operate. HUD also agreed to take steps to 

better identify the source of down payment assistance, which would permit 

it to better monitor the performance of these loans. HUD also agreed to 

consider incorporating the presence and source of down payment 

assistance when underwriting loans.

HUD also commented on certain aspects of selected recommendations. 

First, although HUD agreed with the report’s recommendation to perform 

routine and targeted loan performance analyses of loans with down 

payment assistance, it stated that FHA already monitors the performance 

of these loans. We recognized in our report that FHA does perform ad hoc 

analyses of loan performance, but because of the substantial number of 

FHA loans that involve some form of down payment assistance, and the 

risk of these loans, we continue to believe that FHA should more routinely 

monitor the performance of these loans. Second, HUD disagreed with our 

recommendation that it should revise its standards to treat assistance from 

a seller-funded nonprofit organization as a seller inducement to purchase, 

arguing, based on advice of HUD’s Office of the General Counsel, that if the 

gift of down payment assistance is made by the nonprofit entity to the 

buyer before closing, while the seller’s contribution to the nonprofit entity 

occurs after the closing, then the buyer has not received funds that can be 

traced to the seller’s contribution. We realize that FHA relies on this advice 

to authorize sellers to do indirectly what they cannot do directly. 

Nevertheless, because gifts of down payment assistance from seller-funded 

nonprofits are ultimately funded by the sellers, they are like gifts of down 

payment assistance made directly by sellers. We, therefore, continue to 

believe that assistance from a seller-funded entity should be treated as a 

seller inducement to purchase. Finally, while the draft report was with the 

agency for comment, HUD’s contractor completed the 2005 Annual 

Actuarial Review. Consistent with our recommendation, the contractor 

included the presence and source of down payment assistance as a factor 

in estimating loan performance—finding that it is a very important factor. 

However, in reviewing the contractor’s methodology, we found certain 
Page 7 GAO-06-24 Mortgage Financing

limitations may understate the impact that down payment assistance has 

on estimates of loan performance. We, therefore, modified our 

recommendation to address one of these weaknesses and to emphasize the 

continuing need to consider the presence and source of down payment 

assistance in future loan performance models.

Background Mortgage insurance, a commonly used credit enhancement, protects 

lenders against losses in the event of default. Lenders usually require 

mortgage insurance when a homebuyer has a down payment of less than 20 

percent of the value of the home. FHA, the U.S. Department of Veterans 

Affairs (VA), the U.S. Department of Agriculture’s Rural Housing Service 

(RHS), and private mortgage insurers provide this insurance. In 2003, 

lenders originated $3.8 trillion in single-family mortgage loans, of which 

more than 60 percent were for refinancing. Of all the insured loans 

originated in 2003, including refinancings, private companies insured about 

64 percent, FHA about 26 percent, VA about 10 percent, and RHS a very 

small number. 

One of FHA’s primary goals is to expand homeownership opportunities for 

first-time homebuyers and other borrowers who would not otherwise 

qualify for conventional mortgages on affordable terms. As a result, FHA 

plays a particularly large role in certain market segments, including firsttime and low-income homebuyers. During 2001 to 2003, FHA insured about 

3.7 million mortgages with a total value of about $425 billion. FHA insures 

most of its single-family mortgages under its Mutual Mortgage Insurance 

Fund (Fund), which is primarily funded with borrowers’ insurance 

premiums and proceeds from the sale of foreclosed properties. FHA’s 

mortgage insurance program is currently a negative subsidy program—that 

is, the Fund is self-financed and FHA estimates that it operates at a profit; 

however, the Fund is experiencing higher-than-estimated claims. The 

economic value of the Fund that supports FHA’s guarantees depends on the 

relative size of cash outflows and inflows over time. Cash flows out of the 

Fund from payments associated with claims on defaulted loans and refunds 

of up-front premiums on prepaid mortgages. To cover these outflows, FHA 

receives cash inflows from borrowers’ up-front and annual insurance 

premiums and net proceeds from recoveries on defaulted loans. If the Fund 

were to be exhausted, the U.S. Treasury would have to cover lenders’ 

claims directly. We reported that FHA submitted a $7 billion reestimate for 

the Fund’s credit subsidy and interest as of the end of 2003, primarily due
Page 8 GAO-06-24 Mortgage Financing

to an increase in estimated and actual claims over what FHA previously 

estimated.10 Several recent events may help explain the increase in claims, 

including changes to underwriting guidelines, competition from the private 

sector, and an increase in down payment assistance. A program assessment 

included with the 2006 President’s Budget noted that FHA’s loan 

performance model is neither accurate nor reliable because it consistently 

under predicts claims. Since 1990, the National Housing Act has required an 

annual and independent actuarial analysis of the economic net worth and 

soundness of the Fund.11 

FHA has been backing mortgages with low down payments for many years. 

For example, almost 90 percent of FHA-insured mortgages originated in 

2000 had an LTV ratio greater than 95 percent. LTV ratios are important 

because of the direct relationship that exists between the amount of equity 

borrowers have in their homes and the likelihood of default. The higher the 

LTV ratio, the less cash borrowers will have invested in their homes and the 

more likely it is that they may default on mortgage obligations, especially 

during times of economic hardship. 

The number of loans that FHA insures each year has fallen dramatically 

since 2000 (fig. 1). This decline is likely due, in part, to greater availability 

of low and no down payment products from the conventional market. 

Specifically, in 1992 Congress authorized HUD to establish housing goals 

for Fannie Mae and Freddie Mac that direct them to contribute to the 

affordability and availability of housing for low- and moderate-income 

families, underserved areas, and special affordable housing for very lowincome families.12 In the 1990s, private mortgage insurers began insuring 

loans with low down payments; concurrently, Fannie Mae and Freddie Mac 

began purchasing these loans. More recently, the conventional market has 

introduced products such as zero-down payment loans that have attracted 

homebuyers who might otherwise have applied for an FHA-insured 

mortgage. Certain conventional mortgage products also permit down 

payment assistance. 

10See GAO, Mortgage Financing: FHA’s $7 Billion Reestimate Reflects Higher Claims and 

Changing Loan Performance Estimates, GAO-05-875 (Washington, D.C.: Sept. 2, 2005).

1112 U.S.C. Section 1711 (g).

12Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE) chartered by 

Congress that purchase mortgages from lenders across the country, financing their 

purchases by borrowing or issuing mortgage-backed securities that are sold to investors.
Page 9 GAO-06-24 Mortgage Financing

Figure 1: Number of FHA-Insured Single-Family Purchase Money Loans, Fiscal 

Years 2000 through 2005

Note: Loans insured by FHA’s 203(b) program, its main single-family program, and its 234(c) 

condominium program. Small specialized programs, such as 203(k) rehabilitation and 221(d) 

subsidized mortgages, were not included. 

Homebuyers with FHA-insured loans need to make a 3 percent 

contribution toward the purchase of the property. FHA, like many 

conventional mortgage lenders, permits homebuyers to obtain these funds 

from certain third-party sources and use the money for the down payment 

and closing costs. Generally, mortgage industry participants accept as 

third-party sources relatives, a borrower’s employer, government agencies, 

and charitable organizations (nonprofits).13 

13Some mortgage industry participants consider secondary financing a type of down 

payment assistance. Secondary financing may take the form of an additional mortgage or 

secured loan that pays for a down payment, closing costs, or both. For the purposes of this 

report, we do not include secondary financing as a type of down payment assistance 

because the funds are not a gift. 

0

200

400

600

800

1,000

Number of loans (in thousands)

Fiscal year

Source: GAO.

2005

(projected

total)

2000 2001 2002 2003 2004
Page 10 GAO-06-24 Mortgage Financing

Among nonprofits that provide down payment assistance, some receive 

contributions from property sellers. When a homebuyer receives down 

payment assistance from one of these organizations, the organization 

requires the property seller to make a financial payment to their 

organization. These nonprofits are commonly called “seller-funded” down 

payment assistance providers. Examples of seller-funded nonprofits that 

provide the most down payment assistance to homebuyers with FHAinsured mortgages, include: Nehemiah Corporation of America; 

AmeriDream, Incorporated; and The Buyers Fund, Incorporated. A 1998 

memorandum from HUD’s Office of the General Counsel found that funds 

from a seller-funded nonprofit were not in conflict with FHA’s guidelines 

that prohibit down payment assistance from sellers.14 In contrast, some 

nonprofits do not require property sellers to make a financial payment to 

their organization in return for providing down payment assistance to a 

homebuyer. Examples of these nonprofits that provide the most down 

payment assistance to homebuyers with FHA-insured mortgages, include 

the Clay Foundation, Incorporated; and Family Housing Resources, 

Incorporated. For a nonprofit to provide down payment assistance to a 

homebuyer, regardless of its funding source, FHA requires that the 

organization have a Taxpayer Identification Number.15 FHA does not 

approve down payment assistance programs administered by nonprofits; 

instead, lenders are responsible for assuring that the gift to the homebuyer 

from a nonprofit meets FHA requirements. 

FHA relies on lenders to underwrite the loans and determine their 

eligibility for FHA mortgage insurance. Lenders wanting to participate in 

FHA’s mortgage programs receive approval from HUD. As of August 2004, 

over 10,000 lending institutions had been approved. These lenders review 

loan applications and assess applicants’ creditworthiness and ability to 

make payments. FHA relies on these lenders to ensure compliance with 

FHA standards. Lenders often initiate the use of down payment assistance 

from seller-funded down payment assistance providers. Additionally, FHA 

and its lenders rely upon appraisers to provide an independent and 

accurate valuation of properties. A primary role of appraisals in the loan 

underwriting process is to provide evidence that the collateral value of a

14HUD Office of the General Counsel, April 7, 1998; Memorandum; Subject: Nehemiah 

Homeownership 2000 Program—Downpayment Assistance. 

15A Taxpayer Identification Number is an identification number used by the IRS in the 

administration of tax laws.
Page 11 GAO-06-24 Mortgage Financing

property is sufficient to avoid losses on a loan if the borrower is unable to 

repay the loan. 

Legislation sets certain standards for FHA-insured loans. Currently, 

depending on a property’s appraised value and the average closing costs 

within a state, the LTV limits range from 97.15 to 98.75 percent.16 However, 

because FHA allows financing of the up-front insurance premium, 

borrowers can receive a mortgage with an effective LTV ratio of close to 

100 percent. FHA also has flexibility in how it implements changes to an 

existing product. For example, the HUD Secretary can change underwriting 

requirements for existing products and has done this many times. Specific 

examples include a decrease in items considered as borrower’s debts and 

an expanded definition of what can be included as borrower’s effective 

income when lenders calculate qualifying ratios. Additionally, HUD is 

supporting a legislative proposal that would enable HUD to insure 

mortgages with no down payment. Borrowers would also be able to finance 

certain closing costs. FHA would charge borrowers premiums that would 

be higher than those for FHA’s regular 203(b) mortgage product. The 

program is targeted to first-time homebuyers, and borrowers would be 

required to participate in homebuyer counseling. According to HUD, a zero 

down payment program would provide FHA with a better way to serve 

families in need of down payment assistance. We previously recommended 

that Congress and FHA consider a number of means to mitigate the risks 

that a no down payment product and any other new single-family insurance 

product may pose. Such means may include limiting the initial availability 

of new products, requiring higher premiums, and requiring stricter 

underwriting and enhanced monitoring. Such risk mitigation techniques 

would help protect the Fund while allowing FHA time to learn more about 

the performance of such loans.17

1612 U.S.C. 1709 (b) (2) (B) (ii).

17See GAO, Mortgage Financing: Actions Needed to Help FHA Manage Risks from New 

Mortgage Products, GAO-05-194 (Washington, D.C.: Feb. 11, 2005).
Page 12 GAO-06-24 Mortgage Financing

The mortgage industry is increasingly using credit scoring, automated 

underwriting, and mortgage scoring. Credit scoring models, which estimate 

the credit risk of individuals’, use statistical analyses that identify the 

characteristics of borrowers who are most likely to make loan payments 

and then create a weight or score for each characteristic. Credit scores, 

also known asFICO scores because they are generally based on software 

developed by Fair, Isaac and Company, range from 300 to 850, with higher 

scores indicating a better credit history. Automated underwriting is the 

process of collecting and processing the data used in the underwriting 

process. During the 1990s, private mortgage insurers, the GSEs, and larger 

financial institutions developed automated underwriting systems, and by 

2002 more than 60 percent of all mortgages were underwritten using these 

systems. This percentage continues to rise.18 Mortgage scoring is a 

technology-based tool that relies on the statistical analysis of millions of 

previously originated mortgage loans to determine how key attributes such 

as credit history, property characteristics, and mortgage terms affect future 

loan performance. FHA has developed and recently implemented a 

mortgage scoring tool, called the Technology Open to Approved Lenders 

(TOTAL) Mortgage Scorecard, that can be used in conjunction with 

existing automated underwriting systems. 

18Susan Wharton Gates, Vanessa Gail Perry, and Peter Zorn, “Automated Underwriting in 

Mortgage Lending: Good News for the Underserved,” Housing Policy Debate, vol. 13, no. 2 

(2002).
Page 13 GAO-06-24 Mortgage Financing

We identified and reviewed three studies that evaluated the extent to which 

the presence of down payment assistance impacts loan performance, but 

these analyses have been limited in that they do not consider other 

variables that may be important to delinquency and claim, such as 

borrowers’ credit scores and the period during which a loan is observed. 

HUD’s OIG conducted two studies looking at defaults on FHA-insured 

loans with down payment assistance.19 In the first study, the OIG found that 

the default rate for a sample of FHA-insured loans with down payment 

assistance provided by Nehemiah, a seller-funded nonprofit, was more than 

double that of loans that did not get assistance from this nonprofit (4.64 

percent and 2.11 percent, respectively). The second more recent study 

found that the default rate for the same sample of Nehemiah-assisted loans 

had quadrupled to 19.42 percent. Moreover, this default rate was double the 

default rate for loans that did not get assistance from this nonprofit (9.7 

percent). The OIG’s studies did not adjust for other variables that could 

potentially explain these differences in loan performance, such as 

differences in borrowers’ credit scores or house price appreciation after 

the loans were originated. In response to the OIG’s findings, FHA 

contracted for analysis of a sample of FHA-insured loans to identify the 

presence and source of down payment assistance. A coalition of down 

payment assistance nonprofits, Homeownership Alliance of Nonprofit 

Downpayment Providers (HAND), released a study which found that 

delinquency rates for loans with assistance from nonprofits were about 11 

percent higher than for loans with gifts from relatives. HAND also noted 

that the delinquency rates on loans with assistance from nonprofits were 

about the same as the delinquency rates on loans receiving other forms of 

assistance.20 The HAND study adjusted for geographic distribution, but not 

for other factors, such as borrowers’ credit scores or the age of the loans. 

Because loans with assistance from nonprofits were a small portion of 

FHA’s portfolio until 2000, most of the loans in this sample with assistance 

from nonprofits would have had little time in which to experience a 

delinquency, unlike other loans in the sample.

19The first HUD OIG study evaluated a sample of Nehemiah loans in four cities that were 

originated between August 1997 and May 1999; the OIG evaluated the performance of these 

loans as of October 25, 1999. For the second study, the HUD OIG generated a random 

sample of FHA-insured loans originated in October 1997 through March 2001 and 

reevaluated the performance of the sample of FHA-insured loans in the first study as of 

February 2002.

20This study analyzed loans endorsed in October 1997 through September 2001 and 

evaluated their performance, as of May 15, 2003. 
Page 14 GAO-06-24 Mortgage Financing

The Percentage of 

Purchase Loans in 

FHA’s Portfolio with 

Down Payment 

Assistance Has Been 

Increasing Since 2001

As the number of home mortgages FHA insures each year has fallen, the 

number of FHA-insured single-family purchase money loans with nonprofit 

down payment assistance has not. As a result, the proportion of loans with 

down payment assistance that FHA insures each year has increased 

significantly. From 2000 to 2004, the total proportion of FHA-insured singlefamily purchase money loans that had an LTV ratio greater than 95 percent 

and that also involved down payment assistance, from any source, grew 

from 35 to nearly 50 percent (fig. 2).21 Assistance from nonprofit 

organizations, about 93 percent of which were funded by sellers, accounted 

for an increasing proportion of this assistance. Approximately 6 percent of 

FHA-insured loans received down payment assistance from nonprofit 

organizations in 2000, but, by 2004 this figure had grown to about 30 

percent.22 Our analysis of a sample of FHA-insured loans from 2000 to 2002 

showed that the average amount of down payment assistance, regardless of 

source, was about $3,400 and that the amount of down payment assistance 

relative to sales price was about 3 percent.23 

21The data sample we relied on included only FHA-insured, single-family purchase money 

loans with an LTV ratio greater than 95 percent. Loans with an LTV ratio greater than 95 

percent account for almost 90 percent of FHA’s total portfolio. 

22Loans insured by FHA’s 203(b) program, its main single-family program, and its 234(c) 

condominium program. Small specialized programs, such as 203(k) rehabilitation and 

221(d) subsidized mortgages, were not included. For 2000, 2001, and 2002, our analysis is 

based on a representative sample of FHA-insured purchase money loans with an LTV ratio 

greater than 95 percent. For 2003, 2004, and 2005, our analysis is based on the total universe 

of FHA-insured purchase money loans with an LTV ratio greater than 95 percent. HUD data 

do not differentiate between nonprofit down payment assistance providers that receive 

funding from sellers and those that do not. See the note to figure 2 for details on the 

proportions of loans in the samples with seller-funded assistance. 

23Ninety percent of assistance from seller-funded nonprofit organizations was between 2.8 

and 5.5 percent of the sales price; however, 90 percent of assistance from other sources was 

between 1.0 percent and 8.8 percent of the sales price. 
Page 15 GAO-06-24 Mortgage Financing

Figure 2: Number of FHA-Insured Single-Family Purchase Money Loans and Percentage of Loans with Down Payment 

Assistance, by Source (Loans with LTV Ratio Greater Than 95 percent, Fiscal Years 2000-2005)

Note: Percentage of loans with down payment assistance by source for 2000, 2001, and 2002 are 

based on a representative sample of FHA-insured purchase money loans with an LTV ratio greater 

than 95 percent. Of the loans in the sample with nonprofit assistance, 93.5 percent had seller-funded 

assistance, 1.8 percent had nonseller-funded assistance, 0.5 percent had assistance from a nonprofit 

with both seller-funded and nonseller-funded programs, and 4.2 percent had assistance from 

nonprofits with a status that we could not identify. For these years, our category “nonprofit” includes 

only loans with assistance from nonprofit organizations we could verify as requiring funds from sellers 

2000 2001 2002 2003 2004 2005

Number of loans (in thousands)

Down payment assistance by source

Year

64.2%

24.5%

5.8%

5.5%

4.2%

3.1%

3.0%

3.3% 4.1%

67.6%

18.7%

9.5%

63.4%

17.0%

16.5%

60.8% 15.0%

21.2%

51.5%

14.7%

30.5%

44.8%

13.4%

37.7%

Source: GAO analysis of data from Concentrance Consulting Group and FHA's Single-Family Data Warehouse.

761 744 718

581

456

853 843

800

645

515

347

159

(as of April)

305

(projected total)

0

200

400

600

800

1,000

Other

No down payment assistance

Nonprofit

FHA-insured loans

with LTV ratios

greater than 95%

Loans receiving

down payment 

assistance Relative

Total number of FHA-insured loans
Page 16 GAO-06-24 Mortgage Financing

as a condition of providing assistance. All other loans with nonprofit assistance were included in the 

nonseller-funded (other sources) group.

Percentage of loans with down payment assistance by source for 2003 through April 2005 are based 

on the total universe of FHA-insured purchase money loans with an LTV ratio greater than 95 percent. 

For these years, our category “nonprofit” includes loans with assistance from all nonprofit 

organizations. We reviewed the nonprofit assistance provider for 95.2 percent of the loans with 

nonprofit assistance. Of these loans, 93.5 percent had seller-funded assistance, 1.5 percent had 

nonseller-funded assistance, 1.1 percent had assistance from a nonprofit with both seller-funded and 

nonseller-funded programs, and 3.9 percent had assistance from nonprofits with a status that we could 

not identify. We did not review nonprofit organizations that provided a low volume of assistance. 

As figure 2 illustrates, the total number of FHA-insured loans originated fell 

dramatically between 2001 and 2005. Realtors that we spoke to from across 

the country told us that fewer homebuyers were using FHA-insured 

mortgages, opting instead for conventional low and zero down payment 

mortgage products and loans with secondary financing that do not require 

private mortgage insurance. In addition, officials from government 

agencies that provide down payment assistance noted either a decrease in 

the use of FHA mortgage insurance, an increase in the demand for 

conventional mortgages, or both. 

Although the number of FHA-insured loans decreased markedly from 2001 

to 2004, the number of FHA-insured loans with down payment assistance 

did not. As a result, these loans constitute a growing share of FHA’s total 

portfolio. Growth in the number of seller-funded nonprofit providers and 

the growing acceptance of this type of assistance have contributed to the 

increase in the use of down payment assistance. According to industry 

professionals, relatives have traditionally provided such assistance, but in 

the last 10 years other sources have emerged, including not only sellerfunded nonprofit organizations, but also government agencies and 

employers. The mortgage industry has responded by developing practices 

to administer this type of assistance, such as FHA’s policies requiring gift 

letters and documentation of the transfer of funds. Lenders also reported 

that seller-funded down payment assistance providers, in particular, have 

developed practices accepted by FHA and lenders. For example, sellerfunded programs have standardized gift letter and contract addendum 

forms for documenting both the transfer of down payment assistance funds 

to the homebuyer and the financial contribution from the property seller to 

the nonprofit organization. As a result, for FHA-insured loans, lenders are 

increasingly aware of and willing to accept down payment assistance, 

including from seller-funded nonprofits.
Page 17 GAO-06-24 Mortgage Financing

States that have higher-than-average percentages of FHA-insured loans 

with nonprofit down payment assistance, primarily from seller-funded 

programs, tend to be states with lower-than-average house price 

appreciation rates (fig. 3).24 From May 2004 to April 2005, 34.6 percent of all 

FHA-insured purchase money loans nationwide involved down payment 

assistance from a nonprofit organization, and 15 states had percentages 

that were higher than this nationwide average. Fourteen of these 15 states 

also had house price appreciation rates that were below the median rate for 

all states. In addition, the eight states with the lowest house appreciation 

rates in the nation all had higher-than-average percentages of nonprofit 

down payment assistance. Generally, states with high proportions of FHAinsured loans with nonprofit down payment assistance were concentrated 

in the Southwest, Southeast, and Midwest. 

24We measured house price appreciation using data from Global Insight, Inc., for the end of 

the fourth quarter of 2003 to the end of the fourth quarter of 2004.
Page 18 GAO-06-24 Mortgage Financing

Figure 3: Percentage of FHA-Insured Single-Family Purchase Money Loans Using Nonprofit Down Payment Assistance and 

House Price Appreciation Rates, by State

Sources: GAO analysis of HUD data for May 2004–April 2005 (top map data); Global Insights, Inc., data for the end of the fourth 

quarter of 2003 to the end of the fourth quarter of 2004 (bottom map data); Art Explosion (map images).

Less than 10%

10% - 30%

30% - 50%

More than 50%

Percentage of loans with

down payment assistance

Less than 5%

More than 15%

10% - 15%

5% - 10%

House price

appreciation rate

Down payment

assistance

House price

appreciation
Page 19 GAO-06-24 Mortgage Financing

Some real estate agents we spoke with commented that in housing markets 

with low house appreciation rates, sellers do not typically receive multiple 

offers for their properties. As a result, they may turn to seller-funded down 

payment assistance providers to attract and expand the pool of potential 

homebuyers and facilitate purchase transactions that can result in higher 

sales prices. In contrast, in real estate markets with high house 

appreciation rates, such as San Francisco and New York City, mortgage 

industry participants reported that they generally see more assistance in 

the form of secondary financing involving first and second mortgages. This 

assistance is often provided by government agencies and nonprofit 

instrumentalities of government. In addition, lenders and private mortgage 

insurers described housing markets located on the coasts, and in urban 

areas in general as having higher proportions of homebuyers utilizing down 

payment assistance in the form of secondary financing. 

Purchase transactions in which the seller was a builder had higher usage of 

nonprofit down payment assistance than did other purchase transactions. 

In our sample of loans endorsed in 2000, 2001, and 2002, homes sold by 

builders were more than twice as likely to involve down payment 

assistance from seller-funded nonprofits as homes sold by nonbuilder 

property sellers. Specifically, of the home purchase transactions involving 

nonbuilder property sellers, 8.3 percent had seller-funded down payment 

assistance, compared with 19.3 percent of transactions with homes sold by 

builders. Ninety-seven percent of the loans originated by one lender that 

was affiliated with a builder involved nonprofit down payment assistance. 

Seller-Funded 

Assistance Affects 

Home Purchase 

Transactions and Can 

Raise House Prices

The presence of down payment assistance from seller-funded nonprofits 

can alter the structure of purchase transactions and often results in higher 

house prices. As we have seen, homebuyers may receive down payment 

assistance from a variety of sources besides seller-funded nonprofits, 

including relatives and various government and nonprofit homebuyer 

assistance programs. When buyers receive assistance from sources other 

than seller-funded nonprofits, the home purchase takes place like any other 

purchase transaction—buyers use the funds to pay part of the house price, 

the closing costs, or both, reducing the mortgage by the amount they pay 

and creating “instant equity.” However, seller-funded down payment 

assistance programs typically require property sellers to make a financial 

contribution and pay a service fee after the closing, creating an indirect 

funding stream from property sellers to homebuyers that does not exist in a 

typical transaction. Further, our analysis indicated and mortgage industry 

participants we spoke with reported that property sellers often raised the 
Page 20 GAO-06-24 Mortgage Financing

sales price of their properties in order to recover the contribution to the 

seller-funded nonprofit that provided the down payment assistance. In 

these cases, homebuyers may have mortgages that were higher than the 

true market value price of the house and would have acquired no equity 

through the transaction.

Seller-Funded Down 

Payment Assistance 

Changes the Structure of the 

Purchase Transaction

FHA guidelines state that providers of down payment assistance may not 

have an interest in the sale of the property, noting that assistance from 

sellers, real estate agents, builders, and associated entities are considered 

an inducement to buy.25 FHA guidelines do allow sellers to contribute up to 

6 percent of the sales price toward closing costs, although none of this 

money can be used to meet the 3 percent borrower contribution 

requirement.26 Contributions from sellers exceeding 6 percent of the sales 

price or exceeding the actual closing costs result in a dollar-for-dollar 

reduction to the sales price when calculating the loan’s LTV ratio. In spite 

of these FHA requirements, FHA lists among acceptable providers not only 

relatives, a borrower’s employer, and homeownership programs but also 

charitable organizations (nonprofits)—including those that are funded by 

contributions from property sellers. Like down payment assistance from all 

other sources, FHA does not limit the amount of assistance from sellerfunded nonprofits, and homebuyers can use this assistance for the down 

payment and closing costs. 

As a result, individuals and entities that HUD has described as having an 

interest in the sale of a property may provide gift assistance to homebuyers 

indirectly through these nonprofits, effectively circumventing the 6 percent 

rule. The presence of this type of assistance changes the way a property is 

purchased by creating an indirect funding stream from the seller to the 

buyer (fig. 4). That is, after the closing, these organizations commonly 

require property sellers to provide both a financial payment equal to the 

amount of assistance paid to the homeowner and a service fee. Before the 

sale of the property, sellers that partner with these nonprofits often 

complete an addendum to the sales contract that outlines, as a condition of 

25HUD, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties, 

Handbook 4155.1 Rev-5. Chapter 2, Section 3, “Borrower’s Cash Investment in the Property” 

(October 2003).

26HUD, Handbook 4155.1 Rev-5, Chapter 1, Section 2, “Maximum Mortgage Amounts” 

(October 2003).
Page 21 GAO-06-24 Mortgage Financing

the sale, their commitment to providing a financial payment and fee after 

closing (fig. 5). 

Figure 4: Structure of FHA Individual Purchase Transaction, with Nonseller-Funded Down Payment Assistance and with SellerFunded Down Payment Assistance

Buyer

$100K

$3K

Sold:

$103K

Lender

Appraiser FHA

Real estate

agents

Seller

Source:

• Seller-funded

 nonprofit

 organization

$3K

Source: GAO.

Nonseller-funded down payment assistance Seller-funded down payment assistance

$ Down payment 

$ FHA-insured mortgage through lender

$ Monthly mortgage payments on principal and interest

Potential sources of down payment assistance

Buyer

$97K

Sold:

$100K

Lender

Appraiser FHA

Real estate

agents

Seller

$3K

$ $

Fee

+

Property appraisal: $100K Property appraisal: $103K

Source:

• Nonseller-funded 

 nonprofit organization

• Relative

• Other (employer, 

government agency, etc.)
Page 22 GAO-06-24 Mortgage Financing

Figure 5: Generic Illustration of Addendum to the Sales Contract Completed Prior to 

Closing that Facilitates Seller’s Commitment to Providing Financial Payment to the 

Nonprofit Organization after Closing

Seller-Funded Down 

Payment Assistance Often 

Results in Higher Sales 

Prices

When a homebuyer receives down payment assistance from a seller-funded 

nonprofit, property sellers often raise the sales price of the property to

recover the required payment to the nonprofit providing the assistance. 

GAO analysis of a national sample of FHA-insured loans endorsed in 2000, 

2001, and 2002 suggests that homes with seller-funded assistance were 

appraised and sold for about 3 percent more than comparable homes 

without such assistance.27 Additionally, our analysis of more recent loans, a 

sample of FHA-insured loans settled in March 2005, indicates that homes 

sold with nonprofit assistance were appraised and sold for about 2 

percentage points more than comparable homes without nonprofit

Source: GAO.

Nonprofit ABC Participating Home Agreement

Dear Seller:

Welcome to Nonprofit ABC's down payment assistance program. For homebuyers interested in properties

under our program and using an eligible loan program (e.g., an FHA loan), we offer gift funds to help make 

homeownership a reality.

Your signature below qualifies your home for our program. By signing, you also agree to make a

contribution to Nonprofit ABC in the event a buyer using our down payment assistance program 

purchases your property.

Seller agrees to pay Nonprofit ABC contribution and processing fee:

Contribution amount

(1-10% of purchase price)

Processing fee

$+ = $ $

Total due to

Nonprofit ABC

Note: Payment of the above contribution and processing fee is contingent upon a buyer using

Nonprofit ABC's down payment assistance program to purchase your home.

27We drew the sample of loans for this analysis from a national sample of FHA-insured loans 

developed through a file review study funded by HUD and conducted by the Concentrance 

Consulting Group. The sample consisted of just over 5,000 purchase money loans endorsed 

in 2000, 2001, and 2002 with LTV ratios greater than 95 percent.
Page 23 GAO-06-24 Mortgage Financing

assistance.28 To examine the possibility that sales prices of homes with 

seller-funded assistance were in fact higher than sales prices of comparable 

homes without such assistance, we contracted with First American Real 

Estate Solutions to provide estimates of the value of homes in a sample of 

FHA-insured loans. The values were calculated for the month prior to the 

closing, using an AVM. AVMs, which use statistical processes to estimate 

the property values, using property characteristics and trends in sales 

prices in the surrounding areas, are widely used in the mortgage industry 

for quality control and other purposes. We examined the ratio of the 

estimated AVM values to the appraisal values and sales prices and found 

that the ratios for loans with seller-funded nonprofit down payment 

assistance ranged from about 2 to 3 percentage points lower than the ratios 

for loans without such assistance. In other words, for loans with sellerfunded down payment assistance, the appraised value and sales price were 

higher as compared with loans without such assistance. See appendix II for 

the details of our analysis.

28The sample of loans for this analysis is a stratified random sample of 2,000 FHA-insured 

purchase money loans with first amortization dates in April 2005, extracted from FHA's 

Single-Family Data Warehouse.
Page 24 GAO-06-24 Mortgage Financing

In addition, some mortgage industry participants told us that homes 

purchased with down payment assistance from seller-funded nonprofits 

may be appraised for higher values than if the same homes were purchased 

without assistance. Appraisers we spoke with said that lenders, realtors, 

and sellers sometimes pressured them to “bring in the value” in order to 

complete the sale. Additionally, a prior HUD contractor study corroborates 

the existence of these pressures.29 FHA requires lenders to provide 

information to appraisers about the source and amount of assistance. 

However, FHA reporting requirements do not require lenders to inform 

appraisers whether the source of the assistance is a seller-funded 

nonprofit.30 HUD has issued several Mortgagee Letters that provide 

clarifications regarding FHA standards and requirements for loans with 

down payment assistance.31 For example, in January 2005, HUD issued a 

Mortgagee Letter to clarify FHA’s standards requiring that appraisers be 

informed of the presence and source of down payment assistance, 

regardless of its source.32 Also in January 2005, HUD issued a Mortgagee 

Letter to reiterate that lenders are required to ensure that appraisals 

comply with FHA requirements.33 Lenders we spoke with reported that 

they document the source of the assistance—a relative, nonprofit, and a 

borrower’s employer, for instance—but, typically do not inform appraisers 

about the relationship between the seller and the down payment assistance 

provider.

Marketing materials from seller-funded nonprofits often emphasize that 

property sellers using these down payment assistance programs earn a 

higher net profit than property sellers who do not. These materials show 

sellers receiving a higher sales price, that more than compensates for the 

fee typically paid to the down payment assistance provider. For 

homebuyers who receive assistance from seller-funded nonprofits, the 

higher sales prices result in mortgages that are higher than mortgages made 

29Concentrance Consulting Group, An Examination of Downpayment Gift Programs 

Administered by Nonprofit Organizations, prepared for the U.S. Department of Housing 

and Urban Development (Washington D.C.: March 2005).

30HUD: Mortgagee Letter 2005-02, Seller Concessions and Verification of Sales, Jan. 4, 2005.

31HUD issues Mortgagee Letters to inform mortgage industry participants of changes in 

FHA’s operations, policies, and procedures.

32HUD: Mortgagee Letter 2005-02, Seller Concessions and Verification of Sales, Jan. 4, 2005.

33HUD: Mortgagee Letter 2005-06, Lender Accountability for Appraisals, Jan. 28, 2005.
Page 25 GAO-06-24 Mortgage Financing

using other types of down payment assistance, such as a gift from a 

relative, or with no assistance at all. 

Additionally, several mortgage industry participants we interviewed noted 

that when homebuyers obtained down payment assistance from sellerfunded nonprofits, property sellers increased their sales prices to recover 

their payments to the nonprofits providing the assistance. Again, a prior 

HUD contractor study corroborates the existence of this practice.34 A 

higher sales price results in a larger loan for the same collateral and, 

therefore, a higher effective LTV ratio (fig. 6). 

Figure 6: Example of LTV Ratio Calculations for FHA-Insured Loans, by Source of Down Payment Funds 

The higher sales price that often results from a transaction involving sellerfunded down payment assistance can have the perverse effect of denying 

buyers any equity in their properties and creating higher effective LTV 

ratios. As we have seen, FHA guidance stipulates that any financial 

34Concentrance Consulting Group, An Examination of Downpayment Gift Programs 

Administered by Nonprofit Organizations, prepared for the U.S. Department of Housing 

and Urban Development (Washington D.C.: March 2005).

Down

payment

assistance

No assistance

Seller-funded

nonprofit

Nonseller-funded

(e.g., relative)

Required

borrower

contribution

(3%)

Financed

closing

costs

(.75%)

Loan amount 

before up-front 

insurance 

premium

Up-front

insurance

premium

(1.5%)

Total

mortgage

Home

value

Effective

LTV

ratio

Purchase

price

99.2

99.2

102.2

100,000

100,000

$100,000

750.00

750.00

$772.50

97,750.00

97,750.00

$100,682.50

1,466.25

1,466.25

$1,510.24

(3,000)

(3,000)

($3,090)

- + = =

100,000

100,000

$103,000

99,216.25

99,216.25

$102,192.73 %

Sources: GAO and HUD.

+

Assumptions:

 • A home with a market value of $100,000. (Our analysis of a sample of FHA-insured loans endorsed in fiscal years 2000, 2001, and 2002 indicates that the 

 median sales price for FHA-insured loans with down payment assistance, regardless of source, was about $105,000.)

 • Seller participation in a seller-funded nonprofit down payment assistance program with an agreement to raise the sales price 3 percent higher than the 

 home’s market value. 

 • 3 percent borrower contribution.

 • A state with high closing costs, so the maximum LTV ratio is 97.75. 

 • Buyer financing closing costs of .75 percent of the purchase price.

 • Up-front insurance premium financing of 1.5 percent of the purchase price.
Page 26 GAO-06-24 Mortgage Financing

assistance provided by a party with an interest in the sale of the property is 

limited to 6 percent of the sales price and can be used only for closing 

costs. Contributions from interested parties, such as sellers, that exceed 6 

percent of the sales price or the actual closing costs result in a dollar-fordollar reduction to the sales price when calculating the loan’s LTV ratio. 

Along with the maximum allowable LTV ratio, the effect of this requirement 

is to ensure that FHA homebuyers obtain a certain amount of “instant 

equity” at closing. That is, when the sales price represents the fair market 

value of the house, and the homebuyer contributes 3 percent of the sales 

price at the closing, the LTV ratio is less than 100 percent. But when a seller 

raises the sales price of a property to accommodate a contribution to a 

nonprofit that provides down payment assistance to the buyer, the buyer’s 

mortgage may represent 100 percent or more of the property’s true market 

value. 

FHA-Insured Loans 

with Down Payment 

Assistance, particularly 

from Seller-Funded 

Nonprofits, Do Not 

Perform as Well as 

Similar Loans without 

Assistance

Holding other variables constant, FHA-insured loans with down payment 

assistance do not perform as well as similar loans without such assistance. 

Furthermore, loans with down payment assistance from seller-funded 

nonprofits do not perform as well as loans with assistance from other 

sources. This difference in performance may be explained, in part, by the 

higher sales prices of comparable homes bought with seller-funded down 

payment assistance. 

For our analyses, we used two samples (i.e., national and MSA) of FHAinsured single-family purchase money loans endorsed in 2000, 2001, and 

2002.35 We grouped the loans into the following three categories: 

• loans with assistance from seller-funded nonprofit organizations, 

• loans with assistance from nonseller-funded sources, and 

35The data (current as of June 30, 2005) consisted of loans insured by FHA's 203(b) program, 

its main single-family program, and its 234(c), condominium program. Small specialized 

programs, such as 203(k) rehabilitation and 221(d) subsidized mortgages, were not in the 

sample. The national sample included all 50 states and the District of Columbia, but not U.S. 

territories. The Metropolitan Statistical Area (MSA) sample consisted of loans from three 

MSAs with high rates of down payment assistance (Atlanta, Indianapolis, and Salt Lake 

City). Performance is measured by claim rate, 90-day delinquency rate, and rate of loss given 

default.
Page 27 GAO-06-24 Mortgage Financing

• loans without assistance.36 

We analyzed loan performance by source of down payment assistance, 

controlling for the maximum age of the loan. As shown in figure 7, in both 

samples and in each year, loans with down payment assistance from sellerfunded nonprofit organizations had the highest rates of delinquency and 

claims, and loans without assistance the lowest. Specifically, between 22 

and 28 percent of loans with seller-funded assistance had experienced a 90-

day delinquency, compared to 11 to 16 percent of loans with assistance 

from other sources and 8 to 12 percent of loans without assistance. The 

claim rates for loans with seller-funded assistance ranged from 6 to 18 

percent, for loans with other sources of assistance ranged from 5 to 10 

percent, and for loans without assistance from 3 to 6 percent.

36HUD data does not differentiate between nonprofit down payment assistance providers 

that receive funding from sellers and those that do not. The group of seller-funded nonprofit 

organizations includes only nonprofit organizations we could verify as requiring funds from 

sellers as a condition of providing assistance. All other nonprofits were included in the 

nonseller-funded (other sources) group. In the national and MSA samples combined, 1,655 

loans had at least one gift letter source indicating a nonprofit. Of those, 1,548 (93.5 percent) 

were seller-funded, 29 (1.8 percent) were not seller-funded, 8 (.5 percent) were from a 

nonprofit with both seller-funded and nonseller-funded programs, and 70 (4.2 percent) were 

from nonprofits with a status that we could not identify. 
Page 28 GAO-06-24 Mortgage Financing

Figure 7: Delinquency and Claim Rates, by Maximum Age of Loan and Source of Down Payment Funds 

Note: Analysis based on data from two samples of loans drawn for a file review study funded by HUD 

and conducted by the Concentrance Consulting Group. The sampled loans were purchase money 

loans endorsed in 2000, 2001, and 2002 with LTV ratios greater than 95 percent. The national sample 

consisted of just over 5,000 loans, and the MSA sample consisted of 1,000 loans for each of the three 

MSAs: Atlanta, Indianapolis, and Salt Lake City. 

Delinquency rates Claim rates

0

5

10

15

20

25

30

3 years 4 years 5 years

MSA

Percentage

0

5

10

15

20

25

30

3 years 4 years 5 years

National

Percentage

0

5

10

15

20

25

30

3 years 4 years 5 years

MSA

Percentage

0

5

10

15

20

25

30

3 years 4 years 5 years

National

Percentage

No down payment assistance

Nonseller-funded assistance

Seller-funded assistance

Source: GAO.

Maximum age of loan
Page 29 GAO-06-24 Mortgage Financing

Even when other variables relevant to loan performance were held 

constant, loans with down payment assistance and, in particular, sellerfunded assistance, had higher delinquency and claim rates. In order to test 

whether other factors correlated with the receipt of seller-funded 

assistance—for example, the concentration of these loans in slowly 

appreciating areas—we used regression analyses that controlled for this 

and other potentially relevant variables (see app. III for the details of our 

analyses).37 As figure 8 illustrates, seller-funded assistance was found to 

have a substantial impact on claim and delinquency in both the national 

and MSA samples. 

Specifically, the results from the national sample indicated that assistance 

from a seller-funded nonprofit raised the probability that the loan had gone 

to claim by 76 percent relative to similar loans with no assistance. 

Differences in the MSA sample were even larger; the probability that loans 

with seller-funded nonprofit assistance would go to claim was 166 percent 

higher than it was for comparable loans without assistance. Similarly, 

results from the national sample showed that down payment assistance 

from a seller-funded nonprofit raised the probability of delinquency by 93 

percent compared with the probability of delinquency in comparable loans 

without assistance. For the MSA sample, this figure was 110 percent.38 

37We built four econometric models with differing variables as predictors of the conditional 

probability of a loan becoming 90 days delinquent or resulting in a claim. For the analysis 

presented here, we used a model based on variables used in FHA’s TOTAL Mortgage 

Scorecard, augmented with other variables. The variables included in the model based on 

the augmented TOTAL Mortgage Scorecard variables were: LTV (the initial loan-to-value 

ratio), FICO score (and an indicator variable for borrowers without a FICO score), borrower 

reserves, front-end ratio (housing payment to income ratio), year of endorsement, mortgage 

term (15 or 30 years), mortgage type (adjustable or fixed-rate), underserved area, 

condominium and first-time homebuyer indicators, house price appreciation measured at 

the state level, variables reflecting the passage of time, and variables indicating the presence 

and source of down payment assistance.

38The differences between seller-funded down payment assistance and no down payment 

assistance are statistically significant with a one-tailed test at a level of 1 percent.
Page 30 GAO-06-24 Mortgage Financing

Loans with down payment assistance from nonseller-funded sources did 

not perform as well as loans without assistance when other variables 

relevant to loan performance were held constant. We found that this type of 

down payment assistance had a substantial impact on the probability of 

claim and delinquency in both the national and MSA samples (see fig. 8). In 

the national sample, it raised the probability of claim by 49 percent and the 

probability of delinquency by 21 percent relative to similar loans with no 

down payment assistance.39 In the MSA sample, it raised the probability of 

claim by 45 percent and the probability of delinquency by 36 percent 

compared with loans without assistance.40 

39The differences between nonseller-funded assistance and no assistance in the national 

sample are statistically significant for claims and delinquencies at 1 percent and 5 percent, 

respectively, in one-tailed tests. 

40The differences between nonseller-funded assistance and no assistance in the MSA sample 

are statistically significant at 5 percent in one-tailed tests. 
Page 31 GAO-06-24 Mortgage Financing

Figure 8: Effect of Down Payment Assistance on the Probability of Delinquency and 

Claim, Controlling for Selected Variables

Note: Loans without down payment assistance are set at 100 percent. The results show the effect of a 

change in the variable on the odds ratio—that is, the probability of a claim (or delinquency) divided by 

the probability of not experiencing a claim (or delinquency). However, the probability of experiencing a 

claim or delinquency in any given quarter is fairly small; so, the change in the odds ratio is very close to 

the change in the probability. The analysis is based on data from two samples of loans drawn for a file 

review study funded by HUD and conducted by the Concentrance Consulting Group. The loans in the 

samples were endorsed in 2000, 2001, and 2002 and had LTV ratios greater than 95 percent. The 

national sample consisted of just over 5,000 loans and the MSA sample consisted of 1,000 purchase 

money loans for each of the three MSAs: Atlanta, Indianapolis, and Salt Lake City. The loan 

performance data (current as of June 2005) are from HUD’s Single-Family Data Warehouse. For a 

detailed description of the regression model and other data sources, see appendix III.

No down payment assistance

Nonseller-funded assistance

Seller-funded assistance

Relative

delinquency

probabilities

Percentage

Relative

claim probabilities

Percentage

Source: GAO.

0

50

100

150

200

250

300

0

50

100

150

200

250

300

MSA National MSA National
Page 32 GAO-06-24 Mortgage Financing

The higher probability of claims in the MSA sample, as compared to the 

national sample, may be attributable to higher house price appreciation 

rates at the national level as compared to the MSAs. Research suggests that 

delinquent borrowers who have accumulated equity in their properties are 

more likely than other borrowers to prepay in order to avoid claims.41 

During the 5-year period from the first quarter of 2000 to the last quarter of 

2004, the median house price increase in the national sample was about 39 

percent. During the same period, the Salt Lake City, Indianapolis, and 

Atlanta MSAs realized increases in the median price of existing homes of 11 

percent, 18 percent, and 32 percent, respectively. On average, then, 

borrowers in the national sample could be expected to have accumulated 

more equity than those in the MSAs and to be more likely to sell their 

homes and prepay their mortgages if they faced delinquency. The effect of 

the increased LTV ratio associated with loans with seller-funded down 

payment assistance may be less important in the presence of substantial 

accumulated equity.42

The effect of seller-funded down payment assistance on loan performance 

is substantial and to achieve an equivalent decline in loan performance 

requires substantial changes in other factors. For example, the presence of 

seller-funded down payment assistance increased claims by 76 percent. 

Adjusting other factors to increase claims by 76 percent would require 

lowering a borrower’s credit score about 60 points, for example, or raising 

the payment to income ratio about 25 percentage points. Both of these 

adjustments to a loan are significant. 

41Brent W. Ambrose and Charles A. Capone, “The Hazard Rates of First and Second 

Defaults,” Journal of Real Estate Finance and Economics, vol. 20, no. 3 (May 2000), 275–93; 

Michelle A. Danis and Anthony Pennington-Cross, “A Dynamic Look at Subprime Loan 

Performance,” Federal Reserve Bank of St. Louis Working Paper 2005-029A (May 2005), 

available at http://research.stlouisfed.org/wp/2005/2005-029.pdf.

42Our claim probability findings for nonseller-funded down payment assistance were similar 

with the national and MSA samples.
Page 33 GAO-06-24 Mortgage Financing

We also examined differences in loss severities between loans with sellerfunded assistance and unassisted loans. Although our analysis was 

tentative because many claims had not yet completed the property 

disposition process, it suggested that the ultimate losses from loans with 

seller-funded assistance were greater than other loans. We could determine 

the net profit or loss for only 184 loans from the national sample and for 

only 205 loans from the MSA sample. We used a regression to predict the 

loss rate, or the dollar amount of loss (or profit, in a few cases), divided by 

the original mortgage balances.43 The loss rate for loans with seller-funded 

assistance was about 5 percentage points higher in both samples. The 

differences were not statistically significant in the national sample but 

were in the MSA sample. Our analysis of loss severities indicated no 

significant differences in loss rates between unassisted loans and loans 

with nonseller-funded assistance in the national sample. In the MSA 

sample, loans with nonseller-funded assistance did have statistically 

significantly higher loss rates. 

The weaker performance of loans with seller-funded down payment 

assistance may be explained, in part, by the higher sales prices of homes 

when buyers receive such assistance, resulting in higher effective LTV 

ratios. Prior GAO analysis has found that, controlling for other factors, high 

LTV ratios lead to increased claims.44 Our analysis of AVM data in the 

national sample of loans endorsed in 2000, 2001, and 2002 indicated that the 

sales prices of homes with seller-funded down payment assistance were 3 

percent higher than the sales prices of comparable homes without it, 

leading to higher effective LTV ratios for these loans. GAO analysis 

suggests that this 3 percent difference in sales price translates into a 16 

percent increase in claims. Claim rates for loans with seller-funded 

assistance in the 2000–2002 national sample were about 19 percent to 39 

percent higher than claim rates for loans with other forms of assistance—a

43The other explanatory variables were the LTV ratio at the time the loan was originated, the 

interest rate on the mortgage at the time the loan was originated, the original mortgage 

balance, the borrower’s credit score, and the estimated appreciation in house prices since 

the time the loan was originated, along with indicators for a gift from a seller-funded 

nonprofit or a gift from another source. 

44GAO-01-460.
Page 34 GAO-06-24 Mortgage Financing

difference that may largely explain the difference in claim rates between 

seller-funded and other forms of assistance.45

Stricter Standards and 

Additional Controls 

Could Help FHA 

Manage the Risks 

Posed by Loans with 

Down Payment 

Assistance 

FHA has implemented some standards and internal controls to manage the 

risks associated with loans with down payment assistance, but stricter 

standards and additional controls could help the agency better manage the 

risks these loans pose. First, FHA applies the same standards to loans with 

down payment assistance that it applies to all loans but is less restrictive in 

the sources of down payment assistance it permits than other mortgage 

industry participants. Government internal control guidelines advise 

agencies to consider and recognize the value of industry practices that may 

be applicable to agency operations.46 Private mortgage insurers, Fannie 

Mae, and Freddie Mac offer practices that could be instructive in this 

instance. Mortgage industry participants told us that they viewed down 

payment assistance from seller-funded nonprofits as an inducement and, 

therefore, either restricted or prohibited its use. FHA does not share this 

view and has not held this assistance to the same limits it places on funds 

from sellers. Second, FHA has assessed, on an ad hoc basis, the 

performance of loans with down payment assistance. In contrast, 

government internal control guidelines recommend that agencies routinely 

identify risks that could impede efficient and effective management and 

develop approaches to analyze and manage risk. Finally, although FHA has 

implemented targeted monitoring of appraisers that do a high volume of 

loans with down payment assistance, the agency has not implemented 

targeted monitoring of lenders that do a high volume of loans with down 

payment assistance.

45The poorer performance of loans with down payment assistance from nonseller-funded 

sources relative to loans without assistance may be related to factors not captured by our 

regression models (see app. III). 

46GAO-01-1008G.
Page 35 GAO-06-24 Mortgage Financing

FHA Standards Permit 

Borrowers to Obtain Down 

Payment Assistance from 

Seller-Funded Sources

Government internal control guidelines do not prescribe standards 

specifically for loans with down payment assistance but do advise agencies 

to consider and recognize the value of industry practices that may be 

applicable to agency operations. FHA practices related to down payment 

assistance are in many ways comparable to industry practices. The agency 

applies the same standards to loans with down payment assistance as it 

does to other FHA-insured loans—for example, placing a 6 percent cap on 

the amount of funds sellers can contribute to loan transactions and 

requiring borrowers to meet the same underwriting requirements as other 

borrowers. FHA does not consider the presence, source, or amount of 

down payment assistance as a factor in its underwriting guidelines; more 

specifically, FHA does not include down payment assistance as a variable 

in its TOTAL Mortgage Scorecard.47 Similarly, mortgage industry 

participants reported not imposing additional underwriting criteria for 

loans with down payment assistance. 

FHA’s standards regarding sources of down payment assistance differ from 

those of key mortgage industry participants in one important respect—

while FHA permits down payment assistance from seller-funded sources, 

mortgage industry participants restrict or prohibit such assistance. FHA, 

like other mortgage industry participants, does not permit homebuyers to 

obtain down payment assistance directly from property sellers but does 

permit them to get it from nonprofits that receive contributions from 

property sellers. Further, FHA does not include down payment assistance 

from seller-funded nonprofits in the 6 percent limit that it has imposed on 

seller contributions. In contrast, some mortgage industry participants we 

met with told us that they viewed down payment assistance from sellerfunded nonprofits as an inducement and, therefore, either restricted or 

prohibited its use. Although some mortgage industry participants do permit 

homebuyers to use seller-funded nonprofits, these entities typically impose 

restrictions on the amount of assistance a homebuyer may receive and how 

the funds can be used. For example, Fannie Mae and Freddie Mac permit 

homebuyers to obtain funds provided by seller-funded nonprofits but only 

47Although FHA’s TOTAL Mortgage Scorecard does not directly consider the presence of 

down payment assistance, it is possible that a loan with down payment assistance “looks 

better” as compared with a loan without assistance, because (1) the effective LTV ratio is 

higher than the LTV ratio entered into the TOTAL Mortgage Scorecard because the dollar 

value used for the property value may be higher for transactions utilizing seller-funded 

down payment assistance and (2) the borrower reserves are higher (because the borrower 

doesn't have to use their own funds to make the down payment)—both of which would raise 

the borrower's score.
Page 36 GAO-06-24 Mortgage Financing

up to 3 percent of the sales price and only for closing costs. FHA standards 

for other sources of down payment assistance are similar to those of 

mortgage industry participants we spoke with. Specifically, neither limits 

the amount of assistance a homebuyer may receive from sources such as 

relatives, and this money can be used for the down payment, as well as the 

closing costs. Also, as mentioned earlier, FHA applies the same 

underwriting standards to loans with down payment assistance as it applies 

to loans without such assistance.

Mortgage industry participants we spoke with cited three reasons for 

restricting down payment assistance from seller-funded nonprofits. First, 

some mortgage industry participants noted that seller-funded nonprofits 

are not disinterested third parties because of the contingency requiring 

contributions from sellers after the loan closes. Second, some mortgage 

industry participants noted that homebuyers receiving down payment 

assistance from seller-funded nonprofits often finance larger loan amounts 

than they would otherwise because sellers increase the sales price to 

compensate for the contribution. Third, some mortgage industry 

participants noted that, in effect, seller-funded nonprofits can be used as 

intermediaries to enable sellers to contribute funds in excess of HUD’s 6 

percent limit on seller contributions. 

Additionally, another HUD program has more restrictive standards on 

permitted sources of down payment assistance. The American Dream 

Downpayment Initiative, a program administered by HUD’s Office of 

Community Planning and Development that provides grants for down 

payment assistance programs, does not permit seller-funded nonprofits to 

administer its funds.48 And, in 1999, HUD proposed a rule that would 

prohibit borrowers from obtaining down payment assistance from 

organizations that received funds from sellers. HUD stated that this rule 

was “intended to prevent a seller from providing funds to an organization 

as a quid pro quo for that organization’s down payment assistance for 

purchase of one or more homes from the seller.”49 HUD later withdrew this 

48HUD’s Office of Community Planning and Development administers this grant program, 

which provides down payment assistance funds to homebuyers. Initially, HUD awards funds 

to state and local governments that are participating jurisdictions. These jurisdictions may 

choose to designate nonprofit organizations to administer the funds, but not seller-funded 

nonprofits. 

49Proposed Rule, The U.S. Department of Housing and Urban Development, 24 C.F.R. Part 

203, 64 F.R. 49956 (Sept. 14, 1999).
Page 37 GAO-06-24 Mortgage Financing

rule after receiving 1,871 public comments on the proposed rule; all but 21 

opposed it. 

HUD officials noted that HUD permits seller-funded down payment 

assistance because the assistance does not compromise FHA guidance 

prohibiting homebuyers from using funds from property sellers and other 

interested parties toward a down payment. FHA considers seller 

contributions to the homebuyer in excess of 6 percent of the sales price 

and direct seller down payment assistance as inducements to purchase that 

must be factored into the purchase transaction.50 These funds result in a 

dollar-for-dollar reduction to the sales price before the LTV ratio is 

calculated. Further, FHA requires any down payment assistance be 

essentially a gift that is not subject to repayment. HUD officials stated that 

seller-funded nonprofits are not sellers and do not require homebuyers to 

pay back the funds. In addition, these officials noted that the seller and 

buyer—in a transaction involving seller-funded down payment assistance—

agree on the sales price and pointed out that the contribution the nonprofit 

receives from the seller after the closing supports future homebuyers. For 

these reasons, we were told, HUD did not recognize a direct relationship 

between the property seller and the homebuyer stemming from the 

activities of the seller-funded nonprofit organization.

Although FHA applies many of the same standards to loans with down 

payment assistance as it applies to other loans, it does impose additional 

documentation requirements on loans with down payment assistance. 

Lenders must obtain a “gift letter” that includes the donor’s name and 

contact information; an explanation of the donor’s relationship to the 

borrower; the dollar amount of the assistance; and a statement that 

specifies that no repayment is required. They must ensure that the down 

payment assistance meets FHA’s requirements, document the Taxpayer 

Identification Numbers for all nonprofits, and provide evidence of the 

transfer of funds from the donor to the borrower.51 As noted earlier, lenders 

must also tell appraisers when a transaction involves down payment 

50Other inducements can include repair allowances, moving costs, and items such as cars, 

furniture, and televisions.

51Our review of FHA loan-level data found that a small percentage (less than 1 percent) of 

loans with down payment assistance from nonprofits did not have a documented Taxpayer 

Identification Number, but instead included the number “999999999.” Additionally, we found 

that at least 1.97 percent of the loans had Taxpayer Identification Numbers that were not 

associated with a tax-exempt organization. Loan level data analyzed includes FHA singlefamily mortgages originated from October 2003 through April 2005. 
Page 38 GAO-06-24 Mortgage Financing

assistance and its source, and appraisers must include this information in 

their reports. However, FHA guidance does not require lenders to inform 

appraisers if the source of the assistance is a seller-funded nonprofit. 

FHA Does Not Conduct 

Routine Loan Performance 

Analyses on Loans with 

Down Payment Assistance 

Government risk assessment guidelines recommend that agencies 

routinely identify risks that could impede efficient and effective 

management and develop approaches, either qualitative or quantitative, to 

analyze and manage these risks. Additionally, some mortgage industry 

participants reported that they did some quantitative loan performance 

analyses on loans with down payment assistance in order to understand the 

risks associated with these loans. 

FHA has conducted some risk analysis on its loans with down payment 

assistance. For example, FHA officials recently told us that they had been 

analyzing the performance of loans with down payment assistance on an ad 

hoc basis. FHA’s Office of Evaluation has been conducting analyses since 

February 2000, comparing the performance of loans with down payment 

assistance with those made without assistance. For example, from January 

through July 2005, FHA carried out four ad hoc loan performance analyses 

of all FHA-insured loans. FHA’s analyses indicate that loans with down 

payment assistance do not perform as well as loans without down payment 

assistance. However, according to FHA officials FHA has not undertaken 

ongoing periodic loan performance analyses that consider the presence 

and source of down payment assistance.

HUD has also initiated two research efforts to evaluate down payment 

assistance as it relates to FHA-insured loans and down payment assistance. 

The first study evaluated the accuracy of loan-level data maintained in 

HUD’s information systems and collected information on sources and 

amounts of gift assistance.52 The study included a comparison of data 

found in key documents FHA maintained with the information lenders had 

transmitted via the Computerized Homes Underwriting Management 

System (CHUMS).53 This research found that, for loans with down payment 

assistance, the gift amounts and sources in HUD’s information system were 

52Concentrance Consulting Group, Audit of Loans with Downpayment Assistance, 

prepared for the U.S. Department of Housing and Urban Development (Washington, D.C.: 

Feb. 6, 2004). 

53FHA tracks the presence and source of down payment assistance in an information system 

(CHUMS). 
Page 39 GAO-06-24 Mortgage Financing

frequently missing or different from the information in the documents. The 

study also found that needed Taxpayer Identification Numbers were 

missing for 74 percent of loans reviewed that involved assistance from 

nonprofit organizations. As a result of the study, HUD clarified the data 

requirements for loans with down payment assistance. For example, in 

January 2005 HUD reiterated its requirement for lenders to provide 

information on the presence, amount, and source of down payment 

assistance. 

The second study evaluated the influence of assistance from seller-funded 

nonprofits on the origination of FHA-insured loans through interviews with 

various mortgage industry participants.54 This study found that sellerfunded down payment assistance providers serve primarily as conduits for 

the transfer of down payment funds between buyers and sellers in order to 

meet HUD’s gift eligibility requirement. Additionally, the study found that 

many appraisers, mortgage lenders, underwriters, seller-funded down 

payment assistance providers, and real estate agents reported that homes 

sold with seller-funded down payment assistance had inflated appraised 

values and property sales prices. The second study resulted in a report 

issued in March 2005 and included several recommendations to FHA. FHA 

is currently assessing whether HUD should approach loans with down 

payment assistance differently (e.g., apply an enhanced risk-based 

premium structure on loans with down payment assistance from certain 

sources); but as of September 2005 FHA had not taken any action.

54Concentrance Consulting Group, An Examination of Downpayment Gift Programs 

Administered by Non-profit Organizations, prepared for the U.S. Department of Housing 

and Urban Development (Washington, D.C.: March 2005).
Page 40 GAO-06-24 Mortgage Financing

FHA annually contracts for an actuarial review. A key component of this 

review is an assessment of loan performance. These analyses of loan 

performance—which also help in estimating program subsidy costs—

consider a number of factors including the loan’s LTV ratio and mortgage 

age. However, the presence and source of down payment assistance were 

not included in these loan performance analyses prior to the actuarial 

review for 2005.55 This actuarial review indicates that down payment 

assistance has a significant impact on the performance of these loans. 

Specifically, when the actuarial review incorporated down payment 

assistance into the econometric model, the estimated value of FHA’s 

insurance fund for 2005 decreased by $1.8 billion. The actuarial review also 

stated that down payment assistance “has had a major economic impact on 

the fund” and that these loans should be closely monitored. However, the 

analysis in the actuarial review may understate the magnitude of the effect 

of down payment assistance on claim rates because the gift letter source 

variable used in the actuarial review understates the number of loans with 

gift assistance for loans endorsed between 2000 and 2002, according to 

HUD’s contractors. Additionally, the impact of down payment assistance 

may be greater than found in the actuarial review. Specifically, the actuarial 

review’s estimates of loan performance are based on the historical 

experience of loans made with down payment assistance, most of which 

were originated between 2000 and 2005—a period marked by rapid house 

price appreciation. However, because down payment assistance has a 

greater impact in areas of low price appreciation, should the rate of house 

price appreciation decline in the future, the effects of down payment 

assistance may be greater. Further, the actuarial review does not examine 

the impact that the presence and source of down payment assistance may 

have on claim severity. As noted earlier, FHA recently took action to clarify 

data reporting requirements regarding the source and amount of down 

payment assistance, but these FHA reporting requirements do not 

differentiate seller-funded nonprofits from nonseller-funded types of 

nonprofits.56

55Technical Analysis Center, Inc. with Integrated Financial Engineering, Inc. “An Actuarial 

Review of the Federal Housing Administration Mutual Mortgage Insurance Fund for 

Fiscal Year 2005,” prepared for the U.S. Department of Housing and Urban Development 

(Fairfax, VA: Oct. 14, 2005).

56HUD: Mortgagee Letter 2005-02, Seller Concessions and Verification of Sales, Jan. 4, 2005.
Page 41 GAO-06-24 Mortgage Financing

FHA’s Monitoring of Down 

Payment Assistance 

Lending is Limited

Government internal control guidelines advise agencies to monitor 

external entities that perform critical functions, in part to ensure that these 

entities are accountable for their operations. FHA relies on numerous 

outside entities—including lenders and appraisers—to perform critical 

functions, including functions specific to loans with down payment 

assistance. As we have seen, lenders must ensure that assistance provided 

by nonprofits organizations meets FHA requirements and that the 

nonprofits have current Taxpayer Identification Numbers. Furthermore, 

FHA and its lenders rely upon appraisers to provide an independent and 

accurate valuation of properties, including confirmation of sales and 

financing concessions such as down payment assistance and seller 

contributions. 

Two recent GAO reviews found that FHA performs some oversight of both 

lenders and appraisers, but that opportunities exist for improved 

monitoring.57 As we have seen, additional opportunities still exist for 

improving FHA’s monitoring of loans with down payment assistance. FHA 

carries out risk-based monitoring of lenders and appraisers that are 

involved in the process of endorsing FHA-insured loans, using loan 

performance data (e.g., higher early defaults and claims), complaints of 

irregularities or fraudulent practices, the results of technical reviews of 

individual loans, and other factors to target lenders for review. However, 

FHA has not implemented targeted monitoring of lenders that do a high 

volume of loans with down payment assistance. HUD monitors appraisers 

that it has determined pose risks to FHA’s insurance fund, targeting 

individual appraisers on several risk factors, such as involvement with 

loans that have early default rates and those that are insured under HUD 

programs known to be at a higher risk of fraud and abuse. FHA has also 

implemented targeted monitoring of appraisers that do a high volume of 

loans with down payment assistance. When an appraiser is targeted, FHA 

first does a desk review and then, if necessary, conducts a field review.

Conclusions Homebuyers receiving down payment assistance from seller-funded 

nonprofits pay higher purchase prices, reducing their initial equity in the 

57GAO, Single-Family Housing: Progress Made, but Opportunities Exist to Improve HUD’s 

Oversight of FHA Lenders, GAO-05-13 (Washington, D.C.: Nov. 12, 2004). GAO, SingleFamily Housing: HUD’s Risk-Based Oversight of Appraisers Could be Enhanced, GAO-05-

14 (Washington, D.C.: Nov. 5, 2004).
Page 42 GAO-06-24 Mortgage Financing

home. In effect, these homebuyers are financing the down payment 

assistance and paying for it over time. Moreover, loans with down payment 

assistance—particularly from seller-funded sources—perform significantly 

worse than loans without such assistance. These loans have higher claims 

and delinquencies—meaning that some households receiving assistance 

ultimately lose their homes. However, down payment assistance has helped 

some households become homeowners, or become homeowners sooner 

than they might have without such assistance.

Down payment assistance can impose additional risks to the loans FHA 

insures, and it has taken steps toward managing these risks by conducting 

ad hoc loan performance analyses and studies. More recently, HUD has 

supported legislation for a no down payment product that would help 

homebuyers who lack down payment funds, obviating the need for down 

payment assistance. This legislation includes tools for mitigating the risks 

of such loans with higher premiums and homebuyer counseling. We 

previously recommended that Congress and FHA consider a number of 

means, such as enhanced monitoring, to mitigate the risks that a no down 

payment product and any other new single-family insurance product may 

pose. Such techniques would help protect the Fund while allowing FHA 

time to learn more about the performance of such loans.58 Likewise, such 

tools may be useful in mitigating the risks associated with loans with down 

payment assistance. 

Although FHA has taken some steps to understand the risks associated 

with loans with down payment assistance, it could take additional steps to 

understand and manage the risks that loans with down payment assistance 

represent, while still meeting its mission of expanding homeownership 

opportunities. Furthermore, because the proportion of loans FHA insures 

that involve some form of down payment assistance has increased 

dramatically in the last 5 years, and because the risks associated with down 

payment assistance are substantial, the need for FHA to better manage 

these risks has become increasingly important. For example, FHA requires 

lenders to collect and report information on the presence and source of 

down payment assistance, but it does not require them to collect and report 

whether the entity providing the assistance is funded by property sellers. 

Without this information, FHA cannot, on a regular basis, monitor and 

evaluate the prevalence of this form of assistance or its impact on loan 

performance. 

58GAO-05-194. 
Page 43 GAO-06-24 Mortgage Financing

More routine and systematic analysis of the impact that all forms of down 

payment assistance have on loan performance would also provide FHA 

with an ongoing assessment of the effect that the increasing use of down 

payment assistance is having on loan performance. Though we found that 

the presence and source of down payment assistance is an important 

predictor of loan performance, FHA does not now include it as a factor in 

its TOTAL Mortgage Scorecard automated underwriting tool. We 

recommended in our September 2005 report that FHA assess and report the 

impact that including the presence of down payment assistance would have 

on the forecasting ability of the loan performance models used in FHA’s 

actuarial reviews of the Fund.59 Consistent with our recommendation, in 

October 2005, FHA, for the first time, included down payment assistance as 

a factor in its annual actuarial review estimates of loan performance. 

However, because data on the use and source of down payment assistance 

is still limited, the review may underestimate the impact that down 

payment assistance has on claims. Further the review does not consider 

the impact that down payment assistance may have on the severity of 

claims. 

Finally, although FHA holds lenders and appraisers accountable for the 

quality of appraisals, appraisers may not have complete information 

affecting the sales price of the home. Specifically, FHA requires lenders to 

inform appraisers of all contract terms, including seller concessions, which 

may include down payment assistance. However, FHA does not require 

lenders to inform appraisers when down payment assistance is provided by 

a seller-funded nonprofit. Further, as we have seen, such assistance creates 

an indirect funding stream from the seller to the buyer and, thus, becomes, 

in effect, a seller inducement. However, because FHA does not consider 

down payment assistance from a seller-funded nonprofit an inducement to 

purchase, it does not require that lenders reduce the sales price before 

applying the appropriate LTV ratio.

Recommendations for 

Executive Action

While balancing the goals of providing homeownership opportunities and 

managing risk, FHA should consider implementing additional controls to 

manage the risks associated with loans that involve “gifts” of down 

payment assistance, especially from seller-funded nonprofit organizations, 

as these loans pose additional risks to the FHA mortgage insurance fund. 

59GAO-05-875.
Page 44 GAO-06-24 Mortgage Financing

Specifically, given the increased risks posed by loans with down payment 

assistance, from any source, we recommend that the Secretary of HUD 

direct the Assistant Secretary for Housing (Federal Housing 

Commissioner) to consider the following four actions to better understand 

and manage these risks:

• To provide FHA with data that would permit the agency to identify 

whether down payment assistance is from a seller-funded down 

payment assistance provider, modify FHA’s “gift letter source” 

categories to include “nonprofit seller-funded” and “nonprofit nonsellerfunded” and require lenders to accurately identify and report this 

information when submitting loan information to FHA;

• To more fully consider the risks posed by down payment assistance 

when underwriting loans, include the presence and source of down 

payment assistance as a loan variable in FHA’s TOTAL Mortgage 

Scorecard during the underwriting process; 

• To ensure that FHA has an ongoing understanding of the impact that 

down payment assistance has on loan performance, implement routine 

and targeted performance monitoring of loans with down payment 

assistance, including analyses that consider the source of assistance; 

and

• To more accurately reflect the impact that down payment assistance has 

on loan performance, continue to include the presence and source of 

down payment assistance in future loan performance models. To 

enhance the actuarial reviews’ estimates of claims, consider including in 

the annual review of actuarial soundness, the impact that the presence 

and source of down payment assistance has on claim severity. 

We further recommend that the Secretary of HUD direct the Assistant 

Secretary for Housing (Federal Housing Commissioner) to take the 

following two actions to balance the goals of expanding homeownership 

and sustaining the actuarial soundness of the Fund by managing the risks 

associated with loans that involve “gifts” of down payment assistance from 

nonprofit organizations that receive funding from sellers:

• To ensure that appraisers have the information necessary to establish 

the market value of the properties, require lenders to inform appraisers 

about the presence of down payment assistance from a seller-funded 

source; and 
Page 45 GAO-06-24 Mortgage Financing

• Because down payment assistance provided by seller-funded entities is, 

in effect, a seller inducement, revise FHA standards to treat assistance 

from seller-funded nonprofits as a gift from the seller and, therefore, 

subject to the prohibition against using seller contributions to meet the 

3 percent borrower contribution requirement.

Agency Comments and 

Our Evaluation

We provided a draft of this report to HUD for its review and comment. We 

received written comments from HUD’s Assistant Secretary for Housing 

(Federal Housing Commissioner), which are reprinted in appendix IV. HUD 

generally agreed with the report’s findings, noting that the analysis of loan 

performance is consistent with its own findings regarding the performance 

of loans with down payment assistance and how seller-funded down 

payment assistance programs operate. HUD also agreed to take steps that 

will improve its oversight of down payment assistance lending. Specifically, 

HUD will modify its information systems to document assistance from 

seller-funded nonprofits, and HUD will consider incorporating down 

payment assistance into FHA’s TOTAL Mortgage Scorecard and requiring 

lenders to inform appraisers when assistance is provided by seller-funded 

nonprofits.

The department commented on certain aspects of selected 

recommendations. First, although HUD agreed with the report’s 

recommendation to perform routine and targeted loan performance 

analyses of loans with down payment assistance, it maintained that FHA 

already performs monitoring of these loans. We recognized that FHA has 

conducted ad hoc risk analyses of its loans with down payment assistance. 

Additionally, the actuarial review of FHA’s insurance Fund for 2005 

includes, for the first time, down payment assistance as a variable in its 

model of loan performance. Consistent with our findings, the 2005 actuarial 

review found the presence of down payment assistance to be a significant 

factor in explaining loan performance. Further, the 2005 actuarial review 

states that loans with down payment assistance should be closely 

monitored. We agree. Because the proportion of loans FHA insures that 

involve some form of down payment assistance is growing dramatically, 

and because the risks associated with down payment assistance are 

substantial, we continue to recommend that FHA more routinely monitor 

the performance of loans with down payment assistance.

Second, HUD disagreed with our recommendation that it should revise its 

standards to prohibit the use of down payment assistance from sellerfunded nonprofit organizations to meet the three percent borrower 
Page 46 GAO-06-24 Mortgage Financing

contribution requirement. Our recommendation was based on our 

conclusion that the down payment assistance provided by seller-funded 

nonprofits was, in effect, a seller inducement to purchase. As the basis of 

its disagreement with our recommendation, FHA cites a 1998 internal HUD 

Office of the General Counsel memorandum, acknowledged in our report. 

The 1998 HUD memorandum reasoned that as long as seller-funded down 

payment assistance is provided to the buyer before closing, and the seller’s 

contribution to the nonprofit entity occurs after closing, the buyer has not 

received funds that can be directly traced to the seller’s contribution. 

We realize that FHA relies on HUD’s 1998 memorandum to authorize sellers 

to do indirectly what they cannot do directly, namely provide gifts of down 

payment assistance to buyers. We continue to believe that HUD should 

recognize that because gifts of down payment assistance from sellerfunded nonprofits are ultimately funded by the sellers, they are like gifts of 

down payment assistance made directly by sellers. We, therefore, continue 

to believe that FHA should revise its standards to treat assistance from a 

seller-funded entity as a seller inducement to purchase.

In addition, as noted in our report, HUD agreed with our conclusion and 

recommendation after it issued its 1998 memorandum. In 1999, HUD 

proposed a rule that would have prohibited use of gifts from nonprofit 

organizations for buyers’ down payment assistance, if the organizations 

received funds for the gifts—directly or indirectly—from sellers. Although 

HUD later withdrew the rule without substantive explanation, we continue 

to believe HUD’s rationale in proposing the rule was correct.

Third, in its comment letter, HUD stated that FHA has incorporated the 

source of down payment assistance in the 2005 actuarial review of the 

Mutual Mortgage Insurance Fund, which was published during the course 

of obtaining HUD’s comments on a draft of this report. In response, we 

have added information describing the analyses contained in the 2005 

actuarial review, and modified our recommendation to address a weakness 

in the actuarial review’s analysis of down payment assistance, and to 

emphasize the need to continue considering the presence and source of 

down payment assistance in future loan performance models.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

appropriate Congressional Committees and the Secretary of Housing and 
Page 47 GAO-06-24 Mortgage Financing

Urban Development. We also will make copies available to others upon 

request. In addition, the report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-8678 or shearw@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 major contributions to this 

report are listed in appendix V.

Sincerely yours,

William B. Shear

Director, Financial Markets and

Community Investment
Page 48 GAO-06-24 Mortgage Financing

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

To examine trends in the use of down payment assistance with loans 

insured by the Federal Housing Administration (FHA), we obtained loan 

data from the U.S. Department of Housing and Urban Development (HUD) 

on single-family purchase money mortgage loans—that is, loans used for 

the purchase of a home rather than to refinance an existing mortgage. 

First, to measure the use of down payment assistance from fiscal year 2000 

to 2002, we used two samples of loans originally drawn for a file review 

study funded by HUD and conducted by the Concentrance Consulting 

Group (Concentrance).1

 That study found that FHA’s Single-Family Data 

Warehouse was not a reliable source for identifying loans with down 

payment assistance. A review of paper files indicated that down payment 

assistance was frequently not recorded in the database and that the source 

of the assistance (government, nonprofit, relative, etc.) was often 

miscoded. Therefore, we limited our review to the 8,294 files reviewed by 

Concentrance for which the presence, source, and amount of assistance 

had been ascertained from a review of the paper files. The national sample 

consisted of just over 5,000 loans from a simple random sample of FHA 

purchase money loans endorsed in fiscal years 2000, 2001, and 2002, while 

the Metropolitan Statistical Area (MSA) sample consisted of just over 1,000 

purchase money loans from each of the three MSAs (Atlanta, Indianapolis, 

and Salt Lake City) endorsed over the same time period.2

 Only loans with 

loan-to-value (LTV) ratios greater than 95 percent were sampled. The 

sample included loans insured by FHA’s 203(b) program, its main singlefamily program, and its 234(c) condominium program. Small specialized 

programs, such as 203(k) rehabilitation and 221(d) subsidized mortgages 

were not included in the sample.

Second, to measure the use of down payment assistance for fiscal years 

2003, 2004, and 2005, we obtained from HUD loan-level data for singlefamily purchase money loans with an LTV ratio greater than 95 percent. We 

utilized HUD’s loan-level data for these years, because in January 2003 FHA 

implemented changes to its data collection requirements for loans with 

1

For a full description of this sample, see Concentrance Consulting Group, Audit of Loans 

with Downpayment Assistance, prepared for the U.S. Department of Housing and Urban 

Development, Feb. 6, 2004. 

2

According to HUD officials, HUD selected the Atlanta and Indianapolis MSAs for the 

Concentrance review because the use of down payment assistance was relatively high in 

those MSAs. HUD chose the Salt Lake City MSA because it had relatively high rates of down 

payment assistance and relatively high claim rates.
Appendix I

Objectives, Scope, and Methodology

Page 49 GAO-06-24 Mortgage Financing

down payment assistance. We believed that these changes should lead to 

improved data quality. 

We analyzed the data, by source of assistance, for trends in loan volume 

and in the proportion of loans with down payment assistance. For fiscal 

years 2000, 2001, and 2002, we generalized the percentage breakouts from 

the representative sample to the universe of FHA-insured single-family 

purchase money loans endorsed in these years. We also analyzed state-bystate variations in the proportion of loans with nonprofit down payment 

assistance; loans endorsed from May 2004 through April 2005 were 

included in this analysis. We met with appropriate FHA officials to discuss 

the quality of the data. Based on these discussions, we determined that the 

FHA data we used were sufficiently reliable for our analysis. 

To examine the structure of the purchase transaction for loans with and 

without down payment assistance, we reviewed HUD policy guidebooks 

and reports on down payment assistance. We also interviewed HUD 

officials; staff from Fannie Mae and Freddie Mac; staff from selected 

conventional mortgage providers, private mortgage insurers, mortgage 

industry groups representing realtors and appraisers, state and local 

government agencies, and nonprofit down payment assistance providers; 

and individual real estate agents and appraisers. During the interviews, we 

asked a structured set of questions designed for the particular type of 

industry participant. We also reviewed the Web sites of selected mortgage 

industry participants.

To examine how down payment assistance impacts the prices of houses 

purchased with FHA-insured loans, we examined the sales prices of homes 

by the use and source of down payment assistance using property value 

estimates derived from an Automated Valuation Model (AVM).3

 We 

contracted with First American Real Estate Solutions to obtain property 

value estimates derived from their AVMs on two samples of FHA-insured 

single-family purchase money loans. One sample included the data set of 

8,294 loans endorsed in fiscal years 2000, 2001, and 2002—the sample 

developed by Concentrance. The second sample included a stratified 

random sample of 2,000 FHA purchase money loans with first amortization 

3

AVM is a broad term used to describe a range of computerized econometric models that are 

designed to provide estimates of residential real estate property values. AVMs may use 

regression, adaptive estimation, neural networking, expert reasoning, and artificial 

intelligence to estimate the market value of a residence. 
Appendix I

Objectives, Scope, and Methodology

Page 50 GAO-06-24 Mortgage Financing

dates in April 2005, extracted from FHA's Single-Family Data Warehouse.4

We used the AVM data as benchmarks to determine if a relationship existed 

between property valuation and the presence and source of down payment 

assistance by examining the ratio of the estimated AVM value to the 

appraised value and the sales price of the home. We met with staff of First 

American Real Estate Solutions to discuss the data and models in their 

AVM, including the steps the firm takes to verify the accuracy and maintain 

the integrity of the data. Based on these discussions, we determined that 

the AVM data we used were sufficiently reliable for our analysis. For a 

detailed description of our data sources and analysis, see appendix II. 

To evaluate the influence of down payment assistance on the performance 

of FHA-insured home mortgage loans, we conducted multiple loan 

performance analyses on HUD data for the sample of loans endorsed in 

fiscal years 2000, 2001, and 2002. We used information on the source of 

down payment funds—data developed by Concentrance; delinquency, 

claim, and loss data; and other factors that research had indicated can 

affect loan performance. The loan performance data we used were current 

through June 30, 2005. First, we analyzed loan performance by source of 

down payment assistance, controlling for the maximum age of the loan. 

Second, we compared the performance of the loans by the presence and 

source of down payment assistance while holding other variables constant. 

Third, we examined the size of the effect of down payment assistance on 

loan performance relative to the size of the effect of other variables that 

influence loan performance, including LTV ratio and credit score. Fourth, 

using AVM data obtained from First American Real Estate Solutions for 

these loans, we also assessed the extent to which higher sales prices 

explained any difference in the performance of FHA-insured loans with 

down payment assistance. For a detailed description of our data sources, 

performance measures, and risk models, see appendix III.

To examine the extent to which FHA standards and controls for loans with 

down payment assistance are consistent with government internal control 

guidelines and, as appropriate, mortgage industry practices, we first 

assessed whether key FHA controls were consistent with the guidelines in 

GAO’s August 2001 Internal Control Management and Evaluation Tool.

5

4

The date of first amortization is generally the first day of the month after settlement, so that 

most of these loans would have been settled during March 2005.

5

GAO-01-1008G.
Appendix I

Objectives, Scope, and Methodology

Page 51 GAO-06-24 Mortgage Financing

These guidelines include (1) ensuring that an agency’s operations are 

consistent with any applicable industry or business norms; (2) using 

qualitative and quantitative methods to identify risk and determine relative 

risk rankings on a scheduled and periodic basis; (3) ensuring that adequate 

mechanisms exist to identify risks to the agency arising from its reliance on 

external parties to perform critical agency operations; and (4) ensuring that 

statutory requirements—as well as agency requirements, policies, and 

regulations—are applied properly. Second, we compared FHA’s standards 

and controls to mortgage industry practices, as appropriate. We 

interviewed officials from HUD, Fannie Mae, Freddie Mac, conventional 

mortgage providers, private mortgage insurers, state and local government 

agencies, and nonprofit down payment assistance providers. These entities 

provided us with information about the controls they reported using to 

manage the risks associated with affordable loan products that permit 

down payment assistance. We did not verify that these entities, in fact, used 

these controls. We also reviewed descriptions of mortgage products 

permitting down payment assistance that are supported by mortgage 

industry participants and compared the standards used by these entities.
Page 52 GAO-06-24 Mortgage Financing

Appendix II

Automated Valuation Model Analysis ApendxiI

This appendix describes our analysis of differences in the sales prices and 

appraised values of homes purchased with and without down payment 

assistance and insured by the Federal Housing Administration (FHA). The 

U.S. Department of Housing and Urban Development’s (HUD) Office of 

Inspector General (OIG) and others have indicated that appraisals and 

sales prices may be higher for homes with seller-funded assistance, relative 

to comparable homes without such assistance. Higher prices for 

comparable collateral can lead to higher loan amounts when supported by 

higher appraisals, which may cause higher delinquency, claim, and loss 

rates for loans with seller-funded assistance. To examine this possibility, 

we contracted with First American Real Estate Solutions (First American) 

to provide estimated house values from their Automated Valuation Models 

(AVM). AVMs from First American and other vendors are widely used by 

lenders, mortgage insurers, HUD, and government-sponsored enterprises 

for quality control and other purposes. 

First American obtains data from local governments, large lenders, and 

other sources on house price sales and property characteristics across 

most of the United States. These data are used in statistical analyses that 

model the sales prices of properties, as a function of their characteristics, 

and appreciation trends for the surrounding neighborhoods. The models 

estimate a property’s value on a given date, along with a likely range for 

that value and a confidence score, indicating the probability that the 

property’s true value is within 10 percent of the estimated value. First 

American used four models to value the transactions we submitted, with 

about 95 percent of the cases relying on one of two models. Both of these 

are hybrid models, in that they use both hedonic regression to estimate 

property value and repeat sales methods to estimate a more precise 

estimated value for a property.1

 Hedonic regression places values on the 

characteristics of a property, such as square footage, number of bathrooms, 

and presence of a garage, to use when examining comparable properties. 

The repeat sales method uses multiple sales of the same properties over 

time to estimate the growth rates, and then uses these growth rates to 

estimate a sales price based on the previous sales prices of the property 

and the estimated growth rate in prices. In about 5 percent of the cases, 

when these two models could not provide a value estimate, two other

1

See, for example, Bradford Case, Henry Pollakowski, and Susan Wachter, “On Choosing 

Among House Price Index Methodologies,” AREUEA Journal, vol. 19 (1991), 286–307.
Appendix II

Automated Valuation Model Analysis

Page 53 GAO-06-24 Mortgage Financing

models that rely on neural net methods to produce value estimates were 

used.2

GAO provided First American with addresses for the 8,294 loans in the 

Concentrance Consulting Group (Concentrance) sample of loans endorsed 

in fiscal years 2000, 2001, and 2002.3

 First American was asked to provide 

an estimate of each home’s value with an “as-of” date 2 weeks before the 

loan’s actual settlement date. GAO also provided addresses from a 

stratified random sample of 2,000 FHA purchase money loans extracted 

from FHA’s Single-Family Data Warehouse with first amortization dates in 

April 2005. The stratification was based on the gift letter source code in 

FHA’s system, so that 1,000 loans had gift assistance from a nonprofit, and 

1,000 did not.4

 As GAO did not have the settlement dates for this sample, we 

asked the contractor to value the homes as of March 1, 2005.5

 We did not 

provide First American with any information pertaining to the source of the 

purchaser’s down payment funds.

First American might not be able to estimate the value of a particular 

property for a variety of reasons. For example, a data entry error or 

unusual address might prevent a match between FHA’s database and the 

contractor’s, or a local jurisdiction might not allow public access to 

property transaction records, reducing the number of properties in the 

contractor’s database. In addition, there might be too few transactions in an 

area to allow a precise estimate of a property’s value. “Hit rate” refers to the 

2

Neural nets are discussed in Paul Kershaw and Peter Rossini, “Using Neural Networks to 

Estimate Constant Quality House Price Indices,” Fifth Annual Pacific Rim Real Estate 

Society Conference, Kuala Lumpur, Malaysia, January 1999.

3

For a more detailed description of the data developed by Concentrance, see appendix I: 

Objectives, Scope, and Methodology.

4

For the 2000, 2001, and 2002 Concentrance sample, when we had the name and often the 

Taxpayer Identification Number of the nonprofit, we divided the sample between sellerfunded nonprofits and nonseller-funded sources, so that a gift from a nonprofit that was not 

clearly seller-funded was included in the nonseller-funded category. For the 2005 

transactions, we used FHA’s Single-Family Data Warehouse, which records the Taxpayer 

Identification Number but not the name of the nonprofit. Hence, for this analysis the 

samples were split between the categories “gift from a nonprofit” and “gift from a source 

other than nonprofit.” We were able to link the Taxpayer Identification Number to the name 

of the nonprofit for almost 90 percent of the records in the Single-Family Data Warehouse 

sample, and found that the nonprofit was seller-funded in about 94 percent of those cases.

5

The date of first amortization is generally the first day of the month after settlement, so that 

most of these loans would have settled during March 2005.
Appendix II

Automated Valuation Model Analysis

Page 54 GAO-06-24 Mortgage Financing

percentage of loans for which First American was able to make an estimate 

of property value. The hit rates were over 70 percent for the 2000, 2001, and 

2002 national and Metropolitan Statistical Area (MSA) samples and 65 

percent for the 2005 stratified national sample (tables 1-8). Hit rates were 

low for the Indianapolis component of the MSA sample, and confidence 

scores for Indianapolis were much lower than for the other two MSAs and 

for both national samples. Further, in Indianapolis, estimated values were 

much higher than sales prices for the loans that were valued. First 

American told us that Indiana is a nondisclosure state—that is, state law 

prohibits access to property transaction records by the general public.6

 For 

this reason, the contractor used secondary sources to value properties in 

this state. Utah is also a nondisclosure state. Although hit rates and 

confidence scores were higher for Salt Lake City than for Indianapolis, 

sales price ratios were also high for this MSA. Therefore, we dropped the 

Indianapolis and Salt Lake City components from one set of MSA results, 

and we present one table with just the Atlanta results. While some 

nondisclosure states, such as Indiana and Kansas, had low confidence 

scores, others did not. For example, Texas is a nondisclosure state but had 

a high hit rate and high confidence scores. First American has an 

arrangement that allows them to access Multiple Listing Service data for 

several urban counties in Texas, providing a substitute for government 

records. For two cases that clearly represented outliers in the 

Concentrance data files, we replaced a value from the Concentrance 

review with a value from the Single-Family Data Warehouse.7

To examine the possibility that the presence of seller-funded nonprofit 

down payment assistance might increase appraisals and sales prices, we 

calculated the ratio of the AVM estimate of property value to the sales price 

and the appraised value from FHA’s records. Both the numerator and 

denominator(s) were random variables. The AVM estimate was a model 

estimate with an associated error, and sales prices and appraisals reflected 

the buyer’s or appraiser’s estimate of a home’s true value, which may have 

errors of varying magnitudes. The ratio of two normally distributed random 

variables has a Cauchy distribution (a distribution with fat tails and an 

undefined mean). Hence, tests of the difference in medians are generally 

6

The others are Alaska, Kansas, Mississippi, Missouri, New Mexico, Texas, and Utah. 

7

In one case, a mortgage amount was recorded as $12,937, although the Single-Family Data 

Warehouse recorded it as $128,937, and the sales price was $130,000. In the other case, a 

sales price was recorded as $783,300, and the Single-Family Data Warehouse recorded the 

sales price as $78,300, and the mortgage was $77,362.
Appendix II

Automated Valuation Model Analysis

Page 55 GAO-06-24 Mortgage Financing

more informative than tests of differences in means.8 We tested the 

difference in medians with a Kruskal-Wallis test and the difference in 

means with a T-test. We also tested the difference in medians or in means 

using only records with confidence scores of more than 50, rejecting 

transactions with low confidence; we report these results in tables 1–8 as 

the high confidence median and the high confidence mean. We also tested 

for differences in the trimmed means, rejecting the top and bottom 1 

percent of the transactions; we report these results in tables 1–8 as the 

trimmed mean.9

 Because of the statistical problems inherent in testing the 

mean of a ratio of random variables, we relied on the difference in medians 

as our primary indicator of a significant difference in valuations.

The results of the analysis are presented in tables 1–4, which show the 

difference in the ratio of the AVM estimate to the appraised value and sales 

price for loans with and without nonprofit down payment assistance. The 

median ratio of the AVM estimate to the appraised value was slightly over 1, 

except for the MSA sample with Indianapolis included, for which the ratio 

was about 1.1.10 The median ratio of the AVM value to the sales price was 

generally 1 or 2 percentage points higher than the ratio of the AVM value to 

the appraised value, as appraised values were the same as sales prices for 

about half the transactions but were up to 4 percentage points higher than 

sales prices for most of the other half. In the national sample for 2000, 2001, 

and 2002, prices and appraisal ratios were both about 3 percentage points 

lower for loans with seller-funded assistance, indicating that sales prices 

and appraisals were typically about 3 percentage points higher for 

transactions with seller-funded assistance than they were for comparable 

homes without such assistance. The appraisal ratio was also 3 percentage 

points lower when the sample was restricted to estimated values with 

confidence scores above 50; in these cases, the sales price ratio was 4 

percentage points lower, indicating that homes with seller-funded 

8

The problem of testing means for a Cauchy distribution and the use of medians as an 

alternative are discussed in E.L. Lehmann, Theory of Point Estimation. (West Sussex, 

England: John Wiley and Sons, Inc., 1983). In particular see 352–353 and 423.

9

Use of the trimmed mean for non-normal distributions is discussed in the National Institute 

of Standards and Technology's Engineering Statistics Handbook chapter on “Exploratory 

Data Analysis,” http://www.itl.nist.gov/div898/handbook/eda/section3/eda351.htm. 

10There may be a slight upward bias to the AVM estimates for a sample consisting solely of 

FHA-insured loans. Because FHA has a maximum loan amount, only the least expensive 

homes in a high-priced neighborhood will qualify for FHA, so there will be some tendency 

for FHA-insured properties to have lower values than neighboring properties. This tendency 

should not have a differential impact on assisted and unassisted transactions.
Appendix II

Automated Valuation Model Analysis

Page 56 GAO-06-24 Mortgage Financing

assistance sold for about 4 percentage points more than comparable homes 

without assistance. Differences in the MSA sample for these years were not 

as large, with a 1 percentage point difference in the median appraisal ratio 

and differences of about 2 percentage points for the price ratio and for the 

appraisal ratio when the sample was restricted to estimated values with 

high confidence scores. Kruskal-Wallis tests for a difference in medians 

were always significant at 1 percent in one-tailed tests.11 T-tests for 

differences in means were generally significant at 5 percent or more in onetailed tests, except for the national sample appraisal ratio. T-tests were also 

conducted on differences in means with the top and bottom 1 percent of 

the ratio distribution excluded. These trimmed mean results were similar 

to the mean results but with higher significance levels and sometimes 

larger differences. 

For the March 2005 national sample, median differences in both sales price 

and appraisal ratios were about 2.3 percentage points and were statistically 

significant with p-values of less than 1 percent in one-tailed tests. These 

findings indicate that sales prices and appraisals were about 2.3 percentage 

points higher for transactions with nonprofit assistance than they were for 

comparable homes without nonprofit assistance. Mean differences were 

slightly smaller, ranging between 1 and 2 percentage points. The mean price 

difference was statistically significant at 5 percent in a one-tailed test, 

while appraisal ratio differences in means were not significant. Again, 

because of the statistical difficulties inherent in testing the ratio of two 

random variables, we relied primarily on tests of the difference in medians.

11The level of statistical significance is shown as the p-value in tables 1–8.
Appendix II

Automated Valuation Model Analysis

Page 57 GAO-06-24 Mortgage Financing

Table 1: The Ratio of AVM Value to Appraisal Value and Sales Price—Nonprofit Down Payment Assistance, National Sample, 

Fiscal Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; p-values statistically significant at 5% or better are bold. 

Table 2: The Ratio of AVM Value to Appraisal Value and Sales Price—Nonprofit Down Payment Assistance, MSA Sample, Fiscal 

Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; p-values statistically significant at 5% or better are bold. 

78 % hit rate. Confidence score: 78 median

Type

Nonprofit 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.071 1.030 1.068 1.027 1.063

Yes 1.055 1.002 1.041 1.000 1.043

Difference 0.016 0.028 0.027 0.027 0.020

p-value 0.084 0.001 0.008 0.001 0.006

Sales price 

ratio

No 1.095 1.046 1.090 1.043 1.084

Yes 1.067 1.012 1.053 1.007 1.053

Difference 0.028 0.034 0.037 0.036 0.031

p-value 0.011 0.001 0.001 0.001 0.001

85 % hit rate. Confidence score: 78 median

Type

Nonprofit 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.106 1.080 1.086 1.061 1.102

Yes 1.096 1.067 1.068 1.039 1.093

Difference 0.010 0.013 0.018 0.022 0.009

p-value 0.093 0.024 0.008 0.001 0.058

Sales price 

ratio

No 1.126 1.095 1.105 1.076 1.123

Yes 1.110 1.078 1.081 1.052 1.107

Difference 0.016 0.017 0.024 0.024 0.016

p-value 0.015 0.003 0.001 0.001 0.006
Appendix II

Automated Valuation Model Analysis

Page 58 GAO-06-24 Mortgage Financing

Table 3: The Ratio of AVM Value to Appraisal Value and Sales Price—Nonprofit Down Payment Assistance, Atlanta MSA Sample, 

Fiscal Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; p-values statistically significant at 5% or better are bold. 

Table 4: The Ratio of AVM Value to Appraisal Value and Sales Price—Nonprofit Down Payment Assistance, National Sample, 

March 2005

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; p-values statistically significant at 5% or better are bold. 

95 % hit rate. Confidence score: 85 median

Type

Nonprofit 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.037 1.013 1.035 1.012 1.035

Yes 1.025 0.989 1.022 0.988 1.012

Difference 0.012 0.024 0.013 0.024 0.023

p-value 0.165 0.001 0.130 0.001 0.002

Sales price 

ratio

No 1.057 1.028 1.056 1.027 1.057

Yes 1.039 1.001 1.036 1.001 1.026

Difference 0.018 0.027 0.020 0.026 0.031

p-value 0.079 0.001 0.056 0.001 0.001

65 % hit rate. Confidence score: 77 median

Type

Nonprofit 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.051 1.024 1.049 1.024 1.047

Yes 1.037 1.001 1.036 1.000 1.025

Difference 0.014 0.023 0.013 0.024 0.022

p-value 0.116 0.007 0.156 0.006 0.006

Sales price 

ratio

No 1.079 1.044 1.075 1.039 1.070

Yes 1.058 1.021 1.057 1.013 1.048

Difference 0.021 0.023 0.018 0.026 0.022

p-value 0.049 0.008 0.084 0.006 0.013
Appendix II

Automated Valuation Model Analysis

Page 59 GAO-06-24 Mortgage Financing

We also tested for the differences in ratios between transactions with no 

gift assistance versus transactions with gift assistance from sources other 

than nonprofits (tables 5–8). We found no significant differences in any of 

the samples that we examined and no consistent pattern in the signs of the 

differences. Transactions with assistance had differences in medians that 

were sometimes slightly positive and sometimes slightly negative. 

Table 5: The Ratio of AVM Value to Appraisal Value and Sales Price—Down Payment Assistance from Other Sources, National 

Sample, Fiscal Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; no differences were statistically significant at 5% or better. 

78 % hit rate. Confidence score: 78 median

Type

Other 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.072 1.032 1.069 1.028 1.064

Yes 1.070 1.027 1.065 1.024 1.060

Difference 0.002 0.005 0.004 0.004 0.004

p-value 0.430 0.420 0.280 0.360 0.255

Sales price 

ratio

No 1.094 1.046 1.091 1.042 1.083

Yes 1.096 1.046 1.089 1.043 1.086

Difference -0.002 0.000 0.002 -0.001 -0.003

p-value 0.500 0.397 0.420 0.500 0.500
Appendix II

Automated Valuation Model Analysis

Page 60 GAO-06-24 Mortgage Financing

Table 6: The Ratio of AVM Value to Appraisal Value and Sales Price—Down Payment Assistance from Other Sources, MSA 

Sample, Fiscal Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; no differences were statistically significant at 5% or better. 

Table 7: The Ratio of AVM Value to Appraisal Value and Sales Price—Down Payment Assistance from Other Sources, Atlanta 

MSA Sample, Fiscal Years 2000, 2001, and 2002

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; no differences were statistically significant at 5% or better. 

85 % hit rate. Confidence score: 78 median

Type

Other 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.108 1.079 1.085 1.052 1.103

Yes 1.101 1.080 1.087 1.072 1.101

Difference 0.007 -0.001 -0.002 -0.020 0.002

p-value 0.194 0.381 0.500 0.500 0.392

Sales price 

ratio

No 1.128 1.097 1.105 1.068 1.124

Yes 1.122 1.093 1.106 1.083 1.121

Difference 0.006 0.004 -0.001 -0.015 0.003

p-value 0.224 0.375 0.500 0.500 0.340

95 % hit rate. Confidence score: 85 median

Type

Other 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.037 1.012 1.036 1.012 1.035

Yes 1.036 1.017 1.033 1.017 1.036

Difference 0.001 -0.005 0.003 -0.005 -0.001

p-value 0.450 0.500 0.400 0.500 0.500

Sales price 

ratio

No 1.056 1.026 1.056 1.025 1.057

Yes 1.058 1.030 1.056 1.029 1.058

Difference -0.002 -0.004 0.000 -0.004 -0.001

p-value 0.500 0.500 0.500 0.500 0.500
Appendix II

Automated Valuation Model Analysis

Page 61 GAO-06-24 Mortgage Financing

Table 8: The Ratio of AVM Value to Appraisal Value and Sales Price—Down Payment Assistance from Other Sources, National 

Sample, March 2005

Source: GAO.

Notes: p-value is for one-tailed test; p-value of .001 means .001 or less; p-value of .5 means .5 or 

greater; no differences were statistically significant at 5% or better. 

65 % hit rate. Confidence score: 77 median

Type

Other 

assistance Mean Median

High confidence

mean

High confidence

median

Trimmed

mean

Appraisal 

value ratio

No 1.051 1.026 1.031 1.022 1.049

Yes 1.053 1.024 1.021 1.028 1.044

Difference -0.002 0.002 0.010 -0.006 0.005

p-value 0.500 0.354 0.373 0.433 0.379

Sales price 

ratio

No 1.073 1.040 1.069 1.033 1.069

Yes 1.095 1.045 1.091 1.054 1.072

Difference -0.022 -0.005 -0.022 -0.021 -0.003

p-value 0.500 0.500 0.500 0.500 0.500
Page 62 GAO-06-24 Mortgage Financing

Appendix III

Loan Performance Analysis ApendxiI

This appendix describes the econometric models that we built and the 

analysis that we conducted to examine the performance of mortgage loans 

that received down payment assistance and were insured by the U.S. 

Department of Housing and Urban Development’s (HUD) Federal Housing 

Administration (FHA). We developed multiple regression models to 

forecast delinquency, claim, prepayment, and loss on two samples of FHA 

single-family purchase money loans endorsed in 2000, 2001, and 2002.1

 The 

national sample included all 50 states and the District of Columbia but 

excluded U.S. territories. The Metropolitan Statistical Area (MSA) sample 

consisted of loans in three MSAs where the use of down payment 

assistance was relatively high: Atlanta, Indianapolis, and Salt Lake City. The 

data were current as of June 30, 2005.

Our forecasting models used observations on loan quarters—that is, 

information on the characteristics and status of an insured loan during 

each quarter of its life – to predict conditional foreclosure and prepayment 

probabilities.2

 Our model used a pair of binary logistic regressions to 

predict the probability of claim, or prepayment, as a function of several key 

predictor variables. Some of these variables, such as initial loan-to value 

(LTV) ratio, credit score, and the presence of down payment assistance, do 

not vary over the life of a loan, while others, such as accumulated equity 

from amortization and price appreciation, may change and are updated 

quarterly.

Data and Sample Selection For our analysis, we used the 8,294 loans in the Concentrance Consulting 

Group’s (Concentrance) sample of FHA single-family purchase money 

mortgage loans endorsed in fiscal years 2000, 2001, and 2002, for which the 

presence, source, and amount of assistance had been ascertained through a 

loan file review.3

 Only loans with LTV ratios greater than 95 percent were 

sampled. The national sample consisted of just over 5,000 loans from a 

1

The data consisted of loans insured in FHA's 203(b) program, FHA’s main single-family 

program, and the 234(c) condominium program. Small specialized programs, such as 203(k) 

rehabilitation and 221(d) subsidized mortgages were not in the sample.

2

These probabilities are conditional because they are subject to the condition that the loan 

has remained active until a given quarter.

3

For a more detailed description of the data developed by Concentrance, see appendix I: 

Objectives, Scope, and Methodology. For a full description of the data, see Concentrance, 

Audit of Loans with Downpayment Assistance, prepared for the U.S. Department of 

Housing and Urban Development, Feb. 6, 2004. 
Appendix III

Loan Performance Analysis

Page 63 GAO-06-24 Mortgage Financing

simple random sample of purchase money loans, while the MSA sample 

consisted of just over 1,000 purchase money loans from each of three 

MSAs: Atlanta, Indianapolis, and Salt Lake City. Concentrance’s loan file 

review also recorded the borrowers’ credit scores, an important predictor 

of loan performance that, at the time, was not captured in FHA's SingleFamily Data Warehouse.

We supplemented these files with information from FHA's Single-Family 

Data Warehouse. We then merged variables reflecting delinquency, claim, 

and prepayment information with the Concentrance files, along with 

information on borrowers’ assets and data on national and local economic 

conditions. We obtained state-level unemployment rates from the Bureau 

of Labor Statistics, 30-year fixed rate mortgage rates from Freddie Mac, 1- 

and 10-year Treasury interest rates from the Federal Reserve, the Personal 

Consumption Expenditure Deflator from the Bureau of Economic Analysis, 

and median existing house prices at the state level from Global Insights, 

Inc., in order to measure house price appreciation over time. Table 9 lists 

the names and definitions of the variables used in the models. 

Table 9: Names and Definitions of the Variables Used in Our Regression Models

Constructed risk Combines the variables used in a prior GAO report to predict claim 

probability, including initial LTV ratio, price appreciation after 

origination, loan size, location, interest rate, unemployment rate, 

loan type, and other variablesa

FICO score FICO score of borrower in case binder (if two scores, it is the lower 

score; if three scores it is the median score)

No FICO score Equals 1 if no FICO score was available for the borrower

Borrower reserves Equals 1 if the borrower had less than 2 months of mortgage 

payment in liquid assets after closing

Front-end ratio Housing payments divided by income

Seller-funded down payment assistance Equals 1 if the borrower received down payment assistance from a 

seller-funded programb

Nonseller-funded down payment assistance Equals 1 if the borrower received down payment assistance from a 

source other than a seller-funded program

Underserved area Equals 1 if the home is in a census tract designated by HUD as 

underserved

Condominium Equals 1 if the loan is a 234(c) condominium loan

First-time homebuyer Equals 1 if the borrower was flagged in HUD’s database as a firsttime homebuyer

LTV ratio The ratio of the original mortgage amount to the sales price of the 

house
Appendix III

Loan Performance Analysis

Page 64 GAO-06-24 Mortgage Financing

Source: GAO.

a

GAO-01-460.

b

In a small number of cases borrowers received both types of assistance. In these cases, the record 

was assigned to the category with the larger amount of assistance.

c

Global Insights, Inc.

Specification of 

Delinquency and Claim 

Models

The models we estimated used logistic regression to predict the probability 

of a loan becoming seriously delinquent or resulting in a claim on FHA’s 

insurance coverage, as a function of credit score, equity, and other 

variables. Equity and credit scores have consistently been found to be 

important predictors of mortgage credit risk and some studies have found 

that other variables, such as qualifying ratios, are important.4

 The 

dependent variable is the conditional probability of a loan becoming 90

15-year mortgage Equals 1 if the mortgage term is 25 years or less (mostly 15 year 

terms)

Endorsed in fiscal year 2000 Equals 1 if endorsed in fiscal year 2000

Endorsed in fiscal year 2001 Equals 1 if endorsed in fiscal year 2001

House price appreciation rate Growth rate in the median price of existing housing, reduced by 0.5 

percent per quarter to adjust for increasing quality of the housing 

stockc

First 6 quarters Number of quarters since origination, up to 6

Next 6 quarters Number of quarters since the sixth quarter after origination, up to 

12

Following quarters Number of quarters since the twelfth quarter after origination

Adjustable Rate Mortgage (ARM) Equals 1 if adjustable rate mortgage

Atlanta MSA Equals 1 if in the Atlanta MSA sample

Salt Lake City MSA Equals 1 if in the Salt Lake MSA sample

Relatively high equity The ratio of the market value of the mortgage to the book value of 

the mortgage, when greater than 1.2: measures the incentive of the 

borrower to refinance the loan

Relatively low equity The ratio of the market value of the mortgage to the book value of 

the mortgage, when less than 1.2

Initial interest rate The initial interest rate on the mortgage

Original mortgage amount The balance of the mortgage at time of origination

(Continued From Previous Page)

4

See GAO-05-194 for a review of what published research indicates about the variables that 

are most important when estimating the risk level associated with individual mortgages.
Appendix III

Loan Performance Analysis

Page 65 GAO-06-24 Mortgage Financing

days delinquent, or resulting in a claim, in a given quarter, conditional on 

the loan having survived until that quarter.5

 

We estimated the delinquency and claim regressions using both national 

and MSA samples of loans. For each of these samples, we developed four 

different delinquency regressions and four different claim regressions. The 

first model used for delinquency and claim regressions we based on the 

variables used in the FHA Technology Open to Approved Lenders (TOTAL) 

Mortgage Scorecard (used by FHA’s TOTAL Mortgage Scorecard automated 

underwriting algorithm as predictors of credit risk). These variables were 

initial LTV ratio, credit score, housing payment-to-income ratio (the frontend ratio), borrower reserves, and mortgage term (15-year or 30-year term). 

To these, we added variables for house price appreciation, variables 

reflecting the passage of time, and variables indicating the presence and 

source of down payment assistance. For the second model, we augmented 

the model based on the FHA TOTAL Mortgage Scorecard variables with 

indicators of whether the mortgage was an adjustable rate mortgage, the 

property was located in an underserved area, the property was a 

condominium, and the purchaser was a first-time homebuyer. We based the 

third regression model on GAO’s model of FHA actuarial soundness that we 

estimated in 2001.6

 That model used, among others, the initial LTV ratio, 

loan type (30-year fixed, 15-year fixed, investor, or adjustable rate 

mortgage), property type (one or multiple unit), Census division, 

accumulated equity stemming from house price appreciation and 

amortization, and a set of variables reflecting the passage of time, to 

predict the annual probability of a loan terminating in a claim. We created a 

variable called constructed risk, using the results of the 2001 actuarial 

study. Because that study used millions of loans in the model estimation, its 

estimates of the effects of certain variables, such as accumulated equity, 

may be more precise than those produced using the thousands of loans in 

the Concentrance sample. However, the actuarial study did not use credit 

score as a predictor variable or consider down payment assistance. 

Therefore, we included the constructed risk variable along with credit 

score information, borrower reserves, front-end ratio, and presence and 

source of down payment assistance. The fourth model augments GAO’s 

actuarial model by adding three variables: underserved area, condominium, 

5

Such termination probabilities are called hazard rates in statistical mortgage modeling.

6

This model is fully documented in GAO-01-460 (Washington, D.C.: Feb. 28, 2001).
Appendix III

Loan Performance Analysis

Page 66 GAO-06-24 Mortgage Financing

and first-time homebuyer. GAO estimated prepayments and losses twice, 

once in a national sample, and once in a MSA sample.

The LTV ratio calculated from FHA’s database will tend to understate the 

true LTV ratio of the mortgage if homes with seller-funded down payment 

assistance are sold for higher prices than are comparable homes without 

such assistance.7

 Comparable homes would have the same value, yet the 

home purchased with assistance may have a larger loan. For example, FHA 

regulations allow the borrower to take out a mortgage for about $99,000 on 

a $100,000 home. With seller-funded down payment assistance, the same 

home might sell for $103,000 and qualify for a $102,000 loan.8

 The 

calculated LTV ratio would be about 99 percent in each case 

($99,000/$100,000 or $102,000/$103,000), but the transaction with sellerfunded assistance would have a larger mortgage, backed by the same 

collateral. In such cases, the initial LTV ratio would be understated, the 

borrower’s equity subsequent to origination would be overstated, and the 

risk of delinquency or claim for such loans should be higher than for loans 

with comparable LTV ratios and subsequent price appreciation. To test for 

this possibility, we included a variable, seller-funded down payment 

assistance, which was set equal to 1 for loans that received seller-funded 

down payment assistance. To test for the possibility that down payment 

assistance in general, and not just seller-funded assistance, raised 

delinquency and claim probabilities, we included a variable, nonsellerfunded down payment assistance, which was set equal to 1 for loans that 

received down payment assistance from relatives, a borrower’s employer, 

government programs, nonprofits that were not seller-funded, or nonprofits 

with a source of funding that was not ascertained. 

Estimation Results Tables 10 through 17 present the estimation results for our 90-day 

delinquency regressions, and tables 18 through 25 present the results for 

our claim regressions for the national samples and MSA samples. Our 

results are consistent with other research that finds credit scores and 

accumulated equity to be important variables predicting delinquency and 

claims.9

 In specifications that use the constructed risk variable (tables 12, 

7

And the higher price is supported by an appraisal.

8

FHA requires a buyer contribution of about 3 percent, but allows the borrower to finance 

some closing costs and the mortgage insurance premium.

9

GAO-05-194.
Appendix III

Loan Performance Analysis

Page 67 GAO-06-24 Mortgage Financing

13, 16, 17, 20, 21, 24, and 25), we find it a statistically significant predictor of 

delinquency or claim. Additionally, credit score is highly significant. The 

front-end ratio, which FHA uses in its underwriting, is also very important. 

Borrower reserves, however, generally have the wrong sign, and are 

statistically insignificant. In some specifications indicators for 

condominium loans, for loans to first-time homebuyers, and for loans in 

underserved areas are added, and they are also found to be insignificant. In 

specifications that use TOTAL Mortgage Scorecard variables (tables 10, 11, 

14, 15, 18, 19, 22, and 23), credit score has statistically significant effect of 

the expected sign. The front-end ratio is also an important predictor with 

the expected sign. Again reserves are not an important predictor; neither 

are the 15-year loan indicator, the initial LTV ratio, and indicators for 

condominiums or underserved areas.

The failure to find a significant effect for short-term loans is not surprising, 

as such loans constitute only about 1 percent of the loans in each sample. 

The lack of a significant effect for LTV ratio is also not surprising. The 

Concentrance samples are restricted to high-LTV loans, and about 85 

percent of loans in the sample had LTV ratios in a very narrow range (98 to 

100 percent). Over 99 percent of loans had LTV ratios between 96 and 102 

percent. The lack of variation in this variable meant that the regression had 

little ability to identify its effect.

The lack of a significant effect for reserves in the claim and delinquency 

regressions is surprising. It may indicate that down payment assistance 

alters the relationship between reserves and credit risk. Without 

assistance, borrowers with substantial liquid assets may have few reserves 

after a down payment is made. With assistance, borrowers with substantial 

liquid assets may retain those assets by not making a down payment with 

their own funds. If liquid assets are a better measure of risk than are 

reserves, then reserves may be a less useful risk indicator when substantial 

numbers of loans have down payment assistance.
Appendix III

Loan Performance Analysis

Page 68 GAO-06-24 Mortgage Financing

Delinquency Results In both the national and MSA samples, down payment assistance 

substantially increased the likelihood of 90-day delinquency. Using the 

augmented GAO actuarial model, results in the national sample indicated 

that down payment assistance from a seller-funded nonprofit raised the 

delinquency rate by 100 percent, compared with similar loans with no 

assistance (table 12).10 Assistance from other sources raised the 

delinquency rate by 20 percent, relative to similar loans with no assistance. 

With the model based on the augmented TOTAL Mortgage Scorecard 

variables, the results indicated that assistance from a seller-funded 

nonprofit raised the delinquency rate by 93 percent, while assistance from 

other sources raised the delinquency rate by 21 percent (table 10). The 

differences between loans with seller-funded assistance and loans without 

it are significant with a one-tailed test at a level of 1 percent in all variations 

of the model. The differences between seller-funded assistance and 

assistance from other sources were large and also significant at 1 percent 

in a one-tailed test in all variations. Differences in delinquency rates in the 

MSA sample were also substantial. Considering the augmented GAO 

actuarial model, loans with seller-funded down payment assistance had 

delinquency rates that were 105 percent higher than the delinquency rates 

on comparable loans without assistance, while loans with assistance from 

other sources had delinquency rates that were 34 percent higher than the 

delinquency rates of loans without assistance (table 16). The differences 

between seller-funded assistance and no assistance, and between sellerfunded assistance and other assistance, were both significant at 1 percent 

in one-tailed tests in all variations.11

10This can be calculated from the regression coefficients for seller-funded down payment 

assistance and non-seller-funded down payment assistance in table 12, by taking the 

exponent of the coefficient. See Betty Kirkwood and Johnathan Sterne, Essential Medical 

Statistics, 2nd edition (Oxford UK: Blackwell Publishing, 2003), 197-198. 

11The model based on the TOTAL Mortgage Scorecard variables found even larger 

differences, with seller-funded nonprofit assistance loans having claim rates 109 percent 

higher and loans with assistance from other sources having claim rates 36 percent higher 

than comparable loans without assistance.
Appendix III

Loan Performance Analysis

Page 69 GAO-06-24 Mortgage Financing

Claim Results Down payment assistance also had a substantial impact on claims in both 

the national and MSA samples. Results from the national sample using the 

augmented GAO actuarial model indicated that assistance from a sellerfunded nonprofit raised the claim rate by 81 percent, relative to similar 

loans with no assistance, as shown in the odds ratio point estimate column 

of table 20.12 Assistance from other sources raised the claim rate by 44 

percent, relative to similar loans with no down payment assistance. With 

the model based on the augmented TOTAL Mortgage Scorecard variables, 

we found that assistance from a seller-funded nonprofit raised the claim 

rate by 76 percent, while assistance from other sources raised the claim 

rate by 49 percent (table 18). The differences between loans with down 

payment assistance and those without it were statistically significant with a 

one-tailed test at a level of 1 percent. Seller-funded assistance had a larger 

impact on claims than did assistance from other sources. Those 

differences, while large, were not quite significant at conventional levels.13 

Differences in the MSA sample were even larger for seller-funded nonprofit 

assistance. Using the GAO actuarial model, loans with seller-funded down 

payment assistance had claim rates that were 134 percent higher than the 

claim rates on comparable loans without assistance, while loans with down 

payment assistance from other sources had claim rates that were 24 

percent higher than the claim rates on loans without assistance (table 25). 

The difference between seller-funded assistance and no assistance, and the 

difference between seller-funded assistance and other assistance, were 

both significant at 1 percent in one-tailed tests in all variations of the 

model.

12The odds ratio is the probability that an event, such as a claim or a prepayment, will occur, 

divided by the probability that the event will not occur.

13The p values for a one-tailed test range from 0.11 to .12 with the constructed risk variable, 

and .2 to .27 with the TOTAL Mortgage Scorecard variables.
Appendix III

Loan Performance Analysis

Page 70 GAO-06-24 Mortgage Financing

Several explanations are possible for the increase in delinquency and claim 

rates associated with down payment assistance from nonseller-funded 

sources. It is possible that the gifts from relatives were actually loans, 

despite the inclusion of a gift letter indicating that repayment is not 

expected. In these cases, the LTV ratio would be misstated, not because the 

collateral value was overstated, but because the total amount of debt 

incurred in the transaction was understated. It is also possible that 

borrowers who could save for a down payment differed in key respects 

from borrowers who could not. For example, some researchers have 

suggested that households may increase their savings rates prior to 

purchasing a home.14 Others have found evidence that young households 

increased their earnings and savings by working more hours prior to 

purchasing their first home.15 It may be the case that households that can 

more easily increase earnings or reduce consumption in order to 

accumulate savings enter homeownership when a down payment is 

required but that both flexible and inflexible households purchase homes 

when no down payment is required. The inclusion of households with less 

flexibility would tend to increase delinquencies and claims.

While delinquency differences are about the same for the MSA sample and 

the national sample, claim rate differences for seller-funded nonprofit 

assistance are much larger in the MSA sample than they are in the national 

sample. Research suggests that delinquencies are more likely to cure, or to 

prepay, than to claim if the borrower is projected to have accumulated 

equity.16 The rate of house price appreciation in the national sample is 

much higher than in the MSA samples, so that borrowers in the national 

sample would have accumulated more equity. Over the 5-year period from 

the first quarter of fiscal year 2000 to the last quarter of fiscal year 2004, the 

median house price of existing houses increased 11 percent the Salt Lake 

City MSA, 18 percent in the Indianapolis MSA, and 32 percent in the Atlanta 

14Ronald J. Krumm and Austin Kelly, “Effects of Homeownership on Household Savings,” 

Journal of Urban Economics, vol. 26, (1989), 281-294. 

15Don Haurin, Pat Hendershott, and Susan Wachter, “Wealth Accumulation and Housing 

Choices of Young Households: An Exploratory Investigation” Journal of Housing Research, 

vol. 7, no. 1, (1996), 33-57.

16Brent W. Ambrose and Charles A. Capone, “The Hazard Rates of First and Second 

Defaults,” Journal of Real Estate Finance and Economics, vol. 20, no. 3 (May 2000), 275–

293; Michelle A. Danis and Anthony Pennington-Cross, “A Dynamic Look at Subprime Loan 

Performance” Federal Reserve Bank of St. Louis Working Paper 2005-029A (May 2005), 

available at http://research.stlouisfed.org/wp/2005/2005-029.pdf .
Appendix III

Loan Performance Analysis

Page 71 GAO-06-24 Mortgage Financing

MSA. The median increase in the national sample was about 39 percent and 

the mean increase was 51 percent. It is possible that substantial house 

price appreciation in the national sample weakened the effect of sellerfunded down payment assistance on claims, as the assisted loans that 

became delinquent were more likely to be resolved without a claim in 

rapidly appreciating markets.

Table 10: Delinquency Regression Results—National Sample, Model Based on Augmented TOTAL Mortgage Scorecard 

Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 2.9662 3.8624 0.4425

LTV ratio -0.00214 0.038 0.9551 0.998

15-year mortgage 0.096 0.2587 0.7105 1.101

FICO score -0.0119 0.000716 <.0001 0.988

No FICO score 0.5569 0.1259 <.0001 1.745

Borrower reserves 0.0634 0.0895 0.4789 1.065

Front-end ratio 1.477 0.5467 0.0069 4.38

Endorsed in fiscal year 2000 -0.1064 0.1047 0.3096 0.899

Endorsed in fiscal year 2001 -0.0332 0.0979 0.7346 0.967

ARM -0.3078 0.1678 0.0667 0.735

Underserved area 0.0703 0.0785 0.3706 1.073

Condominium -0.2547 0.1843 0.1669 0.775

First-time homebuyer -0.0448 0.1064 0.6736 0.956

Seller-funded down payment assistance 0.6583 0.1111 <.0001 1.932

Nonseller-funded down payment assistance 0.1911 0.0935 0.041 1.211

House price appreciation rate -0.9398 0.7716 0.2232 0.391

First 6 quarters 0.1997 0.0259 <.0001 1.221

Next 6 quarters 0.00186 0.0492 0.9698 1.002

Following quarters 0.0558 0.0496 0.2603 1.057
Appendix III

Loan Performance Analysis

Page 72 GAO-06-24 Mortgage Financing

Table 11: Delinquency Regression Results—National Sample, Model Based on TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 0.3717 3.7917 0.9219

LTV ratio 0.0249 0.037 0.4997 1.025

15-year mortgage 0.1153 0.2585 0.6555 1.122

FICO score -0.012 0.000714 <.0001 0.988

No FICO score 0.5782 0.1251 <.0001 1.783

Borrower reserves 0.0545 0.0892 0.5414 1.056

Front-end ratio 1.4461 0.5442 0.0079 4.246

Endorsed in fiscal year 2000 -0.1498 0.1039 0.1493 0.861

Endorsed in fiscal year 2001 -0.0351 0.0979 0.7197 0.965

Seller-funded down payment assistance 0.6384 0.1101 <.0001 1.894

Nonseller-funded down payment assistance 0.1911 0.0933 0.0405 1.211

House price appreciation rate -1.0039 0.7676 0.191 0.366

First 6 quarters 0.1994 0.0259 <.0001 1.221

Next 6 quarters 0.000889 0.0493 0.9856 1.001

Following quarters 0.0563 0.0497 0.257 1.058
Appendix III

Loan Performance Analysis

Page 73 GAO-06-24 Mortgage Financing

Table 12: Delinquency Regression Results—National Sample, Augmented GAO Actuarial Model

Source: GAO.

Table 13: Delinquency Regression Results—National Sample, GAO Actuarial Model

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 1.8293 0.498 0.0002

Constructed risk 0.1162 0.0175 <.0001 1.123

FICO score -0.0116 0.000711 <.0001 0.988

No FICO score 0.5583 0.1255 <.0001 1.748

Borrower reserves 0.0476 0.0893 0.5943 1.049

Front-end ratio 1.2325 0.5399 0.0224 3.43

Underserved area 0.0415 0.0783 0.5961 1.042

Condominium -0.2416 0.1713 0.1584 0.785

First-time homebuyer -0.047 0.1062 0.6583 0.954

Seller-funded down payment assistance 0.6961 0.1086 <.0001 2.006

Nonseller-funded down payment assistance 0.1839 0.0932 0.0484 1.202

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 1.8124 0.4868 0.0002

Constructed risk 0.118 0.0174 <.0001 1.125

FICO score -0.0117 0.000708 <.0001 0.988

No FICO score 0.5652 0.1247 <.0001 1.76

Borrower reserves 0.0448 0.0891 0.615 1.046

Front-end ratio 1.191 0.5363 0.0264 3.29

Seller-funded down payment assistance 0.6979 0.1083 <.0001 2.01

Nonseller-funded down payment assistance 0.1835 0.0929 0.0483 1.201
Appendix III

Loan Performance Analysis

Page 74 GAO-06-24 Mortgage Financing

Table 14: Delinquency Regression Results—MSA Sample, Model Based on Augmented TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -8.4601 8.0246 0.2918

LTV ratio 0.0457 0.079 0.5634 1.047

15-year mortgage 0.2383 0.5188 0.6461 1.269

FICO score -0.011 0.000826 <.0001 0.989

No FICO score 0.4604 0.1437 0.0014 1.585

Borrower reserves -0.0184 0.1163 0.8742 0.982

Front-end ratio 2.2265 0.672 0.0009 9.268

Endorsed in fiscal year 2000 -0.2113 0.1344 0.116 0.81

Endorsed in fiscal year 2001 -0.0661 0.113 0.5586 0.936

ARM -0.0869 0.1367 0.5249 0.917

Underserved area 0.1458 0.0918 0.1124 1.157

Condominium 0.3403 0.2298 0.1387 1.405

First-time homebuyer -0.1141 0.1258 0.3643 0.892

Seller-funded down payment assistance 0.741 0.1146 <.0001 2.098

Nonseller-funded down payment assistance 0.3074 0.1346 0.0224 1.36

Atlanta MSA -0.1697 0.1149 0.1399 0.844

Salt Lake City MSA 0.2951 0.1265 0.0197 1.343

House price appreciation rate 4.9561 2.2367 0.0267 142.033

First 6 quarters 0.2025 0.0294 <.0001 1.224

Next 6 quarters 0.0374 0.0589 0.5256 1.038

Following quarters -0.0242 0.0626 0.6988 0.976
Appendix III

Loan Performance Analysis

Page 75 GAO-06-24 Mortgage Financing

Table 15: Delinquency Regression Results—MSA Sample, Model Based on TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -4.3569 5.0712 0.3903

LTV ratio 0.00335 0.0465 0.9425 1.003

15-year mortgage 0.2403 0.5184 0.643 1.272

FICO score -0.0109 0.000822 <.0001 0.989

No FICO score 0.463 0.1423 0.0011 1.589

Borrower reserves -0.0185 0.1164 0.8735 0.982

Front-end ratio 2.1509 0.6709 0.0013 8.593

Endorsed in fiscal year 2000 -0.1969 0.1292 0.1273 0.821

Endorsed in fiscal year 2001 -0.0439 0.1114 0.6936 0.957

Seller-funded down payment assistance 0.7357 0.1138 <.0001 2.087

Nonseller-funded down payment assistance 0.3091 0.1343 0.0214 1.362

Atlanta MSA -0.1443 0.114 0.2054 0.866

Salt Lake City MSA 0.3253 0.1244 0.0089 1.384

House price appreciation rate 4.9592 2.2289 0.0261 142.478

First 6 quarters 0.2026 0.0294 <.0001 1.225

Next 6 quarters 0.038 0.059 0.5197 1.039

Following quarters -0.0256 0.0628 0.6838 0.975
Appendix III

Loan Performance Analysis

Page 76 GAO-06-24 Mortgage Financing

Table 16: Delinquency Regression Results—MSA Sample, Augmented GAO Actuarial Model

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 1.0815 0.5621 0.0543

Constructed risk 0.1411 0.0239 <.0001 1.152

FICO score -0.0108 0.000819 <.0001 0.989

No FICO score 0.45 0.143 0.0016 1.568

Borrower reserves -0.0195 0.1159 0.8666 0.981

Front-end ratio 2.1455 0.6696 0.0014 8.546

Underserved area 0.1265 0.0914 0.1665 1.135

Condominium 0.3149 0.1905 0.0983 1.37

First-time homebuyer -0.1261 0.1256 0.3152 0.882

Seller-funded down payment assistance 0.719 0.1125 <.0001 2.052

Nonseller-funded down payment assistance 0.2932 0.1342 0.0289 1.341

Atlanta MSA -0.1538 0.1071 0.1508 0.857

Salt Lake City MSA 0.1268 0.1222 0.2991 1.135
Appendix III

Loan Performance Analysis

Page 77 GAO-06-24 Mortgage Financing

Table 17: Delinquency Regression Results—MSA Sample, GAO Actuarial Model

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 0.987 0.5534 0.0745

Constructed risk 0.1419 0.0238 <.0001 1.152

FICO score -0.0107 0.000814 <.0001 0.989

No FICO score 0.4409 0.1415 0.0009 1.554

Borrower reserves -0.017 0.1158 0.8831 0.983

Front-end ratio 2.0408 0.6682 0.0023 7.697

Seller-funded down payment assistance 0.7131 0.1118 <.0001 2.04

Nonseller-funded down payment assistance 0.2924 0.1338 0.0289 1.34

Atlanta MSA -0.131 0.1065 0.2185 0.877

Salt Lake City MSA 0.1711 0.1203 0.1549 1.187
Appendix III

Loan Performance Analysis

Page 78 GAO-06-24 Mortgage Financing

Table 18: Claim regression results – National Sample, Model Based on Augmented TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 4.6847 4.4388 0.2912

LTV ratio -0.0575 0.0431 0.1816 0.944

15-year mortgage 0.4688 0.3668 0.2012 1.598

FICO score -0.00926 0.00116 <.0001 0.991

No FICO score 0.7271 0.1946 0.0002 2.069

Borrower reserves -0.0933 0.1558 0.5492 0.911

Front-end ratio 2.1398 0.8949 0.0168 8.498

Endorsed in fiscal year 2000 0.0121 0.1814 0.9468 1.012

Endorsed in fiscal year 2001 0.1217 0.1696 0.473 1.129

ARM -0.7761 0.345 0.0245 0.46

Underserved area 0.0268 0.1304 0.837 1.027

Condominium -0.3245 0.3088 0.2933 0.723

First-time homebuyer -0.3168 0.1663 0.0567 0.728

Seller-funded down payment assistance 0.5664 0.1924 0.0032 1.762

Nonseller-funded down payment assistance 0.3995 0.148 0.007 1.491

House price appreciation rate -1.6943 1.0614 0.1104 0.184

First 6 quarters 0.448 0.0545 <.0001 1.565

Next 6 quarters 0.1178 0.0554 0.0333 1.125

Following quarters 0.0879 0.0543 0.1052 1.092
Appendix III

Loan Performance Analysis

Page 79 GAO-06-24 Mortgage Financing

Table 19: Claim Regression Results—National Sample, Model Based on TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept 3.0763 5.0183 0.5399

LTV ratio -0.0413 0.0488 0.398 0.96

15-year mortgage 0.5144 0.3667 0.1607 1.673

FICO score -0.00929 0.00116 <.0001 0.991

No FICO score 0.7393 0.1927 <.0001 2.094

Borrower reserves -0.1276 0.1552 0.4108 0.88

Front-end ratio 1.9601 0.8969 0.0288 7.1

Endorsed in fiscal year 2000 -0.0442 0.181 0.807 0.957

Endorsed in fiscal year 2001 0.1316 0.1698 0.4384 1.141

Seller-funded down payment assistance 0.5012 0.1904 0.0085 1.651

Nonseller-funded down payment assistance 0.3786 0.1475 0.0102 1.46

House price appreciation rate -1.8949 1.0561 0.0728 0.15

First 6 quarters 0.4486 0.0545 <.0001 1.566

Next 6 quarters 0.1189 0.0554 0.032 1.126

Following quarters 0.0863 0.0543 0.1118 1.09
Appendix III

Loan Performance Analysis

Page 80 GAO-06-24 Mortgage Financing

Table 20: Claim Regression Results—National Sample, Augmented GAO Actuarial Model

Source: GAO.

Table 21: Claim Regression Results—National Sample, GAO Actuarial Model

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -2.2855 0.8291 0.0058

Constructed risk 0.2665 0.0244 <.0001 1.305

FICO score -0.0088 0.00116 <.0001 0.991

No FICO score 0.7538 0.1937 <.0001 2.125

Borrower reserves -0.1405 0.1559 0.3674 0.869

Front-end ratio 1.8786 0.8691 0.0307 6.544

Underserved area -0.0771 0.1308 0.5559 0.926

Condominium -0.2178 0.2986 0.4659 0.804

First-time homebuyer -0.2937 0.1662 0.0771 0.745

Seller-funded down payment assistance 0.5947 0.1887 0.0016 1.812

Nonseller-funded down payment assistance 0.3641 0.1483 0.0141 1.439

Analysis of maximum likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -2.6245 0.8108 0.0012

Constructed risk 0.2656 0.0242 <.0001 1.304

FICO score -0.00861 0.00115 <.0001 0.991

No FICO score 0.7174 0.1917 0.0002 2.049

Borrower reserves -0.1575 0.1555 0.3111 0.854

Front-end ratio 1.7053 0.8705 0.0501 5.503

Seller-funded down payment assistance 0.5894 0.1878 0.0017 1.803

Nonseller-funded down payment assistance 0.3443 0.1477 0.0197 1.411
Appendix III

Loan Performance Analysis

Page 81 GAO-06-24 Mortgage Financing

Table 22: Claim Regression Results—MSA Sample, Model Based on Augmented TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -20.5482 9.2777 0.0268

LTV ratio 0.0309 0.0906 0.7334 1.031

15-year mortgage 0.5153 0.6032 0.393 1.674

FICO score -0.00643 0.00108 <.0001 0.994

No FICO score 0.6042 0.1723 0.0005 1.83

Borrower reserves 0.179 0.1498 0.2322 1.196

Front-end ratio 1.3785 0.9056 0.128 3.969

Endorsed in fiscal year 2000 -0.6808 0.1897 0.0003 0.506

Endorsed in fiscal year 2001 -0.1985 0.1533 0.1954 0.82

ARM -0.3282 0.1857 0.0771 0.72

Underserved area 0.1533 0.1218 0.2083 1.166

Condominium 0.0761 0.2989 0.799 1.079

First-time homebuyer -0.0626 0.1733 0.7179 0.939

Seller-funded down payment assistance 0.9768 0.1576 <.0001 2.656

Nonseller-funded down payment assistance 0.3724 0.1864 0.0457 1.451

Atlanta MSA -0.5987 0.1764 0.0007 0.55

Salt Lake City MSA 0.7624 0.1591 <.0001 2.143

House price appreciation rate 13.3648 2.8741 <.0001 >999.999

First 6 quarters 0.4356 0.0503 <.0001 1.546

Next 6 quarters 0.1633 0.0513 0.0015 1.177

Following quarters -0.00873 0.0535 0.8704 0.991
Appendix III

Loan Performance Analysis

Page 82 GAO-06-24 Mortgage Financing

Table 23: Claim Regression Results—MSA Sample, Model Based on TOTAL Mortgage Scorecard Variables

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -18.9754 7.322 0.0096

LTV ratio 0.018 0.0691 0.7941 1.018

15-year mortgage 0.5857 0.6014 0.3301 1.796

FICO score -0.00645 0.00108 <.0001 0.994

No FICO score 0.6401 0.1701 0.0002 1.897

Borrower reserves 0.191 0.1499 0.2027 1.21

Front-end ratio 1.3525 0.9035 0.1344 3.867

Endorsed in fiscal year 2000 -0.6919 0.1865 0.0002 0.501

Endorsed in fiscal year 2001 -0.1672 0.1517 0.2703 0.846

Seller-funded down payment assistance 0.9732 0.1569 <.0001 2.647

Nonseller-funded down payment assistance 0.3778 0.1863 0.0426 1.459

Atlanta MSA -0.5566 0.1748 0.0014 0.573

Salt Lake City MSA 0.765 0.1571 <.0001 2.149

House price appreciation rate 13.0362 2.8596 <.0001 >999.999

First 6 quarters 0.4345 0.0503 <.0001 1.544

Next 6 quarters 0.1621 0.0513 0.0016 1.176

Following quarters -0.00953 0.0536 0.8589 0.991
Appendix III

Loan Performance Analysis

Page 83 GAO-06-24 Mortgage Financing

Table 24: Claim Regression Results—MSA Sample, Augmented GAO Actuarial Model

Source: GAO.

Table 25: Claim Regression Results—MSA Sample, GAO Actuarial Model

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -4.3382 0.7653 <.0001

Constructed risk 0.3949 0.0292 <.0001 1.484

FICO score -0.00628 0.00108 <.0001 0.994

No FICO score 0.5396 0.1727 0.0018 1.715

Borrower reserves 0.1587 0.1491 0.2872 1.172

Front-end ratio 1.1872 0.9057 0.1899 3.278

Underserved area 0.0986 0.1218 0.4181 1.104

Condominium 0.1499 0.2587 0.5625 1.162

First-time homebuyer -0.0842 0.1732 0.6267 0.919

Seller-funded down payment assistance 0.8555 0.154 <.0001 2.352

Nonseller-funded down payment assistance 0.2174 0.1885 0.2488 1.243

Atlanta MSA -0.4073 0.1515 0.0072 0.665

Salt Lake City MSA 0.3428 0.1506 0.0229 1.409

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -4.3714 0.7543 <.0001

Constructed risk 0.3956 0.0291 <.0001 1.485

FICO score -0.00625 0.00108 <.0001 0.994

No FICO score 0.5421 0.1696 0.0014 1.72

Borrower reserves 0.1634 0.1486 0.2716 1.177

Front-end ratio 1.12 0.9029 0.2148 3.065

Seller-funded down payment assistance 0.8486 0.153 <.0001 2.336

Nonseller-funded down payment assistance 0.2154 0.1879 0.2518 1.24

Atlanta MSA -0.3964 0.1512 0.0087 0.673

Salt Lake City MSA 0.3626 0.1488 0.0148 1.437
Appendix III

Loan Performance Analysis

Page 84 GAO-06-24 Mortgage Financing

Prepayment Model Modeling conditional claim rates has a substantial advantage: It allows 

time-varying covariates such as post-origination increases in house prices 

to be incorporated into the regression model. But the use of conditional 

claim rates also poses one possible disadvantage. If certain borrowers, 

such as recipients of seller-funded assistance, had high rates of 

prepayment, their conditional claim rates could be high not because they 

had higher credit risk but because a small number of loans survived and 

eventually went to claim. That is, the hazard rate would be large because 

the denominator was small, not because the numerator was large. To 

examine this possibility, we used a logistic regression that predicted the 

quarterly conditional probability of prepayment to estimate the competing 

risk of loans terminating in prepayment. The results are presented in tables 

26 and 27.

The regressions used as explanatory variables two variables that represent 

the incentive to refinance—the ratio of the book value of the mortgage to 

the value of the mortgage payments evaluated at currently prevailing 

interest rates, split into two segments. One segment represented book 

value exceeding market value, the other represented book value that was 

less than market value. Additionally, the regression used variables that 

measured the passage of time, the constructed risk variable, credit scores, 

and indicators for down payment assistance. Results were as expected. 

Loans with an incentive to refinance that was driven by the interest rate 

had significantly higher rates of prepayment. High-risk loans and those 

with low credit scores prepaid more slowly. We also found that loans with 

seller-funded assistance prepaid more slowly than comparable loans 

without assistance, demonstrating that our estimate of the effect of 

assistance on loan performance was not inflated by rapid prepayment in 

this group of loans.
Appendix III

Loan Performance Analysis

Page 85 GAO-06-24 Mortgage Financing

Table 26: Prepayment Regression Results—Quarterly Conditional Probability of Prepayment, National Sample

Source: GAO.

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -15.0802 0.7199 <.0001

Relatively high equity 3.2059 0.1639 <.0001 24.679

Relatively low equity 5.5491 0.6957 <.0001 256.998

Constructed risk -0.0232 0.0137 0.0911 0.977

FICO score 0.00374 0.000293 <.0001 1.004

No FICO score -0.2327 0.0691 0.0008 0.792

ARM 0.6987 0.0853 <.0001 2.011

Condominium 0.2131 0.0611 0.0005 1.238

Underserved area -0.1744 0.0365 <.0001 0.84

First-time homebuyer -0.1203 0.0445 0.0068 0.887

Seller-funded down payment assistance -0.2284 0.0641 0.0004 0.796

Nonseller-funded down payment assistance -0.0562 0.0412 0.173 0.945

First 6 quarters 0.2094 0.0146 <.0001 1.233

Next 6 quarters -0.0471 0.0236 0.0461 0.954

Following quarters -0.049 0.0243 0.044 0.952
Appendix III

Loan Performance Analysis

Page 86 GAO-06-24 Mortgage Financing

Table 27: Prepayment Regression Results—Quarterly Conditional Probability of Prepayment, MSA Sample

Source: GAO.

Loss Given Default Model We also examined the severity of the loss for loans that resulted in a claim. 

The results of this analysis are limited because FHA's Single-Family Data 

Warehouse had profit or loss amounts for only 389 loans.17 We ran a 

regression to predict the loss rate, defined as the profit or loss amount 

divided by the original mortgage amount. Explanatory variables included 

the initial LTV ratio, credit score, initial interest rate, original mortgage 

amount, house price appreciation since time of origination, and indicators 

for whether the loan had seller-funded nonprofit down payment assistance, 

assistance from another source, or no assistance. The results of this 

analysis are in tables 28 and 29.

In the national sample, loans with seller-funded nonprofit assistance had 

loss rates that were about 5 percentage points worse than those for loans 

Analysis of maximum 

likelihood estimates

Odds ratio 

estimates

Parameter Estimate

Standard

error Pr > ChiSq

Point

estimate

Intercept -16.4562 0.8684 <.0001

Relatively high equity 2.7283 0.2334 <.0001 15.307

Relatively low equity 6.6288 0.8161 <.0001 756.558

Constructed risk 0.0174 0.0228 0.4469 1.018

FICO score 0.00527 0.000391 <.0001 1.005

No FICO score -0.3271 0.0882 0.0002 0.721

ARM 0.3858 0.1059 0.0003 1.471

Condominium -0.1332 0.0929 0.1514 0.875

Underserved area -0.2159 0.0486 <.0001 0.806

First-time homebuyer 0.1096 0.0615 0.0745 1.116

Seller-funded down payment assistance -0.2208 0.0556 <.0001 0.802

Nonseller-funded down payment assistance 0.064 0.0579 0.2689 1.066

First 6 quarters 0.1487 0.0193 <.0001 1.16

Next 6 quarters -0.0359 0.0366 0.3256 0.965

Following quarters -0.1246 0.0404 0.0021 0.883

17These included 184 in the national sample and 205 in the MSA sample.
Appendix III

Loan Performance Analysis

Page 87 GAO-06-24 Mortgage Financing

with no assistance. Loans with assistance from other sources had loss rates 

about 2 percentage points better. Neither result was significant. In the MSA 

sample, loans with seller-funded nonprofit assistance also had loss rates 

about 5 percentage points worse, while loans with assistance from other 

sources had loss rates about 7 percentage points worse. Both were 

significant in a one-tailed test.

Table 28: Loss Regression Results—Loss Rate Given Default, National Sample

Source: GAO.

Note: N=184.

Variable Parameter estimate t Value Pr > |t|

Intercept 0.41124 0.22 0.8259

LTV ratio -0.01548 -0.79 0.4308

Seller-funded down payment assistance -0.04978 -1.08 0.2828

Nonseller-funded down payment assistance 0.02139 0.61 0.5417

FICO score 0.00023796 0.82 0.4147

No FICO score -0.01532 -0.32 0.7456

House price appreciation rate 0.66013 2.17 0.0312

Initial interest rate -0.03729 -1.91 0.0583

Original mortgage amount 0.00000218 5.11 <.0001

R-squared = 0.1897
Appendix III

Loan Performance Analysis

Page 88 GAO-06-24 Mortgage Financing

Table 29: Loss Regression Results—Loss Rate Given Default, MSA Sample 

Source: GAO.

Note: N=205.

Variable Parameter estimate t Value Pr > |t|

Intercept 0.020059 0.01 0.9911

LTV ratio -0.0251 -1.32 0.1895

Seller-funded down payment assistance -0.05107 -1.78 0.0769

Nonseller-funded down payment assistance -0.0698 -2.05 0.0416

FICO score 0.00027289 1.11 0.2703

No FICO score 0.02254 0.72 0.4743

House price appreciation rate 1.54727 3.41 0.0008

Initial interest rate 0.0048 0.35 0.7261

Original mortgage amount 0.00000261 5.44 <.0001

R-squared = 0.182
Page 89 GAO-06-24 Mortgage Financing

Appendix IV

Comments from the Department of Housing 

and Urban Development ApendxiIV
Appendix IV

Comments from the Department of Housing 

and Urban Development

Page 90 GAO-06-24 Mortgage Financing
Appendix IV

Comments from the Department of Housing 

and Urban Development

Page 91 GAO-06-24 Mortgage Financing
Page 92 GAO-06-24 Mortgage Financing

Appendix V

GAO Contact and Staff Acknowledgments ApendxiV

GAO Contact William B. Shear (202) 512-8678

Staff 

Acknowledgments

In addition to the individual named above, Mathew Scirè, Assistant 

Director; Anne Cangi; Emily Chalmers; Susan Etzel; Austin Kelly; John 

McGrail; Marc Molino; Heddi Nieuwsma; and Mitchell Rachlis made key 

contributions to this report.

(250236)
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