What is recycling of downpayment assistance?
State and local downpayment assistance programs expand homeownership opportunities for moderate-income families by helping them make a down payment on a home. In some cases, downpayment assistance also helps to reduce the amount of mortgage a family is required to take out. When downpayment assistance is provided in the form of a grant or a forgivable loan, a new grant in the full amount may be necessary to serve each additional family. Programs that recycle downpayment assistance provide the assistance in the form of a loan that families are required to repay. This strategy allows the community to help more families with a set amount of funding.
What problems does recycling downpayment assistance solve?
The principal problem addressed by recycling downpayment assistance is the limited availability of public funds for down payment assistance. Because the need for down payment assistance often exceeds the demand, many communities have determined that the funds should be recycled to help more families. In general, there is a trade-off between the value of recycling the funds to help other families and the administrative costs involved in handling the recycled funds. For very small amounts, recycling may not be cost-effective. But for more substantial amounts – opinions differ on the exact level, but certainly for assistance of $5,000 or more and perhaps for lower amounts as well – recycling is an efficient use of government funds.
In some cases, downpayment assistance loans are structured as no- or low-interest mortgages. But to avoid adding to families’ monthly housing costs, downpayment assistance loans are often provided in the form of a “silent second mortgage,” in which no payments are due until the family sells the home.
Solutions in Action
Tucson, Arizona provides downpayment assistance in the form of a silent second mortgage with 2 percent simple interest. (The interest is forgiven if a family stays in a home for 20 years.) From the program’s inception in 1994 through 2006, Tucson invested about $9.5 million and generated approximately $4 million in program revenue – mostly through repayments of silent second mortgages.
From 2002 through May 2006 alone, 213 families repaid their second mortgages, returning program funds to help many more families become homeowners.
As the amount of downpayment assistance needed to get a single family into a home increases, many communities decide that not only do they want the original assistance to be recycled, but they want the funds to keep pace with the housing market as well. These communities have turned to shared equity homeownership – a set of solutions designed to preserve the buying power of public funds in the face of rising home prices.
Where are these policies most applicable?
Recycling of downpayment assistance is most important in communities with down payment assistance programs that provide more than a minimal level of assistance to each family. Such communities often have large gaps between what entry-level homes cost and what working families can afford. As the per-household subsidy level increases, communities may wish to consider moving to a shared equity solution that helps their subsidy keep pace with the housing market.
Learn more about recycling downpayment assistance
Go back to learn about other policies that preserve and recycle resources
This section draws heavily on the experience and work produced by Rick Jacobus of Burlington Associates, including the paper Preservation of Affordable Homeownership, A Continuum of Strategies [PDF], co-authored with Jeffrey Lubell, Center for Housing Policy.