Lack of wealth for a down payment is one of the most recognized barriers to home ownership. In response to this barrier, state and federal government have implemented many programs that provide down payment assistance to potential home buyers. Numerous studies have shown that this assistance can increase homeownership rates, but few have measured how receiving assistance may alter borrowing behavior. Using data from a down payment assistance grant in the Midwest, this study compares the loan type and size of grant recipients to other borrowers that report similar income and buy homes in the same census tract. Results indicate grant recipients are more likely to use conventional loans, which are less expensive than other loan types that require a smaller down payment. Estimates also suggest that the grant may reduce loan size for borrowers who are on the margin of using a conventional loan.
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The price also depends on the loan-to-value ratio. Loans with smaller loan-to-value ratios face lower prices. This is omitted from the theoretical model to simplify characterization of the loan decision. Including the loan-to-value ratio does not alter the ambiguous prediction for the effect on loan size.
This timing provides an opportunity to use an instrument for the probability that a borrower receives the grant. Unfortunately, the comparison data do not report the month of application, so it is not possible to utilize differences in timing.
The income variable between the two data sets does not always match because of differences in measurement. The FHLB data include the income of all household members who will reside in the home purchased. The HMDA data include only the income of the loan applicant. In many cases, these measurements produce marginal differences. We use applicant income to manually match observations only when a match is not certain using the other variables.
A preferred variable is whether or not a bank was a member of the FHLB in a given year. Because the FHLB does not publish this information for past years, the grant provider indicator is meant to proxy for FHLB-member banks. The results using this variable are not meaningfully different than results that are estimated using a bank fixed effect.
We do not analyze this specification using census tract fixed effects due to the incidental parameters problem associated with non-linear fixed effects models (Greene 2002).
Loan size estimates that use a cutoff of 0.40 and 0.60 are not meaningfully different from those that use the 0.50 cutoff.
We do not use the natural log of loan amount because the effect of the grant is not expected to be larger for borrowers that have larger loan amounts. The maximum decrease for all loans is $5,000 and the maximum increase is a function of loan-to-value ratios used by the bank.
An F-test indicates that grant recipients initiate loans that are significantly less than FHA borrowers at the 5 % level for columns (2) through (4) in Table 7.
For the regressions that include census tract fixed effects, F-tests indicate that the difference between grant recipients and unassisted conventional loan borrowers is not significantly different in 2007 and 2009. The difference is statistically different at the 1 % level for 2008.
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The authors are very grateful to David Hehman and Jeff Reynolds at the Federal Home Loan Bank of Cincinnati for motivating and facilitating this research. The authors also would like to thank an anonymous referee for invaluable feedback and guidance.
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Lang, B.J., Hurst, E.H. The Effect of Down Payment Assistance on Mortgage Choice. J Real Estate Finan Econ 49, 329–351 (2014). https://doi.org/10.1007/s11146-013-9432-1
- Mortgage subsidies
- Down payment assistance
- Mortgage size
- Borrowing behavior