Politics & Government
Minnesota's Down Payment Assistance Programs Are Working; Auditor Finds Room For Improvement
Under the current contract with U.S. Bank, Minnesota Housing does not have the ability to force the bank to take corrective action.
![](https://patch.com/img/cdn20/users/23833043/20240328/102534/styles/patch_image/public/mn___28102458481.png)
March 28, 2024
Minnesota Housing has largely succeeded in running one of the country’s most active down payment assistance programs, and much of the help is going to racial and ethnic minorities and lower income Minnesotans who are most in need of it, according to a 74-page report released Wednesday by the Office of the Legislative Auditor.
Find out what's happening in Minneapoliswith free, real-time updates from Patch.
The report is a rare bit of good news in a state that that has among the nation’s worst racial housing gaps — 77% of white, non-Hispanic households own their home, while 29% of Black Minnesotans own the home they live in, according to a Minnesota Housing Partnership report.
The audit also revealed some issues with the programs, some related to U.S. Bank’s role as the agency’s sole loan servicer.
Find out what's happening in Minneapoliswith free, real-time updates from Patch.
Prospective home buyers who can afford a monthly mortgage payment but don’t have enough cash for a down payment and closing costs may qualify for Minnesota down payment assistance programs.
The state offers two types of loans to help: a zero-interest “deferred payment loan,” which a buyer doesn’t have to repay until their mortgage is paid off or the house is sold; and a “monthly payment loan,” which carries the same interest rate as the mortgage and is paid back in monthly installments over 10 years.
The assistance is only available to buyers who get their mortgage through Minnesota Housing programs, which are distributed by authorized lenders. The down payment assistance is an incentive to make Minnesota Housing loans more attractive; more Minnesota Housing mortgages means more income for the agency and more assistance for the next round of homebuyers.
This system allows the agency to fund itself. The Legislature usually allocates less than $1 million each year to the down payment assistance programs. (Last year, the Legislature directed $50 million to create a new down payment assistance program for first-generation homebuyers, which is expected to launch soon, and also approved a $50 million cash injection for the deferred loan payment program.)
Minnesota is among the top five states in the amount of down payment assistance it provides as a percentage of overall mortgage lending, not counting the new first-generation homebuyer fund established last year. The other four states in the top five — Rhode Island, Wyoming, North Dakota and South Dakota — have some of the smallest housing markets in the country.
The vast majority of Minnesota Housing borrowers make less than the state median income. Over the past decade, 30% to 40% of down payment assistance loans have gone to homebuyers who are Asian, Black, Native American, Pacific Islander, multiple races, or Latin American of any race, according to the auditors’ data.
The audit also found that the geographic distribution of down payment assistance loans mostly mirrored the distribution of all mortgages issued around the state, though slightly more assistance went to homebuyers in the Twin Cities metro area.
More than 80% of lenders surveyed by the auditors said Minnesota Housing mortgage programs are easy to understand and help borrowers who would otherwise be unable to purchase a home — though many lenders were unhappy with their compensation through the program (2.5% of the mortgage.) The low pay discourages some loan officers from working with Minnesota Housing programs, according to lenders.
Auditors find issues with programs’ reach, U.S. Bank agreement
Minnesota Housing found issues with more than 85% of mortgages it randomly selected for internal audits, like missing or incomplete paperwork, which should have been caught by the lender or loan servicer, U.S. Bank. Almost all of the issues were resolved when the borrower or lender sent over the correct paperwork, according to Minnesota Housing staff, but the auditors were concerned about the bigger pattern — a lack of quality control from loan officers and U.S. Bank.
Under the current contract with U.S. Bank, Minnesota Housing does not have the ability to force the bank to take corrective action.
The contract also allows U.S. Bank to impose stricter eligibility requirements on borrowers for Federal Housing Administration-insured loans than the criteria set by Minnesota Housing, including minimum credit scores and maximum debt-to-income ratios, according to the auditors.
U.S. Bank did not immediately respond to a request for comment.
Minnesota Housing staff told auditors that they would likely rebid the loan servicing contract — meaning the agency could switch servicers and edit its contract — in late 2024 or early 2025.
The auditors suggested Minnesota Housing do more to reach potential home buyers — not just people actively searching for homes, but also those who would seek to buy a home if they had assistance. It’s hard to know how many of those potential buyers exist, according to the auditors, but federal data show Minnesota Housing extended down payment assistance to around 8% of borrowers whose incomes fell within Minnesota Housing criteria in 2022.
“The relatively small number of down payment assistance recipients in comparison to the number of borrowers who were potentially eligible suggests strongly that at least some Minnesotans that could have received down payment assistance did not,” the report states.
The down payment assistance programs are not codified in state statute, according to the auditor’s report, meaning Minnesota Housing could choose at any time to modify or cut the programs entirely.
If lawmakers like the programs, they should pass laws to ensure they continue, the report suggests — and if the Legislature does choose to codify the programs in statute, they should do so with “broad guidance about priorities rather than detailed program requirements,” so Minnesota Housing can retain its financial flexibility.
Because Minnesota Housing is on good financial footing, it should use a small portion of its budget to experiment with financing programs that could help the agency reach more people, like directly financing a small number of loans with more relaxed eligibility criteria.
In response to the audit, Minnesota Housing Commissioner Jennifer Ho said the agency will consider piloting small scale alternative funding models — after it implements the 13 new programs created by the Legislature last year.
The Minnesota Reformer is an independent, nonprofit news organization dedicated to keeping Minnesotans informed and unearthing stories other outlets can’t or won’t tell..