What’s the mission index?
In 2022, the GSEs introduced a Social Index — renamed the Mission Index in 2024 — to measure how well loans serve typically underserved markets. Fannie Mae, for example, sets benchmarks for Low Income Purchase (LIP) products at 28% (80% AMI and below) and Very Low Income Purchase (VLIP) loans at 7% (50% AMI and below).
Social responsibility is a cornerstone of the GSEs’ charters and is measured by their regulator, the Federal Housing Finance Agency. But there’s also a financial angle for GSEs to incentivize Mission loans: secondary market investors will “pay up” for LIP and VLIP loans since they tend to stay on the books longer, thus avoiding early payoffs and providing steady income streams.
Every loan sent to the GSEs is reviewed to determine if it meets one or more Mission criteria and is scored based on the number of Mission criteria satisfied. The corresponding pools are assigned a Mission Criteria Share (MCS) value, which represents the percentage of loans within the pool that meet at least one of the ten Mission criteria. The pool is also assigned a Mission Density Score (MDS) which represents the average of the loan-level scores for the pool.
These metrics directly impact loan pricing, creating a clear incentive for lenders to prioritize Mission-compliant loans.
Carrots and stick
The rewards for delivering Mission loans are substantial. LLPA waivers and other incentives typically reduce loan costs by thousands. Without them, these costs might be passed along to the borrower in the form of a higher interest rate, which can reduce the lender’s net yield from the loan. Alternatively, a lender might eat costs to remain competitive, affecting its margin on the loan. By offering loans like HFA Preferred and HFA Advantage, lenders eliminate these LLPA costs, improve pricing flexibility and make the loan more affordable for borrowers.
Those are the carrots, now here’s the stick. Lenders that cannot deliver enough loans in line with the GSEs’ Mission Index can be penalized with fines and repurchase costs, exposing them to greater financial risk. Non-compliant lenders could lose the guarantee, which could be pricey if they have to buy back the loan or the borrower defaults.
Adding DPA to the equation
At a time when every dollar counts, DPA offers a powerful tool to qualify more borrowers and reduce costs.
DPA is abundant, with Down Payment Resource reporting more than 2,460 programs in Q4 2024. And most importantly, by directly addressing common reasons for loan declinations DPA helps more low- to moderate-income (LMI) borrowers to buy homes.
On average, DPA can lower a homebuyer’s LTV by 6%, making it easier to qualify and reducing monthly payments. Additionally, DPA can have more flexible income and credit requirements and even allow borrowers to avoid PMI, or at least reduce the monthly premium.
Even with these benefits, you won’t believe how much DPA goes unused.
A study conducted by Down Payment Resource and the Urban Institute found that 36.7% of declined mortgages were rejected because of a high debt-to-income (DTI) ratio, and another 5.7% were rejected because of insufficient cash-to-close. For LMI borrowers, those figures jump to 46% and 5% respectively. DPA could have saved many of these declined loans by improving DTI and increasing cash-to-close.
Despite this, HUD data shows that only about 15% of FHA borrowers leverage DPA, even though nearly 80% could potentially qualify. That’s a massive missed opportunity.
Meeting the mandate
The value proposition of combining DPA with HomeReady or Home Possible is compelling.
For example, for HomeReady loans, Fannie Mae waives the LLPA fees for eligible community seconds. That adjustment alone is 1.875% when LTV is greater than 90%. The program also waives LLPAs for many other loan attributes, has lower MI rates, and does not penalize lenders when loans don’t close, all of which can be big cost savers.
In addition to scoring with the GSE Mission Index, using DPA can help lenders align with fair housing regulations and Community Reinvestment Act (CRA) requirements, meeting these obligations and closing service gaps. Large bank lenders are already using DPA to meet these mandates. Mid-size and smaller lenders need to be proactive, too, to benefit from GSE Mission Index incentives.
Plus, having DPA as part of your purchase business strategy can help you engage with homebuyers more effectively and “do good by doing well.”
DPA’s value comes through
Supporting DPA doesn’t just benefit communities, it’s a growth strategy. It helps lenders deliver more Mission-compliant loans, improving pricing and reducing risk with the GSEs and aggregators. It’s also important to note that DPA can help salvage loans that have already eaten significant time and resources.
Doing what is best for customers and getting more buyers into homes creates positive reviews and repeat business. That is reputation and money gained.
So before dismissing DPA as a loss leader, consider what not using it might be costing you.
Rob Chrane is founder and CEO of Down Payment Resource.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
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