PROBLEM- Seller assistance is generally prohibited, whenever the buyer is using a federally-backed loan. Most “new” buyers would like to use the $8,000 tax credit as a down-payment, but lack the $8,000 in cash. The lender cannot give the buyer credit for the tax credit, nor can the seller. So, the $8,000 tax credit Congress created is not helping 1,000’s of buyers qualify, as Congress and President Obama had hoped. Once again, Congress created a solution that solves nothing.

SOLUTION- Enter the U.S. Department of Housing and Urban Development (HUD).

HUD has issued Mortgagee Letter 2009-15, which provides guidance for government agencies and other authorized parties to follow to monetize the first-time homebuyer tax credit through the use of either short- or long-term loans in conjunction with Federal Housing Administration (FHA)-insured mortgage loans. Because the tax credit can’t be assigned by the home buyer to a lender or seller at closing, it is necessary that a third party lend the home buyer these funds if the funds are needed to close a purchase.

Short- or Long-Term Loan Guidelines

Per the Mortgagee Letter, short-term or “bridge loans” can be made by

governmental agencies, nonprofit instrumentalities of government, FHA-approved

non-profits, and FHA-approved lenders when these loans are secured by the tax credit due the home buyer. The amount of a short-term loan may not exceed the anticipated amount of the tax credit plus nominal fees and charges. Longer-term loans that are secured by a second lien on the property may be made by government agencies, nonprofit instrumentalities of government, and FHA-approved nonprofits, however, the second lien may not exceed that which is needed for the down payment, closing costs, and prepaid expenses. The advance must provide for principal and interest payments to begin automatically if the borrower does not repay the amount borrowed by a designated deadline. If payments on the tax credit advance are required, they must be included in qualifying the borrower and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay. Payments must be deferred at least 36 months from the settlement date in order to be excluded from qualifying ratios. While a borrower would be allowed to repay the second loan voluntarily, the terms of the loan must not require a balloon payment before ten years have elapsed.

More Information Available

Many state housing finance agencies are offering tax credit-related loan programs. More information about these programs can be found on the National Council of State Housing Agencies (NCSHA’s) web site at:

www.ncsha.org/section.cfm/3/34/2920.

Information regarding the process by which nonprofit organizations can seek FHA

approval can be found at: www.hud.gov/offices/hsg/sfh/np/np_prog.cfm.

Each of the four HUD Homeownership Centers maintains a list of approved nonprofits in

their service areas. These lists can be accessed via:

www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm.

Here is a press release I just received from the Indiana Builders Association.

HUD Secretary Donovan Unveils Details Of Plan To Monetize Home Buyer Tax Credit

May 29, 2009 – In a speech before the National Association of Home Builders (NAHB) Board of Directors, HUD Secretary Shaun Donovan today unveiled new rules that will help spur the housing market by allowing consumers to use the $8,000 first-time home buyer tax credit to help cover the costs of closing on an FHA-insured home.

“We believe this is a real win for everyone,” said Donovan. “Today, the Obama Administration is taking another important step toward accelerating the recovery of the nation’s housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away.”
“With the spring home buying season in full bloom, Secretary Donovan’s move to enable buyers to access the tax credit at the time of closing could not have come at a better time,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “This new rule will further encourage state housing finance agencies to develop programs to monetize the tax credit.”

The current recession started with a crisis in the real estate market, and the solution, in large measure, remains tied to the real estate market.  However, there are three problems with the massive stimulus plan Congress passed, as it relates to housing.

First, the current stimulus plan limits the $8,000 tax credit to first time home buyers.  Those buyers are in the lower end of the housing market.  So, there is no direct stimulus for middle to upper-end home buyers, who tend to buy larger and more expensive homes.  It made no sense for Congress to stimulate demand for the lower end of the housing market and essentially ignore the other portions of the housing market.

By offering a tax credit to all home buyers, not just first time buyers, Congress would provide needed stimulus for the entire residential real estate industry.

Secondly, Congress failed to account for the fact that all real estate markets are not alike.  Some areas of the country are suffering more than others.  Southern California, Florida, Arizona and Nevada have horrible real estate troubles.  California has seen a drop of nearly 75% in home values in particular areas of that state.  Supply in those markets is out-pacing demand.  There are too many homes, and too few buyers.

In Indiana, we have not suffered huge drops in values, because values here were never over-inflated.  The fall in Indiana property values has not been so deep, because the rise in values was not as high over the past few years.

We need a program that accounts for the differences in local real estate markets across the country.  Congress should establish a formula for determining what constitutes “excess” housing supply for a particular market.  For example, Congress could determine that a normal amount of housing inventory is five months of home sales, on national average.  Then, Congress could provide greater buyer incentives for those markets with excess inventory (greater than five months of inventory), until housing supplies have dropped to a “normal” level.  This would enable Congress to direct more aid to those markets in greatest need.

Thirdly, there is a difference between stimulating the sale of existing homes and stimulating demand for new home construction.  In Marion County, Indiana, we have too much housing inventory.  We need incentives for home buyers to purchase existing homes.  We do not need incentives for new home construction.  By contrast, housing inventories in the surrounding counties are much lower.  Arguably, Hamilton County, Indiana is seeing a housing shortage.  So, new home construction should and could be stimulated in those counties that do not have excess inventory.

What’s the first rule of selling real estate?   Location, location, location.  Congress has ignored that basic principle.   All real estate is not the same, nor are all real estate markets the same.

Are there any solutions in development?

Sort of.

Indiana Congressman Dan Burton is going to co-sponsor the Homebuyer Tax Credit Act, H.R. 1245.  The goal of the bill is to stimulate the entire housing market by offering a $15,000 tax credit to individuals who purchase a home in the next year.  The amount of the tax credit would be $15,000 or 10 percent of the purchase price, whichever is less. Purchases must be made within one year of the legislation’s enactment, and the tax credit would not have to be repaid.  The bill, if passed into law, would replace the current $8,000 housing tax credit.

H.R. 1245 would address some, but not all of the concerns I have expressed in this blog.

What are your thoughts on the subject?  Post your comments.