HUD rescinds $8000 tax credit down payment

Earlier this week, HUD Secretary Shaun Donovan mentioned that the first-time homebuyer tax credit could be used as a down payment, but that may no longer be the case.

The mortgagee letter with the program details has since been removed from the HUD website; a call to the FHA confirmed this had occurred.

The employee I spoke with said the program is essentially pulled as of now, but nothing official has been released regarding the fate of the so-called tax credit advance.

So as it stands now, it appears as if the tax credit cannot be used for a down payment. It’s unclear why the FHA withdrew (or at least stalled) the program, though it could have something to do with perceived risk involved.

Allowing first-time homebuyers to purchase a property with nothing down is certainly high-risk, and the practice of using tax credits for down payments is fairly similar to the seller paid down payment assistance loans that nearly sunk the FHA.

Last summer, FHA Commissioner Brian D. Montgomery said the agency realized $4.6 billion in “unanticipated long-term losses,” largely due to an increased number of seller-funded loans in its portfolio.

The loans, which accounted for 14 percent of all FHA loans outstanding and 31 percent of all FHA foreclosures, are no longer available.

If they hadn’t been banned, the FHA would have needed appropriations of $2.5 billion to operate.

While I’m sure the program could help some borrowers in need, it could also lead to abuses, which may outweigh the positives.

$8000 Loan for an $8000 payback?

States Contemplate Loans for Home Buyers
The $8,000 first-time home buyer mortgage tax credit, which is part of the Recovery and Reinvestment Act of 2009, is a great boon. But, it doesn’t help people who don’t have money for a down payment and closing costs.

Now some states are contemplating offering an $8,000 loan to home buyers before they close on the condition that they repay the loans as soon as they get their federal tax credits.

The idea has been adopted in Missouri, which advances the money to those who take out first mortgages offered through the state’s housing finance authority. The New York State Builders Association is lobbying the State of New York Mortgage Agency to adopt a similar strategy.

“A lot of states are trying to get through the technical aspects of this," says Gregory Brown, an assistant vice president for government affairs at the National Association of Home Builders. "I feel very confident they’ll find a way to make it work.”

Meanwhile, some home builders are taking matters into their own hands, offering programs that purchase the tax credit from borrowers prior to closing.

“This is a legitimate monetizing program that actually works,” says David Abrahamson, vice president of S.E. operations for American Home Key Mortgage Company, which makes the loans for many participating builders in the southeast.

Source: The New York Times, Bob Tedeschi and HousingWire.com, Paul Jackson (04/10/2009)