When the U.S. Department of Housing and Urban Development (HUD) announced in May that the Federal Housing Administration (FHA) would allow for home buyers to monetize the federal $8,000 first-time home buyer tax credit for down payment purposes, many in the home building felt a renewed sense of hope. The monetization, which meant FHA-approved lenders and certain nonprofit agencies could advance buyers their tax credit, would get many would-be first time buyers over one of the biggest hurdle to homeownership: the down payment. By removing that obstacle, housing demand would stand to get a boost.
Not so fast.
HUD posted the original announcement, Mortgagee Letter 2009-15, to its Web site on May 12 but promptly took it down the same day, citing the need for further review by the IRS and other organizations. The revised mortgagee letter that HUD reissued more than two weeks later on May 29 had considerably more fine print that many in the industry say renders the entire program moot.
"It's not worth the paper it's written on as far as we are concerned," said Mike Snider, executive vice president of Texas-based LGI Homes, which targets the first-time home buyer. "Unfortunately," he added, "Because it would help our business."
The main criticism has been that the revised guidance erased much of the incentive on both the part of the home buyer and the mortgage lender to monetize the tax credit.
Most industry stakeholders had hoped that the tax credit advance could be used as part, or whole, of the 3.5% required down payment on FHA-insured mortgages. However, the revised mortgagee letter spelled out that while the credit advance could be used as a down payment, it would be incremental to the requisite 3.5% down. So, for buyers lacking down payment money--they would need to put approximately $7,756 down on a $221,600 new home (the national median price)--the advance on the $8,000 tax credit would be of no help.
"FHA is one of the few games in town," explained Phillip Schulman, an attorney with K&L Gates in Washington, D.C., who recently co-authored an article detailing the changes in the mortgagee letter. "That's why everyone got excited about the possibility to get some money in buyers' hands."
However, arguably, an advance on the credit could help home buyers quickly repay their friends and family for money borrowed for a down payment.
But even so, lenders appear reticent to begin advancing on the tax credit. Josh Denny, vice president of public policy at the Mortgage Bankers Association, said, "We're not aware of any lender that is doing this yet. We are aware of lenders looking at it ... but there are challenges."
Chief among the concerns is that lenders would have to assume a good degree of responsibility and risk on what amount to little more than faith. Specifically, a lender neither can secure the advance with the property the home buyer is purchasing nor require the home buyer to assign the tax credit to the lender when it is disbursed by the IRS. In addition, the FHA has capped lender fees for the service at 2.5% of the anticipated credit; any higher and the government agency deems the fees "excessive."
Although Denny said he hadn't heard many of the MBA's members complain about the fee caps, it could surface as a big sticking point going forward given the degree of due diligence lenders would have to do to execute on a monetization of a tax credit. The onus would be on the lenders not only to determine the estimated amount of credit the home buyer would receive but also to verify and validate that the home buyer has no unsettled tax obligations, be it student loans, wage garnishments, or anything of that ilk.
"The bottom line is that this FHA program is not the panacea the [HUD] secretary announced it would be," said Schulman.
However, as the devil in the details has scared off lenders to this point, some in the industry have argued that state housing agencies could fill the current tax credit monetization void. Sources have said that at least 10 states have down payment advance programs in the works.