When David Hart, head of the Florida Home Builders Association, first learned about Missouri's federal tax credit advance loan program, he quickly snagged a copy of the program details and began making calls to see if something similar could be set up in his state. "It was a really smart idea," he said.
By July 1, the state Legislature had set aside $30 million for the Florida Housing Finance Corp. to launch the Florida Homebuyer Opportunity Program through its State Housing Initiatives Partnership (SHIP) plan, which would give qualified first-time home buyers up to $8,000 in down-payment assistance to be repaid when the buyers receive their federal tax credit.
Hart said that members of the association were "very pleased" with the state's decision to seed the program and was expecting the money to start flowing soon given the start of the state's new fiscal year. However, there's a grimmer reality to the program that many hope will help the state's housing economy.
Last year, the SHIP program had an allocation of $161 million. Roughly 85% of the funds were used to promote homeownership, mostly in the form of first loans and second loans as down-payment assistance. Under this framework, SHIP should've been able to accommodate a tax credit monetization program. However, between a tightening in the bond market and a state budget crunch, the organization's funding has shrunk by 80%. Good-bye down-payment assistance programs, and hello tax credit advance. That $30 million tax credit advance program is the thing the state now has going on in terms of down-payment assistance.
This type of situation, where funding is stretched thin and hard decisions about good programs have to be made, is one many state housing agencies find themselves in following the Department of Housing and Urban Development's (HUD) May announcement that the Federal Housing Administration (FHA) would allow FHA-approved lenders and state housing finance agencies to advance first-time buyers the $8,000 federal tax credit for down-payment purposes. There's a palpable need to help spur state economies through homeownership, and there's an opportunity for state housing finance agencies to have a big role in administering that solution, but there are still challenges.
Since the guidelines were issued, many state agencies--18 as of press time--have scrambled to put together monetization programs, either stand-alone or as a bolt-ons to existing down-payment assistance programs. The reason? Given FHA guidelines, only tax credits advanced through state housing finance agencies can be used as part of FHA's required 3.5% down payment on mortgage loans. However, as these housing agency-run programs could become home builders' last best hope for getting down payment-challenged buyers into their new homes, there are creeping concerns about both the reach and the sustainability of such programs, particularly if the tax credit is extended.
Monetize or not?
The NAHB estimates that by the time the $8,000 federal first-time home buyer tax credit expires Nov. 30, it will have stimulated as many as 200,000 home sales. There's potential for upside to that number if states can remove the biggest barrier to entry into homeownership--the down payment--with tax credit advance and other down-payment assistance programs.
For a buyer wanting to monetize the tax credit for down-payment purposes on a home, she would first locate a participating lender through her state housing finance agency. From there, she would need to work with the lender to complete the necessary loan documentation. In most cases, the state housing agencies require the buyer to secure a first lien through them to be able to access a second lien for down-payment purposes. The lender then underwrites the loan to the buyer. Once the housing agency approves the application, it disburses funds to repay the lender.
But whether this process will provide the boost to help home builders in the areas they need it most remains in question.
For example, the Nevada Housing Division, a subset of the Nevada Department of Business and Industry, has no plans to set up a special program for the monetization of the tax credit. Betty Roark, a loan officer for the division's single-family program, said the agency's management decided that its standing down-payment assistance program was sufficient.
"It made no sense to go out and secure special financing for a [monetization] program that would only last through November," she said.
A similar decision was made in Arizona. "The HFA reviewed the option of doing it and decided not to pursue it. It's such a short deadline. If it's extended, they'll re-review," said Kristina Fretwell, public information officer for the Arizona Housing Finance Authority, noting that the state does have other down-payment assistance options.
In California, however, the decision to stick with existing down-payment assistance programs rather than launch a discrete tax credit advance program was less a reflection of the tax credit's time horizon and more an indication of the turmoil in the bond markets. Many housing finance agencies fund their programs by selling mortgage-backed securities to investors in the secondary market.
Kim Giebo, director of marketing for the California Housing Finance Agency, said the agency could not afford to launch a new program in conjunction with the new rules allowing for the monetization of the tax credit because it had to conserve its cash. "We have variable-rate bond debt, and if Moody's and S&P downgrade our ratings, we'll need liquidity," he said. "We need to save that money for whatever happens with the ratings agencies."
Feeling the bond crunch
California's housing authority is hardly alone in feeling the crunch in the bond market. The subprime market meltdown in the summer of 2008 turned mortgage-backed securities (MBS) into a dirty word. Consequently, investors fled the mortgage revenue bond market, also known as tax-exempt bonds, in droves, taking with them housing agencies' main source of financing.
"There are still investors," said Wellington Meffert, general counsel for the Florida Housing Finance Corp. "Not many who understand the difference between HFA bonds and regular housing bonds. But they are hard to find."
The alternative to the MBS model, known as a "whole loan" model, could be constraining. By holding the loans on their books, housing finance agencies were on the hook for the full amount of the loan, limiting the number of loans they could make and increasing the cost of capital. (Agency insiders indicate ratings agencies were often tougher on whole-loan agencies.) By using MBS, housing agencies were able to better leverage their money.
But those types of pure bond deals are few and far between these days, putting a serious crimp on housing finance agencies' abilities to offer a full menu of housing programs. Wall Street's once bitten and twice shy about investing in housing bonds and regulators have forced government-sponsored enterprises like Fannie Mae and Freddie Mac to stem their purchases of loans on the secondary market.
Colorado Housing and Finance Authority is one agency that has been successful in pooling first mortgage loans and selling them to Ginnie Mae. Karen Harkin, director of home finance, said that this purchase agreement was critical to the state agency being able to take $10 million out of its general fund to seed its JumpStart program, which allows home buyers in the state to leverage the federal tax credit for down payment or closings costs.
"Our rates are more competitive, but they're not as low as a pure tax-exempt bond issue like before the whole [mortgage meltdown] thing happened," she said. "We're also able to serve more families. If we'd had to do a bond issue, we couldn't do the volume we're doing."
Harkin said that 92% of the agency's borrowers need down-payment assistance, and with the JumpStart program, as many as 3,500 families will be helped.
The investors still in the market for housing bonds are pricing in what they consider risk in the market, straining housing finance agencies' internal resources and ability to offer competitive interest rates to borrowers.
Unlike conventional mortgage lenders, whose rates are based off of what the Federal Reserve does to manipulate interest rates, housing finance agencies' interest rates are determined by their cost of capital. When bond investors up their required returns, it strains housing finance agencies' liquidity and ultimately reduces the number of loans they have the capacity to make.
Michele Watson, director of homeownership programs for the Virginia Housing Development Authority, said the authority encountered this problem in January. At the time of the bond issue, market rate was 5.25%; however, the authority's bonds, which are AAA-rated, carried a rate of 6.5%.
"What we had to do was subsidize the rate to make it competitive," she said.
But for states with more limited funding--Virginia's housing authority will do between $850 million and $1 billion in loan production this year and has $50 million earmarked for its Homebuyer Tax Credit Plus Loan Program--those higher bond rates are affecting the affordability of some of its loan programs.
In Texas, for example, capital constraints have led the Texas Department of Housing and Community Affairs to annul its former down-payment assistance program. However, the agency has allocated $7.5 million to two tax credit advance programs. Roughly $2.5 million of that allocation will come from mortgage revenue bonds to fund the 120-day Mortgage Assistance Program while the remaining $5 million will come directly from the agency to support the 90-day Down Payment Assistance program.
Under the Mortgage Assistance Program, qualified first-time home buyers are eligible for a second mortgage of up to 5% of their first lien mortgage, not to exceed $6,000, for down-payment purposes. The loan is interest free for 120 days, during which the borrower is encouraged to file an amended 2008 tax return, get the federal tax credit refund, and pay off the second lien.
The second program is set up similarly; only the cap on the program is 5% of the first mortgage up to $7,000, and the loan is interest free for 90 days.
However, if a borrower does not repay within the preset period of time, the interest rates skyrocket. Under the 120-day program, failure to pay results in five years of second-lien payments at 7%; under the 90-day program, the penalty is two years of second-lien payments at 10%.
And while those rates are tied to specific programs intended to incentivize borrowers to pay back the loan as soon as they receive their tax refund check, Eric Pike, the state agency's director of its homeownership division, said rates have been creeping up in all sorts of programs.
"Investors are requiring a higher return. And for an HFA to structure a bond deal, it costs more money, and you aren't achieving lower interest rates," he explained. "If you can't achieve that low interest rate or do a DPA, there's no market for your product."
He also noted that he was seeing early signs that the bond market might be rebounding. In the meantime, he said he had his fingers crossed that market rates maintained their current level as of mid-July or head higher.
"We hope the market rates maintain or go higher, otherwise people aren't going to be interested in our program."
But Greg Spurgeon, single-family homeownership administrator for the Missouri Housing Development Commission, which was the first housing agency to offer a tax credit advance program, said he thought that even if state housing finance agencies were seeing their rates climb above market rate, it wasn't killing the affordability of their products.
"There are issues in the tax-exempt bond market. That market has been disrupted. Our rate was traditionally below market, and now we are not. ... But [although] we may offer a higher rate, it's not necessarily a higher cost," he said, noting that housing agency fees are regulated and capped at lower levels than in the private sector.
Road to recovery
With general malaise permeating the bond markets, it's a stretch for many state housing finance agencies to be able to continue funding their existing programs much less launching new ones to help buyers use a federal tax credit to help facilitate the purchase of homes. But with HUD and the FHA driving more business to their doors, many state housing agency leaders see it as an opportunity to become a major player in housing and economic recovery.
Although many of these tax credit advance programs are essentially a new spin on down-payment assistance programs currently in agencies' portfolios, it's hardly as simple as developing a new program name and marketing collateral. Money is an issue. Funding has to be secured de novo or diverted from other programs and internal resources, limiting agencies' capacities.
Cindy Flaherty, director of homeownership at the Ohio Housing Finance Agency, said she considered the agency "fortunate" to have enough reserves to capitalize the $4 million Homebuyer Tax Credit Advantage Program, which she said "should stretch pretty far" in terms of the number of families served. However, she cautioned that it was a short-term program aimed to help buyers take advantage of a limited-time opportunity for down-payment assistance.
"In Ohio, our economy needs a boost. But we can't sustain this over time," she said.
As it stands today, the federal $8,000 first-time home buyer tax credit is set to fade into oblivion as of Dec. 1. However, there is a push from key housing stakeholders to keep the credit alive. Some proponents want to extend the life of the program, others want to open it up to apply to all buyers or increase the credit value, and still others want to do all of the above.
If there's any part of that wish that's granted, there'll be another clamber by state housing finance agencies to fund the programs. Theoretically because borrowers are encouraged to repay the credit advance immediately, some of the funds should be circulated back into the programs. However, will they be enough to meet whatever demand is stimulated from any sort of expansion of the tax credit remains up for debate. Some state housing agency leaders believe the bond market will open up before then, and others have been busy trying to secure alternative sources of financing.
In the meantime, many state housing finance agencies are eager to connect with the builders in their markets by solving, at least in part, the industry's gripe about buyers' lack of down-payment and financing options--at least until the tax credit's expiration. But the scattered availability of these programs casts some doubt about whether partnerships can be advanced in any significant way. At the very least, if state agencies are helping expand the reach of the tax credit short term, the sales spurred will put even a small dent in the inventory on the market nationally. And that would be a good thing.