UPDATE: FHA Policy On Tax Credit More Limited Than Expected
(Updates with comment from National Council of State Housing Agencies in 19th
and 20th paragraphs.)
By Jessica Holzer and Dawn Wotapka
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- U.S. housing officials rolled out the details of a
plan to allow borrowers who use Federal Housing Administration financing to
apply a federal home buyer tax credit toward a home purchase.
The new policy is the latest in a string of moves by the administration to
spur demand in the housing market. But the details announced Friday suggest it
won't have the impact that realtors, home builders and housing analysts had
first anticipated.
Under the guidelines, most borrowers won't be able to use the funds from the
tax credit to meet the minimum 3.5% down payment required for an FHA loan.
Rather, they can apply the money toward closing costs, other upfront charges or
increasing the size of their down payment above 3.5%.
"One of the primary hindrances for a lot of would-be buyers, especially if
they're entry-level buyers that are looking to be home owners, is coming up with
a down payment. It doesn't erase that," Brent Anderson, vice president of
investor relations for home builder Meritage Homes Corp. (MTH), said.
Anderson pointed out that closing costs can often be paid by the seller. "The
down payment is a bigger assistance," he said.
Through Dec. 1, qualified first-time home buyers are entitled to a federal tax
credit under economic-stimulus legislation passed into law earlier this year.
The credit amounts to 10% of the purchase price of the dwelling, or $8,000,
whichever is smaller.
But the tax credit can only be claimed by filing a form with the IRS once the
home has been purchased. A slew of states - including Colorado, Idaho, Missouri,
New Jersey and Ohio - quickly launched programs to allow people to "monetize"
the tax credit, by advancing money to qualified borrowers so that they can apply
the funds from the tax credit toward a home purchase.
HUD's announcement earlier this month that it intended to allow FHA borrowers
to do something similar was met with great fanfare from the home-building and
real-estate industries. But some analysts argued the policy could harm borrowers
and taxpayers, citing the higher default rates of no-money-down loans
popularized during the housing boom.
Buyers Will Have Skin In The Game
HUD on Friday said amounts advanced by FHA lenders cannot be used to meet
FHA's minimum 3.5% down payment due to a law barring such lenders from assisting
borrowers with their down payments. FHA borrowers may use the money to increase
the size of their down payment above the 3.5% minimum, to pay closing costs, any
upfront interest charges or FHA's upfront premium.
This could help reduce monthly payments for borrowers by reducing the amount
of principal and interest on the loan, a senior HUD official argued.
By contrast, state and local housing finance agencies as well as certain
nonprofits aren't barred from assisting FHA borrowers with their down payment.
They will be allowed to provide short-term loans to borrowers for that purpose
under FHA's new policy. But most FHA borrowers obtain financing through a
lender.
A senior HUD official said it was important that FHA borrowers funded their
own minimum down payment "because we want the home buyer always to have skin in
the game."
Some housing analysts agreed that it would have been unwise to change the
rules so that a flood of FHA borrowers could rely on the tax-credit funds to
meet FHA's requirements. As of Oct. 1, sellers were barred from funding a
borrower's down payment because high default rates on such loans were taking a
toll on the FHA's insurance fund.
"A hundred percent financing with no skin in the game is probably not a good
solution either in the near term or the long term," Michael R. Widner, a home
building industry analyst for Stifel Nicolaus, said.
New Program Draws Praise
Housing Secretary Shaun Donovan touted the new program before a conference of
the National Association of Home Builders Friday, saying it would allow tens of
thousands of people to purchase a home with an FHA loan. FHA loans accounted for
roughly a quarter of all U.S. mortgage originations at the end of the first
quarter.
"This should help make home purchase more affordable," Donovan said.
NAHB Chairman Joe Robson offered praise for the new policy in a press release.
"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," he said.
Mary Trupo, director of policy issues for the National Association of
Realtors, also applauded the announcement. "We of course think the less
restrictions, the more advantageous for a home buyer. However, keeping a 3.5%
down payment does, as they're saying, give the buyer skin in the game," she
said.
The FHA's new policy could spur more states to action, said Garth Rieman,
director of housing advocacy and strategic initiatives for the National Council
of State Housing Agencies.
"We think the FHA has gone forward with an approach that will allow low-down-
payment lending by responsible state and local governmental entities, but will
avoid the risks of opening up no-down-payment lending too widely," he said.
HUD unveiled several requirements to ensure lenders and borrowers don't abuse
the program. For example, any fees and costs charged by the lender to advance
funds from the tax credit must be reasonable. The FHA would consider fees and
costs amounting to more than 2.5% of the credit amount excessive, HUD said.
FHA lenders are also required to contact the borrower's employer to confirm
there are no garnishments to their wages and review tax returns to determine
whether the borrower has any outstanding obligations to the IRS.
-By Jessica Holzer and Dawn Wotapka, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
(END) Dow Jones Newswires
05-29-091517ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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