Wednesday, June 3, 2009

Someone says, "Crud my Name is Mud!" for HUD's Dud

HUD issues then retracts a letter, "Using First-Time Home Buyer Tax Credits" and then releases it again.

May 29, 2009 -- DETROIT, MI - Oops! Someone has some explaining to do to their boss at HUD. In case you missed all the hoopla, on May 11th HUD issued Mortgagee Letter 2009-15 on its website and then pulled it later that same day. The letter, with an important change, was released again on May 29th.

It sounds like someone didn't follow protocol and jumped the gun in releasing the letter the first time. Hope they still have a job.

If you've been out of touch with the housing news of late, President Obama's housing recovery plan includes an $8,000 tax credit for anyone buying a home that hasn't owned one in the last three years. Home purchases between January1, 2009 and December 1, 2009 qualify.

Unlike President Bush's homebuyer incentive, which was really a $7500 loan that had to be paid back over 15 years, the $8,000 tax credit is a real credit. Qualifying homebuyers just have to file their federal tax return to claim it. They can even amend their 2008 return after buying a home to get the credit this year.

HUD was basically forced to release their letter and play catch up, in response to several state governments creating programs using second mortgage and/or short-term loans to advance the tax credit money to qualifying homebuyers. The homebuyers than used this money as their down payment to buy homes with FHA financing.

At this time there are 10 states with these "tax credit advance programs" and several more working on and considering them.

HUD now allows the following entities to offer tax credit advance programs:
  • Federal, state and local government agencies
  • Non-Profit Instrumentalities of government
  • FHA-approved non-profits
  • FHA approved lenders

These entities can either advance the tax credit through a second mortgage or by purchasing the tax credit from the homebuyer.

If using a program with a second mortgage:
  • No cash back to a borrower.

  • The loan amount can't exceed the total needed for down payment, closing costs and prepaids.

  • Secondary financing may OR may not require monthly payments.

  • If payments are required, they must be included in debt ratios for the FHA mortgage.

  • If payments are deferred, the deferment must be at least 36 months in order to exclude the payment from qualifying ratios.

  • If the tax credit advance loan has a short term for repayment and the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a "soft" second (no payments).

  • No balloon payments before 10 years.

If using a tax credit purchase program:
  • Proceeds of the sale of the tax credit may not exceed the anticipated tax credit due.

  • Borrower must sign a certification that the tax credit is not subject to offset of other debt.

  • Copy of form IRS 5405 must be retained by the FHA lender.

  • Costs associated with the tax credit purchase cannot exceed 2.5% of the anticipated credit. (Example: $8k tax credit means maximum $200 cost)

  • The proceeds of the sale of the tax credit to FHA approved lenders, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

This last condition is mainly what HUD changed when they retracted the first letter they released.

Many real estate agents and mortgage lenders are misinterpreting HUD's announcement to mean that Down Payment Assistance (DPA) programs are back. (DPA programs allowed a seller to basically give the buyer their down payment funds). They're hoping the $8k tax credit can be used to fund the DPA. Not going to happen. Let me be clear - HUD will not allow the $8k tax credit to be used for the 3.5% down payment required on FHA loans.

HUD was pretty adamant about stopping the use of DPA programs and finally succeeded in April of 2008. Their internal statistics showed default rates on loans with DPA were three times higher than the rest of their portfolio.

The revision HUD made to their mortgagee letter was specifically done to avoid the return of DPA programs. The language, "any third party or entity that is reimbursed, directly or indirectly" is the key to that goal. Any entity that advances the tax credit can only be paid back by the borrower, no one else. On top of that, they can only charge 2.5% of the tax credit, which means a maximum of $200.

I don't think many lenders are going to go through the hassle of setting up a special program to take advantage of this allowance by HUD, given that the tax credit program ends December 1st.

So, that leaves buyers in the other 40 states without a tax credit advance program hoping that one develops in their state soon - or else the opportunity will be gone.

Of course, they can also hope that President Obama extends the program past its December 1st deadline. That might actually happen as the housing crisis is far from over.

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