Putting instant value into an $8,000 tax credit

By Kenneth R. Harney

Syndicated Columnist

WASHINGTON – For the housing market, it’s the equivalent of financial alchemy, and it’s hot: Turning the $8,000 federal home-purchase tax credit, which normally isn’t spendable until after you’ve gotten your refund, into immediate, hard cash today, available for your down payment and closing costs.

Congress’ stimulus-bill tax credit for 2009 is generating efforts nationwide, including in Washington state, to find ways to “monetize” it – providing money upfront to buyers who need dollars for down payments right now, not next year after they file their federal returns and get refunds.

The credit is only available to qualified taxpayers who have not owned a house during the previous three years, and who close by Nov. 30, among other requirements. Buyers can amend their 2008 returns to claim the credit or claim it on returns for 2009.

In recent weeks, at least 10 states, including Washington, say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible purchasers the cash they need for their closings.

Generally the advances take the form of second mortgages – with or without interest charges – that become due and payable whenever purchasers receive their credits in the form of refunds from the IRS.

In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax-credit advance” of up to 6 percent of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate.

The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.

Colorado kicked off a similar program, known as “JumpStart,” April 14. The other states – Washington, Delaware, New Jersey, Tennessee, Idaho, Ohio, Pennsylvania and New Mexico – have come out with their own versions, some with modest interest charges on the second mortgage from the beginning.

In Washington, where the state Housing Finance Commission already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger.

He has been pushing for creation of a “public-private” down-payment program that could reach far larger numbers of consumers than is possible under the housing commission’s current funding constraints.

McIntire has proposed depositing $25 million of state funds into interest-earning accounts at an FDIC-insured bank. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts.

In a novel arrangement, the Washington Association of Realtors has pledged $400,000 as a backstop for McIntire’s plan to cover any unexpected losses on the credit monetization transactions. The Legislature has authorized the program in its new budget.

Bill Riley, the incoming president of the association, says research by his group has shown that fully half of all would-be first-time buyers in the state “cannot save enough money for the down payment and closing costs” – effectively locking them out of both the $8,000 credit and current low mortgage rates and house prices even when their monthly incomes qualify them to purchase a home.

McIntire is also trying to convince the Obama administration to allow the state to tap into bridge-loan-assisted homebuyers’ amended 2008 tax returns and be directly assigned all or a portion of the tax credit refunds.

Under current IRS rules, according to McIntire, tax-refund checks are sent only to the taxpayer’s address.

To ensure prompt repayment of bridge loans, the state would like to have refunds mailed to the housing finance commission in cases where repayment of a bridge loan is due.

In letters to Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman, McIntire argued that credit-monetization programs run by states are crucial to the success of the federal effort to stimulate first-time home purchases in 2009.

But the states need quick, direct access to federal tax-credit dollars to pay back down payment bridge loans, thereby allowing them to loan out more money before the Nov. 30 expiration of the federal credit.

Charles McMillan, president of the National Association of Realtors, sent a similar request to Shulman. An IRS spokesman said officials “are reviewing” the issue.

Bottom line: Keep your eye on what’s happening in your area. A no-cost advance tied to the $8,000 credit just might get you the down payment and closing cash you need.

Kenneth R. Harney: kenharney@earthlink.net

Copyright © 2009 The Seattle Times Company

Post from: The Mortgage Reel - Seattle Real Estate Preferred Correspondent Lender

Seattle 1st Time Home Buyers Given $8,000 For A Down Payment?

April Fools, the Depression is over! Of course it is! We were/are (debatable) in a severe recession. With the passing of the modification to the Mark to Market accounting rule the financial sector finds a much needed boost in confidence. Interestingly enough less than three weeks ago one of the largest banks in the United States was pleading it would need another $180 billion to stabilize itself. On the heels of the modification adjustment the same banks make a public statement that they would like to return the once needed T.A.R.P. funds, then announcing to the public that it would begin to offer Portfolio (held and serviced by the bank) Jumbo loans. AMAZING? Not so much. For over a year there has been a heated debate that the Mark to Market accounting rule needed to be addressed. Now that it has been done many analysts are calling it the possible turn in the economy and to go as far as saying that it will go down in history as the turning point in the economy. With all of this said and done how did it impact lending and rates. UP OR DOWN?…………………. with little surprise the markets held or even worsened slightly. Another round of unemployment showed that the bottom for jobs is still not here, normally creating a slide on Wall Street but having little affect. In fact Wall Street held closing over 8,000.

Where will rates go? We still hear these ads of 4.00% is coming, media saying rates dropped to another historical low. STOP PLEASE, enough is enough! YES rates are BELOW 5% in the 4.0% RANGE not 4.0%! Translating to reality what we have been saying this whole time, just under the 4.75% mark and still testing the floor of 4.5%. Here is a key point to keep in mind as we move now into the peak real estate selling months this summer. If the economy does actually show signs of hope to a economic recovery rates may begin to react along with that glimmer of hope. Slowing taking a bumpy ride up. Why we say slowly is because there is still money set aside from the Federal Reserve to stabilize the interest rates. However there will be days where rates will volatile, this is still the norm. Timing as we have also been saying is key. Waiting as a “Fence Sitter” at this point has no advantages.

• FACT rates have not dropped below the floors this year or in 2008.
• FACT there is no indication that there is a market being purchased by the Federal Reserve to drive rates lower, at least as of April 3, 2009.
• FACT over $1.2 trillion has now been set aside by the Federal Reserve to purchase / heavily invest in mortgage backed securities and the rates have not gone lower.
• FACT two consecutive months of significant unemployment reports and rates have not gone lower.

FICTION rates going lower, we will not make that bold of a statement, but this paints a clear picture as of right now there may not be much more news or efforts to push rates lower.

In closing we want plant a seed in all current and future home owners mindsets. With all the government has done to stall our further fall into a economic depression they have flooded the markets with money being printed fresh off of the presses. Many analysts believe that inflation will once again return in the near future. We all know what inflation can do and how it is a brutal reminder at the gas pumps. This is why it is a strategic time to reduce your out going expense on your largest and most valued investment, your home. Prepare yourself for the future so it does not hit as hard on the pocket books. With rates most likely remaining around these lows for the next two quarters timing is key. There is a sense of urgency building if the word of inflation continues to grow.

Stay tuned as the home page will have even more valued added information under the professional corner as we launch the “Evolution of Home Ownership” we are so excited to bring this to all of our viewers. Also with so much media attention on LOAN MODIFICATIONS we wanted to make sure to bring value and options to homeowners, this is why we sought out and created a partnership with local professional to break down the ways to accomplish a loan modification, most importantly what to watch out for and some basic steps. There are many viable options and also just as many schemes.

Thank you again for viewing and please help us spread the word to as many people as you know. We are growing our viewer base at a mind blowing speed and we thank everyone for finding value in TheMortgageReel!  We are gaining viewer from across the United States!

Post from: The Mortgage Reel - Seattle Real Estate Preferred Correspondent Lender

Seattle Mortgage Reel, Weekly Recap, April 3, 2009