U.S. Housing and Urban Development Secretary Shaun Donovan recently announced that the Federal Housing Administration (FHA) will allow some buyers to apply the Obama Administration’s new $8,000 first – time home buyer tax credit toward the purchase costs of an FHA – insured home.  Donovan made these statements before the National Association of Home Builders Spring Board of Directors, stating that this action will help stabilize the nation’s housing market by stimulating home sales across the nation.

 Pursuant to the American Recovery and Reinvestment Act of 2009, first – time home buyers are offered the up to $8,000 tax credit for purchasing their first home.  Families can only access the credit after filing their tax returns with the IRS.  His announcement detailed the various rules regulating the state Housing Finance Agencies and some non – profits access to the funding, up to the maximum amount ( depending on the mortgage amount ) so that the borrowers can immediately apply these monies to their down payments.  If an FHA – approved lender is utilized by the buyer, this credit can be applied to the down payment in excess of the 3.5% requirement of appraised value OR closing costs.  This may lead to the achievement of a lower interest rate.

Donovan stated, “… What we are doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing.”

 Current law did not allow for approved lenders to “monetize” the tax credit to meet the required 3.5% minimum down payment, but, under the terms of the announcement, lenders can now monetize the tax credit for use as an additional down payment, or other closing costs, which can help a lower interest rate.

 In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute to the down payment.  Unlike seller – financed down-payment assistance, which was easily abused, this program will allow home buyers to shop for the best home price and services using the anticipated tax credit.

 Estimates offered up by the National Association of Home Builders, are 160,000 home sales may be realized across the nation – 101,000 of these will be first – time buyers who receive the credit.  Another 59,000 existing homeowners will be able to buy another home because their home was purchased by a first- time home buyer.  Based on the FHA’s current market share, it’s estimated that thousands of families will be able to purchase a home by utilizing a combination of the tax credit and an FHA – insured mortgage.

 Home buyers should use caution in comparing benefits and costs when seeking tax credit monetization services.  Lenders should be aware that the government is now more vigilant toward potential mortgage scams.  For every FHA borrower who is assisted through the tax credit program, FHA will collect the name and tax certification number of the providing organization as well as the associated fees and charges.  FHA will use the information to track the business closely and will refer any questionable practices to the appropriate regulatory agency, as necessary.

Beginning in the late ‘90s, and in response to the Community Redevelopment Act, the Inland Empire and the rest of this country saw a surge of “fantasy funding” unlike anything since the practice of buying stocks on margin in the 1920’s.  Banks were compelled to make loans to potential homeowners in the spirit of egalitarianism rather than the more traditional profiling used to determine a viable loan candidate.

In response to the frenzy to fund homeowners wanting the “American Dream”, builders, lenders, and realtors in the nation became extremely successful by filling the pipeline.  Financing for residential and commercial properties became “exotic” and such loans allowing “less than principle and interest” payments became more prevalent than conventional products. Borrowers, as well as short-sighted lenders, weren’t concerned with the realities of economics, and thus began the trend to “borrow any sum, buy at any price.” Value had no meaning.  Inland Empire properties were snatched up buy teams of investors thinking they could lease-option these homes. 

The argument was, “Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money.” It wasn’t trendy to finance under terms which paid down a mortgage, because equity appeared through appreciation.  Debt was something to be serviced, not retired; and there was no need to be building equity through the traditional practice of retiring debt through amortization.  Besides, paying down the mortgage required sacrifice, thrift, and was a slow process and building equity through the rapid appreciation experienced here in the Inland Empire was much faster and required much less sacrifice. This euphoria appealed to the fantasies of unlimited wealth and spending power.

Today, the fundamental belief in unstoppable property value has been challenged.  All the requisite notions allowing such thinking now require facing principles of economics.  Fortunately, many people have now begun to modify their thinking.  No longer can a homebuyer rely on the subterfuge of borrowing real estate purchase money without disclosing and verifying income, savings, and employment.