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$8,000 Tax Credit Advance Friend or Foe?

I have been following the $8,000 Federal Tax Credit with great interest this year. Currently it is the most talked about topic that I am discussing with potential home buyers. There is a lot of interest in receiving $8,000 when a first time buyer files their taxes for 2009. Now that many states (Washington being one of them) are discussing ways to use the $8,000 tax credit as a way to help first time home buyers get into their homes through bridge loans the discussions have really become spirited. When HUD announced that they would allow the $8,000 tax credit as collateral for “bridge loans” to cover the down payment on FHA insured mortgages the pot literally boiled over with opinions.

Currently it seems on a daily basis that the $8,000 tax credit advance is in the news for one thing or another. Yesterday the Arizona Republic announced that the tax credit would be ineligible for down payment. Later in the afternoon the Seattle Post Intelligencer announced that the Feds still plan to allow use of tax credit for down payments.  Today the Arizona Republic reports the HUD bridge loan program hasn’t been killed. So what exactly is going on with the $8,000 tax credit advance? It would appear that nobody even HUD and FHA really know. I am sure that by the time I actually publish this post there will be something new to report.

What I want to know is what the readers of Bloodhound Blog think of the $8,000 tax credit and in particular what you think of allowing the tax credit to be used towards a buyer’s down payment?

I will go on record that I feel that this makes sense in some particular situations and with some additional requirements on the borrowers.

  • Potential home buyer has the income to cover the complete cost of home ownership out of their current income. The ratios must be well within the FHA guidelines.
  • The credit score of the home buyer is greater than 675. There is no need to allow marginal credit worthy buyer’s even easier access to borrowing money that they might have troubles repaying.
  • The borrower attends and completes a first time home buyer course.
  • The borrower needs to stay in the home five years or repay the $8,000 instead of the three years if they get the money when they file their taxes. They need to have some incentive to keep the home.

Since we already have zero down loans for people wanting to buy in rural areas and for people who have served in the military I am not sure why this program is creating such a public upheaval. Do USDA or VA loans have a significantly higher default rate than other loan programs? What makes us think that the $8,000 tax credit advance program would cause an increase in defaults?

I asked this question yesterday to my LinkedIn connections and I was not surprised that the responses were spirited. Many feel that this is simply going to continuing the overly liberal lending that has created the mess that we are in with regards to real estate. Others feel that lending the money will help jumpstart the economy and that it is of great importance that the government does everything possible to help stimulate the housing markets. Everybody seemed to not have an opinion on the topic. I am sure that the readers here will have something to say on this topic. So, what say you?

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  • 16 comments

    16 Comments so far

    1. Jeff Baxter May 20th, 2009 4:14 pm

      I think the idea floated to monetize the $8000 tax credit was a mistake from the beginning. If someone can’t save 3.5% of a home price, maybe they should rent for a while longer. I’m not in foavor of using tax policy to promote home ownership at the margins. Looks what the increase in ownership rates over the past 15 years has gotten us – defaults and foreclosures enough to lead the headlines for years.

    2. Kevin Sandridge May 20th, 2009 4:51 pm

      I’m a fan of the Tax Credit Advance, so long as I’m sure the borrowers truly have the ability to maintain payments. No shoestring folks for this deal.

    3. Tom Vanderwell May 20th, 2009 5:17 pm

      I’ve already said a lot about the $8000 being used as a downpayment, so I’m not going to say much this time (yeah, I know, big surprise). A couple of thoughts:
      1. If a homebuyer can’t come up with 3.5% of the price of their home by means of their own cash and/or “gifts” from their parents, then they shouldn’t be buying a house.

      2. The FHA DPA loans had significantly higher default rates because the buyers had “no skin” in the game. These would be the same or worse.

      3. The most financially tight time in a first time home buyer’s life is within the first 2 years of buying their first home. Rather than saddling them with more debt, we should be allowing them to use the tax credit to give them more breathing room during the first years.

      If it were up to me, I’d vote a resounding “NO” and not let it be used as a downpayment.

      With that being said, I do believe that the NAR and the MBA lobbyists will get something passed but like many decisions that are made, we’ll live to regret it.

      Tom

    4. Don Reedy May 20th, 2009 6:15 pm

      “No matter where you go, there you are”, as the saying goes. Such is the case with the $8000 buyers tax credit.

      It’s here until December 1, and then it’s gone. Just in case you haven’t looked recently, the year is just about half gone, and so I think the impact of giving away this particular money won’t kill us any more than the money we’ve already given away. Personally, I don’t like second hand smoke, so I would have preferred it if the government wouldn’t have poisoned the air with a program like this in the first place. They did, however, and so how much of this stuff should we breath in, and how?

      Much has been written even here about the credit, MID, etc., the pros and cons, philosophies, drawbacks and bootstrapping that may occur when the government gives away our money to someone else. But, Scott, honestly, promoting borrowing against the money we’ve borrowed is simply preposterous!

      Bridging loans with a tax credit as collateral is check kiting. It’s foolhardy. Most importantly, at least in this group of professionals, I hope most will see it as an incestuous program that we should be quick to call out as philosophically, intellectually and morally wrong.

      By the way, I voted NO on every one of the stupid California initiatives for the same reason. Let’s start using our heads, those of us who get paid for doing so, and solve problems rather than growing fingers to plug dikes.

    5. Brian Brady May 20th, 2009 7:35 pm

      What’s the big deal, y’all? Nobody’s “financing” the tax credit, they’re factoring it; that’s a BIG difference.

    6. Tom Vanderwell May 20th, 2009 7:41 pm

      Brian,

      Do explain how, if they aren’t financing the tax credit, the buyer can get a credit against future income to use as an actual cash downpayment for the purchase of a house?

      Curious minds want to know……

      Tom

    7. Don Reedy May 20th, 2009 8:02 pm

      Brian,

      I believe I understand your “financial” stance in this. Let’s say, for the sake of discussion, that I hold your financial view of this to be true.

      It’s still wrong. You can understand that a daughter has hormones, and still think it’s wrong when the boy next door uses those hormones to his advantage. You can understand when your beloved dog steals a burger off a plate on the kitchen sink, and still be pretty upset that he hasn’t learned that what he’s doing is wrong. You can understand the legislative process, and still rale against using the system to foil or disrupt.

      I think this discussion is couched in terms not so much financial, as I myself indicated that the actual money being spent was probably secondary, but rather to how we, as professionals, are educating the consumer. I believe it’s right to question how far we let a drunken sailor go before we pull him back from the ship’s edge. What’s done is done, but I for one do not relish another carrot. Bugs Bunny (AKA the government) is eating me alive.

    8. Joe Loomer May 21st, 2009 4:23 am

      Take a VA Buyer about to finance 103% of the purchase price. They already qualified for the VA loan – which probably means they qualify FHA if they have the downpayment. Convert them to an FHA DPA Buyer using the tax credit (may have to come down in price range), and you have a great program for those who’ve sacrificed the most for us.

      Consider:

      - This converted VA buyer then moves in with 3.5% equity vs. -3% equity. If they’re Active Duty, they can now sell in three years when Uncle Sam decides to transfer them – even if their market is slow or merely stable. Giving our Heroes a 6.5% swing in equity balance at the closing table sure makes sense to me.

      Given Brian’s proposition of requirements to qualify, I think this can work easily. I’d throw in some qualifiers like the USDA products regarding payment shock and other disqualifiers, but if you’re already limiting it to a decent credit score – why not?!?!

      Put me down as a resounding – Ok, make that a qualified “Yes.”

      Navy Chief, Navy Pride

    9. Thomas Johnson May 21st, 2009 6:48 am

      By the time this gets legs, we will be in Q3, 90 days from tax credit expiration. Just another distraction while Geithner & pals loot America with Obama’s approval.

    10. Brian Brady May 21st, 2009 8:10 am

      “Curious minds want to know……”

      It’s a factor (which is a form of financing), much like using a charge card (note that I didn’t say credit card). They’re going to get the credit; we know that. All we are doing is facilitating that credit by allowing them to monetize it now. I suppose a “service charge” of $250 might be appropriate if you wanted to keep the factoring concept pure.

      Don understands where I’m going but this is a zero-sum effect on Treasury. The time to be appalled was when the FTHB tax credit went from loan to gift.

    11. Sean Purcell May 22nd, 2009 9:53 am

      More shenanigans… what fun.

      Scott – Not sure I get the point of your “layered” conditions. The borrower must already qualify using FHA guidelines on income and credit score. Does that fact that they get their money upfront rather than some months down the road change their creditworthiness? Granted, they haven’t saved their downpayment yet, but they’ve certainly earned it as a member of the dependent and kept citizens of a progressive state. :) All kidding aside, putting fancier clothes on a hooker doesn’t make her less of a whore…

      Brian – Factoring, huh? Are you sure you’re not working for the administration these days? Factoring is an extremely plausible and sensible explanation that will satisfy most people once they explore it… except for its total irrelevance. In business, a company can factor their receivables, for a fee, in order to gain access to their money. How’s that different? They earned these receivables during the course of running a business (and, I might add, contributing to the economic society rather than draining it). They are not factoring a gift that calls into question the very viability of their business. You’re thinking more of an SBA loan, wherein someone says I don’t have what takes to qualify for this business (home) right now, but I’m good for it. If the SBA (gov’t) agrees, you get your loan and open your business (buy a house). No, the idea of factoring makes much more sense in a home buying scenario when thought of as a potential homebuyer (business person) saying “I have future income and I’d like to borrow against it in order to make a purchase now.” …Oh wait, we already have that – it’s called a mortgage.

      Tom -
      1. Why is a gift from your blood parents different than a gift from our new “big daddy?”
      2. What if purchases using a tax credit bridge loan were priced for the risk – just as the DPAs should have been?
      3. Agreeing that the most financially tight time is the first two years, shouldn’t we create a bridge loan more like the factoring that Brian mentioned? No payments and a small fee up front; thus allowing the buyer to make a lower monthly payment do to the reduced loan amount?

      Come on boys, let’s have some fun.

    12. Brian Brady May 22nd, 2009 6:10 pm

      Sean,

      Whether they earned it or had it gifted to them, the tax credit is a receivable. Ask your accountant how he would enter it in the ledger.

      Borrowers can borrow that “credit” from their credit card (as long as the added payments still qualify them). Then your accountant would enter a debit in your A/P and credit your T/R accounts.

    13. Scott Cowan May 23rd, 2009 9:24 am

      I knew that this would generate an interesting conversation.

      Sean, I think that the FHA guidelines are not strict enough and that that if for this program they were tightened up it would help make sure qualified borrowers were buying.

      Brian, I think your description of factoring is the most accurate way of describing the advance.

      Thomas, I really feel that the tax credit will be extended through 2010. Especially if the DPA is allowed. That is the only way that the assistance would be of any political clout.

    14. Sean Purcell May 23rd, 2009 10:56 am

      Brian – No question it’s a receivable. Your accounting primer is right on also. My point is this: all receivables may be equally accounted for, but that does not make all receivables equal. Factoring borrows money against income from an ongoing concern. Tax credit bridge loans allow the purchase of a home where the buyer would not otherwise qualify and so is not “an ongoing concern.” Answer this: why do lenders differentiate between a family gift and a seller contribution (or more on point: a credit card advance) toward the borrower’s down payment?

      Scott – This program is allowing buyers to use a “gift” for their down payment. More guidelines would probably help (the DAP programs actually had a lower default rate once you accounted for DTI and credit score) but I’d rather see more accurate pricing over stricter rules that prevent people from getting a loan.

    15. Joe Hayden May 23rd, 2009 1:38 pm

      It’s hard to not get caught up in the whirlwind surrounding this new culture of government bailout. Bailouts have always been a component of a central banking system similar to ours, but the recent moves into the private sector are new and have unknown long-term consequences.

      I don’t think the tax credit will reach its full potential until it can be used as a down payment. In absence of such a policy change (which may happen very soon), the tax credit will help a few that may have been locked out of homeownership to get into home and be a nice bonus to those with the credit and resources to buy a home, but it will matter little to those unable to muster the cash for a down payment. That fact alone I think will help mitigate the potential negative effects of the tax credit.

    16. Brian Brady May 23rd, 2009 11:43 pm

      “Tax credit bridge loans allow the purchase of a home where the buyer would not otherwise qualify and so is not “an ongoing concern.””

      I follow you but I think you’re forgetting that a buyer CAN finance a down payment if it’s accounted for in the DTI ratio. I’m not completely against that layer of protection to “collateralize” the TCAL