$8000 Tax Credit category archives

Market: We’re flat, as in 0bps movement, so far today.  We’ve been trading in a narrow range, with a push to the upside on bonds (down on rates) for a few days now.  I find this exceedingly odd, and will attempt to explain why.  Rates continue 5.25% or thereabouts on the 30-year, lower (and MUCH lower sometimes) on ARMs, which yes, are still out there and making good sense for many.

Analysis: This is a tough market to read.  We are sitting right on the 100-day moving average (and the 200-day moving average).  For weeks, every time we touched that line, we retreated strongly.  Any news, even bad news, was interpreted in the most positive possible light, and bonds sold off.  The stock market is strongly up since March, and though bonds have not fallen by the same amount, the general consensus (here, too) has been that rates were trying to rise and that it was only a matter of time before we saw 6% and higher again.

Well, now I’m not so sure.  This is very odd behavior for the market.  The last couple days there has been some decent economic news, home sales higher, Case-Schiller index higher in 95% of the measured markets, consumer confidence much higher than expected, durable goods orders higher (but with embedded weakness), and ordinarily this would mean a selloff in bonds, especially as we’re right at the top of a trading range.  And yet, and yet.  We even had a huge 5-year treasury auction yesterday, but the bond market actually ROSE following that auction.

So here’s my interpretation at the moment: I think there is a nagging suspicion in the market that there is some really, really negative news coming.  I think there’s a fear that this summer was irrationally exuberant in terms of calling an end to the recession.  I think that means that we’re going to hang out right here on interest rates until at least the $8000 first-time homebuyer credit goes away (loans must be CLOSED by November 30).

That’s my read.  I could be wrong.  I’m holding out at least a 25% chance that there could be a big move down in rates before the end of the year.  I also wouldn’t be surprised to see a large move upward.  But if I were betting, and hey, that’s kind of what I do here every day, I’d bet on holding right here.

P.S. For you duplex buyer mortgage shoppers, just wanted to say that you’ll need to be in underwriting (for conventional financing) by Monday unless you want to put 20% down.  80% becomes the loan limit on all duplexes as of Tuesday Sept 1.  Just a word to the wise.

The government’s $8,000 first-time home buyer tax credit has been a source of some confusion by those who might be eligible, but aren’t quite sure if they fully meet the criteria.

Now you can take a simple, 5-question quiz to find out if you qualify:

Do You Qualify for the $8,000 First-Time Home Buyer Tax Credit?

The great thing about this new quiz is that it was developed as a widget that you can put on your own blog or Web site.  Just copy and paste the code, and anyone who visits your site can then take the quiz and get instant results.

When you’re done taking the quiz, make sure to check out all of the other real estate and mortgage widgets Zillow offers.  Here are some of the latest widgets that are among my favorites:

• Mortgage I.Q.
• Market Bottom Poll
• Most Expensive Homes

Now is a great time time to purchase a home!  Here are some great reasons why!

• If you can pay rent, you can own a home
• Lock in housing cost at today’s rate vs. rent increases over time
• Tax advantages of home ownership
• Equity building through appreciation and paying down loan balance
• May be eligible for the $8000 tax credit as a first time homebuyer

Only 138 days left to take advantage of the $8000 first time homebuyer tax credit.

In college, I learned about something called the “lean and slap“.

The lean and slap is one of the professors favorite tricks - or at least it seemed to be when I was part of the captive audience there. When performing the “lean and slap” trick, the professor presents a business case in a certain light and has you thinking that the right answer is *obvious*.

And the majority of the students go ahead and fall for it - and pick the apparently obvious answer as the solution to the complex business problem presented in the case.

And as they lean forward in their chairs, all excited that they finally have the right answer…

They get slapped with the answer that they never considered.

Who says college doesn’t prepare you for life?

Lean:

“Hey everybody, we are going to allow people to monetize their 8000 tax credit by allowing them to get a bridge loan!”

Slap:

“Uh, sorry… wait… uh… we will get back to you on that. We officially retract that mortgagee letter that we put out about it. Everything is on hold for now. We will get back to you when we feel like it.”

After I pick myself up off the floor after being slapped silly, I will be sure to give everyone an update.

Right now, all I see is stars and I vaguely hear the sound of birds chirping.

The recent FHA ruling (HUD Mortgagee Letter 2009-15),  designed to allow a subordinate lien, cross-collateralized by the anticipated First-Time Homebuyer Tax Credit, has been stalled.  Less than one hour after the ruling was posted on the HUD website, the provision was rescinded.  From Boston.com:

According to contacts with both FHA and HUD, Mortgagee Letter 2009-15, which stated that first-time homebuyers would be allowed to use the tax credit for their downpayment, has been rescinded. On a phone call with FHA, Kim Kahl was told, “The mortgagee letter has been rescinded for the time being.” NAEBA President John Sullivan was told something similar when contacting HUD. Neither FHA nor HUD gave further details.

This is not to say that the policy won’t be reintroduced soon.  Government relations’ executives at mortgage banks believe that HUD wanted to avoid the implementation problems the temporary agency-jumbo loan limits increase order created when the agencies and lenders weren’t prepared.

Can a home buyer borrow money for his/her down payment today? Of course they can provided the loan is documented and the repayment terms are figured into the debt-to-income ratios.  Current sources for downpayment loans, which are acceptable to HUD, are not limited to but include:

• personal loan from a family member
• unsecured line of credit (credit card)
• 401-k retirement plan loan

For example, if a home buyer wanted to purchase a $300,000 home, which required a $10,500 down payment, they could take a cash advance against a credit card.  Underwriters would most likely require that a 4% per month minimum payment ($420) be used to calculate the debt-to-income ratios (regardless of the actual minimum payment).  Is this a prudent use of credit?

Perhaps. In our example, the home buyer might pay nine months interest on that credit card loan, at 24%, until the tax credit could be realized.  That interest (in our example) would be about $1,900.  if the home buyer were reasonably certain that the home they were buying was offered at such a compelling price that the $1,900 cost was minor, then I’d suggest it might be a prudent use of credit.

Perhaps not. I’m not convinced that the compelling deals won’t be here in 8-9 months.  In short, it would seem a bit impetuous to me to use that credit card loan.

It has amazed me how many people (mainly Realtors and lenders) are already out there proclaiming that you can now go back to the days of the “No money down” loans with FHA and you can do it right now.   Well, that’s not quite the whole story.    Let me explain:

What I know:

• I know that FHA is now allowing a borrower who qualifies for the $8000 tax credit to use that tax credit as the downpayment for purchasing the house.
• I know that they can’t get any cash back - if they need $7000, they can only get $7000.
• Government agencies and non-profits can do second liens against the house for the downpayment.
• The payments on that second lien need to be counted into qualifying rations.   In other words, if you are going to borrow the $8000 so you can use it for your down payment, you need to be able to pay that amount back.  Gee, there’s a novel concept.
• FHA approved mortgagees can do a “bridge loan” against the tax credit.

What I don’t know:

• I don’t know whether any FHA approved non-profits are going to be willing to do second liens in situations like that.
• I don’t know whether any FHA mortgagees (such as my bank) are going to be willing to do a bridge loan against a tax credit.   Typically banks don’t like to do unsecured loans and I’m not sure how you can secure a loan against a tax credit.
• I don’t know what fees and rates will be charged for such a bridge loan.

Personal feelings:

• In today’s volatile market, if you aren’t able to come up with 3.5% for a downpayment on a house, maybe you should continue to rent for a while.
• The “tightest” 12 to 18 months that a home buyer typically has is their first 12 to 18 months when they are getting used to the house payment.   Do we really want to add the cost of having to pay back a bridge loan on top of that?

So I guess my recommendation is essentially this:

• Take a deep breath.
• Wait to give the financial institutions the time to sort this all out.
• Once we know how the details of how that would work, then we can start promoting it as a done deal.   Right now, FHA is saying, “We’ll allow it.”   But I haven’t heard of anyone who has yet said, “We’ll write the loan.”   Until we have that, it’s going to be hard to know whether this is really a good idea or not.

As a friend of mine likes to say after giving his opinion…..

“That, and $3.50, will get you a cup of coffee.”

Tom Vanderwell

P.S.  The details of what I’ve put in here came from HUD Mortgagee Letter 2009-15.

FHA and the $8000 Tax Credit

While I could write for a LONG time about it, I’m going to limit it to what I feel are the top 6 things that I think could very well happen.   Keep in mind, this is being written after watching President Obama’s press conference but before anything gets passed.

1. The market is expecting that both the Stimulus Plan and TARP II will provide “the answer” to the problems that are currently plaguing our economy.   With that being said, I believe the markets will be disappointed because the problems facing the economy are way more complex and urgent than what one or two bills can solve.   The disappointment will put downward pressure on stocks and upward pressure on rates.

2. The $15,000 tax credit for home buyers will pass but rather than jumpstarting the housing market, it will instead cause a few people to buy homes, mainly first time home buyers, and will extend the inventory problems that we have because prices won’t adjust as they should.   We won’t get nearly the “bang” for the $Billions that will be spent on the tax credits.   I’m sorry but I really think the main beneficiaries of the $15K tax credit will be mortgage lenders, real estate people and the relatively few people who were already thinking of buying.   Will it reduce inventories?  No, other than taking some bank owned inventory (for first time buyers) off the banks, the rest of the people will be “shuffling” inventory because they all have a house to sell.

3. Between the Stimulus Plan and the TARP II funds, we’ll (yes, it’s you and me) will be spending close to $1.2 Trillion.   Do we have the money?   No, we don’t, so we’re going to borrow it.   What will that mean to the market?   A couple of things are going to happen (obviously in my opinion):  1) The government is going to flood the market with debt in order to finance this spending.   That’s going to push the supply demand equilibruim off base and that is going to put upward pressure on mortgage rates.

4. What about that 4.5% mortgage rate?  Is it possible for the government to “mandate” a certain rate on long term debt?   Technically it is.   They could create a new type of debt that would automatically be at that rate.   Is it possible for it do be done using market forces and buying the debt to force rates down.   I think they’ll try but I don’t believe they’ll succeed.

5. Inflation - What?  I’m talking about inflation?  Yeah, I am because it’s going to come back to haunt us.   All of this borrowing that the government(s) are doing will eventually boomerang, get us through the downturn and then spring back up as inflation due to all of this debt is going to spring out of control.   So what does that mean?  It means we’re going to see low rates for quite some time (I’d say 12 to 18 months) and then we’re going to see rates on all kinds of debts jump way up.   That’s why I’m recommending that using variable rate equity lines to save money now is only a good thing if you plan on paying it off within 2 to 3 years.

6. Banks - what’s it going to take to save the banking industry?   Is the banking industry in trouble?  Yes, I believe it is.   Is it going to take more than “buying assets from the banks” as the original TARP program wanted to do?   Yes it will.   But it will also take a realization that we were drunk on an easy credit binge and we don’t want to and can’t go back to that.   Even when the banks do lend, it’s going to be a more conservative, careful and thoughtful lending that requires verifiable cash flow, a downpayment, and good collateral.   Are the days of easy credit over?  Yes, for the foreseeable (translated - long time!) future.   Am i concerned that FHA is going to run into problems down the road because they are the only ones taking mortgages with less than spotless credit and minimal downpayments?  Yes I am.  I don’t expect that we’ll see FHA in 2010 being as lenient as they are now.

Well, there you have it.   My top 6 things that I see coming at us.   Is it going to be easy?  Nope.   But I firmly believe that those who understand what’s happening, understand the markets and where they are going will have many opportunities to navigate the “maze” and take advantage of what this market offers.

Is it a scary market?  Yes.  Is it a market that I’m scared of?  Nope.  The scary parts offer opportunities……

Today, President Barack Obama will address the American public, no doubt to lay out his case for two mammoth billion-dollar plans that are designated to help real estate: the economic stimulus package and the bank bailout. Within each plan are pieces designated to help jump-start real estate:

$15,000 tax credit

Interest around the $15,000 tax credit has reached heightened proportions in the past week as troubled homeowners and homebuyers want answers to this critical housing amendment that is part of the economic stimulus package (American Recovery and Reinvestment Act of 2009). So far, we can only speculate how this shapes up until the bill becomes official. On Tuesday, the Senate is expected to pass it by a squeaker: 61 votes (only 60 are needed). Then, the bill will go before the House and Senate committees for fine-tuning, then to Obama’s desk to be signed — hopefully by Feb. 16.

Foreclosure relief

Running parallel to the economic stimulus package is work being done to slow down foreclosures. This week, Treasury Secretary Timothy Geithner is expected to provide details for how the $350 billion remaining in the financial industry bailout package will be used. (This is the “other half” of the $700 billion TARP fund — Troubled Asset Relief Program — that is being given to the banks). House Financial Services Committee Chairman Barney Frank said President Obama is pledging to spend $50 to $100 billion directly on foreclosure relief. This time around, the Obama administration will make provisions that banks lend more and help deal with foreclosure in a reasonable way or “they’re not going to get the money,” Frank said. According to CNN, Obama’s loan modification plan calls for:

• Making monthly payments more affordable by reducing interest rates
• Lengthening loan terms or deferring principal
• Reduce payments to no more than 31% of a borrower’s monthly income.

So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.

Read more in Zillow Advice about:

Obama stimulus plan

The $15,000 tax credit

Will the $15000 tax credit apply to a second home?

Questions on $15000 tax credit and existing loan applications

How does the tax credit help people in ‘09 if they can’t claim it until ‘10 when filing?