New Government Policy: Tax Credit as Mortgage Down Payment 16 comments
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I've become numb a long time ago, but seeing these programs and "solutions" one after the other is simply.... I don't have words. Just enjoy - last week we mentioned how some states had created a work around to use the tax rebate (i.e. after you buy the home you get the handout) as a substitute for a down payment and closing costs [May 8: Minyanville - Subprime Lending is Back with a Vengeance]
- In an effort to boost home-buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
Well folks - it did not take long; the early results of letting people who cannot even find enough money to put 3.5% down into the housing market must have been spectacular. Because in just the blink of an eye this "adjustment" to what Congress originally approved, has now become the federal standard.
- (May 12, 2009) Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a down payment.
- Secretary Donovan said that important changes, which the National Association of Realtors(R) has been calling for, will help consumers purchase a home. "We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment," Donovan said. According to Donovan, the FHA's approved lenders will be permitted to "monetize" the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.
This is the same FHA we posted last week would cause the next housing bust [May 6: WSJ - FHA Loans, the Next Housing Bust]
Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.
... taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent -- nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in "serious delinquency," which means at least three months overdue.
Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser's equity can be very close to zero.
So let's wrap this up and put a bow on it. Effectively the US government is going to allow people with "3.5% down" (now covered by the tax payers gift of $8000) to enter into agreements of sub 5% mortgage rates, to FICO scores as low as 620. As long as it's your first home. Closing costs? Remember the FHA allows people to finance that... you don't need to have it on you.
To put that in perspective this means, based on the median home price in America - about 70% of homes are now available to home buyers for less upfront than a rental. In a rental you at least need to save enough to put down a security deposit. Under this innovative program (that was not the original intent of the legislation) $8000 can finance 3.5% down on up to a $228,000 home.
Anyone who can make the monthly payments from there now is welcome to join the home ownership class. Or if you really don't care about your 620, 630 FICO score, you can basically get into one of these homes, not make a single payment and live rent free from 12-18 months before they get around to foreclosing on you (which many banks are dragging their feet on).
And if the home value goes down even 1%, and you find yourself immediately underwater? You walk away and send the keys to the US taxpayer - we're going to pay for it on the back end as well as the front end.
This is what was done in the auto industry - it's called pulling forward demand with greater and greater incentives (0% interest rates for multiple years, $4K, $5K, $6K rebates). Now we pulled almost all natural demand for home buyers that should have been arriving in 2008-2009 into 2006-2007. So you have to create an even stronger drug when you can rustle up enough home buyers. And here we are.... and when home data "drops at a slower rate than the previous period" we can rally on "2nd derivative improvement"... failing to mention whom is bearing the costs for that improvement
Am I surprised? No. It's all Groundhog Day at this point - each program begins to sound like the other. Common theme is taxpayer handouts and taxpayers bearing risk -Kick the Can policies. In my predictions piece for 2009, I wrote things would get so desperate... err, correction - I wrote green shoots would be so plentiful that:
But larger than that - my prediction is Fannie/Freddie and then above and beyond that, for people who do not have 20% down and won't pay for insurance, the FHA - will wage a war against current mortgages. We'll see interest rate buydowns, we'll see principal reductions, we'll see anything and everything that basically gives a big (bleep) you to people who have been honoring the system. In return, we will tell those people, well if your neighbor's house goes into foreclosure we will all suffer, so it's a necessary evil.
By the back half of 2009, refinancing will reach levels (and above) seen in the bubble years of 2005-2006. Obama & Co will also come up with myriad plans for buyers to suck up excess inventory - the government will be our partner. Nothing should surprise you - this will be an all out assault - we are already seeing the first inane ideas such as no appraisal refinances. The "private" mortgage industry will be almost completely crowded out as no one can compete with what the government will offer.
Mission Accomplished. On that note - Freddie Mac asked for another $6B of bailouts. Just put in on the tab.
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This article has 16 comments:
This is exactly analogous to the practice by which non-profit groups (usually funded by home builders), gave "down-payment gifts" to buyers (also called seller-funded downpayment assistance). These loans default at much much higher rates. Behavioral finance proves that people treat money given to them by others much differently than they treat their own money -- they care much less about losing gifted money than losing their own money.
This will end in (more) tears.
This is unnerving. I've already voted my opinion, and I'm looking forward to voting out the people in this dystopia in the next elections.
This is also paradoxically against the imperative for the Federal Reserve. As the government crowds out the private mortgage companies, jobs are lost, prices are destabilized, and volatility goes up.
BUY......XLF
BUY......XHB
The FEDS will be spending TRILLIONS to make them go
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And you have not heard it all yet.
You heard...$700 Billion....TARP
You heard....$787 Billion...Stimulus
But the TV channels,News coverage forgot to mention
the TRILLIONS,yes,TRILLIONS
FHA will GUARANTEE in HOME LOANS
THAT THE BORROWER does not,
does not,does not have to pay back.
Do I have your attention??
(u can verify by google-"HECM Economic Recovery")
I am a real estate broker (20 yrs)
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Let's also ignore the possibility that these homes may well be worth less than the purchase price next year.
Taxation and policymaking without representation is as real today as it was in the 1770's.
There are two problems that I see in market today ,besides growing inventory of property.One the unemployment and fear factor of becoming unemployed . the other is lack of investor financing.I mean true investors not the flip this house wantabes that drove up home prices.
As policy it is probably better to put some full price buyers (owner/occupiers) into the homes even if the credit risk is high versus having the properties trade at discount valuations to higher credit quality buyers with the government taking the stealth loss through TARP, PPIP, TALF etc. The model would be similar to the credit card company model whereby the high interest rates offset the high default rates. From a societal prospective, the positive externalities of "stabilized prices" and increased homes sales velocity need to be factored into the credit loss equation to determine the true impact to the taxpayer. To make a rationale investment decision, investors need to focus not on what should be and what is fair and right, but on what is. Ultimately we are price takers, which is why the government can set interest rate artificially low. The essense is whether you would you rather earn negative real return by holding cash or an essentially zero after tax return by buying government bonds. Once business risk appetite returns worldwide, the government will lose control of interest rates and will not be able to artificially have credit providers subsidize the mortgage market.
1) The median home price in Phoenix has fallen 51% from the peak. If you bought around the peak, it doesn't matter if you put 0, 3.5 or 20 percent down, you have a large incentive to default.
2) Money is cheap but hard - the interest rate is great but it's hard to qualify for a loan. The people getting these loans are more qualified than many who got loans during the boom. For example, today there are no no-doc loans and people are not being qualified using the 1 year teaser rate.
Yeah, people who put 0 percent down will default at a higher rate than those who put some money down but that default rate is not going to be in the same ballpark as the default rates we've seen since the peak.
In addition, the median home price may be bottoming out in some areas of Phoenix. Since falling prices were the greatest generator of defaults, it seems to me that you are exaggerating the default rates on these loans that receive the $8,000 tax credit, in metro Phoenix anyway.
I am unclear when owning a home became the stated government goal and/or american birthright
I'll have to re-read the constitution - must be in one of the appendix sections ahem
On May 14 09:08 AM traden4alpha wrote:
> Good article, TraderMark (and OnTarget is on target). Haven't we
> learned anything in this crisis at all?
>
> This is exactly analogous to the practice by which non-profit groups
> (usually funded by home builders), gave "down-payment gifts" to buyers
> (also called seller-funded downpayment assistance). These loans
> default at much much higher rates. Behavioral finance proves that
> people treat money given to them by others much differently than
> they treat their own money -- they care much less about losing gifted
> money than losing their own money.
>
> This will end in (more) tears.
washingtonindependent....
"A housing program blamed in part for high default rates on government-backed loans, derided as a “scam” by the Internal Revenue Service and targeted for years for elimination by the agency that ran it looked like it finally had reached its end this fall, after Congress finally banned it. But now, in a sign that some lessons of the housing crisis have yet to be learned, a movement is afoot to bring it back."
"Forget the homebuilders, they are unlikely to benefit as the pull forward of demand will simply help them liquidate their current inventory. "
Survival is a benefit. This might help them survive.
"The government is desparate to prop up the major banks. The government needs to put a floor under home prices to break the foreclosure induced home price and mortgage security devaluation cycle."
Yes but it won't work. Markets are controlled by trend makers. In the housing market the trend is controlled by sellers not buyers.
The USG has to reduce the incentive to sell. The only thing that would change that in the short term is by forcing down interest rates on existing mortgages.
My pick is Obama won't do it. So hang on - it could get bumpy.
Unable to come up with any workable solution that makes economic sense, they are now in full panic and coming up with the solution de jure.
Perhaps they should switch to decafe in their morning strategy meetings