Homebuyer Tax Credits Threaten the FHA

From the WallStreetJournal.com:

A few weeks ago, President Barack Obama signed legislation extending an $8,000 tax credit for first-time home buyers. The refundable tax credit, available even if a family has no taxable income, will enable many more buyers to close on a home. But it also could bankrupt the Federal Housing Administration (FHA) and, by doing so, damage an already weak housing market.

The tax credit was put in place as part of the stimulus package signed into law earlier this year. Initially, it was available only to first-time buyers with a combined income of $150,000 or less ($75,000 for individuals). Approximately 40% of all first-time buyers used the credit in 2009, so extending it was strongly supported by real estate brokers, home builders and their congressional allies.

The extension the president signed makes the credit available to first-time buyers, but also to people who have owned a home for at least five years. In addition, it raises the maximum income for a qualified buyer to $225,000 a year for couples and makes the credit available until mid-2010. (It had been set to expire at the end of this month.)

The problem is that the FHA insures mortgages of homes below certain price levels with such a low down payment that it can be funded solely by the refundable tax credit. And, as we've seen in the recent housing crisis, buyers with no skin in the game are more likely than others to default on their mortgages when the value of their home falls below their mortgage balance.

Here's how the credit allows buyers to avoid putting their own money at risk. Suppose a couple making $60,000 annually buys a home worth $200,000. They can get an FHA-insured loan if they put down 3.5% of the purchase price, about $7,000. The couple will also need to come up with another $1,000 in closing costs, for a total of $8,000. The couple can either dip into savings or borrow that money from relatives or somewhere else on a temporary basis.

Questions for the Tax Lady: October 12th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I owed the IRS thousands, and I want to hire an attorney but I am afraid I will not have enough money to afford the retainer fee. How much does it usually cost to hire an attorney?

Answer: The amount you will pay is going to depend on the attorney you hire. Typically an attorney, or law firm, with a lot of experience helping taxpayers settle their debts will cost a little more then an inexperienced lawyer or enrollment agent. Additionally, the amount of time it takes the attorney to work on your case will also influence fees.

Question #2: Is it true that I can use my federal tax credit to help pay for closing costs on my new house?

Answer: Yes. If you do not want to have to wait until April to collect your Federal tax credit, then you can elect to use it to pay for your closing fees or even part of your down payment. However, it can be a tricky process, and not all loan companies can handle it. If you do want to use your credit upfront then be sure to speak with your loan agent as soon as possible. For more information on the topic, check out the following article from Lending Tree.com.

How to use tax credit at closing

To use the tax credit at closing, home buyers must obtain a loan that's insured by the Federal Housing Administration (FHA). To obtain an FHA-insured loan, be sure to apply through an FHA-approved lender. Keep in mind that not all lenders can accommodate using the tax credit at closing. If you're interested in applying the tax credit to your closing costs, ask your lenders in advance. You may also want to consider working with a state housing finance agency that enables the tax credit to be applied towards closing.

The credit can't be used toward the first 3.5 percent of the down payment on an FHA loan. That means borrowers who want to use the tax credit as a down payment must still bring at least that amount to the transaction in addition to the tax credit. The 3.5 percent down payment must come from the buyer's own funds or a gift, subject to FHA rules. However, if the borrower obtains a loan through a state housing finance agency, the minimum down payment requirement to use the tax credit at closing may be waived.

FHA Shortfall Seen at $54 Billion May Lead to Bailout

The Federal Housing Administration may be asking taxpayers for a bailout within the next year, claims former Fannie Mae executive Edward Pinto. He asserts that the program will incur over $54 billion in unexpected losses in the next twelve months. For those of you who may not be familiar, the Federal Housing Administration helps finance mortgages with low down payments, but had been struggling to keep up with risky loans in an unstable housing market. Check out the following story about the announcement courtesy of Bloomberg.com.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

Representative Scott Garrett, a New Jersey Republican, introduced legislation this month to boost the FHA’s minimum down payment to 5 percent from 3.5 percent to help shore up the agency’s insurance fund, a move that could add to the housing market’s burdens as it struggles to recover.