Just when you thought it was safe to go back in the water… Subprime lending has come roaring back.
But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.
If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don’t end up in a buyer’s pockets until his or her 2009 tax returns are filed – even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn’t go far enough.
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.
States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious – usually just a bit over the prime lending rate. Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
If the federal government wants to subsidize home ownership, fine. It’s already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can’t afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
The Federal Housing Administration — another vehicle for government-backed mortgages where taxpayers bear all the risk — gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
McAuley’s World: 3% of $250,000 is $7,500. Should the Government really be fronting the $7,500 and then loaning a quarter of a million dollars to an individual who can’t scrape together $7,500 on their own? Why doesn’t the individual simply scrape together a down payment and buy a “starter” home in the first place. The median home price in the US (half fall below, half are above) is approximately $170,000. A 3% down payment for a $170,000 loan is $5,100. If you can’t save $5,100 for a down payment, you won’t have the money to pay the increase in property taxes that will occur when the market does recover. Such a buyer is doomed to a future foreclosure, or does the Government plan on subsidizing the property taxes for these home buyers also? Back to the article ….
In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government — and now state governments as well — insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.
From the looks of it, Washington is leading by example.
Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Scott Andrew Jeffery.
McAuleys’ World: Once again the Government is behind these activities … just how short can our collective memory be …….
What happens when the individual can’t pay this “second mortgage”, or the “loan” to cover the downpayment? Read on …….
Government Tackles Second Mortgages
[Apr 28, 2009.]
The Obama administration announced plans today to address homeowners who are unable to afford the payments.
During the real estate boom, many homeowners used home equity loans and lines of credit to purchase a new home with little or no money down. These second mortgages were also used by many borrowers who took advantage of rising property values by extracting cash from the equity in their homes.
Banks were lending to people with credit challenges, borrowers who could not or did not want to document their income, and some even lent up to 125 percent of the value of someone’s home – with the expectation that real estate prices would continue to soar.
Now, these second mortgages are making it difficult for many homeowners to avoid foreclosure. Some are having success in having the terms modified on their primary mortgage, however, without modifying the terms of their home equity line of credit or home equity loan, the homeowner will be unable to meet their monthly obligations.
Obama’s previous foreclosure prevention initiatives have been criticized for not doing enough and for not addressing the second mortgage issue.
Under a new program, the government will pay mortgage servicers $500 upfront and $250 a year for three years for successfully modifying a second mortgage, such as home equity loan.
The Obama administration this week announced a new government program that will help some struggling homeowners to reduce their payments on a second mortgage at the same time they are modifying their first.
This is great news if you’re a homeowner who can’t repay your debts, not so great news if you would rather not see tax dollars subsidizing second mortgages. During the housing boom, many homeowners took out a second mortgage – either a home equity loan or line of credit – to make a down payment or pay for home improvements, medical bills, college bills, cars, vacations or other expenses.
The new plan builds on a mortgage modification announced in February called Making Home Affordable. That plan, which applies to first mortgages, encourages lenders to reduce payments for homeowners in danger of foreclosure by cutting their interest rate, temporarily reducing the balance and other means. The government makes payments to lenders that partially offset the reduced payment. It also pays servicers who get homeowners into modified mortgages and homeowners who stay current with their reduced mortgage payments.
The plan, like others before it, has had limited success because so many people who can’t pay their first mortgage can’t pay their second. “We estimate up to 50 percent of at-risk mortgages have second liens,” the Treasury Department says.
Obama’s plan envisions modifying or extinguishing 1 million to 1.5 million second mortgages.
“His expectation for success seems reasonable, but I think he is paying far too much,” Morrison says.
“Obama’s plan looks, generally, more generous,” he says. It would pay second-lien holders 3 to 12 percent on balances up to $729,750. On an average second mortgage, which Morrison says is $68,000, the payment would range from $2,040 to $8,160.
First the Government creates a program that provides mortgages that people can’t afford, and backs those mortgages with tax dollars, then the Government pays tax dollars to have the mortgages modified when the individulas can’t make the payments.
This will not lead to a housing recovery – it is simply reinflating the old “bubble” …… Billions of taxpayer dollars wasted on the same programs that created the problem in the first place ……