For the housing market, it's the equivalent of financial alchemy, and it's hot: Turning the $8,000 federal home-purchase tax credit, which normally isn't spendable until after you've gotten your refund, into cash today, available for down payment and closing costs.
Congress' stimulus-bill tax credit for 2009 is generating efforts nationwide to find ways to “monetize” it – providing money to buyers to make down payments right now, not next year after they get refunds।
The credit is only available to qualified taxpayers who have not owned a house during the previous three years, and who close by Nov। 30, among other requirements. Buyers can amend their 2008 returns to claim the credit or claim it on returns for 2009.
In recent weeks, at least 10 states say they've come up with ways to work this monetary magic। They have created innovative bridge-loan programs that advance purchasers the cash they need for their closings. Generally the advances take the form of second mortgages – with or without interest charges – that become due whenever purchasers receive their tax refunds.
In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6 percent of the home price। The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.
If buyers can't meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate। The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.
Colorado kicked off a similar program, known as “JumpStart,” April 14। Delaware, New Jersey, Tennessee, Idaho, Washington, Ohio, Pennsylvania and New Mexico have come out with their own versions, some with modest interest charges on the second mortgage from the beginning.
In Washington, where the state already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger। He has been pushing for creation of a “public-private” down payment program that could reach far larger numbers of consumers. McIntire has proposed depositing $25 million of state funds into interest-earning accounts at an FDIC-insured bank. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts. In a novel arrangement, the Washington Association of Realtors has pledged $400,000 as a backstop for McIntire's plan to cover any unexpected losses on the credit monetization transactions.
Bill Riley, the incoming president of the association, says half of all would-be first-time buyers in the state “cannot save enough money for the down payment and closing costs” – effectively locking them out of the $8,000 credit even when their incomes qualify them to purchase a home।
McIntire is also trying to convince the Obama administration to allow the state to tap into bridge loan-assisted homebuyers' amended 2008 tax returns and be directly assigned all or a portion of the tax credit refunds. Under current IRS rules, according to McIntire, tax refund checks are sent only to the taxpayer's address. To ensure prompt repayment of bridge loans, the state would like to have refunds mailed to the housing finance commission in cases where repayment of a bridge loan is due.
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