Using First-Time Homebuyer Tax Credit

May 29, 2009

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
www.hud.gov espanol.hud.gov

May 29, 2009
MORTGAGEE LETTER 2009-15

From: Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

TO: ALL APPROVED MORTGAGEES
SUBJECT: Using First-Time Homebuyer Tax Credits

The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides for as much as an $8000 tax credit to qualified first-time homebuyers. FHA supports this important initiative to promote homeownership. This mortgagee letter provides:
• Basic information on the first-time homebuyer credit obtained from the Internal Revenue Service (IRS) website. Complete information on how the first time homebuyer tax credit works, including the eligibility requirements for the tax credit, the amount of the tax credit that a first-time homebuyer may be eligible to receive, and how a homebuyer may claim the tax credit is available on the IRS website at http://www.irs.gov/newsroom/article/0,,id=204671,00.html?portlet7.
• Guidance on how FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local government agencies or instrumentalities may assist homebuyers that are eligible for the tax credit.

I. About the First-Time Homebuyer Tax Credit Please check the IRS website to ensure you have up-to-date information. A brief overview of the tax credit from the IRS website and a copy of IRS Form 5405 (including instructions) are attached for reference. Pursuant to 31 U.S.C. 3727 and 26 U.S.C. 6402, a refund of the first-time homebuyer credit will be made by the IRS only to the taxpayer, not to a third party. In other words, any refund issued in response to a claim for this credit cannot be assigned by a taxpayer to a third party.

II. FHA Tax Credit Guidance
Secondary Financing Consistent with existing FHA policy, FHA will permit entities covered by Section 528 of the National Housing Act to use the current authority to offer tax credit advances with second liens in a
manner consistent with the requirements in 12 U.S.C. 1709(b)(9). Eligible government agencies and instrumentalities of government are described in handbook HUD-4155.1 5.C3 and 5.C4.

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Conditions:
• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
• The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.
• Secondary financing may be “soft” (silent) or require a monthly repayment.
• If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.
• Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
• If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.
• The secondary financing may not require a balloon payment before ten years.

Purchase of Tax Credit
FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities thereof may purchase the tax credit anticipated by the homebuyer.

Conditions:
• The proceeds of the sale of the tax credit may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405;
• The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness.
• A copy of the borrower’s tax refund and/or the IRS 5405 must be collected and retained in the FHA case binder.
• Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees
and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)
• Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity).
Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

Due Diligence
FHA expects that entities purchasing tax credit assets will employ appropriate due diligence measures including, but not limited to:

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• Require the homebuyer to draft and provide the IRS form 5405 “First-Time Homebuyer Credit.”
• Contact the borrower’s employer and review pay stubs to confirm there are no outstanding garnishments.
• Review the homebuyer’s credit report to ensure there are no unpaid student loans, or other obligations that could be offset against the credit.
• Validate that all of the eligibility requirements for the tax credit are fulfilled
• Review previous tax returns and IRS tax assessment letters, if any, to determine that the borrower does not have unsettled obligations to the IRS

III. Monitoring
In order to track the tax credit monetization activities, FHA will require FHA-approved mortgagees to input into FHA Connection the following data:
• Name and EIN of the party who purchased the tax credit, • The amount of the anticipated credit, and • The amount the homebuyer paid for the monetization services. The lender must also collect and maintain in the FHA case file the documentation that validates all of the tax credit monetization data submitted via FHA Connection. FHA will monitor the purchase of tax credit transactions closely. Charging of excessive fees or costs in the purchase of the tax credit or increasing other fees or charges in the transaction without FHA approval may result in referral to the Mortgagee Review Board, and particularly with respect to entities that are not FHA-approved mortgagees, referral to the Federal Trade Commission, or referral to the appropriate State Attorney General office, as may be applicable.

If you have any questions regarding this mortgagee letter, please call FHA’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

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HOUSING RESCUE PROGRAM DETAILS RELEASED

March 6, 2009

– President Obama earlier this week unveiled details of his home loan aid plan designed to help millions of Americans who are at risk of losing their homes.

Administration officials say the Homeowner Affordability and Stability Plan could help nearly nine million households restructure or refinance their mortgages to avoid foreclosure.

The plan includes a $75 billion homeowner stability initiative that targets at-risk homeowners, many of whom have adjustable-rate mortgages that have increased house payments to as much as 50 percent of their monthly incomes.

This initiative offers cash incentives to lenders and borrowers for working out loan modification agreements that result in lower monthly mortgage payments and allow homeowners to keep their homes. Any bank that receives federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part.

Another component of the plan is intended to help as many as five million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those institutions.

To finance that effort, the Treasury is providing the two companies with up to $200 billion in capital on top of $200 billion that it had already pledged to them.

“This is not going to save every person’s home,” said White House spokesman Robert Gibbs. “The plan is not intended to . . . augment somebody’s loan for a house that they couldn’t afford under any economic situation, good or bad.”

According to the latest data from the Mortgage Bankers Association, nearly 12 percent of homeowners — a record 5.4 million — were at least one month late or in foreclosure at the end of last year.

New York Times/Associated Press


Understanding the American Housing Rescue and Foreclosure Prevention Act of 2008

July 27, 2008

The U.S. House of Representatives passed H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008. The bill includes a temporary, $7,500 first-time home buyer tax credit which many believe will jump start the housing market and bring buyers off the sidelines. President Bush has since signed this bill into law.

Kieran P. Quinn, CMB, Chairman of the Mortgage Bankers Association (MBA) hailed the House of Representatives passage of the omnibus housing bill. The bill, which passed the House by a vote of 272-152, will now go to the Senate – where leaders have indicated it will pass – and then to President Bush, who has stated he will sign it.

Among the provisions in the bill:

FHA Modernization: Authorizes a $25 million appropriation to improve technology, processes, program performance, eliminate fraud and provide appropriate staffing. Effective January 1, 2009, it also increases the FHA loan limit to the lesser of 115 percent of the local median home price or $625,500 with a floor for lower priced markets of $271,000, establishes a 12-month stay on FHA’s proposal for risk-based premiums, sets the down payment requirement at 3.5 percent and prohibits seller-funded down payment assistance (both direct or through a third party). In my opinion: This means today’s buyer will have to have his “skin in the game” and not rely solely on outside sources for his/her downpayment. This is how purchasing a home used to be and should always be as buyers who actually have their hard-earned money invested in their home will be more likely to pay their mortages and stay in their home than just walk away and leave the property to foreclosure.

GSE Oversight Reform: Creates a new regulator (five-year term, appointed by the President, confirmed by the Senate) with oversight authority similar bank regulators, establishes a new affordable housing fund and capital magnet fund to be funded by a 4.2 basis point fee on all new loans, significantly changes the affordable housing goals and raises the conforming loan limit to the higher of $417,000 or 115 percent of the local median home price, not to exceed $625,500 (the stimulus limits remain in effect until January 1, 2009). In my opinion: This will allow buyers in very expensive markets to find competitive loans as many Jumbo Loans (non-conforming loans over the loan limit) come with higher interest rates and are an unfair punishment for purchasing in a high dollar area).

FHA Rescue: Creates a voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home. The lender would pay a 3 percent FHA loan origination fee. To qualify, the borrower must have a debt-to-income ratio above 31 percent on the original loan. The program is capped at $300 billion. In my opinion: This will help keep many homes off the foreclosure chopping block and will have a positive affect on surrounding properties and homeowners.

Tax Incentives: Creates a $7,500 refundable tax credit for first-time home buyers, expands the volume cap for the low income housing tax credit, allows for tax-exempt treatment of bonds guaranteed by the Federal Home Loan Banks and exempts the low income housing tax credit from the alternative minimum tax. In my opinion: This is a fairly low cost incentive to help first time home owners enter the market.

Low Income and Affordable Housing: Encourages the development of low-income and affordable housing by harmonizing multi-family FHA mortgage insurance programs with the low income housing tax credit. Allowing these two programs to work together will result in more effective uses of both programs. In my opinion: Again, another low cost incentive for affordable housing.

GSE Backstop: Authorizes the Treasury Secretary to temporarily increase the GSEs’ line of credit and to, if necessary, buy equity in the GSEs in order to provide confidence to credit markets. Also provides a role for Treasury and the Federal Reserve in GSE oversight to ensure safety and soundness. In my opinion: Yes, another bail out but one that is necessary to our Nation – much like the airline industry bailout of years’ past.

TILA Reform: Requires TILA disclosures to be delivered seven days prior to loan origination, requires that disclosures include examples of how payments would change based on rate adjustments in addition to disclosing the maximum possible payment under the loan terms and mandates that the consumer receive early disclosures before paying anything more than a nominal fee that covers the cost of a credit report. In my opinion: Disclosures that should have already been required so that the lending vehicle is transparent to the prospective buyer. I have seen too many buyers that were blindsided by the costs of rising interest rates during the transaction as well as dealing with punitive pre-payment penalties after the sale. Education is never a bad thing and this mandated disclosure will be helpful to the general public.

Empowering States: Raises the cap by $11 billion on tax-free bonds that state housing finance agencies may use to help at-risk homeowners by refinancing troubled loans and appropriates $4 billion for states to purchase and renovate abandoned and foreclosed properties. In my opinion: Again, a good way to help keep homes out of foreclosure.

Licensing: Encourages state officials to create a national licensing system for residential loan originators, allows HUD to create a licensing system for those states that fail to enact their own, establishes minimum qualifications for all loan originators and requires federal regulators to create a registry for banks and thrift employees who originate loans. In my opinion: loan originators are poorly regulated and are certainly part of the problem that should be addressed. By mandating a minium qualification standard and licensing, perhaps this can be resolved. I personally am not allowed by my brokerage firm to originate loans for my clients. This could certainly be a source of conflict of interest and we choose to eliminate that from the transaction. I would suggest that buyers may wish to deal with a loan originator who does this full time rather than someone trying to handle all aspects of the real estate transaction.

All in all, this bill has good, strong point that should positively affect the current housing market and the economy as a whole. While I agree that no private industry should be “bailed out” when their bad practices have lead to ruin, this is an issue that goes beyond private industry. The secondary mortgage market is necessary to us all and we need to make sure we do everything we can to keep it healthy.