Mortgage rates have been remarkably steady in the lat few weeks. The Obama administration successfully adopted a policy of driving mortgage rates down and keeping them there. Observers believe that the Treasury and Federal Reserve are keeping rates in a narrow range by buying mortgage-backed securities whenever rates threaten to rise.
The decision to finance first-time homebuyers’ down payments with tax dollars was a highlight of a week that saw little change in mortgage rates. Under the plan announced Tuesday by Housing Secretary Shaun Donovan, buyers can get a piggyback mortgage or an unsecured bridge loan for the amount of the tax credit when they get a Federal Housing Administration-insured mortgage. The piggyback or bridge loan can take the place of a down payment.
Typically, borrowers will be expected to pay off the piggyback or bridge loans when they claim the tax credit on their 2009 returns next year or their amended 2008 returns this year. To claim the tax credit, buyers have to buy by the end of 2009.
By using tax credits as down payments, buyers won’t have to put some of their skin in the game by shelling out their saved-up cash to make down payments. It’s ironic that the FHA is allowing this because less than a year ago it banned a similar practice.
For years, the FHA grudgingly allowed down payment assistance programs, or DPAs, to operate. DPAs were a mechanism by which home sellers could indirectly fund buyers’ down payments. A seller isn’t allowed to supply the buyer’s down payment money. But DPAs exploited a loophole that allowed charitable organizations to make down payments for needy buyers. The DPAs accepted “charitable contributions” from sellers (plus administrative fees), then gave equivalent “donations” to the buyers to cover their down payments.
The Realtors say they will push this year to extend the $8,000 tax credit to all home buyers at all income levels, and not just to first-time buyers with modest incomes.