Here is the direct quote from HUD Secretary Sean Donovan’s May 29, 2009 press release: “Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.” (emphasis added)

HUD has re-published Mortgagee Letter 2009-15 entitled “Using First-Time Homebuyer Tax Credits”. Remember, they originally published it then recanted. This Mortgagee Letter does have some changes that provide the regulatory framework for monetizing the $8000 first time homebuyer tax credit. However, it will be interesting to see if the public can make this possible.

While HUD's announcement does set out a framework for the policy, HUD does not provide the money. That is obviously going to be an issue making this program work. Don't run out and purchase a home thinking you are going to have a check waiting for you.

So who can come up with the money for the buyer? Non-profits or lenders could but, coming up with the money to make these loans when the tax credit proceeds cannot be assigned to a third party is very slim. (another nice provision) This would require that the non-profits or lenders advance the money to the buyer in hopes that the buyer, who is not obligated to, hands over their tax refund check when they get it. With the old seller paid down payment assistance(you know the one's that are now prohibited, the borrower never put their hands on the money. With this plan, the non-profits or lenders who would provide a second lien would have to hope they got repaid when or if the tax credit money arrives.

What about State Agencies? Gee about everyday you here how they don't have any money either.

The Mortgagee Letter also specifically points out that according 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).”

In English this means, the borrower must still contribute 3.5% of their “own money” into the transaction. Of course, as was always the case, this can be a gift from a relative or similar close relationship. So this really does nothing for providing the downpayment. The borrower must still have "Skin" in the transaction.

The proceeds from this monetization can be used for additional down payment or to buy down the interest rate or to pay closing costs. The best use of the money will be dictated by the transaction. For example, many borrowers who are “on the borderline” of approval through the automated underwriting system may be able to change the decision to an approval with a little additional down payment. Other people (i.e. those who definitely plan to stay in the house for a very long time) would be better off paying down the interest rate with the “free money” from the tax credit. Borrowers who know they are going to move in a few years, and who can get the seller to pay all the closing costs may be better off waiting to receive their tax refund the normal way by waiting until they file their next tax return. The tax credit money can simply be put into the bank for a rainy day.

So while a lot of press has been generated, the reality is that there will probably not be any big rush to buy homes because the people the can buy don't have any money and the people the want to move and buy a new home can't sell the one they have.