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.

Housing construction plunged to a record low in April as a steep drop in apartment building offset a rebound in single-family construction. Permits for new projects also hit a new low.

The Commerce Department said Tuesday that construction of new homes and apartments fell 12.8 percent last month to a seasonally adjusted annual rate of 458,000 units, the lowest pace on records going back a half-century.

Even in last month's big decline, there were some signs of stabilization. Construction of single-family homes rose 2.8 percent to an annual rate of 368,000, following a 0.3 percent gain in March and no change in February. The stability in single-family construction likely will be viewed as a hopeful sign that the three-year slide in housing could be bottoming out.
The weakness last month came in the more volatile multifamily sector where construction plunged 46.1 percent to an annual rate of 90,000 units after a 23 percent fall in March.
Housing construction fell 30.6 percent in the Northeast, the largest drop for any region. Housing starts dropped 21.4 percent in the Midwest and 21.1 percent in the South.

The nation's top three homebuilders reported financial results earlier this month that give little hope the spring selling season will be strong enough to stop the red ink.

While all this sounds gloomy, it's a process that we must go through if we are going to get to a bottom. We need to work off the current supply of unsold homes. We do not need builders building tons on new inventory that just sits vacant.

Well the details are out. Wait no their not. Ok well maybe. HUD published the details of using the future tax credit in ML09-15 on May 11th and then pulled in 2 days latter.

Maybe they are having second thoughts. Maybe they overlooked some key points like the fact that the borrower has nothing into the deal.

In any case you can read a copy of the original ML Letter here

WASHINGTON, DC, May 12, 2009 - Today the secretary of the U.S. Department of Housing and Urban Development, Shaun Donovan, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a downpayment.
Donovan's remarks came in an address to several thousand Realtors(R) gathered this morning at The Real Estate Summit: Advancing the U.S. Economy, a special daylong session at the Realtors(R) Midyear Legislative Meetings & Trade Expo.

"We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment," Donovan said. According to Donovan, the FHA's approved lenders will be permitted to "monetize" the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.

Donovan said the Obama administration plans to further stabilize the housing market. "I do think we have some early signs that the market overall is stabilizing," said Donovan. "Since January we've seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate."

As with anything the "Devil will be in the Details". How will the Lender "monitize" the downpayment? What this sounds like is that the Lender will make a 2nd mortgage loan to the buyer secured against the tax refund. Hey does this sound anything like the "tax refunds loans" that pop up each year at tax season?

I'm also pretty sure that these won't be free. Most likely there will be a payment or interest rate associated for "monitizing" the credit.

So we are coming back to 100% loans for those that have no money into the property, no savings and may have a shaky employment or credit history. While this type of arrangement might make sense for some borrowers, ie. those with the funds that just don't want to use them and have shown an ability to save and manage their finances, it will probably be opened up to the masses and we will see those first time buyers with little or no savings and now nothing in the deal buying the biggest house they can get. Are we just setting up for a crash in the future?

Why not do something simpler like making the tax credit available to anyone purchasing a 1-4 unit property. Whether a fist time buyer, owner occupant or investors. Even if it is not forgivable by opening it up to a greater list of buyers you will help eliminate the inventory of unsold house.

It's simple economics, supply and demand.

The Los Angeles City Council has made it illegal for mortgage and real estate brokers to charge an upfront fee when offering to help distressed homeowners obtain loan modifications. So why is this important? Because it basically puts these companies out of business.

Once a mortgage is modified, how would a loan modification company expect to get paid? There is no escrow company and generally the people are not bringing money to the table. The lender is certainly not going to become the collection agent for the modification company. Oh yeah, they could sue them in court or threaten to put a collection account on their credit which would harm their credit score.

That's too funny. You thing these people would care if their credit get trashed?

While there are scam operation out there, unfortunately the LA City Council has painted a broad brush that included legitimate operations. In the LA times it said: “Some of the services are legitimate, officials said, but others are not.” So we just make them all illegal. That makes sense!!

The real looser here will be the residents of the City who will no longer have access to firms that may be able to help them. While they can still try and work with the Government HOPE hotline at 888-995-HOPE. Last I heard they were getting somewhere around 13,500 calls per day. I'm sure they won't mind sitting on HOLD. Once they reach someone do they actually think they will be able and motivated to work on THEIR case.

The city would be better off trying to regulate or better yet, enforce the current laws than alienate an industry. Unfortunately if your don't pay your mortgage, you may have to pay someone to help you solve the problem you caused.