Mortgage rates dip

This year, some first-time homebuyers will charge their down payments to the taxpayer.

Buyers will be allowed to use their first-time homeowner tax credits as down payments when they get FHA-insured loans, Housing Secretary Shaun Donovan announced on Tuesday. Depending on the buyer's tax-filing status and the price of the home, the tax credit can be as much as $8,000.

The National Association of Realtors hailed the announcement and asked taxpayers to subsidize all home purchases, and not just for first-time buyers.

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.

The benchmark 30-year, fixed-rate mortgage fell 6 basis points to 5.21 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.19 percent; four weeks ago, it was 5.18 percent.

The benchmark 15-year fixed-rate mortgage fell 2 basis points to 4.76 percent. The benchmark 5/1 adjustable-rate mortgage fell 26 basis points to 4.81 percent.

Mortgage rates have been remarkably steady in the last 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.

Donovan, secretary of the Department of Housing and Urban Development, boasted about the effort to keep mortgage rates low when he spoke Tuesday before a meeting of the National Association of Realtors. "And we are taking action to further help the housing market recover," he said as he introduced the down payment subsidy.

The down payment initiative is built onto this year's first-time homebuyers' tax credit, in which qualified buyers can get an income tax credit of 10 percent of the home's price, or $8,000, whichever is less. (The credit is half that for spouses filing separately, and the credit phases out for higher-income filers.)

Tax credit becomes down payment

Under the plan announced Tuesday by 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, FHA-insured loans require a down payment of at least 3.5 percent.

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.

"We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit," Donovan told the Realtors. He cited a homebuilders' study that claimed that the tax credit will stimulate 101,000 sales to first-time buyers, and another 59,000 home sales to people who will be able to buy homes because first-time buyers bought their homes.

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.

After years of griping about higher default rates on loans that used down payment assistance, the FHA persuaded Congress to ban DPAs last October, as home sales were declining precipitously. Now it appears that the FHA will let the IRS replace down payment assistance programs -- this year, at least.

The DPA business was dominated by two nonprofits: AmeriDream and Nehemiah. AmeriDream President Ann Ashburn told Bankrate on Wednesday: "By setting this policy, the FHA is tacitly acknowledging the mistake it made last October when it convinced Congress to ban charitable down payment assistance. That mistake cost hundreds of thousands of Americans the opportunity to become responsible homeowners, accelerated the decline in home prices and likely delayed the housing market's recovery."

Ashburn added that "down payment assistance must be a long-term, privately funded program, not a short-term subsidy funded by the U.S. taxpayer." She supports H.R. 600, a bill that would allow DPAs to resume their activities.

In response to the FHA's new down payment policy, the National Association of Realtors pats itself on the back. "Last year, NAR asked Congress to pass housing stimulus legislation, which passed and is beginning to show results," the Realtors' president, Charles McMillan, says.

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.