First Time Home Buyer Tax Credit May Be Revised

I wrote earlier this year about how residents that purchased a home between April 9 of this year and June 30 of 2009 could receive a tax credit up to $7,500.  There is even more good news! Potential home buyers could receive additional tax and financing incentives in coming months.  It could come from either a post-election lame-duck congressional session or from the newly elected Congress arriving in January.

National housing industry trade groups are pressing hard federal officials for a second round of emergency economic stimulus legislation to encourage activity in the housing market. Though House and Senate leaders have not yet agreed on whether or not to hold a session immediately following the election, advocates would like to see action by the end of December.

The National Association of Home Builders (NAHB) is working on a plan for a more generous tax credit for home buyers, possibly ranging as high as $12,000.

The reasoning behind their push is pretty straightforward. The housing and mortgage crisis helped to trigger the current financial meltdown, but until the real estate market is put back on track, and the flood of unsold new and existing homes is decreased, a deeper recession could be unavoidable.

The NAHB also wants to make the new tax credit immediately spendable as cash for a down payment. This could be achieved through credit-anticipation loans from private lenders that would be repaid by buyers following receipt of the credit on their next federal income tax return.

The National Association of Realtors has its own proposed package to jump-start action on the real estate market. One of their proposals is to rework the current $7,500 first time home buyer tax credit enacted this summer by removing the requirement that the credit be repaid government over a period of years or when the property is sold. Under the Realtors' plan, the credit would stay at $7,500 but would be available to all types of primary residence home buyers (not just first timers) and would not need to be paid back.
Lawrence Yun, the chief economist for the association, said that Congress' repayable $7,500 credit has not been sufficiently attractive to pull large numbers of buyers into the market.

Potential buyers "view [the current credit] as a loan that they've got to pay back," he said, "but they don't want to be burdened with more debt," even at a zero interest rate. The repayment feature "is a big psychological barrier" for consumers, he said.

Although Yun believes that a "larger credit [than $7,500] would be better," simply getting rid of the repayment feature and broadening the spectrum to all buyers would spur significantly higher sales at a relatively modest cost to the Treasury.
Both of the organizations want Congress to step in before the end of the year to extend the original 2008 stimulus bill's high-cost mortgage limits, which are scheduled to expire December 31.  In the 13-county Twin Cities metro area,  that changed the limit on FHA backed loans from $276,683 to $365,000. For greater Minnesota, the limit rose to $271,050, up from $200,160.  That means 77% of homes currently for sale could be purchased through FHA backed loans, yet another incentive to induce action in the real estate market.

However, absent congressional action, the limits would drop back to their previous, lower levels.

The builders' stimulus proposal also includes support for reinstitution of controversial down-payment assistance programs for certain FHA home buyers.  Legislation was passed this year that banned programs where sellers basically funded all or parts of their home purchasers' down payments.  This was accomplished by making charitable contributions to nonprofit organizations.  The groups take out an administration fee of about $500 or more, and then channel the money to the buyers. The ban took effect just recently in October.

FHA officials oppose all types of seller-funded down-payment assistance.  They argue that they result in disproportionately higher delinquency and foreclosure rates.

Not all housing trade groups support a new emergency stimulus effort aimed at stoking home sales. The National Multi Housing Council says that special tax credits and revived down-payment assistance would just prolong imbalanced housing policies that triggered housing boom abuses in the first place.

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