Paying Tax Credit Forward Would Get More Buyers In the Door

For the housing market, it's the equivalent of financial alchemy, and it's hot: Turning the $8,000 federal home-purchase tax credit, which normally can't be spent until you get your refund, into cash today, available for your down payment and closing costs.

The stimulus bill's tax credit for 2009 is generating efforts nationwide to find ways to "monetize" it -- providing money upfront to buyers for down payments now, not next year after they file their federal returns and get refunds. The credit is available to qualified taxpayers who have not owned a house during the previous three years, and who close by Nov. 30, among other requirements. Buyers can amend their 2008 returns to claim the credit or claim it on returns for 2009.

In recent weeks, at least 10 states say they have come up with ways to work monetary magic. They have created innovative bridge-loan programs that advance credit-eligible purchasers the cash they need for their closings. Generally the advances take the form of second mortgages -- with or without interest charges -- that become due whenever purchasers receive their credits in the form of refunds from the IRS.

In Missouri, which was the first state to create such a program, buyers can get a no-cost "tax credit advance" of up to 6 percent of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can't meet that deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate. The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.

Colorado kicked off a similar program, known as JumpStart, on April 14. Delaware, New Jersey, Tennessee, Idaho, Washington state, Ohio, Pennsylvania and New Mexico have come out with their own versions, some with modest interest charges on the second mortgage.

In Washington, where the state Housing Finance Commission already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger. He has been pushing for creation of a public-private down payment program that could reach far more borrowers than is possible under the housing commission's current funding constraints.

McIntire has proposed depositing $25 million of state funds into interest-earning bank accounts. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts. In a novel arrangement, the Washington Association of Realtors has pledged $400,000 as a backstop for McIntire's plan to cover any unexpected losses on the transactions. The state legislature has authorized the program in its new budget.

Bill Riley, the incoming president of the Realtors association, said research by his group has shown that half of all would-be first-time buyers in the state "cannot save enough money for the down payment and closing costs" -- effectively locking them out of both the $8,000 credit and current low mortgage rates and house prices even when their monthly incomes qualify them to purchase a home.

McIntire is also trying to convince the Obama administration to allow the state to tap into the amended 2008 tax returns of bridge loan-assisted buyers and be directly assigned all or a portion of the tax credit refunds. Under current IRS rules, according to McIntire, tax refund checks are sent only to the taxpayer's address. To ensure prompt repayment of bridge loans, the state would like to have refunds mailed to the housing finance commission in cases where repayment of a bridge loan is due.

In letters to Treasury Secretary Timothy F. Geithner and IRS Commissioner Douglas Shulman, McIntire argued that credit monetization programs run by states are crucial to the success of the federal effort to stimulate first-time home purchases in 2009. But the states need quick, direct access to federal tax credit dollars to pay back bridge loans, thereby allowing them to lend more money before the federal credit expires.

Charles McMillan, president of the National Association of Realtors, sent a similar request to Shulman. An IRS spokesman said officials "are reviewing" the issue.

Bottom line: Because other state housing agencies are considering rolling out credit monetization programs on their own, keep your eye on what's happening in your area. A no-cost advance tied to the $8,000 credit just might get you the down payment and closing cash you need.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.