Two intriguing ideas to help poor, subprime homebuyers

Nation's Housing

March 02, 2003|By KENNETH HARNEY

CONGRESS AND the White House are pursuing innovative potential solutions to two of the biggest impediments that stand in the way of most first-time home purchasers. The first is subpar credit scores that virtually guarantee unaffordable high-interest rates and mortgage fees. The second is the lack of cash for down payments and closing costs.

Here's a quick update on two of the most intriguing ideas now under consideration. Sen. Debbie A. Stabenow, a Democrat from Michigan, is drafting legislation that would perform financial alchemy by converting federal income tax credits into cash for down payments and closing fees - spendable by either first-time homebuyers or their mortgage lenders.

Stabenow's bill, scheduled for introduction in midmonth, would work like this: To qualify, first-time buyers would need to have moderate household incomes - no higher than the 27 percent federal income-tax bracket. Married purchasers could qualify for up to $6,000 in federal tax credits; single buyers for up to $3,000.

What exactly is a tax credit? Think of it as a net dollar-for-dollar subtraction off the bottom line of your federal tax return. If you owed $8,000 in federal taxes for a given year and you were handed a $6,000 tax credit, that would cut your net taxes to $2,000. If you had already paid the $8,000 in withholding over the course of the year, you'd get a refund check for $6,000 from the Treasury.

Tax credits are far more valuable than tax deductions. When you deduct $1,000 in mortgage interest, your net tax reduction varies with your tax bracket. In the 27 percent bracket, a $1,000 deduction is only worth $270 at the bottom line. But a $1,000 tax credit saves you a full $1,000.

Stabenow's bill would seek to turn tax credits for the first time ever into immediately spendable down payment and closing-cost cash. To do so, it would give qualified first-time buyers the option of either handing over their tax credit to their lenders, or using it later to reduce their personal income taxes.

For example, if a young husband and wife qualified for the $6,000 maximum, they could transfer their credit to the lender at settlement as part of their down payment or closing expenses - just as if it were real cash. The lender could then use it to offset its own corporate tax liabilities.

Alternatively, if the couple had saved or borrowed enough for the down payment and closing, they could keep the credit and use it to reduce their federal income tax during their first year of homeownership.

Either way, according to Stabenow, the proposed new homebuyer tax credit would be far more liquid than any other federal credit.

"With a normal tax credit," she says, "homebuyers have to wait until tax time before they see the money. That is not a lot of help for a working family that can't save enough to cover the down payment and closing costs, but could otherwise afford the monthly payment."

Key operational details of Stabenow's plan - such as certification of eligibility for first-time buyers and creation of a system that would allow lenders to accept tax credit transfers - still need to be worked out, according to aides. Stabenow expects bipartisan co-sponsorship of the bill, including at least one Republican on the tax-writing Senate Finance Committee.

A second innovative program under development for would-be homebuyers: creation of a federally insured "subprime" mortgage program for consumers with troubled credit and high debt ratios who might otherwise end up in the grasp of ultra-high-cost "predatory" lenders.

The new loan would be insured by the Federal Housing Administration (FHA) and would seek to offer a better deal than generally available in the private marketplace.

The idea was proposed for the first time in President Bush's fiscal 2004 budget. The administration expects that it would be a significant new force in the troubled-credit, first-time buyer market, racking up $7.5 billion in new mortgage insurance volume per year.

Who would qualify for the loans? First and foremost, people with relatively low credit scores - some of which may be artificially depressed as a result of erroneous information or minimal prior usage of traditional credit. Recent immigrants, certain minority groups and young households frequently find themselves in these situations.

Second target: People with heavier consumer debt-to-income ratios than are acceptable under standard FHA underwriting rules. The new subprime program would essentially search for diamonds in the rough among borrowers with low credit scores and high ratios - folks who look riskier than they truly are.

It would offer low down payments, but slightly higher interest rates than regular FHA loans. But the new program would also feature a "good performance" discount: After two years of on-time monthly payments, the monthly FHA insurance charge would be reduced, effectively lowering the rate.

Ken Harney's e-mail address is kharney@winstarmail.com.

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