Homebuyer Tax Credit: Problems for FHA?

by Karen Lawson
December 1st, 2009

As FHA reserves dwindle, questions about the influence of the homebuyer tax credit program on FHA’s losses. With the tax credit program extended for purchase contracts signed by April 30, 2010, buyers are combining benefits of lower home prices, the tax credit, and FHA loans.

An article in the Wall Street Journal suggests that extending the federal home buyer tax credit could bankrupt the Federal Housing Administration (FHA). This theory, based on the assertion that home buyers with little personal investment in their homes stand to default on home loans at a higher rate than those who’ve made the 10% to 20% down payment plus closing costs required for conventional mortgages.

Falling FHA Reserves + Tax Credit = Disaster

With FHA reserves well below the required level of 2% of its insured loans, FHA could be in a precarious position if low-to-moderate-income home buyers use FHA-insured mortgages to buy homes and end up in default. Robert C Pozen, the author of the WSJ article, asserts that the tax credit program will cost the US Treasury $15 billion in 2009, more than twice the projected cost when the tax credit program was initially approved. Pozen further asserts that many of these losses were attributed to mortgage and tax fraud perpetrated by home buyers who were ineligible for the tax credit, or by taxpayers who claimed to have bought homes when they hadn’t. It seems unfair to suggest that low-to-moderate-income homeowners are causing most of the problems with the tax credit program when it’s already been established that some of the fraud occurring involves people who haven’t bought homes at all.

FHA: Too Big to Fail

With its market share of home mortgage loans expanding after the demise of many sub-prime lending programs, the real question is what would happen to housing markets if FHA stops insuring loans? FHA loans currently account for about 30% of mortgage loans; if these buyers could not qualify for conventional financing, they likely would not have bought homes, and US housing markets may have fared worse than they already have.

FHA Mortgage Loans Provide Access to Low Rates, Affordable Homes

Buyers seeking a new home loan or refinance mortgage should consider FHA loans. If you need a low down payment or have little home equity due to devalued home prices, FHA mortgages allow low down payments and offer options for financing closing costs. Compare quotes on FHA mortgages and refinance loans today.

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