Analysts are questioning the Federal Housing Administration's plan to let first-time homebuyers apply their federal tax credit early to help close the purchase.
Some observers cheered the idea, announced last week, that qualified buyers could possibly apply the credit to their down payment.
The plan is being finalized and details are expected soon, the Department of Housing and Urban Development said Friday. But in the meantime, there are doubts about how much impact the plan will have, and some fear it too closely resembles the risky lending practices that fueled the worst housing downturn in decades.
"Much like the lax lending standards of the housing bubble, all it succeeds in doing in our view is pulling sales forward and encouraging speculative buyers into the market," said Michael Widner, an analyst with Stifel Nicolaus Equity Research. "While that may look good for a quarter or two, we already know how it could potentially end."
The FHA's idea, which HUD Secretary Shaun Donovan labeled "a real win for everyone," is the latest attempt to jump-start the markets for sales of new and existing homes to help stabilize the economy. The government previously offered qualified first-time buyers a tax credit of up to $8,000 until Dec. 1. But buyers have to scrape together a down payment and file their taxes to get the credit, which has impeded sales. The FHA now aims to remedy that with short-term bridge loans.
"If there are no other hidden costs, this will be a huge benefit to new-home sales," possibly boosting them by 20% to 30%, said John Burns, the head of John Burns Real Estate Consulting.
The National Association of Home Builders, many of whose members have struggled to survive the slump, said last week that this could double the previous estimate of 160,000 additional sales of new and existing homes by December.
But Michael Rehaut, an analyst with JPMorgan Chase & Co., said that because the sale has to be completed by Dec. 1, orders should be placed by June or July at the latest. And those looking to quickly snap up already-built spec homes face limited choices: Inventory is down 34% year over year and 46% from the July 2006 peak.
There are broader concerns that such a program could worsen or prolong the foreclosure crisis.
During the housing boom, buyers were able to get homes for no money down, so they had little incentive to pay the mortgage once the house lost value or the owner struggled financially. Subprime mortgages, a good portion including those with minimal or zero down payments, have a 21.9% delinquency rate and a 13.7% foreclosure rate, according to JPMorgan Chase.
There are also concerns that the plan resembles seller-funded down payment assistance. Under DPA programs, nonprofit groups would "gift" the then-3% minimum down payment to a buyer, often funded by the home seller. In some cases the "gift" was tacked on to the home's price.
The programs were a key sales driver for builders. But after critics pointed out that such deals had higher foreclosure rates, the government banned seller-funded DPA on mortgages insured by the FHA, essentially halting the practice.
"Down payment assistance is coming back," Burns told clients in a research report last week.
The current FHA proposal does not appear to include seller contributions.
Still, "the proposed practice of accepting bridge-loan financing of the federal tax credit for a down payment," which would likely fully satisfy the 3.5% down payment requirement for today's median-priced home, "could raise questions in Congress and among industry observers, and could ultimately endanger this provision's continued existence," Rehaut said.
Widner said he does not "embrace the view that the urgency of excess inventory justifies a return to looser lending standards to encourage higher homeownership."
"Distilled down to the basics," he said, "we see the program as designed to encourage speculators" — who will capture any future pricing upside while taxpayers bear the downside risk — "in a misguided attempt to maintain homeownership rates at unsustainable levels in hopes that this can stop home prices from falling."
