You remember the feeling.
Remember back in high school when your teacher announced a pop quiz and you didn’t study the night before because you were hanging out at your friends house watching the A-Team?
You know the feeling and you can describe it in two words. (hint: the first word is “Oh”)
That is how I felt yesterday when I learned about the possibility of the 8000 tax credit being used for a down payment as mentioned by HUD Secretary Shaun Donovan in a prepared speech.
Apparently it is now being called a “bridge loan” today and details are still very sketchy as to what exactly is going to become official.
My disclaimer at this point is that to my knowledge, things can still change with this thing, and I promise to keep you updated since I opened this can of worms. Also, rant ahead.
A bridge loan?
You have to be kidding me.
The term “bridge loan” is a term that is used by MBA’s when describing the way they are financing a company. It is right up there with words like “mezzanine financing, tranches, series A, B, C rounds, cap tables, convertible debt” and “warrants”.
It is not a term that you use when handing out a loan that has financing terms worse than a payday loan and could be considered criminal if not cloaked in the right light to someone who works as a manager at the local Kentucky Fried Chicken and probably can’t afford the house he is buying in the first place because he is one missed paycheck away from being late on his mortgage.
The first “nonprofit” group in America to cloak their greed in public?
The Memphis Area Home Builders Association.
From what I can tell, here is how the mechanics of the “bridge loan” program work if you live in Memphis and want to buy a $100,000 house with a “bridge loan”.
You don’t have the $3,500 for a down payment on an FHA loan.
You borrow the $3,500 from the “non-profit” arm of the Memphis Area Home Builders Association and agree to pay them a “service fee” of $500.
The non profit then handles the paperwork needed for the amended tax return and bank account setup to handle the arrival of the $8,000 tax credit.
TRANSLATION: “We are going to loan you the money, you are going to pay us five-hundo right up front. Then we are going to have you sign over your tax refund check to us and we will set up a separate bank account with us as signers so that we can be sure we get our money back from you when the government wires the money into the account.”
This is possibly the greatest LEGAL business scam I have ever heard of — the only thing that I can find wrong with it is that the MBA guy who came up with it used a term he was familiar with like “bridge loan” to describe it. For his target market, he may have been better served to have called it “a little get-you-by” money or maybe even “Obama money” so customers knew who to vote for in the next election.
Let’s do the math.
Loan out $3,500, collect $500 up front and get $3,500 90 days later (that is being very generous – it could take days or even weeks to get the money back).
The above transaction described means that conservatively this transaction should generate north of about a 60% interest rate on an annualized basis.
HOLY HIGHWAY ROBBERY. TO SOMEONE WHO CAN’T AFFORD IT.
Sounds exactly like something called a “tax refund anticipation loan” to me. Google “Tax Refund Anticipation Loan” and see what the financial wizards have to say about those things.
But what do I know.
I am just a loan officer.
Who hands out free money to people because all of the smart people who make the rules tell me that I should.
I think that I am going to go start a non profit.
Heck, who knows – maybe this will be the silver bullet that turns the market around.
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Hey Justin,
I heard this morning that the Mortgagee Letter allowing this scam has been rescinded. It appears that the government isn’t quite doing what they originally said.
It ain’t over until it’s over…..
Tom
http://straighttalkaboutmortgages.com/2009/05/13/fha-and-the-8000-tax-credit-what-i-know-and-what-i-dont/
Hey Justin – got here from Jay’s site, posted something similar on my own blog last week. I’m an agent, not a mortgage guy – so I read your entry with trepidation. Here in GA, it’s still in its infancy, but I see this being something out of the hands of non-profits. Could be a boon for VA buyers if they’re willing to pay the MIP in order to get the equity (so they can sell in three years when Uncle Sam Obama wants them at another duty station or ship).
Navy Chief, Navy Pride
@Joe,
We will see how it all plays out.
If nothing else, the last few years has taught me to “wait and see” with this kind of stuff.
Justin
“60% interest rate on an annualized basis” – thats a pretty unbelieveable rate huh!
Anybody know the latest on this (dare I say it) fiasco in the making? If so, please drop me a lin with where newest press releases can be found…seems to have dropped off the radar.
Hi Kent,
I haven’t heard a word — if anyone else has, please comment! Sometimes stuff happens and I am the last one to know…
Justin
I read what you guys know and think of the tax credit situation. I’m in the process of my first home purchase and learned of this acouple of weeks back, however; i’m being told now that there are not any clear details at this time, so is my agent playing me or what?
Kevin,
Here is the up-to-the-minute-information-that-I-have…
Nothing is yet official.
The question is whether or not FHA will allow this to happen — and although some people/agencies/organizations/companies are claiming that they can allow people who are eligible for the 8000 tax credit to use it as their down payment (they use the term “monetization”) HUD has not issued a formal mortgagee letter saying they approve of this.
So – whoever your agent is, as weird as it sounds… I am telling my clients the same thing right now.
I have no idea if or when anything will be officially announced.
Justin
my own experienece with these kinds of businesses is definitely optimistic, folks ought to appreciate the risks just before they accept anything