UPDATE: FHA Decision Could Benefit Home Buyers, Builders

UPDATE: FHA Decision Could Benefit Home Buyers, Builders

The U.S. government gave ailing home builders a ray of hope, although it also raised concerns lending mistakes that fueled the housing boom - and bust - could be repeated.The Department of Housing and Urban Development's Federal Housing Administration is paving the way for first-time buyers to tap a federal tax credit of up to $8,000 for a downpayment. The announcement, made Tuesday before several thousand real-estate agents attending the National Association of Realtors' Real Estate Summit, could prove a game changer for the sluggish housing market for new and existing inventory.Coming up with money to put down remains a stubborn stumbling block for many eager buyers. But now, the FHA's approved lenders, HUD-approved nonprofits and state and local governmental entities could be permitted to monetize the tax credit that expires Dec. 1 through short-term bridge loans, according to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development. Right now, buyers have to wait until they file their taxes to receive the credit.More information is expected shortly. HUD declined to comment further Wednesday."There are still lots of details that need to come out," Dan Klinger, president of K. Hovnanian American Mortgage, Hovnanian Enterprises' (HOV) mortgage subsidiary. "If it is what it appears to be, it's going to sell lots of homes."The National Association of Realtors, which has called for the change, could boost its previous estimate that the tax credit will spark at least 300,000 additional sales. The National Association of Home Builders, meanwhile, estimates an additional 160,000 new home sales - 101,000 of which would be first-time buyers who will receive the credit, Donovan said. Another 59,000 existing homeowners will be able to buy another home because a first time buyer purchased their home, he added."For HUD to remove (the downpayment) hurdle, it will open the gate," said NAHB President and Chief Executive Jerry Howard, adding the 160,000 number could double. "This is significant."To appeal to first-timers - considered key to recovery because they don't have an existing home to sell - several builders have begun building smaller and more affordable homes. This comes as interest rates hover near record lows and home prices have plunged.While Donovan labeled the idea "a real win for everyone," it is also drawing some comparisons to the no-money down programs the FHA has worked to shut down. Congress ended a program last year that allowed home sellers to fund downpayments to home buyers through nonprofit groups, and the FHA has blamed that program for an outsized share of loan defaults. Under that program, nonprofit groups would "gift" the 3% minimum downpayment to a home buyer, often funded by the seller of the home. Buyers would move into the home without paying any of their own money for the downpayment."Although it remains to be seen how the program is actually implemented, the plan resembles former seller-funded downpayment assistance programs," wrote housing analyst Ivy Zelman in a research note Wednesday. "We remain concerned that the lenient underwriting standards, low down-payment requirements and now the ability of FHA borrowers to purchase a home without putting any of their own equity into the purchase is creating a tremendous risk for the program and taxpayers in the future."The NAHB's Howard, who would like to see seller-funded DPA reformed, disagreed: "There's no room for even the perception of abuse in this program." Regardless, the FHA would follow patchwork attempts from several states, including New Jersey, Colorado, Tennessee and Kentucky.Some fund downpayments and/or closing costs - possibly getting buyers to the dotted line for nothing out-of-pocket - and offer interest-free bridge loans that essentially convert to piggyback mortgages. The states say they are carefully screening applicants to avoid prolonging or adding to the housing crisis.Missouri led the way earlier this year when it set aside $6 million to offer first-time buyers a loan for up to 6% of the purchase price, capped at $6,750, to cover the downpayment and closing costs. Should the loan - which comes from the agency's general funds - not be repaid, it amortizes monthly over a decade starting July 1, 2010.The Show-Me state welcomed the news."It definitely blessed what the state agencies have been doing, no doubt about that," said Greg Spurgeon, single-family homeownership administrator for the Missouri Housing Development Commission. "We had some lenders that were unwilling to participate in the program until FHA gave this official approval."-By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com(Nick Timiraos contributed to this report.)