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Uncle Sam Says: Go Buy a House with Your $8,000 Tax Credit

Today's breaking news from the U.S. Department of Housing and Urban Development (HUD): This morning HUD Secretary Shaun Donovan announced a new program that will allow first-time buyers to "monetize" (that's his word) their $8,000 tax credit and use it toward paying FHA loan costs.

The announcement came in a speech this morning to the National Association of Home Builders (NAHB). It's a redo of a plan that came out a couple of weeks ago (and was rescinded in days), allowing first-time buyers to "monetize" their $8,000 tax credit and use it toward a down payment on their home.

But that decision turned out to be a political hot potato, as folks weighed in saying that if first-time buyers didn't have the cash available for a down payment, what the heck were they doing buying a house to begin with?

Great question. (I've asked that same question myself.)

So, HUD retooled and came up a new plan that requires first-time buyers to come up with the cash for the 3.5 percent down payment required by FHA loans, but allows them to use the $8,000 tax credit toward FHA loan closing costs or a down payment above and beyond the 3.5 percent.

(Here's what I'm wondering: What kind of loans are we talking about that would have closing costs of $8,000? If you're buying a home with a $200,000 loan, are you really paying 4 percent in closing costs? If you're a long-time reader of my columns and books, you'd know where I stand on that kind of number. In this program, FHA lenders are limited to loan costs of 2.5 percent, and the seller may be able to pay those.)

I was on the phone with Mark Zandi, chief economist of Moody's and author of the book Financial Shock (second edition), this morning. He said that the big economic question the government faces right now is what to do to stimulate the housing market further. "We have to get a modification program that's working," he told me, "or we have to get a plan B."

Stimulating demand while beefing up the loan modification program under President Obama's Making Home Affordable program should be Job #1. Today's announcement is another in a series of attempts to stabilize the housing industry.

What's not clear is if it will work in a big enough way to be meaningful.

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