Loan Modification

Should Tax-Credit Benefits Be Extended Until September?

By Peter G. Miller

When last we left off with the tax credit, it ended for most buyers and sellers as of April 30th. The exception is for active-duty military personnel serving outside the US, individuals who have until April 30, 2011.

So if the tax credit ended April 1st what happened to FHA mortgage volume in May? Should it not decline?

Funny the question should arise. Before the end of the tax credit — as much as $8,000 for first-time home buyers and $6,500 for sellers — I would have argued that sales and FHA loan originations would slip significantly in May. Indeed, I did make that argument.

May Numbers

HUD is now reporting that FHA loan applications in May totaled 181,524 — that’s down 15.8 percent from April.

HUD is also saying that FHA mortgage endorsements, loans actually approved for insurance — totaled 124,759 in May, a figure that’s off just 1.2 percent from April. That’s not much of a drop.

You can see a big different with applications but not with endorsements? What’s going on here?

Part of the answer is that with the tax credit deadline looming for most buyers and sellers, demand for FHA had already slowed in April. As FHALoanPros reported:

“For April,” we explained, “HUD says the government received 215,578 FHA mortgage applications ? that?s a big number but it?s also a number that?s down 23.1 percent from April 2009. Endorsements didn?t fare any better: 126,316 FHA mortgages were approved, a drop of 22.2 percent from a year ago.

But if May FHA applications are down 15.8 percent compared to April, why is it that endorsements fell just 1.2 percent?

The answer, I suspect, is that we’re looking at the wrong numbers.

Year-To-Year

As I tell folks, measuring real estate activity week-by-week or month-by-month is typically interesting but not especially significant. Minor tweaks — such as a longer month or a holiday weekend in one month but not another — can skew short-term results. The better measure is to compare what’s happening now with what happened a year ago. Look at those numbers and you can instantly see the end of the tax credit has had quite an impact.

The May application numbers are down 29 percent from a year ago.

The May endorsements have fallen 23.3 percent from May 2009.

These are big declines and they follow the pattern established in April.

Under the rules, a tax credit was possible for those who had a contract by April 30th and who settled by June 30th. (Again, there is an exception for certain military personnel.)

Now the new catch is that some of those with qualifying contracts will not be able to settle as of June 30th. How many?

The National Association of Realtors estimates that “the number of home buyers who have qualified for the tax credit and met the contract deadline of April 30, but who would not be able to close their transaction by the June 30 deadline, could go as high as 180,000. Realtors have reported as many as one-third of qualified applicants have been notified by lenders that their mortgages will not close before June 30 due to the sheer volume of applications in the pipeline.”

The argument is being made that the closing date should be extended until September 30th. Will that happen? I don’t know, but it is an election year….

Full post as published by FHA Mortgage Guide on June 21, 2010 (boomark / email).