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Keepin' It Real Estate: Subprime Lending Is Back With a Vengeance

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Getting to the "bottom" of the housing market.

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Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.

But this time, reckless financial innovation isn't being hatched on Wall Street. Instead, state governments are angling to "monetize" first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.

If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.

The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.

Critics, however, argue that rebates don't end up in a buyer's pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.

Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.

In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.

States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn't make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.
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