HOUSING POLICY

WASHINGTON UPDATE

Changing Housing Law

BY BARRY G. JACOBS

AFFORDABLE HOUSING FINANCE • April 2008

Senate Majority Leader Harry Reid (D-Nev.) has introduced a sweeping bill (S. 2636) that includes billions of dollars in direct federal funding, bankruptcy law changes, and expanded taxexempt bond financing for housing.

The White House is threatening to veto the measure as the administration insists that its own emphasis on private-sector actions to provide relief to homeowners facing foreclosure is the right approach.

The stimulus bill that Bush did sign increases substantially, though temporarily, the size of one- to four-family mortgages that the Federal Housing Administration (FHA) can insure and that Fannie Mae and Freddie Mac can buy.

For the two government-sponsored enterprises (GSEs), the limits will be increased to the lower of 125 percent of the area median price for houses of applicable size or 175 percent of the 2008 limits determined under the basic Fannie Mae and Freddie Mac statutes. The higher limits will apply to mortgages originated during the period beginning July 1, 2007, and ending Dec. 31, 2008, no matter when they are purchased.

Since the basic one-family limit for 2008 is $417,000, the temporary limit could be as high as $729,750.

The FHA one-family limit would also be the lesser of 125 percent of the area median home price or 175 percent of the basic GSE limit, with proportional increases for the two- to four-family limits.

The higher FHA limits would apply to mortgages for which the lender issues credit approval for the borrower on or before Dec. 31, 2008.

While the president worked with congressional Democrats, as well as Republicans, on this stimulus legislation, the Reid bill is a different story.

The bill would provide $4 billion through the Department of Housing and Urban Development (HUD) to state and local governments for the redevelopment of abandoned and foreclosed homes. It would also give $200 million in housing counseling funds to the Neighborhood Reinvestment Corp. for foreclosure mitigation activities.

In addition, the measure would provide states with an additional $10 billion in privateactivity tax-exempt bond cap to finance rental and owner-occupied housing. It would also modify the rules for home mortgage bonds to allow bond proceeds to be used to refinance adjustable-rate subprime loans originated after Dec. 31, 2001, and before Jan. 1, 2008, that the bond issuer determines would otherwise cause financial hardship to the borrower.

Interest on tax-exempt home mortgage bonds and veterans' housing bonds would also be exempted from the alternative minimum tax (AMT).

Bankruptcy law changes in the bill would allow courts to modify a claim that is secured by the debtor's principal residence. Such modifications aren't permitted under current law. The modified claim could be paid off over a period of up to 30 years, minus the term for which the loan has been outstanding, at the Federal Reserve Board's conventional mortgage rate plus a reasonable risk premium.

An Office of Management and Budget statement opposing the bill says the $4 billion for states and localities "would constitute a bailout for lenders and speculators, while doing little to help struggling homeowners."

The statement also criticized the bankruptcy law changes, arguing that they would undermine existing contracts, reduce the availability and affordability of mortgage credit, and prolong the housing recovery.

Tax credit program revisions

Sen. Maria Cantwell (D-Wash.) has introduced legislation (S. 2666) that would liberalize some of the current limitations on the use of the low-income housing tax credit. The bill would also attempt to remove the perceived stigma from the name of the program by changing it to the affordable housing tax credit.

Cantwell and three of the bill's cosponsors - Sens. Gordon Smith (R-Ore.), John Kerry (D-Mass.), and Ken Salazar (D-Colo.) - are on the Senate Finance Committee, which has jurisdiction over the legislation. However, the prospects for the measure are unclear.

Action on tax credit legislation may have to await developments in the House, where Ways and Means Committee Chairman Charles Rangel (D-N.Y.) and Financial Services Committee Chairman Barney Frank (DMass.) have been working on program changes.

The Cantwell bill would revise the tax credit calculation to provide minimum credit percentages of 9 percent and 4 percent if the current 10-year present value calculations of 70 percent and 30 percent result in lower amounts.

The bill would also modify the rules for projects that receive other federal subsidies. As revised, the current provision limiting projects with tax-exempt bond financing to the 4 percent credit would apply only to bonds that aren't subject to the private-activity bond cap. In addition, tax-exempt construction financing would be disregarded if the bonds are redeemed before the property is placed in service.

The bill also lists a number of rent subsidy programs that wouldn't be considered grants and thus wouldn't require a reduction in eligible basis. In addition, the bill would repeal the 10-year placed-in-service restriction on acquisition credits and the ban on credits for Sec. 8 moderate-rehabilitation developments.

The bill would also allow state-designated projects to qualify for the 30 percent increase in basis now available for projects in difficult development areas and qualified census tracts, and it would boost the allowable increase in basis for community service facilities. Currently, the latter increase is limited to 10 percent of the eligible basis of the tax credit project, and the bill would raise the limit to 20 percent for the first $5 million in eligible basis, with an annual adjustment for inflation.

Other provisions would eliminate the requirement to post a recapture bond when a tax credit property is sold, eliminate annual income recertifications for 100 percent tax credit buildings, improve the coordination of tax credit and tax-exempt bond rules, and exempt the credit from the AMT.

The bill would also exempt interest on tax-exempt housing bonds from the AMT and repeal the 10-year limit on recycling mortgage bond repayments into new mortgages.

What's happening with NMTCs

The tax package submitted with the administration's fiscal 2009 budget includes a one-year extension of the New Markets Tax Credit. The proposal would continue the program through calendar 2009, with an investment allocation of $3.5 billion for that year.

The administration is also proposing to allow tax-exempt mortgage bonds to be used to refinance subprime home mortgages from 2008 through 2010. The private-activity bond cap would be increased by an aggregate amount of $15 million for the threeyear period, with all of the additional cap to be used for subprime mortgage refinancings.

Increasing FHA multifamily mortgage limits

HUD has increased the FHA multifamily mortgage limits for calendar 2008, making the inflation adjustment required by Sec. 206A of the National Housing Act. The increases reflect a 2.56 percent increase in the Consumer Price Index for All Urban Consumers.

As an example, the Sec. 221(d)(4) loan limits for non-elevator structures have been increased from a range of between $42,408 for efficiency units and $82,760 for units with four or more bedrooms in 2007 to a range of $43,493 to $84,878 this year.

Barry G. Jacobs is editor of Housing and Development Reporter, the nation's premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The two-part publication includes informed reports and insightful analyses in "HDR Current Developments," and an always up-todate compilation of essential documents in the "HDR Reference Files." Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.