- Loan repayment repeal
- Changing limits on prices of homes purchased with
Due to rising housing prices and mortgage rates, and a
higher demand for tax-exempt, low-interest mortgage loans
from low- and middle-income first-time homebuyers, the
mortgage revenue bond (MRBs) market has seen a healthy
increase over the last few years.
According to The Bond Buyer, a newspaper that
covers the bond markets, the amount of private-activity
bond cap that states allocated for single-family home
mortgage programs about doubled to $3.64 billion in 2000,
up from $1.81 billion in 1999.
The report indicated that while the increase is
significant, changes in survey procedure might account for
part of the increase. The data for year 2000 allocations to
single-family also included the unused volume cap that
states are allowed to carry forward for up to three years,
which was not included in past studies.
The use of private-activity bond cap increased for all
types of housing. The Bond Buyer reported that
states increased the allocation and use of multifamily
housing bonds by 5%, to $3.04 billion from $2.90 billion.
States also allocated an additional $1.59 billion for
unspecific housing purposes, up 36.6% from $1.17 billion in
1999, according to the article.
In fact, the only area that saw a decrease in
private-activity bond cap were the exempt facility bonds,
which dropped 5.7% from $1.51 billion in 1999 to $1.43
billion in 2000.
The cap amount that states are allotting to housing is
being driven by more than just the increased demand. John
Murphy, executive director of the National Association of
Local Housing Finance Agencies, indicated that the role
housing lobbyists have played in pressuring Congress for
increased volume bond cap has resulted in greater
allocations for housing from the states.
Nevertheless, while states are responding increasingly
to the demand for tax-exempt, low-interest mortgage loans,
rising home prices and higher mortgage rates are balancing
rather than tipping the scales.
Loan repayment repeal
Meanwhile, housing advocates planned to continue to
fight in 2002 to repeal a law that requires MRB issuers to
use loan repayments to retire outstanding MRBs rather than
to make new loans.
Until recently, state and local housing finance agencies
(HFAs) could use all payments they received from mortgages
they financed with MRBs to make new mortgages to other
lower income, first-time homebuyers. In 1988, a law was
passed that forces housing agencies to use all mortgage
principal payments received 10 years after a MRB is issued
to pay off old bonds, not make new mortgages.
As this requirement starts to kick in, the National
Council of State Housing Agencies (NCSHA) has estimated
that states will lose approximately $12 billion in
mortgages for first-time homebuyers for 2001 to 2005.
That’s enough to finance loans for 150,000 buyers,
NCSHA said. States could make up for that decrease by
allocating more private-activity bond authority to MRB use,
but that would take funds away from other programs.
Repealing the 10-year rule is one of NCSHA’s
top legislative priorities. NCSHA said the rule reduces
first-time homebuyer lending by half or more in some
The 10-year rule was enacted in 1988 to hasten the end
of the MRB program, which was then due to sunset that year,
according to NCSHA. Instead, Congress made the MRB program
permanent in 1993, reflecting program changes and
MRBs’ spectacular success in helping lower-income
families buy first homes. In making the program permanent,
however, Congress overlooked the 10-year rule, the first
impact of which was not felt until 1998.
The recently enacted private-activity bond cap increase
does not make up for the impact of the 10-year rule NCSHA
said. “Congress increased the cap only by the
amount its purchasing power had been cut by inflation since
the cap was imposed in 1986. In addition, the cap covers
multifamily housing, industrial development, redevelopment
and student loan bonds (none of which are covered by the
10-year rule), and HFAs must compete every year for
housing’s share of that cap against these other
A report by Merrill Lynch said, “The 10-year
rule, to a large extent, offsets gains from the volume cap
Changing limits on prices of homes purchased with
NCSHA also is asking Congress to change the current
limits on the prices of homes that can be purchased using
Under current law, homes bought with MRB-financed
mortgages can cost no more than 90% of the average purchase
price of homes in the same area. The IRS publishes area
purchase price limits.
This system is not working well, the NCSHA said.
“The IRS has not issued new limits since 1994,
even though home purchase prices have skyrocketed in most
areas since then. As a result, qualified buyers in many
areas simply cannot find suitable homes priced under the
outdated limits. In other areas, buyers are restricted to
home purchase prices lower than Congress ever meant to
The price limits have not been updated since 1994
because Treasury believes the available data is inadequate
to fulfill its legal responsibility to update the price
limits. The limits are based on data from a survey
conducted by the Federal Housing Finance Board and modified
by HUD. In 1994, IRS announced that it was unwilling to
release future purchase price limits until data reliability
could be improved. That has not happened. In addition, HUD
no longer has the staff or capacity to review and adjust
future survey data to meet the IRS requirements.
Some states set their own price limits, using an
IRS-approved methodology, where adequate and accessible
resale information is available. At best, that process is
time-consuming and expensive. In many areas in most states,
and rural areas in particular, states cannot determine
their own purchase price limits, because home sales data is
not available or accessible.
NCSHA wants Congress to make purchase prices a multiple
of eligible buyer income, just as mortgage eligibility is
normally judged throughout the housing industry. Setting
the MRB purchase price limit at 3.5 times the eligible
income limit would dramatically simplify the rule and
enable qualified families to find homes like those Congress
intended for them, according to NCSHA.
NCSHA started a major lobbying effort for legislation to
repeal the 10-year rule and revise home purchase price
constraints in 2001.
The proposed Housing Bond and Credit Modernization and
Fairness Act (H.R. 951 and S. 677) also would give tax
credit project sponsors more flexibility in how they meet
income limits for tenants of tax credit projects.
Part of NCSHA’s challenge is to show
multifamily-oriented groups why they should support the
repeal of the 10-year rule. About 40% of the overall
private-activity bond volume cap goes to housing, said
Barbara Thompson, executive director of NCSHA. Of that,
between one-half and two-thirds goes to mortgage revenue
bonds. “If you remove this source [the use of loan
repayments], it will put all this pressure back on the cap
and squeeze out other uses, including multifamily
housing,” she explained.