• Loan repayment repeal
  • Changing limits on prices of homes purchased with MRBs

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 states.

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 bond uses.”

A report by Merrill Lynch said, “The 10-year rule, to a large extent, offsets gains from the volume cap increase.”

Changing limits on prices of homes purchased with MRBs

NCSHA also is asking Congress to change the current limits on the prices of homes that can be purchased using MRBs.

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 limit them.”

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.