Drain on federal revenue through mortgage subsidies plugged
Do US taxpayers want to help people buy $200,000 oceanside estates in California? Or $60,000 condominiums in Chicago? How about $55,000 Victorian brownstones in Boston?
In the last three years, an indirect federal subsidy to both rich and poor home buyers has been mined like a mother lode in almost all states, heavily cutting potential revenue to the US Treasury.
But Congress last year decided the practice was getting out of hand and passed legislation to curb it. As of Jan. 1, cities and states no longer find it easy to hook onto a federal tax loophole that allows them to make loans available to home buyers through banks at interest rates well below those prevailing in the market generally.
First used extensively by Chicago in 1978 to help entice middle-class families to live in the city, these mortgage bargains rely on local governments using their authority to sell bonds -- free of federal taxes. Municipal bonds, of course, have long been used to raise money for such community needs as schools, sewage plants, and parks. Buyers found the tax-exempt bonds attractive.
Yet in the late 1970s, when housing prices and interest rates spiraled upward , local officials looked again at the tax break from Uncle Sam. Why not raise money to help young people buy homes? Or give incentives to restore old neighborhoods? Or just aid anybody coping with inflation in real estate?
So fast did the idea catch on that state and municipal home loans were flooding the mortgage market at a fast pace. In Rhode Island, more than three-fourths of all home loans in 1979 were sold through banks using government bond money at interest rates 3 or 4 percent below the prevailing market cost. In December, when $60 million was made available at 12 1/4 percent, the money ran out in less than three weeks.
What particularly caught the attention of Congress was the revenue loss to the US Treasury through these federal tax "expenditures." If the mortgage bond practice had not been restricted, projections showed the budget loss rising to well over $12 billion a year by 1985, compared with $618 million in 1980.
In addition, it was argued by Treasury officials that the loans were helping to inflate housing prices and that states could damage their bond credit ratings if the loans were excessively used.
Led by the then-chairman of the House Ways and Means Committee, former Rep. Al Ullman (D) of Oregon, Congress in 1979 spelled out restrictions on tax-exempt mortgage bonds that would trim and control their use.
It also ordered an end to these bond home mortgages by 1983, although a fight is expected to keep them going if housing costs are considered high then.
"Nobody has added up all the tax revenue brought in by helping new home buyers get loans -- like taxes on property, capital gains, and new construction, " argues Ralph Pari, director of the Rhode Island Housing Mortgage and Finance Corporation.
One new US rule limits bond-backed mortgages to 9 percent of a state's home loan market, or $200 million a year -- whichever is higher. In some states, such as California, where such loans account for only 6 percent of the market, the federal restriction may mean an increase in their use.
More drastic, however, is the rule that bond mortgages can only be used to buy homes at 90 percent of he average price for similar local homes the year before.
Congress hoped this purchase price limit would prevent participation by middle- and high-income people. Lawmakers also restricted bond loans to first-home buyers and provided incentives to their use in disadvantaged areas.
Forty-seven states have used bond home loans, with 16 states allowing local agencies or municipalities to use them as well, says Tom White of the Council of State Housing Agencies. The new law could open battles in state legislatures this year over how to work within the federal guidelines, which include the ability to set income eligibility for loan recipients.
In California, Gov. Edmund G. (Jerry) Brown Jr. has taken an active interest in curbing bond mortgages issued by local governments, saying they threaten the state's credit rating. In the last two fiscal years, bond mortgages grew from 16 percent to 56 percent of all state borrowing, says Dean Misczynski, an economist with the governor's planning office. Last fall, the state cracked down for the first time and lowered one local bond mortgage issue from $237 million to $50 million.
"This will be a political hot potato in the state capital this year," said Marcia Mills of the California Housing Finance Agency.