A bill that would kill the use of tax exempt mortgage bonds to finance single-family housing was introduced late yesterday by a bipartisan group of key congressional leaders.
Ranking members of House Ways and Means and the House Banking committee proposed removing tax exemption on all single-family mortgage bonds issued by localities and states. The move would deal a death blow to this increasingly popular way of cutting housing costs.
Last year $600 million in such bonds were sold after the city of Chicago initiated the practice in mid summer. In the first quarter of 1979, $1 billion worth was sold. Bond experts have predicted that as much as $5 billion worth of these issues will be sold this year unless the federal government steps in to stop the bonanza.
In introducting the legislation, Ways and Means chairman Al Ullman (DORE.) called tax exempt mortgage bonds "poor public policy." He said they not only "reduce the effectiveness of monetary policy," but they amount to "an expensive form of subsidy for the federal government."
The bill makes exception for issues designed to finance residence for veterans and multi-family rental projects. The restrictions on tax exemption were made effective immediately, although underwriters having incurred obligations before yesterday will have one month in which to dispose of them.
The most controversial aspect of the mortgage bonds was highlighted by a Congressional Budget Office study released this month whcih found that in many cases they were benefitting upper income home buyers. Of 18 issues studied, eight put no limit on the amount of mortgage money available, while others permitted households with incomes as high as $50,000 to participate.
Because the bonds are tax exempt, mortgage funds generated by them can be lent at 2 or 3 percentage points below market rate. This can make a difference of hundreds of dollars a month in mortgage payments.
Montgomery County, one of the most affluent in the country, issued bonds last month, but with a $27,500 income limit.
The Carter administration is said to be deeply divided on the issue and has thus far been unable to come up with its own bill. The president pledged in his January budget message to limit the use of these bonds to benefit low and moderate income families or for "other narrowly targeted public policy objectives."
The Treasury Department would like to ban the bonds because they would result in a $340 million revenue loss by fiscal year 1980. It also objects to what it considers subsidies for the rich. Finally, the Treasury feels that flooding the market with single-family housing bonds will drive up the interest rates on state multi-family and other tax exempt bonds.
On the other hand, the Department of Housing and Urban Development supports continued use of the bonds, but only to finance low and middle income housing.
Tax exempt mortgage bonds have been enthusiastically promoted by real estate and bond brokers. Savings and loan associations, the primary issuers of mortgage, have become worried about the competition presented by the new bond issues. But as the criticism over "subsidies for the rich" has risen, most of the industry has come to support income limitations.
W. James Lopp 2d, an executive vice president of E.F. Hutton, the stockbrokers who set up the first bond issue in Chicago, commented yesterday, "It's the first bill. The advocates have yet to be heard from. Mayors, congressmen and governors (of the states contemplating issues) will be very interested in testifying (at the hearings set for May 14 and 15).
"If the federal government has a better way than private enterprise (of providing affordable housing), then God bless 'em. But I think outlawing mortgage bonds altogether is too extreme," Lopp concluded.