Anticipating that Congress will extend the life of the popular mortgage subsidy bond program instead of letting it die on Dec. 31, a bipartisan group of influential senators has proposed a voluntary alternative that they say would provide more money for mortgages but cost the Treasury less.
Their bill would encourage state governments to trade in some or all of their mortgage bonding authority for federal income tax credits that would be given to the same home buyers who would have benefited from the bond-funded mortgages.
Senate Finance Committee Chairman Robert J. Dole (R-Kan.) said the bill "would not in any way restrict the use or issuance of mortgage subsidy bonds." By allowing the states the option of issuing tax-credit certificates instead of bonds, he said, the proposed law would extend a comparable benefit to home buyers but save money for the Treasury by reducing the amount of tax-exempt bonds in circulation.
Dole's cosponsors are Sen. Russell B. Long (D-La.), ranking minority member of Finance; Sen. Pete V. Domenici (R-N.M.), chairman of the Budget Committee, and Sens. Bill Bradley (D-N.J.), Malcolm Wallop (R-Wyo.) and John G. Tower (R-Tex.).
Mortgage subsidy bonds, spawned by the record high interest rates and consequent housing depression of the late 1970s, are an indirect federal subsidy designed to permit moderate-income persons to buy houses. Revenue from bonds issued by the states is lent to homeowners at a discount from market rates made possible by the fact that the bonds are tax exempt.
The mortgage bond program is scheduled to expire Dec. 31, after three years, but Dole expects Congress will bow to pressure from the home building and real estate industries to extend it, aides to the senator said.
The Senate has already voted an indefinite extension, but attached it to an unrelated bill repealing a law requiring the withholding of federal income tax on interest and dividend income. When the withholding bill goes to conference with the House on Tuesday, congressional sources said, the House is expected to reject extension because Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) wants to attach it as a sweetener on another, politically unpopular, measure restricting the issuance of industrial development bonds.
When the tactical maneuvering is finished, however, both houses are expected to override the objections of the Reagan administration and vote to extend the program indefinitely. The administration objects because, according to Assistant Treasury Secretary John E. Chapoton, a three-year extension would cost $15 billion.
Dole said the tax-credit plan would achieve "the same congressionally approved purpose of facilitating home ownership for first-time home buyers with the same advantages, but at a fraction of the cost in tax expenditures to the federal government." It would also have the beneficial effect, he said, of reducing the marketplace competition for the bond investors' dollar, thus helping to reduce overall interest rates.
The subsidy bond program results in an estimated 15 percent reduction in mortgage interest payments for qualified home buyers. Dole said his bill would achieve equivalent reductions by a different mechanism.
Any state or locality could choose not to issue some or all of the mortgage subsidy bonds authorized by the tax code in a given year. In exchange, the state or locality would be permitted to issue tax credit certificates directly to home buyers, who would use them to "buy down" the effective interest rate on their loans.
The existing mortgage interest deduction, which is available to all home buyers, would be reduced to reflect the amount of the credit. Even so, Dole said, the interest-rate saving for qualified first-time home buyers would be 20 to 40 percent below market rates.