Home Ownership:

Mortgage Bonds Are Costly and Provide Little Assistance to Those in Need

RCED-88-111: Published: Mar 28, 1988. Publicly Released: Mar 28, 1988.

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John M. Ols, Jr
(202) 512-7631


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In response to a congressional request, GAO provided information on the role of qualified mortgage bonds in providing financing for first-time home buyers, specifically: (1) the extent to which they assisted low- and moderate-income buyers; and (2) how states are allocating issuance authority under the mandated cap.

GAO found that: (1) about two-thirds of the 177,786 buyers who received bond-assisted mortgage loans from January 1983 through June 1987 could have bought the same house at the same time without bond assistance; (2) assisted buyers generally had the same income, racial, marital, and age characteristics as non-assisted buyers; (3) although about two-thirds of the assisted buyers were part of low- or moderate-income households, their median income was similar to the median income of all first-time buyers in metropolitan areas; (4) the median reduction in assisted buyers' interest rate was 1.44 percent, or about $40 per month after taxes; (5) since bond assistance did not affect factors such as the buyer's ability to purchase the home, it did little to increase affordability; (6) recent tax reform laws narrowing the interest rate differential between tax-exempt and taxable issues will provide an even smaller increase in affordability; (7) qualified mortgage bond issuers used pre-Tax Reform Act authority to avoid cap restrictions on issuance authority; and (8) the federal tax loss was about $25 million annually for every $1 billion of bonds issued and could cost $7.8 billion from 1989 through 1993.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress enacted three provisions as a result of a report (P.L. 100-647, sec. 4005(i)). These are: (1) tighter qualifying standards for smaller households; (2) an adjustment of the income qualifying standard for high and low cost areas; and (3) a subsidy recapture.

    Matter: If issuance authority is extended, Congress should consider including in the Internal Renvenue Code four requirements: (1) those being assisted cannot qualify to purchase the house under conventional requirements; (2) all or a portion of the subsidy should be recaptured at time of sale (based on the extent of appreciation of house price); (3) income eligibility requirements should be adjusted for the purchaser's household size; and (4) bond issuers and participating mortgage lenders should not be allowed to set aside mortgage funds for specific developers.


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