Why issuance of mortgage revenue bonds is increasing

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WASHINGTON — Mortgage revenue bond financing is on the rise as state housing agencies respond to higher interest rates by reducing emphasis on mortgage credit certificates.

The credit certificates count as part of a state’s volume cap allocation for issuance of private activity bonds and the de-emphasis of MCCs enables more issuance of mortgage revenue bonds.

For years MRBs weren’t “as economically viable as they once were,” Monica Galuski, director of bond financing and chief investment officer for the Texas Department of Housing and Community Affairs, said in an interview.

With rising interest rates, Galuski said, “our plan is to move toward less mortgage credit certificates and more single family mortgage revenue bonds.”

MRB issuance rose 27% last year to $5.67 billion from $4.47 billion in 2016, according to the annual survey by the Council of Development Finance Agencies of PAB issuance subject to state volume caps.

Thirty states told CDFA they issued MRBs in 2017 while 18 said they issued MCCs.

MRB issuance topped $10 billion back in 2006, then plunged as a result of the housing crisis that led to the Great Recession, according to CDFA surveys. MRB issuance hit a low of $1.83 billion in 2013.

MCCs were created by Congress in 1984 and made permanent as part of 1986 tax reform. Their existence, along with MRBs, was in jeopardy last year when the House Republican tax bill proposed eliminating all types of Private Activity Bondss. The Senate bill preserved PABs, as did the final House-Senate agreement.

The amount of MCCs issued by states has generally risen annually over the last decade, from a low of $247.1 million in 2007 to a record $6.75 billion in 2015.

Texas led the nation in the issuance of mortgage credit certificates in 2017 with $3.02 billion issued.

Nationally, MCCs totaled $6.74 billion last year, up a slight 1.13% from $6.67 billion the year before.

The certificates are used by homeowners as a tax credit that can be claimed on a federal tax return.

The MCCs have a 4 to 1 conversion rate so that the $3.1082 billion drawn from the Texas volume cap resulted in only $777 million in certificates available to homeowners.

The maximum tax credit of $2,000 per homeowner can be used for the life of the mortgage, according to Greg Zagorski, senior legislative and policy associate at the National Council of State Housing Agencies.

In addition, MCCs are not subject to the $10,000 federal cap on deductions for state and local taxes enacted by Congress last year.

The Texas DHCA issues MCCs to first-time homebuyers statewide and to repeat homebuyers in targeted loan areas that are designated as either distressed or where at least 70% of household families have incomes that are 80% or less of the statewide median.

All types of mortgage loans and housing are eligible for MCCs, although there are restrictions on certain types of manufacturer housing.

Other top issuers of MCCs in 2017 were Virginia ($753.2 million), Georgia ($751.7 million), Florida ($474.2 million) and California ($322 million).

The Florida Housing Finance Corporation is also considering a policy shift similar to that of Texas.

“If the markets remain as they are today and are beneficial for bond pricing, Florida Housing will likely issue a greater number of bonds resulting in a smaller allocation for MCCs,” spokesman Taylore Maxey said in an email.

Maxey said her agency continually reviews the bond market and ongoing applications for single-family home financing assistance to determine the size and timing of MRB issuance.

Florida issued $128.3 million in MRBs last year, compared with $424.2 million in MCCs.

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Affordable housing bonds Private activity bonds Housing Housing market Tax reform Bond volume CDFA Washington DC Texas Florida
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