Housing bonds, a form of debt security, have emerged as a crucial tool in the mission to finance affordable housing projects. These instruments, categorized under municipal revenue bonds, are issued by state or local governments. They offer a dual advantage: governments get access to low-cost financing, and lenders—particularly those in the top tax brackets—gain attractive tax benefits.
As unique debt instruments, housing bonds function in a unique space. They offer mortgages typically aimed at first-time homebuyers, given that they earn no more than the area's median income. Further, the purchase price of homes bought using these resources is limited to 90% of the area's average purchase price.
State and local governments primarily issue housing bonds to support the construction or rehabilitation of affordable housing units. The process involves repaying the bond principal alongside interest on the borrowed money. The timeline of these bonds can vary—they can be short-term or long-term issuances. Importantly, housing bonds may sometimes require the approval of voters.
A deeper understanding of municipal bonds aids in comprehending the complexity of housing bonds. The two broad categories of municipal bonds are general obligation (GO) bonds and revenue bonds. General obligation bonds are backed by the full faith and credit of the municipal government, who may increase taxes to honor its payment obligations. On the contrary, revenue bonds, under which housing bonds fall, have payment obligations supported by the project's projected revenue stream.
The landscape of housing bonds experienced a significant shift with the Housing and Economic Recovery Act of 2008. This Act was instrumental in mending the housing market after the subprime crisis, allowing states and municipalities to issue mortgage revenue bonds (MRBs). These MRBs were designed to assist local lending institutions in financing mortgages for low-income Americans, thereby broadening the scope and impact of housing bonds.
In essence, housing bonds serve as an effective mechanism for state and local governments to generate revenue. This revenue aids local banks and lending institutions in providing mortgage loans to the community, thus maintaining a steady cycle of affordable housing finance.
Often referred to as Mortgage Revenue Bonds (MRBs) or housing authority bonds, these bonds have specific implications. For instance, when referred to as housing authority bonds, they typically finance multi-family housing units, using collected rent to cover the bond's coupon.
Housing bonds enjoy a distinctive tax status. They are exempt from Federal capital gains and income taxes, like other municipal bonds, which enhances their yield appeal. Further, they are exempt from the alternative minimum tax (AMT), distinguishing them from several other types of municipal bonds.
Finally, each state maintains a version of a Housing Finance Agency (HFA). These agencies operate in alignment with the Housing and Economic Recovery Act's objectives of promoting affordable housing. Through these agencies, states can coordinate with lenders to facilitate mortgage loans to eligible individuals, thereby underscoring the instrumental role that housing bonds play in supporting affordable housing initiatives.
Summary
The Housing and Economic Recovery Act of 2008 took several steps to patch up the housing market after the subprime meltdown, one of which was the authorization of states and municipalities to issue mortgage revenue bonds (MRBs) which they could then use to help local lending institutions fund mortgages for lower-income Americans.
Housing bonds are issued by state and local governments as a way to raise revenue that can help local banks and lending institutions fund mortgage loans to the community.
This practice was authorized by the Housing and Economic Recovery Act of 2008, and the bonds are sometimes called mortgage revenue bonds (MRBs). If they are called housing authority bonds it may mean they are being used to fund multi-family housing units, and the revenue from any rent collected will help to pay the bond’s coupon.
Housing bonds are exempt from the Federal capital gains and income taxes, like other muni bonds, and this makes their modest yield more attractive. These are also exempt from the alternative minimum tax (AMT), while some other types of muni bonds are not.
Each state has its own version of a Housing Finance Agency (HFA) whose goals are aligned with HERA ideals of affordable housing, and this agency coordinates with lenders to help finance mortgage loans to those who qualify.