• Bond Provisions of the Housing and Economic Recovery Act of 2008
  • August 19, 2008 | Author: Stefanie N. Galey
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The Housing and Economic Recovery Act of 2008 was adopted by Congress on July 26 and signed by President Bush on July 30. The following is a summary of the substantive changes to housing bond law.

    Increase in Authority for Tax-Exempt Housing Bonds and Allowance for Carryforward of Volume Cap

    The legislation increases the tax-exempt volume cap by $11 billion and provides bonding authority for both single-family and multifamily housing. The additional volume cap, which is available through 2010, is shared by states on a per-capita basis. In addition, unused volume cap from 2008 may be carried forward to 2009 and 2010 as long as such amount is used for qualified mortgage bonds or private activity bonds for qualified residential rental purposes.

    Mortgage Bonds Used to Refinance Subprime Loans

    Mortgage bonds are authorized to refinance certain qualified subprime loans (defined as adjustable rate residential mortgage loans originated between January 1, 2002 and December 31, 2007) if the issuer determines that the borrower would be reasonably likely to experience financial hardship if such loans were not refinanced.

    Repeal of Alternative Minimum Tax (AMT) on Housing Bonds

    Tax-exempt interest on housing bonds is now exempt from the AMT. This exemption is effective for bonds issued after July 30, 2008. The exemption, however, does not apply to interest on refunding bonds unless the interest on the refunded bonds was not an item of tax preference.

    Limited Recycling of Multifamily Housing Bond Proceeds

    As of the adoption date, proceeds from multifamily housing bonds issued to finance one qualified residential project may be reused to finance another qualified residential project without counting against the volume cap (“recycling”) if certain tests are met. The tests include:

    (1) the refunding bonds are issued to finance a second project within six months of the repayment of a loan made with the original bonds

    (2) the refunding bonds are the first refunding bonds issued for the project and are issued not more than four years after the original bonds were issued

    (3) the maturity of the refunding bonds is not more than 34 years after the date of issuance of the original bonds

    (4) the Tax Equity and Fiscal Responsibility Act (TEFRA) approval process is followed for the refunding bonds

    Bonds Guaranteed by Federal Home Loan Banks (FHLB) Treated as Tax-Exempt Obligations

    Interest on FHLB-guaranteed bonds issued after July 30, 2008 and before January 1, 2011 is eligible for exclusion from federal income tax. This is an exception to the rule that interest on federally guaranteed bonds is not exempt from gross income for federal income tax purposes.

    Waiver of First-Time Homebuyer Exception in Disaster Zones

    The requirement that qualified mortgage bonds be used to make loans to first-time homebuyers in order to remain tax-exempt is waived for residences located in presidentially declared disaster areas. This waiver applies for bonds issued after May 1, 2008 and before January 1, 2010. This is an extension of an expired waiver.

    Coordination of Low-Income Housing Tax Credit and Tax-Exempt Bond Financed Transactions

    Changes were made to coordinate rules for projects financed with tax-exempt bonds with low income tax credit rules. These include:

    (1) the next available unit rule, which requires that the next available unit be rented to an income-eligible tenant if a low-income tenant’s income exceeds the applicable income threshold, applied on a building basis

    (2) the student rules, which prohibit eligible units from being occupied entirely by full-time students unless the students (a) consist entirely of single parents and their children, where such parents are not dependents of another individual and such children are not dependents of individuals other than their parents; or (b) are married and file a joint return

    (3) an allowance of certain single-room occupancy housing used on a nontransient basis in which eating, cooking and sanitation facilities are provided on a shared basis

    (4) a waiver of annual certification requirements for any project as long as no residential unit is occupied by tenants who fail to satisfy the applicable income limits.