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House Passes Massive Housing Reform Bill

WASHINGTON - The House voted yesterday to pass a massive housing reform package that extends a lifeline to beleaguered mortgage giants Fannie Mae and Freddie Mac and is laden with tax-exempt bond provisions, including the elimination of the alternative minimum tax for housing bonds.

Lawmakers sped the bill to a vote to ensure that the two government-sponsored enterprises have access to capital. The Senate is expected to receive the bill from the House today and vote on it by the end of the week, Senate Banking Committee chairman Christopher Dodd, D-Conn., said.

"We'll be anxious to move this product along," Dodd said in a press conference yesterday. "I think the intention is to finalize this package and get to it as soon as possible."

In a reversal, the White House signaled that it will not veto the legislation because "the positive aspects of the bill are needed now to increase confidence and stability in the housing and financial markets," spokeswoman Dana Perino said. President Bush had previously threatened to veto the measure because he objected to certain provisions.

If signed into the law, the bill will extend an unlimited line of credit from the Treasury Department to Fannie and Freddie as well as allow Treasury to purchase equity in the companies. It also establishes a new regulator over Fannie, Freddie and the Federal Housing Administration.

Among several bond-related components, the bill, which passed by a vote of 272 to 152, eliminates some of the costs imposed on new housing bonds by offsetting the alternative minimum tax through low-income housing and rehabilitation tax credits.

Under current law, interest on most tax-exempt bonds are subject to the AMT, making them less competitive and more expensive to issuers. Housing bond sales subject to the AMT accounted for 71 percent of housing bonds sold in 2007, according to Thomson Reuters.

Issuers have offered higher interest rates to compensate investors for interest lost to the AMT. But without it, state and local governments can save between 60 and 65 basis points on their issuances, said John Murphy, executive director of the National Association of Local Housing Finance Agencies.

"It is one of our highest priorities," Murphy said.

The AMT elimination will go into effect as soon as the bill is signed into law by the president and applies to newly issued housing bonds. This provision will "really sweeten the market for the primary" bonds, and weaken demand for bonds outstanding in the secondary market, said Matt Fabian, managing director for Municipal Market Advisors in Concord, Mass.

The elimination of the AMT is unlikely to lead to a wave of refundings of existing housing bonds because issuers cannot advance-refund housing bonds, market participants said.

Meanwhile, the bill will increase the national limit on state municipal issuances for private-activity bonds by an additional $11 billion. It was unclear yesterday how that money would be divvied up among the states, which are currently allocated the larger of $85 per resident or $256.235 million each year.

The same provision also allows existing homeowners with mortgages worth more than the value of their homes to refinance at rates that have historically been reserved for only first-time buyers. And it allows subprime loans to be temporarily refinanced into long-term affordable loans. In addition, it allows proceeds from tax-exempt bond sales to be used for low-income rental housing.

Except for the new authority related to Fannie and Freddie, the bond-related provisions in the bill have been repackaged from earlier proposals to form a massive housing omnibus that is estimated to cost about $25 billion over 10 years by the Congressional Budget Office.

But critics of the bill, led by Alabama Rep. Spencer Bachus, the ranking Republican on the House Financial Services Committee, warned yesterday that it could cost up to $300 billion, reflecting the roughly $300 billion of available spending to the federal government without bumping against Congress' current $9.8 trillion debt limit.

House Financial Services chairman Barney Frank, D-Mass., stressed that it is highly unlikely the Treasury will need to fully tap its standby authority to buy equity in the companies because most of their mortgages consist of good loans. He estimated that the cost to taxpayers would fall much closer to the CBO estimate.

"It would cost $300 billion only if no one who had one of those mortgages ever made a payment ... and the houses were worth nothing," Frank said.

The bill also includes $4 billion for community block grant developments, which was scrapped in an earlier version of the bill to avoid the White House veto threat. But Democrats insisted on the measure once the GSE provisions were added to the bill, knowing that the GSE components would not be vetoed.

The CDBG funds will allow communities to repurchase foreclosed homes at a discount and rehabilitate neighborhoods hit hardest by the foreclosure crisis, Democratic supporters said. Republican opponents, though, believe CDBG is a slush fund for special interests.

Meanwhile, the bill clarifies how state and local governments can count a series of short-term bonds for low-income housing projects. Under the current law, each short-term issuance for construction projects must be counted against the state's cap for housing bonds that it can issue, but in the new bill, the bonds will only be counted once against the housing bond cap.

The bill also allows the 12 Federal Home Loan Banks to extend letters of credit to 8,100 member institutions for tax-exempt bonds. The legislation allows the FHLBs to provide standby LOCs without triggering a loss of the tax exemption of the issuers' bonds. Supporters say the provision will help small issuers like hospitals and utilities that are unable to secure bond insurance from the major lenders. The White House had also previously threatened to veto this portion of the legislation..

The bill also provides $96 million to temporarily allow qualifying mortgage revenue bonds to be used to help individuals purchase new homes in disaster areas as declared by the President. The provision applies to bonds issued between May 1, 2008, and Jan. 1, 2010.

One of the bill's GSE components will include a permanent housing trust fund to increase and preserve the supply of rental housing and homeownership opportunities for low and extremely low income families.

The provision would amount to approximately $500 million that would be allocated and used to serve families of extremely low income, Frank has said.

Separately, the House version of the bill raises the national debt cap by $800 billion to $10.6 trillion though it is unclear if that provision will make it through Congress because the increase was not included in a previous version of the housing omnibus that the Senate considered earlier this month.

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