WASHINGTON — Housing lobbyists yesterday were pleased with Treasury Secretary Henry Paulson’s call for legislation that would allow states and localities to use tax-exempt bonds to help homeowners refinance mortgages, but said Treasury must also loosen the annual private-activity bond volume cap for the proposal to be effective. In a speech delivered at the Office of Thrift Supervision’s National Housing Forum, Paulson said Congress should temporarily modify the tax code to allow governments to offer tax-exempt bonds not just to first-time homebuyers, but also to those who need to refinance their mortgages to reduce the risk of foreclosure.But while Paulson talked about "increased capacity" housing lobbyists were not sure this was a reference to the volume cap, a federal limit on how many private-activity bonds — which include single-family housing bonds — a state can issue each year. A Treasury spokesperson said this will be one of the issues the department takes up with Congress in legislative discussions.Some skeptics, such as Anthony Freedman, a lawyer with Holland & Knight LLP, believe Paulson’s lack of specificity on the cap issue is deliberate.“If you don’t say you’re going to propose an increase in cap with it, you sort of have to infer they’re not going to propose one,” he said. “It’s the first question that everybody asks.”Freedman said the administration may simply want to push Congress to propose an increase in the cap, which would lead to a loss in federal revenues.“They may want to put the responsibility of the revenue loss on Congress instead of the administration,” he said.Barbara J. Thompson, executive director of the National Council of State Housing Agencies, said she is pleased to see Paulson involve state and local housing finance agencies in the subprime crisis, but expressed concern over whether the annual private-activity bond volume cap will be expanded to accommodate the new relief program.“As the subprime market has collapsed, we’re seeing a flight to quality where first-time homebuyers who might have been entrapped in the subprime market are increasingly turning to HFAs,” she said. “We would be terribly concerned if there were no additional resources coupled with the proposal.”Thompson noted that Paulson, in response to a question from someone attending the forum, referred to “increased capacity” for state and local governments.She said that while this reference makes her optimistic that Paulson’s plan will include a volume cap increase, the NCSHA will turn to lawmakers for help if the administration does not push for an expansion of the cap.“We think it would be a very good investment on Congress’ part,” she said.From a state’s perspective, a spokesperson for the Colorado Housing and Finance Authority said a lack of an increased volume cap will essentially force HFAs to decide whether to serve first-time homebuyers or homeowners in need of refinancing.“We do have a concern that the proposal means increasing demands on the tax-exempt program, and there already is so much demand with the first-time homebuyers,” said Jerilynn Martinez, CHFA legislative and media liaison. “We feel like without an increase in the cap allocation, the proposal would not be as effective as it could be.”Localities and their HFAs believe some volume-cap relief from the federal government is critical, according to John Murphy, executive director of the National Association of Local Housing Finance Agencies.“This [proposal] is in response to a crisis, and we’ve got to think the federal government is going to bring resources to the table,” he said. “In this case I would say additional volume cap is essential.”Paulson’s proposal comes after the National Association of Bond Lawyers sent Treasury a letter in October recommending the department waive the tax law’s first-time homebuyers requirement and increase volume cap to help ease the subprime mortgage crisis. NABL sent the letter after Treasury asked it for some recommendations.NABL president J. Foster Clark said that while the association has not been in talks with Treasury regarding this proposal following the letter, he is encouraged by the call for legislation.“It seems to us that tax-exempt mortgage revenue bonds have provided a relatively safe and secure form of mortgage loan financing for a long time, and with appropriate legislative changes that program could be temporarily expanded to provide one tool out of many to address this problem,” he said.Even though NABL weighed in on the issue, housing sources said yesterday that Treasury’s proposal stems from recommendations made by the Mortgage Banker’s Association. However, the MBA’s proposals included an expansion of the volume cap.Some muni market participants, however, said yesterday that municipalities are wary of solutions that would transfer risk from banks to state and local governments, which would make loans to mortgagors unable to make higher-rate payments on their old mortgages. The municipalities have expressed concerns about how they would implement and administer bond-backed relief programs, handle the associated costs, and pay off the debt in the future. They are waiting to see the details of the final relief proposal that emerges from Treasury’s discussions with Congress.Alison L. McConnell contributed to this story.

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