The Internal Revenue Service published a notice yesterday showing the additional amount of tax-exempt housing bonds that each state and territory can issue under the $11 billion of extra private activity bond volume cap for housing that was authorized by Congress in legislation enacted July 30.

The notice provides guidance for complying with the new law's provisions and also clarifies that new authority allowing the 12 Federal Home Loan Banks to extend letters of credit for tax-exempt financings applies to refunding, as well as, new bonds.

The new housing aid and reform law was enacted as a response to the subprime mortgage crisis and mounting foreclosures. It exempts all housing bonds from the alternative minimum tax and allows states and territories to issue an additional $11 billion of housing bonds under their private-activity bond volume caps through the end of 2010 to either refinance subprime mortgages, provide loans to first-time homebuyers, or finance multifamily housing projects.

According to a chart the IRS includes in the notice, California will get the biggest share of the $11 billion of new capacity and will be able to issue $1.14 billion of housing bonds. Twenty-six states and territories with the lowest share of the new capacity, will still get to each issue $96.55 million of additional housing bonds.

The formula that the IRS used to determine the additional allocation for each state and territory uses the state's or territory's 2008 PAB allocation under the volume cap as the numerator and the total 2008 allocation for all states and territories (a number that the IRS does not publish) as the denominator. That fraction is then multiplied by $11 billion.

The IRS noted that the new law states that the states and territories will only be allowed to carry forward the extra housing bond capacity for two years, rather than the three years usually given for carryforwards for private activity bonds.

In addition, for single-family housing bonds issued under the $11 billion of added cap, states or territories must use the bond proceeds to make loans within 12 months or they will have to redeem bonds with unspent proceeds. That is much shorter than the 42-month period issuers usually have for single-family housing bonds under the cap.

However, the housing finance agencies can use the extra housing bond capacity in any order, before or after, they issue other bonds allocated under the PAB volume cap. Normally, they would have to use the oldest allocated bonds first.

Because the carry-forward periods are different, the IRS is requiring issuers to file separate carryforward elections for unused volume under the general PAB volume cap and for unused volume under the $11 billion of additional cap.

The IRS also clarifies that issuers may elect to exchange unused authority for single-family mortgage revenue bonds to issue mortgage credit certificates under the $11 billion of added cap.

Further, the notice provides a list of nine military installations in various states for which military housing allowances can be excluded when determining whether a tenant complies with income limits that must be met for multifamily housing projects.

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