WASHINGTON - Could tax-exempt housing bonds help resolve the financial crisis?

As lawmakers wrangled over the Bush administration's proposed $700 billion bailout plan, a Philadelphia bond attorney floated an alternative proposal involving the creation of tax-exempt "distressed homeowner bailout bonds," which he believes could save taxpayers billions of dollars.

Jeffrey Blumenfeld, a partner at WolfBlock LLP, is proposing that Congress authorize state housing agencies to sell the bonds and use the proceeds to purchase troubled subprime mortgages.

The state agencies would pay 75% of the current balance of the mortgages and would then recompute their value at 80%, an amount that the borrower might be able to pay or to reflect the borrower's equity in the home. Recomputing the value of the mortgages that way would also ensure that the housing agencies have more assets than debt.

Blumenfeld said his proposal is a better alternative than Treasury's, in part because state agencies have the necessary staff and expertise to administer such a program and there would be no need to create a new bureaucracy to oversee the federal government's purchase of hundreds of billions of troubled debt.

But because the underlying mortgages would not be creditworthy by themselves, Blumenfeld said the bailout bonds would have to be credit enhanced under a new federal insurance or guarantee program. This program would still be safer for taxpayers than the Treasury proposal, which critics have said amounts to giving the federal government a blank check.

He added that the distressed homeowner bailout bonds would be very similar to the types of bonds that the state housing agencies already issue, which is considered "special debt payable from specified sources."

"Their issuances are limited special obligations payable solely from revenues generated by the mortgages they create, so this wouldn't be much different," he said. "They don't have taxing power."

Barbara Thompson, executive director of the National Council of State Housing Agencies, said Friday that she had not had time to digest Blumenfeld's proposal, which was sent to her by The Bond Buyer, and that she was uncertain if it would gain traction.

However, she expressed strong support for bond-related solutions to the financial crisis, and noted that one of the housing provisions in a tentative agreement lawmakers announced on Thursday that would allow some state housing agencies to some purchase foreclosed homes through a grant funding program.

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