WASHINGTON - Legislation introduced in Congress to repeal the so-called 10-year rule could significantly boost single-family mortgage revenue bond issuance, a housing analyst says.
Kurt van Kuller, a director at Merrill Lynch & Co., said that this year's increase in the annual private-activity bond volume cap was really "a hollow victory" for the housing finance sector because the 10-year rule, which is already eroding issuing capacity, promises to cause "increasingly greater declines in potential issuance" if it remains in place.
The proposed Housing Bond and Credit Modernization and Fairness Act would repeal the 10-year rule, which forces housing agencies to use certain prepaid mortgage payments to call single-family MRBs, effectively preventing the recycling of payments into new bonds by way of bond refundings.
Sens. Orrin Hatch, R-Utah, and John Breaux, D-La. introduced the Senate version of the pending legislation in April; Reps. Amo Houghton, R-N.Y., and Richard E. Neal, D-Mass introduced the House version in March.
A repeal of the 10-year rule would, however, allow the "full benefit" of the recent increase in the bond volume cap to be realized, van Kuller argues in his new report, "Impact of Ten Year Rule Repeal: Removing Another Impediment to Single Family Volume." The report was released after press time Tuesday by Merrill Lynch's municipal credit research department.
Repeal of the rule, which adds "needless complexity" to investors' and issuers' analysis, would "basically perfect and complement the volume cap increase by removing an offset to the volume cap increase," he said.
Junking the "encroaching" rule is key to raising single-family MRB volume, he said.
The rule is having a dramatic impact on single-family MRB volume because refundings -- which are not subject to the annual private-activity bond volume cap -- are becoming more and more common as housing finance agencies' preferred means of coping with the issuance limits imposed on them by the volume cap, van Kuller said in an interview yesterday. "The refundings are greater than the volume cap" itself for many state and local bond issuers, he said, adding that many HFAs have become "dependent" on refundings in order to boost issuance volume.
Falling interest rates have contributed to the current MRB prepayment boom, which in turn is further aggravating the situation for many HFAs, he explained. Prepayment speeds and the volume of refinancing applications in the first quarter, especially in March and April, were the highest seen since 1998, he said. "The more prepayments, the more refunding opportunities," he said. "It just magnifies the amount of refundings of prepayment money that could be being lost now."
Housing lobbyists agree that the rule presents roadblocks to issuance. John T. McEvoy, executive director of the National Council of State Housing Agencies, has said that the 10-year rule will cause housing authorities across the nation to forfeit an estimated $8.4 billion in issuance of mortgage revenue bonds from 1998 to 2002. The Bond Market Association has expressed support for the proposed repeal. "Repeal of the 10-year rule could lead to thousands of new mortgages for low- and middle-income homebuyers," TBMA's executive director John Vogt wrote in a letter last month to senators.
The bill would also amend the purchase-price limit to allow applicants who are looking to buy homes that cost no more than the greater of 90% of average area home purchase prices or 3.5 times the applicant's household income to participate in tax-exempt bond mortgage programs. It would also promote rural apartment construction using the low-income housing tax credit by allowing statewide median incomes to serve as the basis for the program's income limits.
