Mortgage Credit Certificates

Government, especially at the state and local level, strives to help low- and moderate-income renter households become homeowners. Mortgage credit certificates offer a reduction in federal income taxes to eligible households, leaving more after-tax income for the purchase of a home. The certificates are good for as long as the household lives in the unit, but the [Page 466]household may have to repay some or even all of the credits claimed if it sells the home prior to living there for 10 years. The program is not an entitlement; the federal government annually allocates to each state only a limited number of Mortgage Credit Certificates. Each state must devise a system to select participants for the program from among the eligible households living in the state. Eligible households are those home buyers who (a) have a household income less than 100% of median household income in the metropolitan area, (b) are buying a home priced less than 90% of the area average home sales price, and (c) have not been a homeowner at any time during the prior 3 years. These restrictions are less stringent if the home is located inside a target area with very low income levels and chronic economic distress.

The credit amount is the interest paid during the year multiplied by the credit rate set by the state. It may be no less than 10% and no more than 50%, but independent of the credit rate, a household may not claim a credit of more than $2,000 per year. If the household itemizes deductions, the amount of interest deduction is the amount paid minus the credit amount. Selection of a credit rate poses a problem for states. If a state selects a low credit rate, more households can be assisted, but the assistance may be minimal, leaving the households with some level of housing affordability hardship.

The program was created as part of the Deficit Reduction Act of 1984 as an alternative to mortgage revenue bonds. Mortgage Credit Certificates were seen as more efficient in that they could provide benefits to households meeting the same eligibility standards but at a lower cost to the government.

The Deficit Reduction Act limits the total dollar amount of mortgage revenue bonds that any one state can issue during a single year and permits states to forgo issuing mortgage revenue bonds using Mortgage Credit Certificates instead. The exchange rate of certificates for bonds has varied over time to ensure a net savings to the federal government.

The Mortgage Credit Certificate Program is administered by each state, usually a state housing finance agency, or by a lower unit of government authorized by the state for this activity. Each year, states must decide how many mortgage revenue bonds to issue and how many Mortgage Credit Certificates. The decision may be based on credit market conditions. During some periods, the difference may narrow between interest rate charged on conventional home purchase loans and the interest rate charged on home purchase loans funded from the proceeds of mortgage revenue bonds. When this spread becomes too narrow, mortgage revenue bonds have no advantage over conventional, unsubsidized loans, and the state turns to Mortgage Credit Certificates. Ease of administration may also cause states to favor Mortgage Credit Certificates. They can be put in place quickly and require only a small staff to administer compared with the larger staff required to prepare, issue, and monitor mortgage revenue bonds. Participating households may be charged a fee to participate in the Mortgage Credit Certificate Program, making it self-supporting.

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