Mortgage Revenue Bonds

How the Program Works

Mortgage revenue bonds use the borrowing capacity of government to raise funds. The governmental entity may be at either the state or federal level, but the most common is the state housing finance agency. The funds obtained in this manner can be lent to eligible home buyers on favorable terms. The home buyer who accepts one of these loans repays the loan on a monthly basis, with the payments passed back to the bond buyers. The favorable terms result from a specific provision of the federal income tax code that exempts from federal income tax liability the interest payments received by bondholders of certain tax-exempt bonds, including mortgage revenue bonds. As such, investors are willing to accept a lower interest rate on these tax-exempt bonds than they would accept on a comparable alternative investment that generates taxable income. This lower interest rate is passed on to the eligible borrowers. Federal law requires that all proceeds from the sale of these bonds minus an allowable amount for transaction costs, be loaned to eligible borrowers for the purchase of a home. Generally, this interest rate will fall significantly below the interest rate charged by a conventional mortgage lender. The lower interest rate leads to lower monthly payments, which should reduce the burden of house payments on the income of the borrower. This may, in turn, help low-income home buyers purchase more housing than would otherwise have been possible, or it may help them surmount the price barrier that has kept them from entering into homeownership. States have some discretion in the way that the loans are made using the mortgage revenue bond funds. States can pass all of the interest rate saving along to borrowers so as to reduce the monthly payments on the loan. Alternatively, states can use this discretion to provide high loan-to-value loans, reducing the down payment that households need to enter into homeownership.

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