Mortgage Subsidy Bond

What is 'Mortgage Subsidy Bond'

A mortgage subsidy bond is one of the few types of municipal bonds ever to be issued that may be subject to taxation, provided that any funds raised were used for home mortgages. Mortgage subsidy bonds are typically issued by state or local governments, cities and other municipalities.

BREAKING DOWN 'Mortgage Subsidy Bond'

Mortgage subsidy bonds, also known as mortgage revenue bonds (MRBs), are municipal bonds used to fund mortgage relief programs and refinancing arrangements through a municipal or state government. The bonds are usually taxable, but some are tax-exempt, including select qualified mortgage bonds as well as those issued to finance mortgages for veterans. The interest on taxable mortgage revenue bonds is subject to federal income taxation.

Tax-exempt mortgage subsidy bonds are sold by state and local governments, which use the proceeds to finance inexpensive mortgages for lower-income first-time homebuyers. As reported by the National Council of State Housing Agencies (NCSHA), tax-exempt mortgages are restricted to first-time homebuyers who earn no more than the area median income (AMI). Larger families can earn up to 115 percent of AMI. In 2016, states provided MRB mortgages to families with an average income of $45,466, just 79 percent of the national median income. The price of a home purchased with an MRB mortgage is limited to 90 percent of the average area purchase price.

Veterans’ Mortgage Bonds

Mortgage subsidy bonds for military veterans qualify for tax exemption if they comply with the following guidelines, among others:

  • At least 95 percent of the issue’s net proceeds are used to provide residences for qualified veterans—those who served on active duty and applied for the mortgage no more than 25 years after leaving active service.
  • The residences must meet a principal residence requirement.
  • The proceeds cannot be used to refinance existing mortgages

For a complete listing of the qualifications and requirements regarding veterans’ mortgage bonds, see Title 26, section 134 of the Internal Revenue Code.

Mortgage Subsidy Act of 1980

Mortgage subsidy bonds were created by the Mortgage Subsidy Act of 1980. In the early 1970s, state housing agencies began to issue tax-exempt bonds for owner-occupied housing in substantial and snowballing quantities. Local governments and housing agencies first issued tax-exempt bonds for single-family housing in 1978. Because the interest on the issues was tax-exempt, the federal government was giving up revenue to subsidize home purchases, and it was insuring or guaranteeing nearly 20 percent of all home mortgages. To scale back the subsidies, Congress passed the Mortgage Subsidy Act of 1980, which placed severe restrictions on government mortgage bond programs and limited mortgage subsidy bonds to 9 percent of the average volume of mortgages.