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Municipal bonds for mortgages: boom or bust?

PRESSURE from several members of the Illinois congressional delegation may have stopped a potentially ruinous bill directed against efforts to rejuvenate housing markets in the cities of Illinois and other states.

Last July, Chicago pioneered a new method of home mortgage financing which has since spread to 15 states and many downstate cities including Belleville, Danville, Decatur, Quincy, Rock Island, Wheeling and Urbana. These cities now issue tax-exempt bonds for the purpose of cutting the interest rates paid by home mortgage loan applicants, thus making mortgages easier to get in today's tight-money market.

Alarmed by this trend, the supposedly pro-urban Carter administration has backed H.R. 3712, sponsored by House Ways and Means Committee chairman Al Ullman (D., Ore.), to stop such uses for tax-exempt bonds. Ullman's second-in-command on Ways and Means, Dan Rostenkowski (D., Chicago), is undecided on the issue.

In a May 19 speech to the National Savings and Loan League, Rostenkowski outlined both sides of the question. The bond-financed mortgages help "older cities attract people to areas which they -- the local people -- have targeted for development or renovation," he said. The lower mortgage rates "bring in the 'solid citizens' likely to create or sustain communities." That point, plus a maximum of effectiveness with a minimum of red tape, inclines Rostenkowski to oppose the bill.

For the Chicago Democrat and the Carter administration, however, the key problem is an estimated $2 billion in tax loss to the federal treasury by 1984 -- in a time of rising taxpayer concern over the size of the federal government deficit.

Rostenkowski also asked whether states and localities might be killing the goose -- tax-exempt bonds -- that lays golden eggs -- available money for improvements. "In this rush to issue these bonds, are they jeopardizing the stability of the very bond market which has served them so well as a source of funds?"

At a recent Ways and Means hearing on H.R. 3712, Reps. Tom Railsback (R., Moline) and George O'Brien (R., Joliet) did their best to convince Rostenkowski to oppose the bill. Both have cities in their districts -- Rock Island and Joliet -- which have issued tax-exempt mortgage financing bonds. Railsback said that Abner Mikva (D., Evanston), another Ways and Means member, also opposed H.R. 3712. Evanston has also issued the tax-exempt mortgage bonds.

Proponents of home mortgage bonds have some powerful arguments, in addition to those Rostenkowski mentioned. First Federal Savings and Loan of Chicago president E. Stanley Edlund told the Tribune May 13 that "the average family income in the first [Chicago bond issue] effort was $20,750" -- far below what would otherwise be required to obtain mortgage financing for home purchase today. "About 89 percent of the borrowers had incomes less than $30,000 --and we made loans in every area of the city," he added. Both developments are desirable from the point of view of those seeking to rejuvenate our cities.

Railsback said that Rock Island's program "benefited a large proportion of the minorities and young." Both groups, until now, have been largely shut out of the home mortgage market. And Rostenkowski told the savings and loan group that both groups are people "for whom home ownership is not a viable option" even with present federal aid. That aid, he added, is often unavailable or hopelessly tangled in red tape which defeats its purpose. The implication of the statements is clear -- this home mortgage loan program works where other, more complicated ones, have failed.

Ecklund took issue with arguments about revenue loss. "You have to look at the additional revenue it [the tax-exempt bond program] develops at the local and national levels," he told the Tribune. But what has not yet been pointed out is that the tax-exempt bond program would not show up in federal budget expenditures -- only in reduced revenues.

As of now, the lobbying offensive, which saw the Illinoisans joined by state and local officials nationwide, appears to have at least modified, if not doomed, H.R. 3712. Prime opposition to the program and support for the bill comes from the administration and some savings and loan lobbyists, who fear a loss of business as cities offer mortgages. But the administration is virtually ignored on Capitol Hill, and some members wonder why the Department of Housing and Urban Development has joined the Treasury in lobbying against a program which develops urban areas. The S & L's are split -many of them are financing the tax-exempt mortgage bonds.

Finally, the prospect is that majorities of the Ways and Means Committee and the full House, will agree on some modified proposal -- possibly with provisions for an 'income cap' for mortgage applicants, or provisions for mortgage aid for rental buildings to help stop the condo boom while aiding lower-and middle-income applicants --in order to pick up wide support on Capitol Hill. House Banking and Housing Committee chairman Henry Reuss (D, Milwaukee, Wis.) said he would favor such a bill.

Together, Ullman and the administration should be no match for Reuss, the Illinoisans, most of the Ways and Means panel and state and local officials. The upcoming months should decide the issue in the house -- in Illinois' favor.

August 1979 / Illinois Issues / 32