What Are Housing Authority Bonds?
State or municipal governments issue housing authority bonds to support affordable rental housing construction or restoration. Some programs utilize bond proceeds to help low-income people buy houses. Housing authority bond investors get tax-exempt interest from federal, state, and municipal income taxes.
Housing authority bonds, like other municipal bonds, are considered safe investments. The federal government backs these bonds to encourage low-income home building.
A Guide to Housing Authority Bonds
Municipalities can issue bonds to finance projects. The two forms of municipal bonds are general obligation bonds and revenue bonds. State or municipal governments support general obligation (GO) bond interest and principal.
The municipal government offers complete confidence and credit for GO bonds, allowing tax increases to meet payment commitments. The project’s estimated income stream meets revenue bond payment requirements. Revenue bonds include housing bonds.
State and municipal governments issue housing bonds to build or renovate affordable rental homes. State or municipal governments must repay bond principal and interest. Housing bonds, known as private activity bonds (PABs), can fund low-income multifamily and senior housing projects for qualifying business and non-profit developers.
Also, housing bonds can provide low-cost mortgage financing to low-income families or individuals looking to buy a property. Housing bonds only offer mortgages to first-time homeowners earning the region’s median income. Housing bond mortgages limit house prices to 90% of the average local price.
Special Considerations
Housing bonds, either fixed or variable rate demand obligations (VRDOs), have historically had low interest rates. Bondholders get principal and interest from mortgage payments and investment returns.
The housing bond trustee invests mortgage repayments in short-term assets until bondholders get income—the timely and regular interest and principal repayment of borrowers’ mortgages back housing bond payments.
State and private investors benefit from housing bonds. The government receives significant amounts of inexpensive financing. The tax advantages of home bonds benefit people in higher tax bands.
Housing bond investors pay no federal or state income tax on bond interest. Higher marginal tax rates increase the value of housing revenue bonds’ tax exemption. While investors subject to the AMT may face taxes, revenue bonds and municipal bonds offer exemptions for those with high federal tax rates. This tax exemption offsets the bonds’ modest interest yield.
Federal low-income housing tax credits as a funding source can supplement or replace housing bonds for affordable housing developments. Qualified homebuyers get non-refundable federal income tax credits for mortgage interest.
Because they include government debt, housing authority bonds may require local voter approval. California voters authorized a $4 billion housing authority bond sale in 2018 to fund low-income, veteran, and farm worker programs.
Conclusion
- State or municipal governments issue housing authority bonds to support affordable rental housing construction or restoration.
- State and municipal governments issue housing bonds to build or renovate affordable rental homes. State or municipal governments must repay bond principal and interest.
- Historically, housing authority bonds were safe investments like other municipal bonds.
