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Renewed interest in Mortgage Credit Certificate programs

Row House ConstructionSection 25 of the Internal Revenue Code (IRC) permits issuers of tax-exempt qualified mortgage revenue bonds to elect to issue mortgage credit certificates (MCCs) to eligible homebuyers in lieu of offering mortgages financed with the proceeds of tax-exempt qualified mortgage bonds. An MCC “converts” a portion of an eligible homebuyer’s mortgage interest deduction into a tax credit for federal income taxes. The amount of the tax credit is equal to the mortgage credit rate (not less than 10% nor more than 50% as determined by the MCC issuer) on the MCC multiplied by the annual interest paid or accrued on the indebtedness incurred to acquire the homebuyer’s principal residence. Homebuyer eligibility requirements are similar to the requirements for tax-exempt qualified mortgage revenue bonds. For example, a homebuyer must be a first time homebuyer, must meet the issuer’s income and purchase price limits and must obtain a loan to finance the purchase of the homebuyer’s principal residence.

Although Section 25 was enacted in 1984, many issuers have not issued MCCs because of their preference to issue tax-exempt mortgage revenue bonds. However, for the last several years, issuers have found it difficult to compete in the home mortgage market because interest rates available from conventional lending sources have been lower than interest rates which could be achieved using tax-exempt mortgage revenue bonds. As an example, GNMA mortgage-backed securities have become a popular investment for financial institutions and foreign investors because such investments have yields which are higher than U.S. Treasury bonds and are guaranteed by the U.S. government. Further, the interest rates of the mortgages underlying the GNMA mortgage-backed securities have been at historically low levels. Consequently, issuers have accumulated large reserves of single family issuing authority or volume cap and, rather than have this issuing authority expire, have turned to MCC programs as an alternate use of this issuing authority.

Critics of MCC programs have questions about the efficiency of such programs. For example, because eligible homebuyers must meet an issuer’s income limits, will a homebuyer have sufficient taxable income from year-to-year to fully utilize the MCC tax credit? Further, if a homebuyer who receives a MCC sells their residence within the 9-year period following the purchase of such residence, the homebuyer must pay a recapture tax and, in some cases, the recapture tax will exceed the amount of the MCC tax credit available for such homebuyer. As these new MCC programs are implemented, perhaps we may have more definitive answers to these questions.