Mortgage Bonds are tax-exempt securities sold by municipal and state authorities intended to provide low-interest rate mortgage loans to qualified individuals. These bonds are specifically geared toward supporting homeownership within certain communities, often targeting first-time home buyers with moderate incomes.
Municipal and state authorities benefit from the tax-exempt status of these bonds as it allows them to offer lower interest rates than market levels, making homeownership more accessible.
Examples of Mortgage Bonds
Example 1: Local Housing Finance Agency Initiative
A Local Housing Finance Agency, created by the city of Local, issued $50 million in mortgage bonds. The proceeds from the bond sale were used to originate mortgage loans for first-time home buyers through local mortgage lenders. The interest on these bonds was tax-exempt, which allowed the agency to borrow at an interest rate below 3%. Consequently, these mortgage loans were offered at rates below 4%, while the prevailing market mortgage rates exceeded 5%.
Example 2: State Housing Authority Program
A State Housing Authority issued $100 million in mortgage bonds to fund a homeownership program for low to moderate-income households. The tax-exempt status allowed the authority to offer lower interest rates on the bonds, which were then translated into favorable mortgage interest rates for participants of the program.
Frequently Asked Questions (FAQs)
What are mortgage bonds?
Mortgage bonds are tax-exempt securities issued by municipalities or state governments to fund low-cost mortgage loans for qualifying homebuyers, generally targeting first-time buyers and moderate-income individuals.
How do mortgage bonds benefit home buyers?
The primary benefit is reduced mortgage interest rates, as the tax-exempt status of these bonds allows issuers to offer loans at rates significantly below current market levels.
Are the interest earnings on mortgage bonds taxable?
No, the interest earnings on mortgage bonds are generally tax-exempt, providing an added incentive for investors to purchase these securities.
Who qualifies for mortgage loans funded by mortgage bonds?
Typically, these mortgage loans are targeted at first-time home buyers or those meeting certain income criteria set by the issuing authority.
Can mortgage bonds be traded in the secondary market?
Yes, mortgage bonds can be bought and sold in the secondary market like other bonds, although their unique features often attract long-term investors.
Related Terms
- Municipal Bonds: Bonds issued by local government entities to fund public projects.
- Tax-exempt Securities: Financial instruments that are exempt from federal, and sometimes state and local, taxes.
- First-time Home Buyer: An individual who has not owned a home in the previous three years.
- Housing Finance Agency (HFA): State or local organizations that provide housing assistance through loans, grants, or tax credits.
- Interest Rate: The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage rate.
Online Resources
- U.S. Department of Housing and Urban Development (HUD)
- Federal Housing Finance Agency (FHFA)
- Municipal Securities Rulemaking Board (MSRB)
References
- U.S. Department of Housing and Urban Development, “Understanding Mortgage Bonds,” accessible at hud.gov
- Federal Housing Finance Agency, “Funds from Mortgage Bonds,” accessible at fhfa.gov
- Internal Revenue Service, “Tax-Exempt Bonds for Housing Finance,” accessible through irs.gov
Suggested Books for Further Study
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zero-Coupon Bonds, Money Market Funds, and More” by Annette Thau
- “Municipal Bonds: The Basics and Beyond” by Michael Pellechia
- “The Housing Policy Revolution: Networks and Neighborhoods” by David J. Erickson
