WASHINGTON -- A presidential commission gave the municipal bond community a pleasant surprise last week by recommending that the tax exemption for mortgage revenue bonds be made permanent -- something the Bush administration has consistently opposed.

But the Advisory Commission on Regulatory Barriers to Affordable Housing also sparked concerns among housing bond lobbyists by suggesting in its report that authority to issue the bonds be restricted to states with federally approved plans for increasing the stock of affordable housing.

President Bush asked Housing and Urban Development Secretary Jack Kem[ to set up the commission in 1989 to study ways that government regulations are making it harder to Americans to afford housing. The 22-member panel includes officials from state and local governments, housing agencies, the construction industry, and banking.

In its report, the commission appears to view the exemption for mortgage revenue bonds -- currently scheduled to expire Dec. 31 -- as a tool that could be used by the federal government to prod states into forming plans to ensure that their citizens have access to affordable housing.

In suggesting that the exemption be made permanent, the commission also said it "believes that it is both counterproductive and a waste of taxpayers' money for the federal government to provide substantial housing subsidies without requiring a commensurate effort to reduce governmentally created barriers to affordability.

"If states receive these substantial federal housing assistance subsidies, they should be subject to the same...requirements for barrier removal to expand the availability of affordable housing that the commission recommends should be required of HUD programs."

The commission also proposed making permanent the low-income housing tax credit, but proposed the same limits on states' use of the credit as it suggested for mortgage revenue bonds. The housing credit also is scheduled to expire Dec. 31.

The future of the mortgage bond exemption and the low-income credit are very much in doubt this year because Congress may not draft a tax bill. Tax bills have been the vehicles to which short-term extensions of expiring provisions have been attached in the last few years.

Lobbyists were intrigued by the commission's call for a permanent extension for mortgage bonds, because it files in the face of the Bush administration's stated position on the subject. The administration has opposed continuing the tax exemption because it generally believes tax-exempt bonds are an inefficient form of federal subsidy.

The commission's proposal is particularly surprising given that HUD was said to have a hand in fashioning the report and presumably would not allow any recommendations to be included that it did not feel comfortable with.

"We're encouraged that at some level HUD appears to support an extension" for authority to issue mortgage bonds, said John T. McEvoy, the executive director of the National Council of State Housing Agencies.

But lobbyists were also worried by the panel's suggestion for linking bond issuance with states' efforts to create more afforable housing, because it would give HUD an unprecedented amoung of regulatory power over an issuer's ability to sell mortgage bonds.

"Anytime anyone endoreses a permanent extension of mortgage bonds and the credit, it's a very positive development, but to couple that with some unrelated [restriction] is not appropriate and not something we support," said John C. Murphy, the executive director of the Association of Local Housing Finance Agencies.

The mortgage bond tax exemption "is targeted in such a way as to focus on family size, income, and house costs to ensure the program goes to those most in need," said Micah S. Green, the executive vice-president of the Public Securities Association. The exemption "meets the very goals the commission is trying to espouse."

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