WASHINGTON - Housing legislation awaiting President Bush's signature would reverse a regulation that lobbyists say hinders the ability of 501(c)(3) organizations to buy low-income units under a federal program.

Under the Housing and Urban Development Department regulation, the terms of mortgages taken out by prospective buyers are limited to 20 years or the remaining term of the original loan on the property. The measure cleared by Congress on Oct. 8 would permit a term of up to 40 years.

"The term issue was a very important one" for nonprofits making purchases under the program, said Stephen J. Wallace, a lawyer with the firm of Kelley Drye & Warren.

Housing lobbyists have complained that confining interest and principal payments to the shorter period of time could raise the effective cost of the debt by as much as 200 basis points. Private nonprofit groups counting on financing the loans with tax-exempt bonds could find the deals uneconomical, they have argued.

The change approved by Congress will "go a long way toward making this a workable program," said Wallace, whose firm represents the Institute for Responsible Housing Preservation.

Congress created the program in question in 1990 to solve the so-called prepayment problem, which involves thousands of housing units. Built in the 1960s and 1970s. the units were constructed by private developers with HUD-subsidized 40-year mortgage loans. In return for the subsidies, the developers were required to keep low-income tenants in the units for 20 years.

Since then, many of the properties have increased in value and the mortgages on those loans have reached their 20th year, prompting developers to prepay their loans so they can be released from the low-income requirements. They could then turn the units into more expensive rental or condominium properties.

Under the program, HUD must offer the owners financial incentives-to sell the properties to private nonprofit groups and others willing to keep low-income tenants in the units. Housing industry officials have predicted that nonprofits would make their purchases with mortgages insured by the Federal Housing Administration and financed with billions in tax-exempt bonds.

But when HUD proposed regulations for the program last year, housing lobbyists detected a number of problems, including the 20-year term limit on mortgage loans, that they said would hamper the ability of nonprofits to participate in the program.

Last April, the housing department issued an updated version of the rules that made several changes in other areas. But HUD stood firm in its term limit on the mortgage loans, saying a 40-year term would be too expensive for the federal government.

"While it is true that a shorter-term loan would carry higher amortization costs, it is not true that a longer-term loan would, therefore, be less costly to the government," HUD said at that time. "The extra subsidy assistance necessary to support a longer-term loan is greater than the reduction in annual debt service costs attendant to a longer-term loan. "

Congress, however, overruled HUD in a provision added to the massive housing reauthorization bill approved Oct. 8. The provision states that a buyer's loan term may be as long as 40 years if it is necessary to make the deal economically feasible.

Some lobbyists said they were concerned that the caveat added by Congress would give HUD some discretion to deny longer-term loans by disputing a purchaser's assertion that the additional time was needed.

But Sheldon Schreiberg, a lawyer with Brownstein Zeidman and Lore, said that according to his reading of the provision, if the longer amortization period helps you, you get it. " He added that "generally, the industry was satisfied" with the provision."

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