WASHINGTON -- Congress's annual practice of granting a temporary reprieve to the tax exemption for mortgage bonds has harmed issuers' ability to go to market t opportune times, driven up borroing costs, and hurt the program's effectiveness, Standard & Poor's Corp. said yesterday.

"For years, the specter of a possible sunset has led issuers to enter the market with bond issues at less than propitious times," the agency said in its latest issue of Creditweek Municipal.

"The piecemeal extensions create continuing uncertainty about these bonds," and that uncertainty leads to "inefficent and ill-planned use of tax-exempt dollars," Wendy Dolber and Dana Bunting, co-managers of Standard & Poor's municipal housing group, say in their article.

Under current law, the authority to issue mortgage bonds is set to expire at the end of this month. But legislation passed by Congress and expected to be signed into law by President Bush would extend that authority to June 30, 1992.

Mortgage bond issuers have faced half a dozen termination dates since the early 1980s. Authority to issue mortgage bonds lapsed for the first time on Dec. 31, 1983, was renewed six months later, and was then extended to Dec. 31, 1987. The Tax Reform Act of 1986 extened that deadline to Dec. 31, 1988.

In each year since 1988, the mortgage bond exemption has come within a few weeks of expiring -- and actually did lapse briefly in 1990 -- before being given another short-term lease on life by Congress.

The rush to market to beat an expiration date "can result in erratic availability of money at a set interest rate" and can add between 10 and 20 basis points to the borrowing costs on a mortgage bond issue, the article states.

Although nearly a dozen other tax provisions -- including the tax exemption for small-issue industrial development bonds -- also continually face expiration dates, the constant threat of termination poses special problems for mortgage bond issuers.

Those issuers use bond proceeds to help banks make below-market loans to first-time home buyers. Mortgage bond issuers routinely call some bonds at the end of the loan origination period -- which can run anywhere from 18 months to three years -- if they have leftover proceeds that were not used to make loans.

"Savvy investors know that the risk of an undisbursed proceeds call is exacerbated by the need to enter the market prematurely," Ms. Dolber and Ms. Bunting said in their article.

Those investors would be unwilling to pay the same price for a mortgage bond as some other type of municipal bond with the same rating. "To entice investors, the interest rate on the bonds may need to be increased," the article states.

But raising the rate often defeats the purpose of the mortgage bond program, which is to foster home ownership among those who otherwise could not afford a to purchase a house. "Higher mortgage rates may prohibit the lower-end borrower from participating in the program," the article states.

Some issuers who have had to speed up bond sales to conform to a sunset date have used so-called convertible-option bonds to allow them to adjust the interest rate once the mortgage bond exemption is extended. The agencies issue short-term bonds that are invested in a guaranteed investment contract until a remarketing date, when the bonds can be converted to long-term debt, presumably at a lower rate.

But Standard and Poor's said issuers pay a pricw when they use that instrument, in several ways. First, an issuer may incur negative arbitrage while the short-term bonds are outstanding. Second, the remarketing requires extra issuance costs. Third, the price of the convertible-option bonds is often driven up by oversupply in the market caused by the other housing agencies that are also trying to beat the sunset deadline.

This year has been even more difficult than usual for mortgage bond issuers planning for the termination date, because market conditions have "been more detrimental to issuers than in prior sunsets." That is because interest rates have been running low on GICs over the last few months, resulting in negative arbitrage and placing "monetary burdens on many transactions," the article states.

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