WASHINGTON -- A budgetary snag in the Senate's bill to finance the new federal housing affordability program could force Congress to drastically scale back funding before giving final approval to the measure this fall, housing lobbyists said this week.

If Congress does reduce the program's funding level, lawmakers may revive an incentive to sell tax-exempt bonds that was removed during Senate deliberations on the bill last month, some of the lobbyists predicted. The program, popularly known as HOME, requires the federal government to match financial contributions made by state and local governments to low-income housing projects.

The Senate in July had approved $2 billion for HOME as part of its fiscal 1992 Housing and Urban Development appropriations measure. That level, about twice as high as expected by many housing industry officials, was possible because lawmakers proposed a change that would generate substantial savings from another program in the HUD budget.

But budget estimators in the Bush administration are now questioning the probability of those savings, and legislators may be forced to scale back their estimates. The HOME program, funded at such an unexpectedly high level, would be a likely target for cuts, housing lobbyists said.

In drafting the housing bill, lawmakers thought they had found a gold mine for the HOME program when they proposed a change to Section 202, another HUD program. Under that program, HUD offered low-interest loans to developers of low-income housing for the elderly, but when borrowers began to have difficulty repaying the loans, HUD found itself having to subsidize the loan repayments. This year, legislators proposed converting the loans to grants, so that HUD would no longer have to dole out subsidies.

The Senate Appropriations Committee estimated that change would save HUD about $1.2 billion in fiscal 1992, and much of that savings was used to boost the HOME program's total funding to $2 billion.

The Office of Management and Budget, however, is now questioning whether the proposed change will save that much money. The agency's uncertainty stems from budget reform measures enacted in 1990, which may not allow Congress to count the loan-to-grant conversions as yielding any federal budget savings in future fiscal years.

A housing lobbyist said the appropriations panel aide responsible for HUD budget issues expects to find a legislative remedy for the budget snag so that the $1.2 billion in savings will not be lost. The aide was not available for comment.

But several other lobbyists and a Congressional Budge Office analyst said a solution would be hard to find, and they predicted the lawmakers will ultimately have to forgo much of the $1.2 billion.

The question of how much money the program receives will be answered when an ad hoc conference committee meets next month to resolve differences in the House and Senate versions of the funding legislation. The Senate's funding level for the HOME program is far higher than the $500 million approved by the House.

What the conferees decide on the funding level for HOME may also have a bearing on their decisions involving another part of the program, which in turn will have an impact on the amount of tax-exempt bonds issued for the program.

Though the basic premise of HOME is that stae and local governments match federal contributions to their housing programs, the Senate proposed waiving the matching requirement for fiscal 1992. It did so to allow cash-strapped states and localities to receive program funds without having to put up their own money. The House bill would leave the matching requirement intact.

Some housing industry officials have said that the Senate proposal would mean less tax-exempt bond issuance, because those financially troubled governments would have no need to sell bonds to finance their portion of the program.

But if the conferees approve a funding level substantially below the Senate's $2 billion, they may also decide to retain the matching requirement to make the smaller amount of federal dollars stretch farther, some lobbyists said. That would be favorable for the bond market, because it would stimulate issuance of tax-exempt bonds to finance the state and local portion of the match.

But a lobbyist for local interests said he did not believe the match would be revived for fiscal 1992. State and local governments will still have trouble coming up with their part of the match no matter what level of federal funding is approved for the program, the lobbyist said.

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