States offer home financing for those in need
By Michael D. Larson • Bankrate.com

If you're looking for a mortgage, the best place to start might be your state capital rather than the local mortgage broker's office.

That's because little-known outfits called housing finance agencies can often be found near governors' mansions. These quasi-independent agencies offer special loan programs to low- and moderate-income home buyers, buyers interested in helping to rehabilitate urban areas and a host of other groups. For borrowers, their mortgages can slash ownership costs considerably because they feature below-market interest rates, closing-cost discounts and other benefits that conventional loans simply can't match.

"We operate a number of different loan programs for home buyers as well as provide other services to help meet the needs of our respective states," says Mark Stalsworth, homeownership manager with the Missouri Housing Development Commission. "We are there to try to fill those gaps the private sector either can't or isn't meeting and put enough money into the deal.

"Our goal is to get funds out and to help the people who need them."

State secrets
Housing finance agencies have been around for almost three decades in some states. But because they operate behind the scenes, many home buyers aren't aware of their existence. Their primary mission is to boost homeownership among needy groups, including first-time home buyers, urban shoppers and people with little money for down payments.

Most are nonprofit companies originally financed with state-government seed money that now operate independently. They raise money for loans by selling tax-exempt bonds. Investors in those bonds are willing to accept yields that aren't as high as the ones on traditional mortgage-backed securities made up of conventional home loans because the lack of taxes boosts their investment return. That allows agencies, and the lenders who offer their programs, to cut consumer loan costs.

"We issue bonds and basically, there are investors out there purchasing those bonds," says Sherrie Simmonds, a spokeswoman for the Alaska Housing Finance Corp. in Anchorage. "Anyone investing in those does not have to pay taxes on the interest they earn.

"They are willing to take a lower interest rate than what they might if they would have to pay taxes on that. And since we're not having to pay as much to issue the bonds, we're able to pass those savings on and charge a lower interest rate to people who are getting the loans through us."

Traditionally, most agency programs have come with fairly strict income and home-value limits. That's because the federal government will only waive taxes on agency bonds if the agencies agree to use the subsidies for social good. Yet in recent years, the agencies have figured out ways to branch out using excess money from tax-exempt bond sales and cash from the sale of taxable bonds. They now offer all kinds of tailored loans that feature less onerous borrower restrictions, giving many more people the chance to save money.

"The agencies are maturing," says Phil Friday, a spokesman for the Pennsylvania Housing Finance Agency in Harrisburg, Pa. "Because they have the experience and they've done it a long time, they're innovating.

"Also, necessity is the mother of invention. You just can't issue enough bonds to meet the demand you have, so agencies have developed relationships with the lenders that meet their needs in particular states."

Special deals for special cases
What kinds of deals do agencies offer? In Philadelphia, a family of four whose annual household income does not exceed $36,000 and aren't buying existing homes worth more than $110,000 can get 30-year loans for just 4.75 percent, one point and a $300 fee, plus normal closing costs. A conventional one-point loan, on the other hand, runs about 5.0 percent in the city, according to Bankrate.com data.

Borrowers who are a little well-off can get discounted loans through the Statewide Homeownership Program. The current regular Statewide rates run between 5.00 to 5.50 percent. A family of four who earns up to $55,000 a year may purchase existing homes worth up to $130,000. Borrowers do have to pay a one-point origination fee, a $300 qualifying fee and other normal closing costs to participate in the program.

"What they offer primarily are discounted interest rates compared to the normal street rate on regular loans," says Richard Mahan, a branch manager with Columbia National Inc. in Harrisburg, Pa. The company is authorized to write Pennsylvania Housing loans. "In its simplest form, that's what the program is all about."

The rates that agencies offer vary widely and can be lower in some states than in others. If a state just issued new bonds and market rates have fallen for several weeks, its rates will often be lower than rates in a state where the most recent bond sale took place before the market decline.

Poorer consumers and those who meet certain state-specific criteria can get even lower rates. In Alaska, Simmonds says certain buyers can qualify for multiple discounts and reduce their rates. The state gives people extra help if they make very little money, purchase energy-efficient homes or choose to live in towns with less than 1,400 people who aren't connected to Anchorage or Fairbanks by road or rail.

Remember the recapture
Borrowers need to watch out for the so-called "recapture tax" on subsidized loans, however, because it can come back and bite people whose incomes or home values rise substantially. Remember that the government is happy to help needy buyers by forgoing the taxes it would otherwise charge on agency bonds in order to lower consumer rates.

At the same time, Uncle Sam doesn't want borrowers benefiting from subsidies they don't need or who are using them as a way to get rich. So on programs backed by tax-exempt bonds, it has developed a way to recapture its subsidies, if necessary.

The rules are somewhat complicated. But generally speaking, people have to pay the tax if their incomes rise more than 5 percent a year and if they profit from their home sales after subtracting real estate commissions, fix-up expenses and other assorted costs. The tax usually amounts to a few hundred dollars.

There are plenty of exceptions, though. People who own their homes for more than nine years don't pay the tax. Consumers who make less than the program limit to begin with can increase their incomes at a faster pace than 5 percent annually without being subject to it. And no matter what, the tax will never be more than 6.25 percent of the original loan amount.

"My objective is to try to get them into the cheapest loan I can, but I'll always show them their options," says Mike Tomaselli, a personal mortgage banker formerly with Arlington Capital Mortgage Corp. in Bensalem, Pa. "You have to really know your client to know if the Hafer program or the bond program is really best for them."

But even with the tax drawbacks, agency loans stack up well against conventional ones. That's why experts say borrowers should be giving these increasingly innovative mortgages a closer look.

"Because we're able to tailor loans to the specific needs of the state and the local economy and to the needs that might not be met by other types of loan options, that really is where we're able to make a difference," says Simmonds.

-- Updated: June 25, 2003