Rev. Proc. 81-36

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide issuers of "mortgage subsidy bonds," as defined in section 103A(b)(1) of the Internal Revenue Code, with a list of the "average area purchase price" safe harbor limitations to assist the issuers in determining whether the bonds will be treated as tax-exempt obligations under section 103(a)(1) or (2).

SEC. 2. BACKGROUND

.01 Section 103(a) of the Code provides that gross income does not include interest on (1) the obligations of a state or political subdivision of a state, and (2) qualified scholarship funding bonds.

.02 Section 103A was added to the Code by the Mortgage Subsidy Bond Tax Act of 1980, 1980-2 C.B. 512. Section 103A(a) provides that, with certain exceptions, any mortgage subsidy bond will be treated as an obligation not described in section 103(a)(1) or (2). A mortgage subsidy bond is an obligation that is issued as part of an issue a significant portion of the proceeds of which is to be used directly or indirectly to provide mortgages on owner-occupied residences.

.03 Section 103A(b)(2)(A) of the Code provides that any "qualified mortgage bond" will not be treated as a mortgage subsidy bond. A qualified mortgage bond is an obligation issued as part of a "qualified mortgage issue." An issue by a state or political subdivision of a state of one or more obligations is a qualified mortgage issue if (1) all the proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences, and (2) the issue meets the requirements of subsections (d), (e), (f), (g), (h), (i), and (j) of section 103A.

.04 An issue meets the requirements of subsection (f) of section 103A of the Code if the acquisition cost of each residence, other than a targeted area residence, to be financed with the proceeds of such issue does not exceed 90 percent of the average area purchase price applicable to such residence. In the case of a targeted area residence (defined in subsection (k)), the acquisition cost may not exceed 110 percent of the average area purchase price applicable to such residence. The average area purchase price is, with respect to any residence, the average purchase price of single-family residences, with separate rules for new, existing, and two-, three-, and four-family residences, in the statistical area in which the residence is located for the most recent 12-month period for which sufficient statistical information is available.

.05 A Treasury decision containing Temporary Income Tax Regulations relating to the tax-exempt status of certain mortgage subsidy bonds under section 103A of the Code was published in the Federal Register dated July 1, 1981 (46 FR 34311). The temporary regulations under section 6a.103A-2(f)(5)(i) provide that an issuer may rely upon the average area purchase price safe harbor limitations published by the Department of the Treasury for the statistical area in which a residence is located. An issuer may use a limitation different from the published safe harbor limitation for an area if the issuer has more accurate and comprehensive data.

SEC. 3. APPLICATION

.01 Issuers of mortgage subsidy bonds may rely on the following average area purchase price safe harbor limitations. The safe harbor limitations are estimates of the average area purchase price on which issuers may rely to satisfy the requirements of section 103A(f) of the Code through February 1982. The safe harbor estimates were prepared by the Office of Housing Policy of the Department of Housing and Urban Development in coordination with the Department of the Treasury. The estimates are based primarily on information from the Federal Home Loan Bank Board's monthly survey of "Terms on Conventional Home Mortgages." The survey contains sales price estimates for both new and existing one-family, nonfarm residences. The sales price estimates are based on data from the 12-month period between April 1, 1980, and March 31, 1981. The sales price data are adjusted for nonconventional (Federal Housing Administration (FHA) insured and Veterans' Administration guaranteed) home sales. The data are presented for Standard Metropolitan Statistical Areas (SMSA) and non-SMSA portions of each state, when sufficient data were available. When insufficient data for an SMSA occurred, the data was combined with other non-SMSA areas in the same state. If insufficient data still occurred at the state level, regional data were used. Safe harbor limitations for 2-4 family residences are equal to the appropriate average area purchase price for single-family residences multiplied by the following adjustment factor: 1.126 for two-family residences, 1.363 for three-family residences, and 1.585 for four-family residences. These adjustment factors are similar to those used for the FHA mortgage limitations.

                                                        AVERAGE AREA