SERVICE ISSUES 'AVERAGE AREA PURCHASE PRICE' SAFE HARBOR LIMITATIONS FOR MORTGAGE BOND QUALIFICATION.

Rev. Proc. 87-20

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with a list of the "average area purchase price" safe harbor limitations.

SEC. 2. BACKGROUND

01 Section 103(a) of the Code provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that section 103(a) shall not apply to any private activity bond that is not a "qualified bond" within the meaning of section 141. Section 141(d)(1)(B) provides that the term "qualified bond" includes any private activity bond if such bond is a qualified mortgage bond.

02 Section 143(a)(1)(A) of the Code provides that the term "qualified mortgage bond" means a bond that is issued as part of a qualified mortgage issue. Section 143(a)(2)(A) provides that the term "qualified mortgage issue" means an issue by a state or political subdivision thereof of one or more bonds, but only if (i) all proceeds of such issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) such issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), and (i); and (iii) such issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b).

03 An issue of bonds meets the requirements of subsection (e) of section 143 if the acquisition cost of each residence financed by the issue does not exceed 90 percent of the average area purchase price applicable to such residence, the acquisition cost must not exceed 110 percent of the average area purchase price. The term "average area purchase price" means, with respect to any residence, the average purchase price of single-family residences (in the statistical area in which the residence is located) that were purchased during the most recent 12-month period for which sufficient statistical information is available. Separate determinations are made for new and existing residences, and for two-, three-, and four-family residences.

04 section 143(e)(2) of the Code provides that the determination of whether the acquisition cost of each residence does not exceed 90 or 110 percent of the average area purchase price for that statistical area shall be made as of the date on which the commitment to provide the financing is made or, if earlier, the date of the purchase of the residence.

05 Section 6a.103A-2(f)(5)(i) of the Temporary Income Tax Regulations (issued under former section 103A(f), the predecessor of section 143(e)) provides 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 if the issuer has more accurate and comprehensive data. However, when computing the average area purchase price for a statistical area that is a county, the issuer ordinarily must make the computation on an individual county basis and may not combine two or more counties.

06 Section 143(k)(2)(A) of the Code provides that the term "statistical area" means (i) a metropolitan statistical area (MSA), and (ii) any country (or the portion thereof) that is not within an MSA. An area qualifies as an MSA if it contains a city of at least 50,000 population, or an urbanized area of at least 50,000 with a total metropolitan population of at least 100,000. If an area has more than one million population and meets certain other specified requirements, it is termed a "consolidated metropolitan statistical area" (CMSA), consisting of major components recognized as "primary metropolitan statistical areas" (PMSA).

07 A state or local government may elect to exchange all or part of its qualified mortgage bond authority for authority to issue mortgage credit certificates. In general, the recipient of a mortgage credit certificate may claim a federal income tax credit equal to the product of the certificate credit rate and the interest paid or incurred on the remaining principal of the certified indebtedness amount. Section 25(c)(2)(A)(iii)(III) of the Code provides that the indebtedness certified by mortgage credit certificates must meet the purchase price requirements under section 143(e). Thus, the purchase price of the residence financed may not exceed 90 percent of the average area purchase price (110 percent in a targeted area).

08 The average area purchase price safe harbor limitations for the period beginning August 2, 1985, and ending August 1, 1986, were published in Rev. Proc. 85-42, 1985-2 C.B. 496. Announcement 86-91, 1986-31 I.R.B. 25, provides that issuers of qualified mortgage bonds may continue to rely on the average area purchase price safe harbor limitations published in Rev. Proc. 85-42 until new safe harbor limitations are published.

SEC. 3. APPLICATION

01 Issuers of qualified mortgage bonds and mortgage credit certificates may rely on the average area purchase price safe harbor limitations contained in this revenue procedure for the period beginning May 11, 1987, and ending on the date that new safe harbor limitations are published. The safe harbor limitations are estimates of the average area purchase price on which issuers may rely to satisfy the requirements of section 143(e) of the Code. The estimates are based on information from the Federal Home Loan Bank Board's monthly survey of "Terms of Conventional Home Mortgages." The survey contains sales price estimates for both new and existing one-family nonfarm residences. The safe harbor limitations are based on the sales prices estimates for the 12 months ending September 30, 1986. The sales price data are adjusted for nonconventional (Federal Housing Administration (FHA) insured and Veterans Administration guaranteed) home sales. The data are presented for each MSA or PMSA for which a sufficient data sample is available. Data for the remaining areas in each state are combined to produce an estimate for "all other areas" in the state. If the data for a state or for "all other areas" in a state are too small, a regional estimate of average purchase price is used. Safe harbor limitations for two-to-four-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.

02 Issuers of qualified mortgage bonds may continue to rely on the average area purchase price safe harbor limitations contained in Rev. Proc. 85-42 for mortgages financed with proceeds of bonds sold before June 10, 1987, if the commitments to provide financing for the mortgages are made before August 9, 1987. Issuers of qualified mortgage bonds that have received a ruling letter from the Service approving an average area purchase price limitation that is higher than the safe harbor limitation in this revenue procedure may rely on the ruling letter for 1 year after the date of the ruling letter. Issuers of mortgage credit certificates may continue to rely on the average area purchase price safe harbor limitations contained in Rev. Proc. 85-42 for certificates issued with respect to bond authority exchanged before June 10, 1987, if the commitments to issue the certificates are made before August 9, 1987. Issuers may continue to rely on the average area purchase price safe harbor limitations for Guam, Commonwealth of the Northern Mariana Islands, and Puerto Rico, as added to Rev. Proc. 85-42 by Rev. Proc. 87-19, page 9, this Bulletin, until new safe harbor limitations are published for those jurisdictions.

03 If an MSA or PMSA is contained in two or more states, the acquisition cost of a residence within that MSA or PMSA shall not exceed the safe harbor limitation provided for the MSA or PMSA, not the limitation provided for all other areas in the state.

04 The following average area purchase price safe harbor limitations have not been adjusted to reflect either the 90 percent of the average area purchase price described in section 143(e)(1) of the Code or the 110 percent of the average area purchase price described in section 143(e)(5).

                                            AVERAGE AREA PURCHASE PRICE

Rev. Proc. 85-42 is obsolete except as provided in section 3.02 of this revenue procedure.