IRS ISSUES GUIDELINES FOR MORTGAGE BOND ISSUERS.

Rev. Proc. 91-17

SECTION 1. PURPOSE

This revenue procedure provides 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 (1) the nationwide average purchase prices for new and existing residences located in the United States, and (2) the average area purchase price safe harbor limitations for new and existing residences located in statistical areas in each state and the District of Columbia.

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(e) provides that the term "qualified bond" means any private activity bond if that bond (1) is a qualified mortgage bond, (2) meets the volume cap requirements under section 146, and (3) meets the applicable requirements under section 147.

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 the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7) of section 143; (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on financing provided by the issue are used not later than the close of the first semiannual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

03 An issue of bonds meets the requirements of subsection (e) of section 143 of the Code only 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. In the case of a targeted area residence, the acquisition cost may exceed 90 percent, but 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 the average area purchase price for a 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 Regulations under Title II of the Omnibus Reconciliation Act of 1980 (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.

06 An issuer may use a limitation different from the published safe harbor limitation if the issuer has more accurate and comprehensive data. See section 6a.103A-2(f)(5)(i) of the temporary regulations. In such a case, 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.

07 Section 143(k)(2)(A) of the Code provides that the term "statistical area" means (i) a metropolitan statistical area (MSA), and (ii) any county (or the portion thereof) that is not within an MSA.

08 An MSA is an area that 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). See Office of Management and Budget Release No. OMB-83-20, dated June 27, 1983.

09 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 accrued during the tax year 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).

10 Average area purchase price safe harbor limitations were most recently published in Rev. Proc. 89-59, 1989-2 C.B. 771, as modified by Rev. Proc. 90-24, 1990-1 C.B. 510. Section 6.03 of Rev. Proc. 89- 59, as modified by Rev. Proc. 90-24, provides that issuers may rely on those average area purchase price safe harbor limitations until they are rendered obsolete by a new revenue procedure, such as this one. Rev. Proc. 90-51, 1990-41 I.R.B. 12, supplemented Rev. Proc. 89-59 by adding average area purchase price safe harbor limitations for Guam and Puerto Rico.

11 Section 143(f) of the Code imposes a requirement concerning the income of mortgagors for whom financing is provided under qualified mortgage bonds. Section 25(c)(2)(A)(iii)(IV) provides that the recipients of mortgage credit certificates must meet the income requirements under section 143(f). Under section 143(f)(1), this income requirement is generally met only if owner financing under a qualified mortgage bond and all certified indebtedness amounts under a mortgage credit certificate program are provided to mortgagors whose family income is 115 percent or less of the applicable median family income. However, paragraph (5) of section 143(f) generally provides for an upward adjustment of the income requirement in areas (high housing cost areas) where the ratio of the area's housing costs to the area's median income is more than 20 percent higher than the analogous ratio computed on a national basis.

12 For purposes of determining whether an area is a high housing cost area under section 143(f)(5) of the Code, the issuer of bonds or certificates must compute the housing cost/income ratio under section 143(f)(5)(D). Two of the elements that must be considered in computing the housing cost/income ratio are the average purchase prices for new and existing residences located in the United States. Section 3.01 of Rev. Proc. 89-59, sets forth the nationwide average purchase prices -- $143,400 for new residences and $114,800 for existing residences. These national average purchase prices are effective until they are rendered obsolete by a new revenue procedure, such as this one.

13 The Department of Housing and Urban Development has provided the Internal Revenue Service with estimates of average area purchase prices. These estimates are based on information from the monthly "Mortgage Interest Rate Survey" (MIRS), Part A, prepared by the Office of Thrift Supervision for the Federal Housing Finance Board (FHFB). The survey contains sales price estimates for both new and existing one-family nonfarm residences. The estimates are generally based on data for the 12 months ending August 31, 1990. However, if insufficient sales data were available for MSAs and PMSAs for the 12 months ending August 31, 1990, consideration was given to earlier 12- month periods to the extent that sufficient data were available for those periods; but no sales data before September 1, 1988, were considered. If sufficient sales price estimates were available from the 12-month periods for both new and existing residences in a statistical area, safe harbor limitations for both new and existing residences were computed and are included in this revenue procedure. If sufficient sales price estimates were available for only one category (new or existing) of residence, then a safe harbor limitation for only that category is included in this revenue procedure. If sufficient sales price data were available for neither new nor existing residences in an area, then no separate safe harbor limitations for that area is contained in this revenue procedure. Data for the areas in each state with insufficient sales price data are combined to produce an estimate for "all other areas" in the state. If the available data for a state or for "all other areas" in a state are insufficient, a regional estimate of average purchase price is used.

14 The figures provided below incorporate adjustments that compensate for the fact that the underlying data from the FHFB do not include mortgages insured by the Federal Housing Administration or loans guaranteed by the Veterans Administration.

SEC. 3. APPLICATION

01 Estimates of the average area purchase prices are set forth in section 4 below. Issuers of qualified mortgage bonds and issuers of qualified mortgage certificates ("Issuers") may rely on these estimates as safe harbor limitations to satisfy the requirements of section 143(e) of the Code. If no estimate is available for an area, the safe harbor limitation for "all other areas" of the state may be used as a substitute for the omitted category.

02 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.

03 The average area purchase price safe harbor limitations, which are set forth below, 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).

04 If a residence is in an MSA or PMSA, the safe harbor limitation applicable to it is the limitation of that MSA or PMSA. In particular, if a residence is in an MSA or PMSA that falls in more than one state and that is listed in section 4 under a state that is different from the state in which the residence is located, then the safe harbor limitation applicable to that residence is the limitation provided for the MSA or PMSA and not the limitation provided for all other areas in the state in which the residence is located. If sufficient data are not available for the applicable category of residence (new or existing) in the MSA or PMSA, however, then the safe harbor limitation for "all areas" or "all other areas" of the state in which the residence is actually located is used for the omitted category.

05 Issuers that receive rulings permitting them to rely on an average area purchase price limitation that is higher than the applicable safe harbor limitation in this revenue procedure may rely on that higher limitation for the purpose of satisfying the purchase price requirement for bonds sold, and bond authority exchanged for authority to issue mortgage credit certificates, not more than 30 months following the termination date of the 12-month period used by the issuer to compute the limitation.

06 When computing the housing cost/income ratio under section 143(f)(5) of the Code, issuers must use as the nationwide average purchase price for residences located in the United States figures of $150,100 for new residences and $119,100 for existing residences (based on data from a 12-month period ending August 31, 1990).

07 If, for purposes of computing the housing cost/income ratio, an issuer computes different average area purchase price limitations based on more accurate and comprehensive data, the issuer must use data from a 12-month period that does not begin earlier than March 1, 1989, or end later than February 28, 1991.

08 If, pursuant to section 6.02 of this revenue procedure, an issuer relies on the average area purchase price safe harbor limitations contained in Rev. Proc. 89-59, the issuer must use the nationwide average purchase prices set forth in Rev. Proc. 89-59 in computing the housing cost/income ratio under section 143(f)(5) of the Code. Likewise, if, pursuant to section 6.05 of this revenue procedure, an issuer relies on the nationwide average purchase price published in 89-59, the issuer may not rely on the average area purchase price safe harbor limitations published in this revenue procedure or on safe harbor limitations based on more accurate and comprehensive data unless that data is from a 12-month period that does not begin earlier than December 1, 1987, or end later than November 30, 1989.

 SEC. 4. AVERAGE AREA PURCHASE PRICE SAFE HARBOR LIMITATIONS

SEC. 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 89-59, as modified by Rev. Proc. 90-24 and supplemented by Rev. Proc. 90-51, is obsolete except as provided in sections 6.02, 6.03, and 6.05 of this revenue procedure.

SEC. 6. EFFECTIVE DATES

01 Issuers may rely on the average area purchase price safe harbor limitations contained in this revenue procedure for commitments to provide financing that are made, or (if the purchase precedes the financing commitment) for residences that are purchased, in the period specified in the following sentence. The period begins on February 19, 1991, the date of publication of this revenue procedure in the Internal Revenue Bulletin, and ends on the date as of which these safe harbor limitations are rendered obsolete by a new revenue procedure.

02 Notwithstanding section 5 of this revenue procedure, issuers may continue to rely on the average area purchase price safe harbor limitations contained in Rev. Proc. 89-59 for mortgages financed with proceeds of bonds sold, or for certificates issued with respect to bond authority exchanged, before March 21, 1991, the date 30 days after publication of this revenue procedure in the Internal Revenue Bulletin, if the commitments to provide financing for the mortgages are made on or before May 21, 1991, the date 91 days after publication of this revenue procedure in the Internal Revenue Bulletin.

03 Issuers may continue to rely on the average area purchase price safe harbor limitations for the Commonwealth of the Northern Mariana Islands as added to Rev. Proc. 85-42, 1985-2 C.B. 496, by Rev. Proc. 87-19, 1987-1 C.B. 712, and for Guam and Puerto Rico, as added to Rev. Proc. 89-59 by Rev. Proc. 90-51, 1990-41 I.R.B. 12, until those safe harbor limitations are rendered obsolete by a new revenue procedure.

04 Issuers must use the nationwide average purchase price limitations contained in this revenue procedure for commitments to provide financing that are made, or (if the purchase precedes the financing commitment) for the residences that are purchased, in the period beginning on FEBRUARY 19, 1991, and ending on the date as of which these national and average area purchase prices are rendered obsolete by a new revenue procedure.

05 Notwithstanding section 6.04 of this revenue procedure, issuers may continue to rely on the nationwide average purchase prices as set forth in section 3.01 of Rev. Proc. 89-59 with respect to bonds sold, and bond authority exchanged for authority to issue mortgage credit certificates, before MARCH 21, 1991, if the commitments to provide financing for the mortgages and the commitments to issue the certificates are made on or before MAY 21, 1991.

DRAFTING INFORMATION

The principal author of this revenue procedure is Patricia M. Monahan of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure contact Ms. Monahan on (202) 566-4414 (not a toll- free call).