What Are Housing Authority Bonds?
Let me explain what housing authority bonds are. These are bonds, often called housing bonds, issued by state or local government agencies to finance the building or rehab of affordable rental housing. In some programs, you can also use the proceeds to help low-income folks buy homes. As an investor, you'll earn interest that's exempt from federal taxes, and sometimes from state and local taxes too.
Just like most municipal bonds, I've always seen housing authority bonds as very safe investments. They're backed by the federal government, which uses them to push for more housing for low-income people.
Key Takeaways
- Housing authority bonds, or housing bonds, are issued by a state or local government agency to help finance the construction or rehabilitation of affordable rental housing.
- State and local governments issue housing bonds to finance the construction or rehabilitation of affordable rental housing. In addition to repaying the bond principal, the state or locality must pay interest on the money it borrows.
- Like most municipal bonds, housing authority bonds have historically been viewed as very safe investments.
Understanding Housing Authority Bonds
You should know that a municipal authority issues debt as bonds to raise money for projects. There are two main types: general obligation bonds and revenue bonds. For general obligation (GO) bonds, the interest and principal come from the government's own funds. These are backed by the full faith and credit of the government, which might raise taxes to pay them off.
Revenue bonds, on the other hand, are backed by the revenue from the project itself. Housing bonds are a type of revenue bond. Governments issue them to fund affordable rental housing construction or rehab. They have to repay the principal and pay interest on what's borrowed. As private activity bonds (PABs), they can be issued for qualified developers—profit or non-profit—to build low-income multifamily or senior housing.
Additionally, housing bond proceeds can provide low-cost mortgages to low-income families or individuals for home purchases. These mortgages are only for first-time buyers earning no more than the area median income, and the home price can't exceed 90% of the average in the area.
Special Considerations
Housing bonds usually come with low interest rates and can be fixed or variable rate demand obligations (VRDO). Bondholders get principal and interest from pledged mortgage repayments and investment earnings. The trustee collects borrower mortgage payments, invests them short-term, and pays out to bondholders on schedule. Essentially, these bonds are backed by borrowers making timely payments on their mortgages.
These bonds benefit both the government and investors. The government gets cheap financing in large amounts. For you as an investor, the tax advantages are a big draw, especially if you're in a high tax bracket. The interest is exempt from federal taxes and often state taxes too. If you're in a high tax bracket, this exemption is even more valuable, though alternative minimum tax (AMT) might apply. It helps offset the low interest rates.
Another option is federal low-income housing tax credits, which can replace or supplement housing bonds for affordable projects. These are non-refundable credits for part of the mortgage interest paid by qualified buyers each year.
Since these involve government debt, selling housing authority bonds sometimes needs voter approval. For instance, in 2018, California voters okayed $4 billion in bonds for programs helping low-income residents, veterans, and farm workers.
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