With foreclosures on the rise in nearly every area of the country, the White House is under pressure from consumer advocates to do something to address the crisis. One of the latest solutions involves letting states issue tax-exempt bonds to help troubled homeowners refinance.
 
The Bush Administration is pushing for Congress to temporarily give state and local governments the authority to issue tax-exempt bonds to homeowners who need help refinancing out of unaffordable loans.

The idea is that state and local governments can sell the bonds and create enough revenue to help subsidize the cost of refinancing. Treasury Secretary Henry Paulson has said that he would like to see the cap on such bonds raised by at least $15 billion over the next three years.

Under current laws, state and local governments have the authority to issue bonds to first time homebuyers and buyers in distressed areas. The change would extend that authority and allow state and local housing agencies to help borrowers refinance with private lenders regardless of “buyer status” or location.

Critics say the plan is dangerous because bond-backed refinances will serve as a prop for artificial house prices and punish future homeowners while rewarding risk-taking borrowers and lenders.

Some say that there is also a chance that the increased use of mortgage bonds could affect other subsidy programs, such as student loan programs and career development programs.  

So far there is no estimate as to how many borrowers could be helped with tax-exempt municipal bonds or what type of borrowers would be eligible, but it is assumed that homeowners who are well into the foreclosure process would not be eligible. Borrowers who have loans that exceed the value of their home are likely to be left out as well.

Examples of ineligibility can already be seen in states like Ohio where enacted refinancing programs have managed to attract only a small percentage of troubled borrowers.

In a recent interview with Reuters, Bob Connell of the Ohio Housing Finance Agency said that most homeowners are simply “too far gone” by the time they contact a housing agency to be helped.

Connell added that he did believe the Bush administration’s proposal would be beneficial nevertheless and hopes that discussion of the proposal prompts homeowners to contact housing agencies for help.