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If you're looking for a mortgage, the best place to start might be your state capital rather than the local mortgage broker's office. That's because little-known outfits called housing finance agencies can often be found near governors' mansions. These quasi-independent agencies offer special loan programs to low- and moderate-income home buyers, buyers interested in helping to rehabilitate urban areas, and a host of other groups. For borrowers, their mortgages can slash ownership costs considerably because they feature below-market interest rates, closing-cost discounts, and other benefits that conventional loans simply can't match.

State secrets
Housing finance agencies have been around for almost three decades in some states, but because they operate behind the scenes, many home buyers aren't aware of their existence. Their primary mission is to boost homeownership among needy groups, including first-time home buyers, urban shoppers, and people with little money for down payments.
Most are nonprofit companies originally financed with state government seed money that now operate independently. They raise money for loans by selling tax-exempt bonds. Investors in those bonds are willing to accept yields that aren't as high as the ones on traditional mortgage-backed securities made up of conventional home loans because the lack of taxes boosts their investment return. That allows agencies, and the lenders who offer their programs, to cut consumer loan costs.

Traditionally, most agency programs have come with fairly strict income and home value limits. That's because the federal government will only waive taxes on agency bonds if the agencies agree to use the subsidies for social good. Yet in recent years, the agencies have figured out ways to branch out using excess money from tax-exempt bond sales and cash from the sale of taxable bonds. They now offer all kinds of tailored loans that feature less onerous borrower restrictions, giving many more people the chance to save money.

Remember the recapture
Borrowers need to watch out for the so-called "recapture tax" on subsidized loans, however, because it can come back and bite people whose incomes or home values rise substantially. Remember that the government is happy to help needy buyers by forgoing the taxes it would otherwise charge on agency bonds in order to lower consumer rates. At the same time, Uncle Sam doesn't want borrowers benefiting from subsidies they don't need or who are using them as a way to get rich. So on programs backed by tax-exempt bonds, it has developed a way to recapture its subsidies, if necessary.

The rules are somewhat complicated. But generally speaking, people have to pay the tax if their incomes rise more than 5 percent a year and if they profit from their home sales after subtracting real estate commissions, fix-up expenses and other assorted costs. The tax usually amounts to a few hundred dollars. There are plenty of exceptions, though. People who own their homes for more than nine years don't pay the tax. Consumers who make less than the program limit to begin with can increase their incomes at a faster pace than 5 percent annually without being subject to it. And no matter what, the tax will never be more than 6.25 percent of the original loan amount.

But even with the tax drawbacks, agency loans stack up well against conventional ones. That's why experts say borrowers should be giving these increasingly innovative mortgages a closer look.

Texas Department of Housing and Community Affairs
Waller Creek Office Building
507 Sabine Street
Austin, TX 78701
Phone: (512) 475-3800

Mailing Address
PO Box 13941
Austin TX, 78711-3941

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