A promising new financing program that could increase the number of first-time buyers in Los Angeles County by as much as 15%could be operating early next year--but only if local lawmakers approve the program's implementation and lenders can be convinced to take part.
The program is based on a financing mechanism called a "mortgage credit certificate," or MCC. Buyers who obtain a certificate are typically able to take an amount equal to 20% of their annual mortgage-interest payments directly off their federal tax bill--a break that can give them thousands of dollars more to put toward their annual housing expenses, at virtually no cost to local and state governments.
The Los Angeles County Boards of Realtors, which represents 43 boards in the area, is expected to launch a campaign next month to convince the City Council and other local government bodies to implement an MCC program in Los Angeles. Realtors in Sacramento began a similar effort last year, which led to the creation of an MCC program that has already helped 713 families purchase their first home. Another 600 Sacramento buyers are expected to use the certificates in the next few months.
Hot Financing Tool
Realtors in Orange County are also considering spearheading an effort to bring the certificates to their area, and Riverside County officials have already agreed to implement an MCC program.
"We think the mortgage credit certificate is one of the hottest financing tools to hit the street in years, and we're going to work our tails off to get it implemented in Los Angeles," said Chuck Lamb, LACBOR president and senior partner in a four-office brokerage chain based in Northridge.
Housing agencies across the nation are authorized to issue MCCs under federal legislation passed in 1984. But their growth has been slowed by a variety of factors, including the tendency of many agencies to be slow-moving bureaucracies and fears that the viability of MCCs would be eliminated by last year's tax-reform legislation.
The certificates survived tax overhaul without a scratch, and local realtors say the success of Sacramento's MCC program should be enough to convince local government officials that the program can work in the Southland, too.
Certificates Not Loans
MCCs can be issued to first-time buyers or to people who haven't owned their own home for the last three years. The certificates are not loans;they are credits the buyer can use to reduce his federal income tax.
Tax credits are better than tax deductions, because credits are subtracted directly from the taxes owed, while deductions are merely used to reduce the overall amount of income subject to taxation.
The Sacramento program, like the handful of other MCC programs operating across the nation, works like this: The buyer purchases a house, and then approaches one of the lenders participating in the program.
First-time buyers generally qualify as long as their income does not exceed 115%of the area's household median income and the purchase price doesn't exceed 90%of the area's average-priced home.
In Los Angeles, those guidelines would allow first-time buyers to earn up to $38,200 annually, purchase a home for as much as $129,870, and still qualify for the program.
When a borrower qualifies for the program, the lender contacts the housing agency and reserves a credit certificate in the borrower's name. The certificate typically allows the borrower to take an annual federal tax credit equal to 20%of his yearly mortgage-interest payments.
First Year of Loan
For example, consider a first-time buyer who purchases a house and gets a 10%, 30-year fixed-rate loan for $100,000. He also gets a 20%mortgage credit certificate.
In the first year of the loan, the buyer will pay about $10,250 in interest charges. The MCC allows the owner to subtract 20%of that amount--$2,050--directly from his federal tax bill at the end of the year.
The remainder of the interest charges are taken as a deduction, just like all homeowners take.
First-time buyers are obviously the biggest beneficiaries of MCC programs. But cities and states win, too, because the programs cost them virtually nothing to run and every home sale pumps thousands of dollars into the economy.
The federal government effectively "pays" for MCC programs because it receives fewer tax dollars. But support for most other federal housing programs--such as the Federal Housing Administration and Veterans Administration--has been reduced, so proponents of the credits say cities should use whatever programs are available to help would-be homeowners.
Task Won't Be Easy
Lamb says he's confident his group will be able to persuade the Los Angeles City Council and other elected officials to authorize a local MCC program. However, his task won't be easy because municipalities that adopt the program must trade some or all of their authority to issue mortgage-revenue bonds in exchange for the power to issue MCCs.