Bush budget would lift mortgage bond cap by $15 bln

WASHINGTON (Reuters) - States and local governments would be allowed to issue an additional $15 billion in tax-exempt mortgage bonds over three years, under President George W. Bush's annual budget proposal released Monday.

The Senate is currently considering a measure attached to its fiscal stimulus bill that would lift the cap by $10 billion over the same timeframe, 2008 through 2010.

The administration also proposed loosening restrictions on the mortgage bond program, which is currently targeted at first-time buyers, to include refinancing of subprime loans with tax-free debt. That change is also included in the Senate bill.

Bush originally suggested lifting the cap in December as the nation weighed how best to address the housing market downturn, but the bonds were not added to the stimulus bill passed by the House of Representatives last week.

States and local governments can use tax-exempt mortgage bonds to provide low-interest-rate new mortgages, but they are limited in how many bonds they can issue each year.

The mortgage bonds are considered private activity bonds, which can also fund development and student loans. In 2007, the cap on private activity bonds was about $28 billion, according to an analysis by The Bond Buyer.

The cap is determined based on inflation and each state's population.

(Reporting by Lisa Lambert; Editing by Tom Hals)