Bush tax-free mortgage refunding bond plan welcomed

CHICAGO (Reuters) - President George W. Bush's proposal on Thursday to let state and local governments sell tax-exempt bonds to refinance troubled mortgages would help lower interest rates for borrowers, but will not aid homeowners already in the throes of foreclosure, state officials said.

Bush's call on Congress to increase tax-exempt volume cap for subprime refinancing programs followed similar remarks on Monday by U.S. Treasury Secretary Henry Paulson. The increased volume cap would be available from 2008 through 2010, according to a Treasury spokeswoman.

The proposal surfaced as several states have launched or were eyeing taxable bond-financed mortgage refinancing programs.

"I think it would help out tremendously," said Jeff Sykes, acting finance director of the Michigan State Housing Development Authority, which is awaiting state legislative approval of a plan to refinance adjustable-rate mortgages to lower-interest fixed-rate loans.

He said that issuing tax-exempt bonds would result in even lower interest rates, helping more homeowners qualify for the program.

Bob Connell, debt management director at the Ohio Housing Finance Agency, also said the move would be a great help.

"If that comes about, then it would clearly help reduce our borrowing costs and lower our mortgage rates," he said, noting the interest rate for Ohio's refinancing program was currently at 7.5 percent.

However, he said the real problem was that too many homeowners were so deep into the foreclosure process that state refinancing programs cannot help them.

"Those who have come into lenders are already too far gone," Connell said, adding that many hold mortgages that exceed the value of their homes.

Connell said that, hopefully, news about the Bush proposal will spur homeowners to get a handle on their mortgage situation and turn to the housing agency on a prospective basis for help.

The agency earlier this year launched a $100 million taxable bond program that so far has only attracted about $14 million in refinancing requests.

Priscilla Almodovar, president and chief executive officer of the State of New York Mortgage Agency, agreed that not everyone can be helped.

"We should also emphasize that state refinancing programs, even if expanded, will not help all borrowers currently at risk," she said in a statement. "But they do have the potential to help a significant number of borrowers and prevent the mortgage crisis from getting worse."

Housing agency officials said regardless of whether bonds are sold on a taxable or tax-free basis, investors would demand enhancement such as private mortgage insurance before purchasing the debt.

(Editing by Jonathan Oatis)