Treasury supports lifting cap on housing bonds

WASHINGTON (Reuters) - The U.S. Treasury Department said Wednesday that it supported temporarily lifting the cap on the volume of tax-exempt bonds that state and local governments may use to buy troubled home loans.

"The Secretary's proposal would increase the volume cap by a total amount to be determined in consultation with Congress and the states. It would be for use in the three years from 2008 to 2010 for refinancing with qualified mortgage bonds," Treasury spokeswoman Jennifer Zuccarelli told Reuters.

In a speech addressing problems in the housing market on Monday, Treasury Secretary Henry Paulson said state and local governments should be permitted to issue tax-exempt bonds to fund refinance programs for struggling subprime homeowners. He did not provide many details.

Most states have reached their limits on housing bonds, so they wouldn't be able to take on any more debt for refinancing unless Congress lifts the cap. At the same time, bonds are only allowed to be sold to pay for mortgages for first-time buyers, and tax law will have to be amended to include refinancing.

The proposal shifts the burden of the national foreclosure crisis onto the shoulders of local governments, said Austin King, director of financial justice at the Association of Community Organizations for Reform Now, known as ACORN, a non-profit advocacy group for low- and moderate-income families.

"It's a classic case of the federal government passing the buck and asking mayors and governors to solve the crisis that the federal government should be doing more to solve," said King, former city council president in Madison, Wisconsin.

He said the goal of existing state and city bond programs is to help first-time home buyers and allowing local governments to sells bonds to refinance full mortgages would add significant risk to taxpayers.

King said the additional bonding capacity would not be enough to solve the problem.

The proposal to allow tax-exempt bonds to refinance troubled mortgages is just one part of a Treasury-brokered plan to help troubled borrowers to be unveiled on Thursday.

About 12 states have already launched or are in the process of launching mortgage refinancing programs but they have been financed through taxable bonds or other sources.

State and local agencies sold $30.5 billion in housing bonds in 2006, according to Thomson Financial, but only $6.4 billion were tax-exempt.

(Reporting by Patrick Rucker and Lisa Lambert in Washington and Anastasija Johnson in New York; editing by Leslie Adler)