Read The Fine Print

[November 14th, 2007]

The Portland Development Commission wants the City Council to endorse a program that would offer first-time homebuyers a riskier deal than what’s available to them under an existing state program.

The city program would, however, benefit an industry with serious credibility problems—mortgage lenders.

And it’s all in the name of affordable housing.

The PDC’s proposed “mortgage credit certificate” program would let about 100 first-time Portland homebuyers claim 20 percent of their mortgage interest as a dollar-for-dollar federal income tax credit. (A PDC analysis says a family of four with an annual income of $66,900 and a $300,000 house would save nearly $3,000 per year in taxes.)

Sounds good so far. But Oregon’s experience with mortgage credit certificates offers cause for skepticism when the proposal comes before the council on Wednesday, Nov. 14.

The Oregon Housing and Community Services Department abandoned such a program in 1997, because it proved too complicated for unsophisticated buyers and left homeowners exposed to predatory lending. Today, the state runs an alternative home-financing program that every year offers about 1,400 first-time buyers a fixed, below-market interest rate—now about 5.1 percent. Because that Oregon Bond Loan program holds those mortgages until they’re paid off, private lenders can’t gouge buyers with high fees and interest rates. State officials say that wasn’t the case with mortgage credit certificates. “We saw interest rates that were all over the board,” says Craig Tillotson, a home loan specialist with the housing department.

Worse, first-time home buyers tended to be less savvy when it came to filling out their income taxes. “People didn’t understand [the tax credit], so they ended up paying the IRS even more,” says Dona Lanterman, the department’s home-ownership manager.

The PDC, however, says its program is worthwhile because it could help certain first-time buyers buy bigger homes in Portland, instead of looking to the suburbs.

If Portland resurrects mortgage credit certificates, Internal Revenue Service rules would force homebuyers to choose between that program and the Oregon Bond Loan—which, Lanterman says, is a “better deal.”

PDC housing officials met earlier this year with their state counterparts to discuss the idea. Despite the state’s mixed record with mortgage credits, the PDC decided to move forward.

PDC neighborhood housing manager Shelly Haack says the PDC will help program participants avoid bad decisions by working with trustworthy lenders who share the city’s goals for boosting home ownership rates for minorities. Locally, those rates are about 20 percentage points behind the 60 percent rate for whites.

PDC Commissioner Bertha Ferran, who also works as a senior mortgage consultant for Windermere Mortgage Services, first proposed mortgage credit certificates last year.

Ferran says she wanted the PDC to offer mortgage credit certificates because she saw many clients who could benefit from a program that the state had discontinued.

“It’s not complicated—the problem is that people don’t want to take the time to understand it,” Ferran says.

If the City Council votes to approve the program, it still must win approval from a state committee that approves projects backed by so-called private activity bonds.

Because the feds limit how many of these bonds a state can authorize, the PDC’s new housing program would compete for limited resources with the Oregon Bond Loan—meaning fewer home buyers could score the state’s “better deal.”