SECTION 2. BACKGROUND

.01 Section 103(a) provides that, except as provided in § 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that § 103(a) shall not apply to any private activity bond that is not a ‘‘qualified bond’’ within the meaning of § 141. Under § 141(e) the term ‘‘qualified bond’’ includes any private activity bond that (1) is a qualified mortgage bond, (2) meets the volume cap requirements under § 146, and (3) meets the applicable requirements under § 147. .02 Section 143(a)(1)(A) provides that the term ‘‘qualified mortgage bond’’

means a bond that is issued as part of a qualified mortgage issue. Section 143(a)(2)(A) provides that the term ‘‘qualified mortgage issue’’ means an issue of one or more bonds by a state or political subdivision thereof, but only if (i) all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7) of § 143; (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of § 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on financing provided by the issue are used not later than the close of the first semiannual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

.03 An issue of bonds meets the requirements of subsection (h) of § 143 only if a sufficient portion of the bond proceeds is made available (with reasonable diligence) for owner-financing of targeted area residences for at least one year after the date on which ownerfinancing is first made available with respect to targeted area residences. The applicable portion of bond proceeds to be made available must be equal to or greater than an amount that is the lesser of (1) 20 percent of the proceeds of the issue that are devoted to providing owner-financing, or (2) 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences in targeted areas within the jurisdiction of the issuing authority.

.04 A targeted area residence, defined in § 143(j), is a residence in either a

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Y P = Required portion to be made avail able to targeted areas, X = Average annual aggregate principal

amount of mortgages executed during the immediately preceding 3 calendar years for single-family owner-occupied residences within

P = Required portion to be made avail able to targeted areas, the state in which the issuing jurisdiction is located, Y = The total population within the

state, based on the most recent decennial census for which data are available, and Z = The total population in the targeted

areas located within the issuer’s jurisdiction, based on the most recent decennial census for which data are available.

An issuing jurisdiction may use estimates of X published by the Treasury Department when computing the safe harbor formula. The specified portion required to be made available in targeted areas is a minimum amount so that more than the minimum amount may be (but need not be) made available in targeted areas. See § 6a.103A–2(h)(4).

.06 Section 25(c)(2)(A)(ii) provides that a state or a political subdivision thereof may elect to exchange all or part of its qualified mortgage bond authority for authority to issue the mortgage credit certificates described in § 25(c). The election must be in accordance with § 1.25–4T(c).

.07 Section 25(a) provides, in general, that the recipient of a mortgage credit certificate (MCC) may claim a credit against income tax equal to the product of the certificate credit rate and the interest paid or accrued by the taxpayer during the taxable year on the remaining principal of the certified indebtedness amount.

.08 Section 25(b)(2) defines the certified indebtedness amount as the amount of indebtedness that is incurred by the taxpayer to acquire the taxpayer’s principal residence, as a qualified home improvement loan, or as a qualified rehabilitation loan, and is specified in the MCC.

.09 Section 25(c)(2)(A)(iii)(V) provides that the indebtedness certified by MCCs must meet the requirements of § 143(h) concerning the portion of loans to be placed in targeted areas. See also § 1.25–4T(g) of the temporary regulations.

.10 The average annual mortgage originations for 1990, 1991, and 1992 were published in Rev. Proc. 95–14, 1995–1 C.B. 520. Section 5.01 of Rev. Proc. 95–14 provides that issuers may continue to rely on the average annual mortgage originations in Rev. Proc.

95–14 until those averages are rendered obsolete by a new revenue procedure, such as this one.

.11 The average annual mortgage originations are developed by the Department of Housing and Urban Development (HUD) for publication by the Service. The mortgage originations are based on data and procedures that are employed in the HUD-coordinated surveys of mortgage lending activity for 1to 4-family dwellings. The estimates of mortgage volume for 1- to 4-family dwellings in each state are adjusted from a special tabulation of the HUDsponsored Annual Housing Survey to reflect only the amount of mortgages originated that were secured by owneroccupied residences.