Katrina Emergency Tax Relief Act (PL 109-73)
The Office of Tax Exempt Bonds implemented Section 404 of The Katrina Emergency Tax Relief Act, which President Bush signed into law September 23, 2005. This section of the Act was enacted to provide relief to those confronted with the burden of rebuilding their homes in the aftermath of Hurricane Katrina. Section 404 of the Act eases certain limitations on the use of tax-exempt qualified mortgage bonds in order to allow proceeds of such bonds to be used to provide mortgages for the rebuilding of residences.
The term “Hurricane Katrina disaster area” means an area with respect to which a major disaster has been declared by the President before September 14, 2005, under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina. The States for which much a disaster has been declared are Alabama, Florida, Louisiana and Mississippi. The term “core disaster area” means that portion of the Hurricane Katrina Disaster Area determined by the President to warrant individual or individual and public assistance from the Federal Government under such act.
Qualified Mortgage Bond Requirements
The definition of a qualified private activity bond includes a qualified mortgage bond as defined in section 143 of the Internal Revenue Code. Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for the purchase, improvement or rehabilitation of owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, including income limitations for homebuyers and purchase price limitations for the home financed with bond proceeds.
Generally, qualified mortgage bonds cannot be used to finance a mortgage for a homebuyer who had an ownership interest in a principal in the three years preceding the execution of the mortgage (the “first time homebuyer” requirement). The first time homebuyer requirement does not apply to targeted area residences. A “targeted area residence” is one located in either a census tract in which at least 70% of the families have an income which is 80% or less of the state-wide median income or an area of chronic economic distress.
Qualified mortgage bonds may also be used to finance qualified home improvement loans. Qualified home improvement loans are defined as loans to finance alterations, repairs and improvements on an existing residence, but only if such alterations, repairs and improvements substantially improved the basic livability or energy efficiency of the property.
Special Rules under Section 404
Section 404 of the Act waives the first time homebuyer requirement for qualified Hurricane Katrina recovery residences by treating such residences as if they were targeted area residences.
A qualified Hurricane Katrina recovery residence is defined as
(1) any residence located in the core disaster area and (2) any other residence if, on August 28, 2005, the mortgagor of such residence owned a principal residence in the Hurricane Katrina disaster area that was rendered uninhabitable by reason of Hurricane Katrina and the residence being financed is located in the same State as the prior principal residence. The provision applies to residences financed before January 1, 2008.
Section 404 of the Act also increases from $15,000 to $150,000 the permitted amount of a qualified home improvement loan with respect to residences located in the Hurricane Katrina disaster area to the extent such loan is for the repair of damage caused by Hurricane Katrina.