New Housing Law Also Benefits Muni Buyers

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Although the “Housing and Economic Recovery Act of 2008” was designed to bolster Fannie Mae and Freddie Mac, it also contains good news for municipal bond investors. 
    
The law, signed by President Bush on July 30, will increase the issuance of tax-free housing bonds. More important, housing bonds issued after the date of enactment will no longer be subject to the Alternative Minimum Tax (AMT), making these bonds attractive to a broader cross-section of investors. According to Thomson Reuters data, 71% of housing bonds sold last year were subject to the AMT, and thus taboo for investors who were either subject to the AMT, or thought they would likely be in future years.

The new law also opens the door for corporations who are subject to the AMT to become significant buyers of tax-free housing bonds. Additionally, the law increases previously imposed limits on the amount of these “private activity” bonds by $11 billion in 2008.

In our view, the law should benefit AMT as well as non-AMT investors. Those subject to the AMT will have a much broader selection of well-secured bonds to add to their portfolio. Investors who are not subject to AMT should experience a general increase in the value of their holdings, as the supply of housing bonds subject to AMT is dramatically reduced.