[Congressional Record Volume 141, Number 18 (Monday, January 30, 1995)]
[Extensions of Remarks]
[Pages E215-E216]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                 FIRST-TIME HOMEBUYER AFFORDABILITY ACT

                                 ______


                            HON. BILL ORTON

                                of utah

                    in the house of representatives

                        Monday, January 30, 1995
  Mr. ORTON. Mr. Speaker, today I am reintroducing my First-time 
Homebuyer Affordability Act of 1995. I would like to take this 
opportunity to explain the need for this legislation and to summarize 
its provisions.
  Study after study has demonstrated that the most significant barrier 
to home ownership in this country is the high level of downpayment 
generally required to secure approval of a mortgage loan. Yet, because 
of our current tax laws, the $850 billion currently invested in 
individual retirement accounts [IRA's] is effectively precluded from 
being used for such downpayment purposes, either directly by a 
homebuyer or through a parental loan. I believe we must change our IRA 
tax laws to dynamically open up these funds to promote home ownership.
  The First-time Homebuyer Affordability Act accomplishes this 
objective. It is substantially identical to legislation I introduced in 
both the 102d and 103d Congress. Last year's bill, H.R. 1149, was a 
bipartisan effort, with 28 cosponsors, about equally split between 
Republicans and Democrats. H.R. 1149 was formally endorsed last year by 
both the National Association of Home Builders and the Mortgage Bankers 
Association of America.
  First, let me explain the need for this legislation. Current IRA 
statutes prohibit an IRA account holder from engaging in a number of 
prohibited transactions, including loans to family members and use of 
one's own IRA funds for personal use. If anyone uses IRA funds for a 
prohibited transaction, the penalties are severe. The money that is 
used is subjected to full Federal and State income taxes. In addition, 
a 10-percent premature withdrawal or distribution penalty is assessed 
on the amount withdrawn. Combined, an IRA account holder may be forced 
to pay over 50 percent of the amount withdrawn in taxes and penalties. 
The result is that under current law, individuals are effectively 
precluded from using IRA funds to make a downpayment to buy a home.
  My legislation overcomes this barrier by providing a targeted 
exemption from prohibited transaction rules to allow individuals to 
access IRA accounts to make a downpayment on a first-time home 
purchase. By structuring the use of funds as an economic transaction 
entered into by a self-directed IRA account, the tax and premature 
withdrawal penalties are avoided--resulting in a substantial savings to 
the homebuyer. By eliminating barriers to the use of IRA funds, this 
change would have a significant impact in increasing homeownership. 
Finally, this approach is prosavings. By structuring use of IRA funds 
as an economic transaction within an IRA, the moneys used to buy a home 
are eventually restored to the IRA, available for continued tax-
deferred reinvestment.
  Specifically, my bill: One, permits individuals to borrow money from 
their own IRA account to make all or part of a downpayment for a first-
time home purchase of a primary residence. This is similar to loans 
permitted from one's 401(k) account; two, permits parents to lend money 
within their IRA account to their children for use as a downpayment on 
a first-time home purchase of a primary residence, and three, permits 
the transactions permitted in one and two above to be structured as an 
equity investment; that is, a home equity participation agreement.
  IRA account holders are currently permitted to invest in a Ginnie Mae 
mutual fund, which consists of thousands and thousands of single family 
mortgages--on other people's homes. However, IRA funds may not be used 
to pay for or finance your own home, nor for the home of a family 
member. In other words, your IRA account can be used for the purchase 
of any home in the country except your own home or the home of a family 
member. 
[[Page E216]] This policy is unfair, anti-home-ownership, and 
antifamily.
  Moreover, consider the purpose of IRA's. IRA's are intended to 
promote long-term productive investments to provide a nest egg for 
retirees. Historical studies have shown that one's home is generally 
the largest and most important asset people have. It is probably also 
the best investment they will ever make. Shouldn't IRA funds be 
available for this important purpose?
  Consider, finally, that we do permit individuals to borrow from their 
401(k) retirement accounts to purchase a home. A 401(k) plan is nothing 
more than a self-directed retirement plan--in much the same way an IRA 
account is. If we allow people to borrow money from a 401(k) plan for 
this purpose, shouldn't we also allow borrowing from an IRA account?
  I believe we should. My legislation allows this to be done in a 
flexible, but responsible manner. My bill allows 100 percent of the 
funds in one's IRA account to be used for a first-time home purchase, 
structured either as a loan or an equity sharing investment.
  Under my bill, IRA advances structured as a loan may be flexible. Any 
loan from an IRA can be for a term of up to 15 years. The loan may be 
interest only--no principal amortization. And, interest on the loan may 
be deferred until repayment of the loan. These two options increase 
flexibility with respect to cash flow. Finally, the loan may be 
unsecured or may be secured--typically by a second lien on the home. 
This increases flexibility with respect to second mortgage limitations 
typically imposed by secondary market mortgage lenders like Fannie Mae 
and Freddie Mac.
  IRA advances structured as an equity sharing agreement are intended 
to mirror current free market practices, in which homebuyers give up 
part of the appreciation of value of their home in return for vital 
down payment assistance. To preserve the concept of having the IRA 
engage in economic transactions, my bill requires that equity sharing 
arrangements be structured under terms similar to those made in arms-
length transactions.
  While flexible, the bill is also structured in a careful, targeted 
manner. The public policy purpose of the bill is to promote entry into 
the housing market. Therefore, the home buyer must be a first-time home 
buyer. In addition, the home purchase must be a principal residence. 
Finally, the loan or equity investment must be repaid upon the sale of 
the home.
  My bill also contains provisions to prevent self-dealing or tax-
gaming. For example, the interest rate on the loan must be no less than 
200 basis points below and not more than 200 basis points above 
comparable Treasury rates. In this way, the IRA earns at least a fair 
rate of return, but individuals cannot funnel excessive tax-deferred 
funds into an account. Perhaps most importantly, my bill provides that 
forgiveness or default on loan or equity repayment subjects an IRA to 
premature distribution treatment--making the funds subject to tax and 
withdrawal penalty. This effectively prevents individuals or parents 
from converting IRA funds tax-free to personal use through a fabricated 
default.
  Finally, I would like to compare this approach to the so-called 
penalty waiver approach. This approach was included in H.R. 4210, a 
major tax bill approved in the 102d Congress, but vetoed by the 
President. The penalty waiver provision was also included in the super-
IRA bills introduced last year by Senator Roth in the Senate and 
Representatives Thomas and Pickle in the House. Many Members of both 
the House and Senate Have introduced legislation incorporating this 
concept.
  Quite simply, the penalty waiver approach provides for a waiver of 
the 10-percent penalty on premature IRA withdrawals for certain 
identified purposes. Typically, qualified purposes in legislative 
proposals include first-time home purchase, higher education expenses, 
and emergency medical bills.
  Clearly, adoption of this type of proposal would make it easier to 
access IRA's for these purposes. However, penalty waiver advocates 
generally fail to emphasize that the IRA account holder would still owe 
Federal and State income taxes. At best, a penalty waiver would 
marginally reduce the huge disincentive against using IRA funds to buy 
a home.
  Let me illustrate this point. Take a hypothetical case in which a 
young couple plans on buying a house, requiring a downpayment of 
$10,000. Let's assume the couple's sole source of long-term savings is 
the $10,000 they have in their IRA account. Let's also assume that this 
couple is in a marginal 28 percent Federal tax bracket, and a 6-percent 
marginal State tax bracket. Even under a penalty waiver approach, this 
couple would still forfeit almost one-third of the amount in their IRA 
account to State and Federal taxes. Moreover, they would have less than 
$7,000 left to invest, not enough to make the required downpayment. In 
contrast, under my legislation, the couple could lend themselves all of 
the $10,000, with no tax or penalty consequences.
  This difference is especially important when considering parental 
loans. It is true that certain penalty waiver proposals permit parental 
withdrawals to assist their children with a downpayment. But I think it 
would be a very rare case in which a parent would be willing to take 
$10,000 from their IRA account, suffering an unnecessary tax of from 
$3,000 to $4,000, to assist their children with a downpayment.
  Thus, a penalty waiver sounds like a good public policy change. 
However, in practice, it would have only a marginal impact--reducing 
one's tax penalty by only around 20 percent of the amount otherwise 
owed. This incentive will induce relatively few people to actually take 
money out of their account to buy a house, compared to current law. As 
a result, it will produce a very small increase in the level of 
homeownership in this country.
  We need to do more to access IRA funds for home ownership. Adoption 
of the First-time Homebuyer Affordability Act would make it much easier 
for many Americans struggling to meet downpayment requirements and 
enter the housing market. I would welcome cosponsors for this bill, and 
urge its consideration in the House.


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