[Senate Hearing 107-534]
[From the U.S. Government Publishing Office]
S. Hrg. 107-534
FHA MULTIFAMILY HOUSING
MORTGAGE INSURANCE PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HOUSING AND TRANSPORTATION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
THE EXAMINATION OF THE FEDERAL HOUSING ADMINISTRATION MULTIFAMILY
HOUSING MORTGAGE INSURANCE PROGRAM, FOCUSING ON THE IMPENDING INCREASE
IN MORTGAGE INSURANCE PREMIUMS, PROGRAM CREDIT SUBSIDY RATES, AND THE
ADMINISTRATION'S PROPOSED INCREASE IN THE PER-UNIT MORTGAGE LOAN LIMITS
__________
JULY 24, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Jonathan Miller, Professional Staff Member
Melody H. Fennel, Republican Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Housing and Transportation
JACK REED, Rhode Island, Chairman
WAYNE ALLARD, Colorado, Ranking Member
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JOHN ENSIGN, Nevada
JON S. CORZINE, New Jersey RICHARD C. SHELBY, Alabama
CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming
CHARLES E. SCHUMER, New York CHUCK HAGEL, Nebraska
DANIEL K. AKAKA, Hawaii
Kara Stein, Legal Counsel
John Carson, Republican Staff Director
(ii)
?
C O N T E N T S
----------
TUESDAY, JULY 24, 2001
Page
Opening statement of Senator Reed................................ 1
Opening statements, prepared statements, or comments of:
Senator Allard............................................... 4
Senator Akaka................................................ 6
Senator Corzine.............................................. 10
Senator Carper............................................... 11
WITNESSES
John C. Weicher, Commissioner, Federal Housing Administration,
U.S. Department of Housing and Urban Development............... 2
Prepared statement........................................... 30
Michael F. Petrie, President, P/R Mortgage and Investment
Corporation, Indianapolis, Indiana on Behalf of Mortgage
Bankers Association of America................................. 18
Prepared statement........................................... 31
Response to written questions of Senator Allard.............. 45
Kevin Kelly, President, Leon N. Weiner and Associates,
Wilmington, Delaware on Behalf of the National Association of
Home Builders.................................................. 19
Prepared statement........................................... 35
Response to written questions of Senator Allard.............. 49
Patton H. Roark, Jr., Exectuive Vice President and Portfolio
Manager, AFL-CIO Housing Investment Trust, Washington, DC...... 21
Prepared statement........................................... 38
Carl A.S. Coan, Jr., Executive Committee Member, National Housing
Conference..................................................... 43
Additional Material Supplied for the Record
Letter submitted by Patton H. Roark, Jr. from John Sweeney,
President, AFL-CIO dated July 24, 2001......................... 50
Statement of the National Association of Realtors................ 52
(iii)
FHA MULTIFAMILY HOUSING MORTGAGE INSURANCE PROGRAM
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TUESDAY, JULY 24, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Housing and Transportation,
Washington, DC.
The Subcommittee met at 2 p.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Jack Reed (Chairman of
the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR JACK REED
Senator Reed. Let me call the hearing to order. Good
afternoon. I would like to welcome all of our witnesses and
everyone to today's hearing on the Federal Housing
Administration Multifamily Housing Program.
The Federal Government has tried a number of different
approaches to provide housing over the past 50 years. The FHA
Mortgage programs is a public/private partnership that
encourages the private sector to produce housing with support
from the Federal Government. It is been one of our most
successful efforts.
The FHA Multifamily Insurance enables moderate income
working families to obtain affordable rental housing. FHA
multifamily programs currently insure more than $41 million
worth of mortgage loans that support over 14,000 multifamily
properties containing 1.8 million housing units.
Unfortunately, this year, for the second consecutive year,
the multifamily insurance programs have been shut down because
they have used up their annual appropriated credit subsidy or
loan loss reserve. This happened approxiamately 3 months ago on
April 19, 2001, 5 months before the end of the fiscal year.
Experts estimate that if we fail to get the programs up and
running again, 55,000 apartments will not be constructed or
rehabilitated this fiscal year.
Last December, Congress recognized that the multifamily
insurance programs might need additional credit subsidies so we
provided a supplemental appropriation of $40 million for this
purpose, making the release of funds contingent upon the
declaration of an emergency by HUD.
Despite requests from many Members on this Committee to
release the $40 million of credit subsidies, the Administration
has decided not to declare such an emergency, and the $40
million has not been released. Many of us hope that the fiscal
year 2001 supplemental conference report was going to include a
provision allowing the $40 million to flow with no conditions
attached. This provision appears to have not been included in
the conference report.
However, even if this additional credit subsidy were
released, this still would only sustain the multifamily program
for only a few months, not until the end of the fiscal year on
September 30, 2001.
At the same time, the Administration has determined on its
own, with almost no input from either Congress or stakeholders,
that the solution to this problem is to raise the FHA
multifamily insurance premiums. This proposed 50 percent
premium increase will become effective on August 1, 2001, which
brings us to the reason for the hearing today.
As of today, we have the following results, programs that
have been shut down since April 19, 2001. Repeated requests by
Members of Congress, including myself, that HUD declare an
emergency and allow the $40 million appropriated last December
to flow to the FHA multifamily insurance programs, but to no
avail.
A 60 percent increase in the premiums and many of the
multifamily programs which arguably will increase the cost of
this housing causing builders to decide not to build or to
raise rents, thus decreasing affordability.
An unsuccessful attempt to fix the problem in the
Supplemental Appropriations bill and what appears to be a
problematic method of calculating how much credit subsidy the
programs need, that still has not been fixed.
In summary, we look forward to the testimony of our
witnesses today, and hope that you will help us untangle this
cluster of interrelated issues and get the FHA multifamily
programs back on their feet.
We will have two panels of witnesses. The first panel will
consist of Mr. John Weicher, the Assistant Secretary for
Housing and Urban Development and the FHA Commissioner.
On our second panel, we will hear from a number of the
stakeholders involved in the FHA multifamily insurance programs
and I will introduce the second panel a bit later. We will be
asking all witnesses this afternoon to address the probable
effect of the recent increase in mortgage insurance premiums,
the accuracy of current price subsidy rates, and their views
about the proposals to increase FHA multifamily loan money.
Before I recognize Secretary Weicher, I would like to
indicate that I will recognize Committee Members as they arrive
at appropriate times so they may make opening statements.
But at this time, Mr. Secretary, we appreciate your
testimony. As you know, we will make, as part of the record,
your written text if you would like to summarize or in any way
abbreviate your testimony. We will ask you to try to keep your
comments to 5 minutes.
Mr. Secretary.
STATEMENT OF JOHN C. WEICHER
ASSISTANT SECRETARY, FHA COMMISSIONER
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Weicher. Thank you, Mr. Chairman. I want to thank you
for inviting me to testify about the FHA Multifamily Mortgage
Insurance Program this afternoon.
With me today is Joseph Malloy, Deputy Director of FHA's
Office of Multifamily Development. We are glad to have the
opportunity to discuss the Subcommittee's concerns about the
program. I am going to discuss each of the three issues in turn
that you mentioned in your letter of invitation, starting with
the mortgage insurance premium increase.
The National Housing Act authorizes the Secretary to set
the premium charge within a range of 25 basis points and 100
basis points on the principal obligation of the mortgage
outstanding at any point in time. The MIP for most multifamily
mortgage insurance programs has been set by regulation at 50
basis points.
In fiscal year 2001, Congress appropriated $101 million for
credit subsidy. The Department effectively obligated all the
available credit subsidy by May for reasons that I described in
my confirmation hearing before you in May. At the end of fiscal
year 2000, the Department ran out of credit subsidy for that
year, and promptly used the first $12 million of credit subsidy
for fiscal year 2001 to fund the projects that were left over
in the pipeline. Also, there was an unexpected increase in
applications in the 221(d)(3) program project sponsored by
nonprofits and that program carries a higher subsidy rate than
most other FHA multifamily programs. Some of these projects
should have been treated as if they had for-profit sponsors. In
recent years, the number of 221(d)(3) commitments has varied,
but they accounted for about 13 percent of the credit subsidy
obligated in fiscal year 2000, less than 10 percent in earlier
years. This year, 221(d)(3) accounts for 40 percent of our
commitments, and that is completely unexpected. If the fiscal
year 2000 activity level had continued this year, FHA would
have obligated approximately $23 million less in credit
subsidy, and we would probably not have this problem.
As the Department exhausted credit subsidy, we advised all
field offices to halt the issuances of commitments conditioned
on credit subsidy in the April 19 mortgagee letter. To meet the
need for multifamily housing, the Secretary then decided to
request a supplemental appropriation of $40 million for credit
subsidy for the
remainder of this fiscal year, and at the same time to
implement a premium interest. On July 2, the Department
published a notice in the Federal Register increasing the
mortgage insurance premium to \8/10\ of 1 percent, 80 basis
points. The rule and the notice become effective on August 1.
At that time, field offices will be authorized to resume
issuing commitments for the 221(d)(4) and other positive credit
subsidy programs. All FHA commitments issued on or after that
date will be processed at the higher premium. Projects in the
headquarters' queue for credit subsidy already, those without
outstanding FHA commitments will be allowed to proceed to
closing at the lower premium of 50 basis points subject to the
availability of credit subsidy in fiscal year 2001. The
increase in the premium rate will lower the credit subsidy
rates in the future.
The purpose of these proposals is both to resume the
production of needed multifamily housing and to put FHA's basic
multifamily program on a demand basis, similar to the 203(b)
program for single family mortgages. This is the third time in
8 years that FHA has run out of credit subsidy before the end
of the fiscal year. The Secretary wants to eliminate the stops
and starts that plague our programs and make sure that this
situation does not happen again. The premium increase of 30
basis points achieves these purposes. It is also in line with
the Administration's proposal in the fiscal year 2002 budget.
Turning to credit subsidy rates. HUD, like all other
Federal agencies under the Federal Credit Reform Act of 1990,
is required to estimate the probable cost to the Agency of its
programs and must request credit subsidy as part of its budget
in each fiscal year to cover those costs. In calculating the
credit subsidy estimates, we look at historic loan performance
of our major programs--prepayments, claims, the income FHA
receives from application/inspection fees, and other sources of
incomes, mortgage insurance premiums, and recoveries from note
and property sales. This analysis becomes the basis for the
credit subsidy rate in the Federal budget. The performance has
improved greatly in recent years. In 2001, the (d)(4) subsidy
rate is a little over 3 cents on the dollar, down from 7 cents
last year and 12 cents in 1996.
At my confirmation hearing, I promised to conduct a
complete reanalysis of the methodology, and make a new judgment
as to the appropriate credit subsidy rate and the appropriate
MIP. We are now in the middle of that analysis. Meanwhile, we
have provided the industry with a computer model and
assumptions, and it is my understanding that they are
conducting a parallel analysis. And I notice Mr. Petrie's
testimony makes reference to the cooperative effort we have
engaged in. Once our work is completed, I will make
recommendations to the Secretary and to OMB as to whether the
credit subsidy rates and the MIP should be changed. The
Secretary, as I mentioned, does have the statutory authority to
change the MIP, and that is the basis on which we issued the
interim rule on July 2, allowing him to raise or lower the MIP
within the range of the statutory authority.
To summarize, very quickly on the loan limits, we are
proposing a 25 percent increase in the basic loan limits across
the board nationally. This is the first increase since 1992. It
matches the increase in construction costs, the national
increase in the index, since 1992, which is about 25 percent as
well.
The result of this will be to increase and to encourage the
construction of much needed multifamily rental housing in the
major metropolitan areas across the country. I understand the
increase has been included in the Senate Appropriations bill
but not in the House bill. We hope the Conference Committee
will adopt the Senate position to facilitate the production of
multifamily housing.
That concludes my statement, Mr. Chairman. Thank you for
the opportunity to appear before you.
Senator Reed. Thank you very much, Mr. Secretary.
Let me recognize the Ranking Member of the Subcommittee,
Senator Allard.
COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I know we are anxious to get
to the questioning. I would just ask unanimous consent that my
opening statement be made a part of the record, behind the
Chairman's.
Senator Reed. Without objection.
Senator Allard. I would just comment that this is an
important hearing. There are changes that are happening in
multifamily housing and issues this Subcommittee needs to look
at seriously.
I think the Administration is trying to take a responsible
position as far as budgeting is concerned. I want to commend
them for that, and look forward to the questioning and response
period.
Senator Reed. Thank you very much, Senator. Let me begin,
Mr. Secretary.
In your testimony, I heard your statement that Secretary
Martinez requested a $40 million supplemental request. That
request was granted, I understand, with the caveat that an
emergency should be declared, or am I confused?
Mr. Weicher. I believe that is not accurate, Mr. Chairman.
We included a $40 million request as part of the
Administration's supplemental proposal. And at the same time,
we announced an intention to increase the premium to 80 basis
points. We intended to
resolve the question about the emergency and operating within
the budget limits by including the $40 million in the
supplemental fully offset, and we were expecting, up until last
Thursday, that we would be reopening the program on that basis
on August 1.
Senator Reed. In a sense, we have battling supplementals.
Last December, there was a supplemental that had emergency
language in place, and then subsequent to that, there was a
supplemental request by the Administration for $40 million.
Mr. Weicher. That is right, on a nonemergency normal basis.
Senator Reed. Which raises the question to me which was can
you give us the rationale why you would not declare an
emergency in a program that is so important and that a
shortfall that could have been remedied by simply declaring an
emergency, at least partially remedied.
Mr. Weicher. Mr. Chairman, the Administration policy has
been and remains to operate within the normal budget process,
except in very unusual situations, and we are perfectly
prepared to allocate the $40 million in credit subsidy within
the supplemental.
It is the Administration's view that emergencies are
responses to natural disasters, to problems of that magnitude,
not to temporary suspensions in on-going programs. That is what
has been at issue here and what remains at issue.
We felt the way to handle this was on the normal order, $40
million appropriated in the normal process, within the spending
caps established and the supplemental fully offset, and on that
basis, we are certainly prepared to go forward.
But we do not see and Congress does not see this as an
emergency or see this as worth funding in the normal way. It
makes it harder to argue that it is an emergency. It is our
feeling that we have tried very hard to work out a problem
which we did not like and which the industry did not like and
which Congress did not like certainly. We are sorry that the
product has come out this way in the supplemental.
Senator Reed. Let me turn to you a moment for the whole
issue of the subsidy rates and the controversy that has
developed about the accuracy of the calculations. There is a
contention that the credit rates are not being calculated
accurately and that in fact less money is required to be
appropriated for FHA programs to satisfy the requirements of
the Credit Act.
If this is the case, then we could find ourselves in a much
better position where Congress could appropriate less money,
HUD is able to keep premiums lower, and the programs which
operate. Indeed, I think it could be a win-win. You have
already indicated you are reviewing carefully the methodology.
Do you have any at least preliminary conclusions with respect
to the level of subsidy that is necessary?
Mr. Weicher. No, Senator, I do not. We are literally in the
middle of the process at this point. I am satisfied that we are
proceeding in an appropriate way to do the analysis that we
have set up the analytical framework properly.
I have not seen any results at this point that I consider
to be properly done within that framework. It is a process of
deciding how to do it and then a process of getting the correct
data entered into it.
And we are in the middle of doing a statistical analysis
within the framework that we have created. It is a high
priority, I can assure you, and we intend to be done with the
analysis by the end of the fiscal year barring some unexpected
problem. But at this point I am not in any position to indicate
results.
Senator Reed. Let me cease for the moment and just suggest
that we do a second round.
Senator Allard. That would be fine.
Senator Reed. Let me recognize Senator Akaka, who has just
joined us and who is the newest Member of the Subcommittee, and
ask you if you would have an opening statement that you would
like to present at this time?
STATEMENT OF SENATOR DANIEL K. AKAKA
Senator Akaka. Thank you very much, Mr. Chairman, Senator
Allard. I commend you for holding this hearing today that will
address the housing issues facing many low and moderate income
families involved in the Federal Housing Administration's
multifamily insurance programs.
I also wish to thank Mr. John Weicher, the FHA Commissioner
and Assistant Secretary for the Department of Housing and Urban
Development and other witnesses for coming today to testify
before this Subcommittee.
This Subcommittee has a responsibility that was known many
years ago. It goes all the way back to 1934. Since then, this
Government has been very active in helping average folks get
housing and FHA has gone through many changes to carry out its
mission.
According to the National Low Income Housing Coalition,
approximately 44 percent of Hawaii's renters are unable to
afford a 2 bedroom unit. The Coalition has calculated that
Hawaii's average rent for a 2 bedroom is $859. Therefore, a
worker in Hawaii would need to earn $16.52 per hour working 40
hours per week in order to afford an $859 unit. That is what we
are faced with in Hawaii. Mr. Chairman, I ask that my statement
be placed in the record.
Once again, I am pleased the Chairman is willing to hold a
hearing and look forward to hearing the witnesses today. Thank
you.
Senator Reed. Thank you.
Senator Allard, questions.
Senator Allard. Thank you, Mr. Chairman.
I just want to point out to Members of the Subcommittee and
the panel that Denver, Colorado has had the highest increase
over the last 10 years in the cost of housing of any place in
the country. They have a 43 percent increase. So personally, I
am interested in making sure that we have a program that is as
self-sufficient as possible and one that will meet our issues
of affordable housing. I want to follow up a little bit on the
questioning that the Chairman has started out on, $40 million
in credit subsidy.
Now, you said in your statement that we have 3 years here
where we have a $40 million supplemental, is that right? Did I
misunderstand that? What were you talking about over that 3
years?
Mr. Weicher. Three times in the last 8 years, we have run
out of credit subsidy before the end of the fiscal year.
Senator Allard. I see, and then you have come in and asked
for more, is that what you have done?
Mr. Weicher. Last year, when HUD ran out at the end of the
fiscal year, they simply took the projects that were in the
pipeline, funded them out of the 2001 appropriation so that the
first $12 million of this year's projects, the first $12
million in credit subsidies for this year's projects were
projects that had been proposed and were in the pipeline in the
year 2000.
Senator Allard. I guess that was my question. There is a
$40 million credit subsidy provided through a supplemental
appropriation last year, am I correct?
Mr. Weicher. During the calendar year. During the present
fiscal year but at the end of the last calendar year.
Senator Allard. Part of the problem for me is that it
sounds like it is forward funding, pulling it into the current
year to make your shortfalls up. Is that what is happening?
Mr. Weicher. The full credit subsidy allocation for last
year and the full appropriation for last year was used on
projects that were in the pipeline and approved in fiscal year
2000. We had an excess demand for credit subsidy at the end of
fiscal year 2000, and that excess demand was funded with money
that you appropriated for fiscal year 2001. Then at the end of
the calendar year, Congress appropriated this emergency
supplemental $40 million for fiscal year 2001.
Senator Allard. I would like to compliment, as a Member of
the Budget Committee, the Administration for trying to
straighten that out. I recall, Mr. Chairman, at a previous
hearing that we had, that we had $12 billion of unobligated
funds in HUD. That was a previous hearing that we had.
The Chairman and I served together on another Subcommittee,
probably one of the most expensive Subcommittees, because we
are dealing with missile programs and such. We could take your
unobligated funds and have a tough time spending them on that
particular Subcommittee where we have a lot of defense.
I want to compliment you on trying to establish some sanity
in this budget process. The forward funding issue is one of
those things that I think is deceptive, and it is quite
difficult for some of the Members to understand. I agree with
that. I also want to compliment you on not trying to abuse the
emergency funding process. Because when you have the emergency
funding process, the disadvantage of it from a policy
standpoint is that it gets considered part of the funding. The
disadvantage to the Administration there is it becomes part of
the base. So it kind of shortfalls you on the other side.
So I agree with you that if you make this part of the
regular funding process, I think it works much better for those
of us who are concerned about the policy issues. And also the
Administration is trying to hold some responsible funding and
spread the stream of funding for your programs, and that is
also important to you.
Is it the Department's view that the FHA Multifamily
Housing Mortgage Insurance Program should be self-financing in
the same manner as FHA's single-family programs?
Mr. Weicher. That is certainly what we are trying to do
with the 221(d)(4) program, which is our base multifamily
program. If we can do that--and we believe that an 80 basis
point premium does that--then we will no longer need to have
hearings where we try to deal with this kind of problem, and we
will no longer need supplementals for credit subsidy or
emergency appropriations or anything else along that line any
more than we now do with 203(b), which works effectively
without the need for anybody to appropriate anything.
Senator Allard. We have your single-family program that has
the surplus. In fact, that was part of our issue last year is
how you are going to spend that surplus. You had too much. I
notice here on multiple families, we have just the opposite. We
are not able to meet the needs of the program. So I do agree
there needs to be some adjustment there if you want to make it
self-sufficient. I think from a budget standpoint, it makes a
lot more sense. Please discuss FHA's intention to raise
insurance premiums, specifically how raising insurance premiums
could lower the amount of credit subsidy FHA needs to pay off
insurance claims.
Mr. Weicher. We have to pay an insurance claim from
basically two sources. It either has to be through the money we
have received in mortgage insurance premiums or it has to be
from money that Congress appropriates. And for many years, I
think back to 1970, it has been necessary to have
appropriations for the multifamily insurance programs. The
premium income has not covered the losses on claims.
And so from year to year, there has been this requirement
for an appropriation. If we raise the insurance premium, every
dollar that we raise the insurance premium reduces by a dollar
the amount of credit subsidy that needs to be appropriated. We
do not measure it in those terms. We talk about basis points
and the one in terms of the insurance premium rather than
dollar amounts. We talk about dollar amounts in credit
subsidies. But there is a very direct relationship.
And by raising the premium to 80 basis points, we will
bring in for every billion dollars worth of mortgages, we would
bring in an extra $3 million worth of revenue. Three million
dollars per year enables us to avoid the need for credit
subsidy and to avoid the need for appropriations. We believe
that we can pay the claims we will incur out of the premium
income. We will be able to cover our losses, and we will have a
program which is operating on a fiscally solvent basis.
Senator Allard. Mr. Chairman, I see my time has expired.
Are we going to have a second round after this?
Senator Reed. Yes. Thank you, Senator.
Senator Akaka, any questions.
Senator Akaka. Thank you very much, Mr. Chairman.
Mr. Weicher, I believe that the Administration sets the
credit subsidy based on the history of defaults and losses in
the program. In your review of the credit subsidy methodology,
you have found that the current process takes into account
changes in tax policy and other economic situations that can
affect default rates or changes in HUD's underwriting
procedures over the past decade that have lowered default
rates. Have you found that the current process does this? And
does it take into account tax policy and other economic
situations?
Mr. Weicher. The procedures that have been followed take
into account the historical experience of FHA over the life of
the program. The procedures that we are working on attempt to
identify the separate effects of changes in tax policy, of
which we have had several over the years, most recently in
1986.
We take into account specifically also changes in
underwriting procedures. And there was a major change in 1991.
And we take into account changes in economic circumstances,
whether the economy is strong or whether the economy is in
recession. And we try to identify the separate effects of each
of those so that we can go forward in estimating the experience
of the program, estimating the losses that we will incur, and
the prepayments will incur, which also affect our premium
income, and on that basis to identify how much if any credit
subsidy we will need.
It is not an easy process. You are trying to disentangle
three different important factors so that we can look forward
analytically to what happens under the underwriting standards
that we now have and expect to have and under the tax laws that
we now have and expect to have and under the economic
circumstances that we can expect to have. It is difficult and
time consuming, but we think at the end of it we will have more
information than we had before.
I might say that this is not the first time that the
analytical framework has been reviewed and modified. It
happened 4 years ago I believe, and of course it was originally
set up in 1992. And then from year to year, there are minor
adjustments so that the actual credit subsidy rate is modified
based on the additional experience we have even when we are not
doing a major reanalysis.
But it seemed to me that the industry representatives that
I spoke to on this raised serious concerns that I thought
should be investigated freshly. So we started doing that after
this Committee confirmed me and I was sworn in by the
Secretary.
Senator Akaka. Thank you so much for that response. I am
always concerned how far back concerning the history and
calculating this, and I am glad to see there are flexibilities
in here. I am concerned that credit subsidy rates may not be
accurate and that less money may need to be appropriated for
the FHA programs in the GI, SI funds. If this were the case, we
could find ourselves in a win-win situation. Congress could
appropriate less money. HUD could keep premiums at 50 basis
points, and the programs could continue to operate.
You testified that you are reviewing how the Administration
sets limits. What is your analysis of whether less credit
subsidy is actually needed for these programs?
Mr. Weicher. We have not yet completed the analysis,
Senator. Therefore, we really do not have a judgment at this
point as to whether the credit subsidy rate or the premiums
should be changed. At this point we are operating under the
best evidence we have so far. And the best evidence we have is
that the program will be able to cover its costs at the 80
basis point premium that the Administration has requested.
Where our analysis will come out at this point I do not
know. We are, as I said in response to the Chairman's earlier
question, we are in the middle of the process. I am satisfied
that we have a solid analytical framework for the work we are
doing. But we do not yet have results.
I have spent a professional career personally doing the
kind of work that we are doing here using the same sort of
analytical techniques, and I know that when you start on an
exercise like this, it takes time and effort, and you always
find in the process that you did not do something quite right
the first time, and you make a choice and do A instead of B,
and then you decide maybe I ought to see if D makes the
difference. And it is not an easy process.
But I am sure we are proceeding in an appropriate way. And
when we have results, we will be making recommendations to you.
And I would be delighted to be able to operate this program on
a demand basis at an appropriate mortgage insurance premium.
Senator Akaka. Do you have an idea of when the time might
be when you would be able to do that?
Mr. Weicher. I believe I said to the Chairman that we
expect to complete this analysis by the end of the fiscal year.
That is certainly our target.
Senator Akaka. Thank you, Mr. Chairman. My time is up.
Senator Reed. Thank you, Senator Akaka.
Senator Corzine, would like to make an opening statement?
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Mr. Chairman, I appreciate you holding
this hearing. I have a statement that we can put in the record.
I also understand that increasing the loan limits, which is
something Senator Carper and I have proposed, is generally
noncontroversial. There are a number of those on the
Subcommittee and in the Administration who support it. I would
like to make sure that I hear that in reality. Certainly I
believe it will make a difference in the interest of private
construction to enter this arena.
On the other issues, though, I have the same kinds of
concerns that I am sure other people are voicing. There is a
huge need for affordable housing. Broadly speaking, there is
almost a 9 year wait for multifamily FHA-sponsored housing. In
Newark, we have an incredibly high cost rental housing market,
across New Jersey, whether the middle-class or lower-income
families. And I think the lack of utilization of this $40
million is hard for me to understand, given its relatively
small position in the overall budget process with such an
incredible need. I know this is not unique with New Jersey. It
is true across the country. My question is more of a statement.
Why are we not moving forward on something that seems so
obvious and there seems to be general agreement?
Mr. Weicher. Senator Corzine, the Administration proposed
to include $40 million in credit subsidy in the supplemental
appropriation which the President sent up, and each House
approved it separately and the Conference Committee dropped it.
It was our view that the $40 million would be appropriately
spent within the normal budgetary process with a full offset
within the spending caps. And until last week, we expected that
we would be reopening this program with the $40 million in
credit subsidy next week.
Senator Corzine. Is there emergency authority that would
allow you to sidestep the fact that it is not in the Conference
Report?
Mr. Weicher. The Administration has taken the view since
the beginning that this program would be funded through the
normal budget process and not on an emergency basis. The
Administration has wanted to operate within the budget
framework and not start spending outside the budget process.
Funds that we spent should be accounted and be offset through
the normal, regular budgetary procedures. We were prepared and
still are prepared to implement the program, to reopen the
program on that basis.
The Administration is not prepared to declare an emergency.
The Administration is quite surprised that Congress is
unwilling to approve the $40 million when, as far as we could
see, there was no controversy whatsoever about the $40 million
as it went through the supplemental appropriations process.
Senator Corzine. And I suppose if there were an amendment
when the VA/HUD appropriation process comes onto the floor that
we would be able to count on the Administration's support?
Mr. Weicher. If you are proposing a $40 million credit
subsidy for this fiscal year through the fiscal year 2002
appropriation, I am not sure when that is likely to become law.
But typically it becomes law very close to the end of the
fiscal year if not after the end of the fiscal year, and then
we are into fiscal year 2002. And we will have projects in the
pipeline which will then be covered under the fiscal year 2002
rules, presumably under the 80 basis point premium that the
Administration has announced.
I am not sure how a $40 million appropriation is part of
the fiscal year 2002 appropriation. Forty million dollars
supplemental for 2001 would in fact benefit the projects which
are now here.
Senator Corzine. Thank you.
Senator Reed. Thank you.
Senator Carper, do you want to make an opening statement?
Then do you want to recognize all the witnesses in the next
panel?
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. I would like to recognize them all. Kevin
Kelly is here from Delaware, President of Leon Weiner &
Associates. Kevin has been in the housing business forever, as
long as many of us have been alive.
[Laughter.]
Senator Carper. And people in the audience who laughed know
him well. I am one of the people. Kevin Kelly is going to be on
the second panel, and I have to start presiding at three
o'clock, so I probably will not be here to hear all that he is
going to say. But we are delighted that you are here.
A question for Mr. Weicher. I just want to say to Senator
Corzine, I appreciate the opportunity to work with him in what
appears to be maybe the only noncontroversial thing John and I
have done this year with lifting the limits on multifamily
housing.
I just want to understand, Mr. Weicher, if I could, I just
got in here in January. I understand there was some work done
last year to try to provide the $40 million. It got caught up
in the supplemental appropriation. Your Administration had the
ability to free that money up by declaring an emergency, but
chose not to. Then it was put in an appropriations bill, but
then dropped out in conference. I know you have probably been
trying to explain what is going on here.
Mr. Weicher. We do not quite know exactly what is going on.
We were surprised as anyone to hear at the end of last week
that the Conference Committee had dropped the $40 million from
the supplemental, which, as far as we could see, was equally as
noncontroversial as raising the mortgage limits by 25 percent.
We thought we had a solution which provided the resources to
continue operating the program for the remainder of the fiscal
year that provided them within the normal budgetary process,
provided them with the full offset, proper scoring, and we
could go ahead with the program. And we had been expecting it
until the end of last week.
We had been expecting that on August 1 we would reopen the
program. We have projects in the pipeline, projects in the
queue and projects with approval, subject to the availability
of funds to receive credit subsidy and we expected that we
would be back in business. And it appears now that while we
have some small amounts of money that have not yet been
appropriated because they have not yet been allocated to us
when we reopen the program, we will not be able to fund all of
the projects that have already been approved.
We really do regret that the appropriations Conference
Committee found other uses for the funds. We thought that $40
million would solve the problem that had bothered us since very
early in the Administration.
Senator Carper. Is there any way to fix it at this late
date, or is it a done deal?
Mr. Weicher. I do not know how you would deal with that
other than through an amendment to the supplemental
appropriation. I doubt if it would provide funds in time to be
available during the current fiscal year, as I understand you
all will be working on the conference on the HUD/VA
appropriation bill during the recess, and that seems to be the
normal schedule. But it seems unlikely to me that you would
then have the legislation passed and have the President sign it
in time to make much of a difference in the present fiscal
year.
Senator Carper. Why not just declare an emergency?
Mr. Weicher. Because the Administration does not believe
that you should be operating outside of the normal budget
process. We believe this program should be funded as other
programs are funded, as part of the normal budget, normal
appropriations process, and we are more than ready to proceed
on that basis.
The Administration has indicated from the beginning that it
was not willing to declare an emergency simply to avoid the
budget rules. That remains the Administration's position.
Senator Carper. Could I ask one more question? I understand
there are a number of projects in the pipeline waiting for
additional credit subsidy. In order to move forward, any idea
what might be the impact of a change in premiums on those
projects?
Mr. Weicher. I do not think we have tried to calculate that
for individual projects or for projects that are now in the
pipeline. Some will be approved, because there is the money
that was not yet allocated when we suspended the program in
April. For those projects, it does not matter.
We do know that we are talking about an increase of about 2
percent in rents from the calculations that we had done earlier
when we made our proposal back in May I believe, May or June,
so we know that this could make a little bit of a difference in
the rent levels on the moderate-income and middle-income
projects, assuming a project owner chooses to increase rents.
And in return for that, we will have a program which will
be operating on a demand basis like the 203(b) home mortgage
program, and we will no longer need credit subsidy, and we will
be able to insure any project that meets our underwriting
guidelines without worrying about competing with other projects
that are in the pipeline and without having to worry about
whether we have $40 million or $8 million or $101 million in
credit subsidies that we have appropriated at the beginning of
the fiscal year, and we think at that point our job and your
job will be much easier.
Senator Carper. Thank you.
Mr. Chairman, thank you.
Senator Reed. Thank you.
Mr. Secretary, we have covered the machinations of the
budget process, which has resulted in bringing us to this
place. But what concerns me more is the policies adopted by
HUD.
Essentially what you have decided to do by raising the
insurance premiums and not aggressively seeking subsidies is to
reduce the subsidies going into the multifamily units,
increasing rents to renters, impeding the production of units
when these projects become more expensive to developers, at a
time when we face a crisis in housing across this country;
housing for people who are working just to get affordable
rents, that is independent of whether or not you declare an
emergency or whether or not it is in the supplemental
conference. You have decided now going forward that you are
going to raise the price of this to the developers and to
renters of this housing at a time when we need to do more to
make housing more affordable. Now I think that is the effect.
Do you disagree?
Mr. Weicher. I think we are doing several things here,
Senator we are making it possible for the industry to produce
multifamily housing on its own production schedule without
having to worry about getting it into this fiscal year or next
fiscal year, getting it in under the $86 million 221(d)(4)
credit subsidy that it appropriated last fall. That is going to
make life easier for developers, and that is going to, to some
extent, as it makes it easier, will make it less expensive for
them to produce housing. We do not have to worry about the
budgeting and appropriations procedures that you all go through
and we go through in the process of operating this program. I
think that is a major step forward, and it is highly desirable
to be able to do that.
Senator Reed. Do you have any estimates of how much money
you are going to save the developers, translated into reduced
rents?
Mr. Weicher. No I do not, Senator. But I am reasonably sure
that if you make the job easier for them it will get translated
into reduced rents.
Senator Reed. There is another view. You can make it less
expensive for them by subsidizing what they do. They also like
that too.
Mr. Weicher. Certainly. And if Congress were to continue to
provide subsidies on the scale on which it has provided
subsidies in the past, we would operate the program on that
basis.
Senator Reed. It seems to me, Mr. Secretary, you have
rejected that approach by saying you do not want to take
subsidies. You want to increase the mortgage premiums and
create, as you say, a demand basis for this housing program. If
you are not asking for the money, it makes it difficult for
Congress to give the money.
Mr. Weicher. We believe, Senator, that the proposal that we
have made, the Administration made for an 80 basis point
premium and a demand program is the appropriate way to operate
this program. The Section 221(d)(4) program is not a program
under which rents are subsidized. We are not dealing with low-
income renters here. We are dealing with moderate- and middle-
income renters, people who are not dependent on Federal
assistance to live in decent housing. It is certainly desirable
to have a larger stock of affordable multifamily housing. We
believe that the approach that we are taking here contributes
to that.
Senator Allard. Mr. Chairman, would you yield just briefly?
It seems to me, Mr. Chairman, that if we have a program that is
self-sufficient, that means those dollars are going to be
available throughout the year. And that to me means more
affordable housing, not less. And when you have this subsidy
coming in at the whim of Congress or you have to break budget
rules to do that, then I do not think that provides a reliable
source of revenue.
If you have a reliable source of revenue coming in through
the years to get these projects going, it provides more money
for the program so that you have more opportunity for
affordable housing. So to me it seems like they are on the
right track when you provide some self-sufficiency.
That is what is happening in the single-family when we have
a program here, single families, we have premiums that we are
providing for that. So that is a consistent program that gets
funded throughout the year. That way, it goes to the surplus.
So it seems to me like this, if you really want more
affordable housing in the multifamily area, I think this is the
right way to go, and I will yield back. And you can have some
of my time, Mr. Chairman.
Senator Reed. Just one additional question. It goes to the
legal basis for the determination of the Secretary by notice,
and not by notice and comment rulemaking, of this change. I
have had some conversations with the Appropriations Committee
staff who indicate that this may not be appropriate.
Let me ask, Mr. Secretary, did the General Counsel at HUD
render an opinion as to the legal sufficiency of this notice
rather than a rulemaking process?
Mr. Weicher. Senator, we issued an interim rule
implementing the Secretary's statutory authority to vary the
premium between 25 basis points and 100 basis points. Certainly
that interim rule would not have come out of the Department
without the concurrences of the General Counsel. It does not
come out without the General Counsel's belief that this is an
appropriate and legal procedure for the Department to follow.
Having done that, that rule allows the Secretary by notice
to vary the premium within that range of 25 basis points to 100
basis points, and the notice that we have issued, on July 2, is
in conformity with the interim rule, and we are proceeding on
the basis that we understand--and I am not a lawyer--but we
understand to be perfectly consistent under the statute. And we
know of no problem there.
Senator Reed. Could you provide us whatever documentation
the Counsel provided, Mr. Secretary?
Mr. Weicher. I do not know what documentation it will be,
but I will ask the General Counsel or the Secretary for
information.
Senator Reed. Thank you.
Senator Allard.
Senator Allard. Mr. Chairman, I want to kind of just for
the record ask you this question. We have had multifamily
housing developers argue that increasing premiums will have an
adverse impact on them and could decrease the number of
affordable units being built. So I was just curious.
I know that you have a study that is going to give you a
more firm answer, but when you decide to increase the basis
points by 30, what sort of figures were you looking at that
determined that you needed to increase the basis points by 30?
I know it is just kind of you are waiting for that study to
come in and more specifically identify what the amount really
needs to be, but you sort of gave a guesstimate. I wonder if
you could share with this Subcommittee how you arrive at that
guesstimate?
Mr. Weicher. It is an estimate, Senator Allard, but it is
not a guesstimate. There is a model now in place on which the
credit subsidy is based. And as I was responding to Senator
Akaka earlier, we look at the information that we have from our
past experience in the multifamily programs, what our premium
income is, what our prepayments are, what our claims are or our
losses per claim, and on that basis, we calculate whether the
projects that we are insuring are in fact going to cover, the
losses on those projects are going to be covered by the
insurance premium income that we get or whether we are going to
run a deficit or need a subsidy.
The calculation that comes from that analytical framework
that we now have in place and was last systematically reviewed
in 1996, the analysis that we now have in place indicates that
the break-even premium is 80 basis points. It is an estimate.
It necessarily is an estimate, and from year to year it is
always going to be off in one direction or another to some
minor extent, but the best estimate that we have at this point
until our work is completed is that the break-even premium is
80 basis points. And it was on that basis that the Secretary
went forward with the notice under the rule.
Senator Allard. Thank you. In single-family loan limits,
they are indexed to changes in the conforming limits for Fannie
Mae, would it be possible to index the multifamily loan limits
in such a way? Could you share with me some pros and cons on
that issue?
Mr. Weicher. It would be possible, Senator Allard. Our
basis is that since we were proposing a 25 percent increase in
the multifamily loan limits in order to take account of the
effects of inflation over the last 8 years, we would like to
get that in place before we start entertaining new changes in
the procedure.
The advantage is that we would be able to continue serving
essentially the same client population from year to year as we
saw a little more inflation, although 25 percent over 8 years
is not a large amount of inflation per year.
The disadvantage would be that it is different from single-
family in that you really have to decide whether are you
looking at construction costs, whether you are trying to look
at rent levels for your index, whether you are trying to look
at income levels for your index. It is harder in this context
than it is in a single-family case where you index to a market
price for units of which several million sell every year. If
you start to index to construction costs on this basis, there
is necessarily a little bit more uncertainty. And I think we
would want to do a fairly thorough analysis of the alternatives
before we put into place an annual indexing formula.
Senator Allard. On the premium rates, the third point that
you were suggesting up to the 80, you were suggesting that
these would probably take effect at the end of this fiscal
year.
Mr. Weicher. Under the notice that we issued, they would
take effect on August 1. However, that was in the expectation
that we would have the $40 million supplemental. At this point,
it will go into effect for any practical purpose on October 1.
Senator Allard. I was wondering if there is going to be a
lag time from when you incur the liability and when you collect
the premium. I was not sure how that would work out in the next
fiscal year. So you are thinking that if this gets applied here
on August 1 and you begin to build up that reservoir, so by the
time you get into the next fiscal year you have enough in your
premium reservoir there that you will not be coming into the
2002 year to pay your premiums. That premium increase will take
care of that cost. Is that correct?
Mr. Weicher. In the remainder of this fiscal year, we
expect to receive zero premium income under the 80 basis
points, because we will not be insuring any loans at the 80
basis points. The program in that sense will start new with an
80 basis point premium starting with projects that are approved
on and insured on October 1.
We will have no credit subsidy in the 221(d)(4) on October
1, and we will simply be operating a demand program that will
be bringing in 80 basis point premiums month by month, year by
year, and then we will be paying claims just as we do under
203(b).
The timing of it will I think not really be a problem. We
will be collecting premium income before we start to see any
claims. There are few claims in the first year of one of these
programs. And then there will be a very few. But we will
bringing in premium income before we incur any claims.
Senator Allard. Mr. Chairman, I just want to make a few
more comments.
Senator Reed. Please go ahead.
Senator Allard. Just as a final note as we draw this panel
to a close, I just want to make clear that I am very supportive
of raising the loan limits. As I noted earlier, Denver has had
the highest increase in construction costs in the Nation of 43
percent from 1992 to today. I think it is important that we
raise those loan limits.
I think it is also important to note that if this program
is made self-sufficient and if it is run like a business, we
will be able to support for more development of affordable
housing. It is difficult to see how FHA can compete effectively
with the starts and stops of the current environment.
So we should do two things here, I believe: Raise the loan
limits and make the program self-sufficient as we go forward.
The FHA single-family program is self-sufficient. It works very
well. And it is a good pattern for us to follow. Thank you, Mr.
Chairman.
Senator Reed. Thank you, Senator Allard.
Thank you, Mr. Weicher, for your thoughtful, careful
testimony. Thank you very much.
Mr. Weicher. Thank you, Senator.
Senator Reed. I would like to call the next panel. If they
would come forward, please.
[Pause.]
Let me welcome the panel and introduce our witnesses.
First, Mr. Michael Petrie. Mr. Petrie is appearing on behalf of
the Mortgage Bankers Association of America. He is President of
P/R Mortgage and Investment Corporation, Indianapolis, Indiana,
and a current Chairman of the Commercial Real Estate/
Multifamily Housing Board of Governors. We want to welcome you,
Mr. Petrie.
Next, Mr. Kevin Kelly, who has previously been introduced
by my colleague, Senator Carper. Kevin is President of Leon
Weiner & Associates, Wilmington, Delaware, a home building,
development, and property management firm. Mr. Kelly is
testifying today on behalf of the National Association of Home
Builders and is currently serving on the NAHB Executive
Committee.
Next to Mr. Kelly is Mr. Patton H. Roark, Jr., appearing on
behalf of the AFL-CIO Housing Investment Trust. He is currently
Executive Vice President and Investments and Portfolio Manager
of the Trust. The AFL-CIO Housing Trust has invested over $3
million in units of single and multifamily housing nationwide.
And finally, we are joined by Mr. Carl A.S. Coan. Mr. Coan
is a senior partner in the firm of Coan & Lyon, and he is
testifying on behalf of the National Housing Conference. He is
the National Housing Conference Director and Executive
Committee member.
Before you begin, gentlemen, I would like to thank you all
for your written statements and indicate they will be made part
of the record and ask you if you would observe our 5 minute
time limit for oral testimony. I thank you again for joining
us. And Mr. Petrie, you may begin.
STATEMENT OF MICHAEL F. PETRIE, PRESIDENT
P/R MORTGAGE AND INVESTMENT CORPORATION
ON BEHALF OF
MORTGAGE BANKERS ASSOCIATION OF AMERICA
Mr. Petrie. Thank you, Mr. Chairman, Members of the
Subcommittee. The reason for our testimony here today is to
address the constraints in the FHA multifamily programs and to
find solutions to improve and strengthen the FHA programs to
provide affordable rental units.
We have always seen the FHA programs as a public/private
partnership and look forward to working with the Congress and
Mr. Weicher as he takes over the FHA programs to strengthen
this partnership.
First I would like to commend Senators Corzine and Carper
for introducing Senate bill 1163. This bill would increase the
maximum mortgage limits for FHA multifamily programs. These
limits have not been increased since 1992, and construction
costs alone have risen since then, on average, of 25 percent.
The fact that the maximum mortgage limits have not been
increased in almost 10 years has virtually shut down the FHA
multifamily insurance programs in many high-cost urban markets.
As important as this issue is, however, approving higher
loan limits alone will accomplish little without addressing the
issue of credit subsidy. Without credit subsidy, or more
importantly, without an accurate accounting that demonstrates
that credit subsidy is not needed, there will be virtually no
new construction with FHA insurance, and the increase in loan
limits will be a hollow victory.
As we have stated in our written testimony, the Federal
Credit Reform Act changed the budgetary treatment of credit
programs to require an analysis before loans are insured of the
long-term cost of the programs.
We believe that HUD and OMB since the beginning of credit
reform in 1992 have overestimated the cost to the Government of
the FHA multifamily insurance programs. This overestimation has
distorted the HUD budget by requiring appropriations that were
not needed and by underreporting income from profitable
programs.
Since the arrival of Secretary Martinez and Mr. Weicher,
both HUD and OMB have been very generous in sharing information
about the calculation of the credit subsidy rates. It appears
from our analysis of the data they have provided that there are
2 key drivers to the credit subsidy rate. The first is the
cumulative claims rate which, put simply, is the percentage of
loans originated each year that are expected to default and
result in a claim. The second is the point at which these
claims are expected to occur. For the cumulative claims rate,
HUD and OMB are currently using a 28 percent default rate. This
is based on the entire experience of the programs since 1956.
The highest claims rates are for loans originated in years
affected by major tax changes, the early 1970's and the early
1980's. By removing those years from the calculation or by
reducing their weight in the calculation, the credit subsidy
rate would drop dramatically. Another way to approach the
cumulative claims rate would be to focus more on the recent
experience of the programs.
In 1991, FHA implemented significant underwriting changes.
Since then, the claims experience has been excellent, actually
less than 4 percent. We believe that HUD's assumptions for
credit subsidy should eliminate the experience of those unusual
periods and should be more heavily weighted to recent
experience which reflects how FHA is underwriting loans today.
As I mentioned, the other key factor in the credit subsidy
calculation is the point at which these loans will result in a
claim which has been heavily front-loaded. This approach has an
adverse impact on the credit subsidy rate.
Because of the very favorable claims experience on loans
originated since 1992, the reestimated credit subsidy rates
have dropped dramatically from the original rates. Congress has
appropriated over $1.4 billion since 1992 for credit subsidy.
More importantly, none of these funds have been expended. And
based on the budget, HUD and OMB do not expect a large portion
of these funds ever to be needed.
Based on our experience and review of the data, we believe
that these programs make money at the current 50 basis point
MIP, and do not require a credit subsidy appropriation. A
correctly calculated credit subsidy rate would be negative and
therefore MBA thinks the 30 basis point increase in the
mortgage insurance premium being implemented by HUD is
unnecessary.
We have asked HUD to delay the implementation of the
premium increase until a full review of the credit subsidy
formula can be completed and an accurate rate determined.
Our concern today, Mr. Chairman, is accuracy, it is also
timing. We need accurate credit subsidy rates calculated by
September 1. And we need Congress to include those rates in the
fiscal year 2002 HUD/VA appropriations bill now being
considered in the House of Representatives and the Senate.
We look forward to working with you, Mr. Chairman, and your
Subcommittee and other Members of Congress, HUD, and OMB to
reexamine the calculation process and the data used to
determine the subsidy rate. Thank you for the opportunity to
testify today.
Senator Reed. Thank you.
Mr. Kelly.
STATEMENT OF KEVIN KELLY
PRESIDENT, LEON N. WEINER & ASSOCIATES
ON BEHALF OF
THE NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Kelly. Thank you, Chairman Reed, Members of the Housing
Subcommittee. As indicated earlier, I am speaking on behalf of
the 203,000 member firms of the National Association of Home
Builders. NAHB wishes to express its appreciation to the
Members of the Subcommittee for holding this hearing on the FHA
mortgage insurance programs.
At your request, I will confine my comments to a proposal
to increase the FHA mortgage insurance loan limits, HUD's
proposed interim rules to increase mortgage insurance premiums,
and the need for credit subsidy and appropriation.
Earlier this year, HUD Secretary Mel Martinez announced the
Administration's support for increasing the FHA multifamily
loan limits. NAHB applauds the Administration for this
initiative, and thanks Members of this Subcommittee,
particularly Senator Corzine and my own Senator Carper, for
introducing S. 1163, legislation to increase the loan limits by
25 percent.
The FHA multifamily loan limits have not been increased
since 1992. NAHB's economics department studies show that
construction, land, and other costs in 10 metropolitan areas
around the country have increased about 25 percent over the
past 8 years.
Because of the current dollar limits on these loans, FHA
mortgage insurance cannot be used to help finance construction
in a number of high cost areas. NAHB, as part of the Affordable
Rental Housing Coalition, supports S. 1163 as one means of
addressing the shortage of affordable rental housing.
Congressional appropriations of adequate levels of credit
subsidy as a necessary part of the functioning of the FHA
multifamily insurance programs. This appropriation is required
by the Federal Credit Reform Act which applies to all Federal
direct loan and guarantee programs.
OMB determines the subsidy rates based in part on an
evaluation of the historic performance of these programs in
recognition of potential costs to the Federal government.
Higher loan activities in these programs could have
budgetary impacts. Due to the exhaustion of credit subsidy, the
FHA multifamily programs have been shut down since April. An
estimated $250 million in credit subsidy is needed to operate
these programs for fiscal year 2001, while only $101 million
was appropriated for this period.
The Administration requests that only $15 million in credit
subsidy appropriations for fiscal year 2002. This undermines
the ability of the programs to provide affordable rental
housing.
The question of how much subsidy is actually required is a
fundamental issue. NAHB questions the assumptions used by OMB
to determine the credit subsidy requirements.
Utilizing the Section 221(d)(4) program, as an example, OMB
over-emphasizes performance of loans from the early 1980's
which were insured under weaker underwriting standards than
today.
Section 221(d)(4) insured mortgages after 1991 have a
cumulative default rate of 5.5 percent, while OMB's model
employs a cumulative default rate of 28 percent. Other
assumptions used by OMB are also excessively pessimistic.
NAHB believes that these programs are performing well,
experience cumulative default rates that are significantly
below the levels OMB uses. If OMB revised its models and
assumptions in the Section 221(d)(4) program would have a
negative credit subsidy rate and would not require credit
subsidy appropriations or an increase in insurance premiums.
NAHB seeks immediate review and revision of the OMB credit
subsidy model and we urge Congress to make the results
effective for fiscal year 2002.
The Administration has pursued another route to address the
need for an appropriation of credit subsidy. Recently, HUD
exercised its statutory authority to set mortgage insurance
premiums for multifamily programs by publishing an interim rule
increasing the premiums for multifamily programs from 50 to 80
basis points.
NAHB believes that this increase will significantly impair
the capacity of multifamily mortgage insurance programs to
deliver affordable rental housing.
Analysis by industry experts shows that the premium
increase would result in rental increases of 3 to 4 percent,
which would undermine the capacity of the program to serve
moderate- and lower-income families. In some cases, builders
would forego projects.
It should also be noted that these projections reflect the
current low level of interest rates. Should interest rates
fluctuate upward, the impact on affordability would even be
more onerous. NAHB believes that the Administration has acted
precipitously by issuing this rule at this time. It has put the
cart before the horse. We have seen no studies documenting the
need for a 30 basis point increase in the premium structure.
In fact, many acknowledge that perhaps OMB should review
its assumptions in calculating the credit subsidy. Furthermore,
the rule is scheduled to take effect on August 1, prior to the
receipt of any public comment.
We do not believe the premium increase should take effect
prior to the study of the credit subsidy or input from the
lending and housing industry.
We hope that the Congress will appropriate the sufficient
credit subsidy to keep the programs running while working with
the Administration to resolves these complex issues. This
concludes my remarks, Mr. Chairman.
Senator Reed. Thank you, Mr. Kelly.
Mr. Roark.
STATEMENT OF PATTON H. ROARK, JR.
EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER
AFL-CIO HOUSING INVESTMENT TRUST
Mr. Roark. Good afternoon, Mr. Chairman, Members of the
Subcommittee. On behalf of the AFL-CIO Housing Investment
Trust, let me first thank you for the opportunity to testify
and applaud you for holding today's hearings on major issues
related to FHA's multifamily program.
I would like to submit for the record my full written
testimony but will recognize that the time allotted to me for
my remarks that will highlight my testimony.
There is a national housing crisis, and crisis within the
production community. My testimony will focus on HUD's recently
proposed 60 percent hike in the FHA 221(d)(4) mortgage
insurance program and its impact on the loan program.
I will also comment on the accuracy of the credit subsidy
rates and the need to increase the statutory loan limits. The
AFL-CIO Housing Investment Trust recommends that Congress take
a number of steps to ensure greater multifamily housing
production and a stronger FHA.
We recommend that HUD and OMB inform Congress and the
public of the real impact of the increase in the cost on
housing insurance on housing costs and rent inflation before
implementing any increase.
Second, require full and open discussion of the model and
the assumptions used in deriving the credit subsidy rates for
FHA's mortgage insurance programs.
And finally, increase statutory loan limits by at least 25
percent provided for in the legislation and introduced by
Senators Corzine and Carper.
In addition, loan limits to be indexed to ensure program
effectiveness on an ongoing basis and additional flexibility
should be provided and loan limits for high cost areas.
The number of all rental units in the United States
increased by just 2.3 percent during the 1990's. During the
same period, the number of households increased by 14.7
percent. The result is a predictable imbalance between housing
supply and demand. In major markets across the country,
increases in rents have far outstripped inflation and income
growth. Rising rents are pricing working families right out of
the rental housing market. We are simply not producing enough
rental housing.
Through the 221(d)(4) program that provides mortgage
insurance for both construction and permanent loans, which
allows institutional investors like the AFL-CIO Housing
Investment Trust to buy securities backed by these loans. This
credit enhancement provides lower cost of capital borne by
projects and results in the production of housing units and
rent affordability. The impact of the increased mortgage
insurance premium will cause negative production and will cause
rent inflation.
According to the 2002 budget, HUD forecasts that $3 billion
in FHA-insured 221(d)(4) mortgage commitments will be issued in
fiscal year 2002. The proposed 30 basis point hike in the
mortgage insurance premium would effectively be a tax of
approximately $105 million on new multifamily projects. For
these development projects to remain viable, the $105 million
must be absorbed by tenants through rent increases further
escalating the affordability crisis facing working families.
I have received the FHA multifamily budget model. Based on
my review and the consultation with senior economists at MBA, I
can only say that the model assumptions do not reflect the
default experience of the last decade, and that independent
review is needed on all assumptions to determine validity.
The model, as mentioned, is very sensitive in three key
assumptions; the seasoning curve, cumulative default rates, and
recovery rates upon property disposition. Each assumption used
in the calculation appears to be biased toward the actual
default experience of 1970 through 1989, and not over the last
10 years.
From 1974 to 1990, FHA operated under a coinsured lending
and underwriting program. During this time, FHA delegated loan
underwriting, third party reporting, and commitment authority
to lenders. The program lacked significant internal controls to
prevent waste, abuse, and resulted in significant losses to FHA
and taxpayers.
In addition to the program's flaws, the Tax Reform Act of
1986 changed the commercial real estate landscape. In 1990,
however, the Coinsurance Underwriting Program was officially
terminated and was replaced with full insurance.
Since then, to the credit of FHA, significant steps have
been taken to restore the integrity of the program. Today,
lenders are monitored, very stringent underwriting processes
and standards are followed, and only FHA has the authority to
commit to mortgage insurance.
Mr. Chairman, this is a key point. The default experience
for production after 1990 has declined dramatically. However,
the model assumes a default rate of 28 percent. If a fair,
independent third party evaluates the current and future
default risk of the multifamily portfolio, using the data from
the last 10 years, we suspect that the 60 percent increase in
the mortgage insurance premium would not be necessary.
What we are asking today is to lift the shroud of secrecy
that determines the supposed cost to the Treasury of the
program and require FHA and OMB to work with the industry to
develop a fiscally responsible subsidy model and mortgage
insurance rates.
Mr. Chairman, I would like to submit a letter from
President John Sweeny of the AFL-CIO on behalf of the 40
million Americans who live in labor households. President John
Sweeney and many State and local labor leaders hear every day
about the impact that the housing crisis is having on working
men and women and their families across the Nation.
He joins us in urging FHA to resume its historic leadership
position supporting the production of multifamily housing. Mr.
Chairman, I would be pleased to answer any questions or to
brief the Subcommittee at any time.
Senator Reed. Thank you, Mr. Roark.
Mr. Coan.
STATEMENT OF CARL A.S. COAN, JR.
EXECUTIVE COMMITTEE MEMBER
NATIONAL HOUSING CONFERENCE
Mr. Coan. Thank you, Mr. Chairman. I am Carl Coan. I appear
here on behalf of the National Housing Conference of which I am
a director and member of the Executive Committee. We appreciate
this opportunity.
NHC was founded in 1931, 3 years before the National
Housing Act became law. During all these years, NHC has
supported FHA and its various programs to help Americans become
better housed. These programs have been essential in helping to
achieve the significant progress that has taken place over the
past 70 years, yet much still needs to be done.
Our research affiliate, the Center for Housing Policy, last
month released a study entitled ``Paycheck to Paycheck: Working
Families and the Cost of Housing in America.'' We have brought
multiple copies up here and have them outside, and we have
given the Staff copies as well. This study followed up on the
Center's report last year entitled ``Housing America's Working
Families.'' Both studies found that over 13 million families in
1997 and again in 1999 had critical housing needs. For example,
they either spend more than 50 percent of their income on
housing, or they live in a seriously substandard unit. Many of
these families were on welfare or had only a marginal
attachment to the labor force. In 1997, 22 percent, about 3
million households, were working families earning between
$10,700 a year--the equivalent of a full time job at minimum
wage--and 120 percent of the area median income, a figure well
in excess of $50,000 in some of our more expensive urban areas.
In 1999, this percentage increased to 28 percent and the number
of households that are fully working households increased to
over 3.7 million. These are the families for which the FHA
unsubsidized multifamily programs were designed to serve.
Starting with the original 207 program as it was revised in
1938, then through the 608 program enacted during the Second
World War, next through the 221(d)(4) program enacted in 1961
and various permutations since then, the FHA multifamily
programs have always been aimed principally at providing
housing for families of modest income. And because that goal
was achieved so successfully in many cases, these programs have
frequently been called upon to provide housing for low-income
families.
During this over 60 year period, the mortgage insurance
premium charged on multifamily mortgages has for the most part
been \1/2\ of 1 percent. Incidentally, I started in FHA in
1958, it was half a percent then, and I guess it will be until
August 1. This premium has generally been adequate to cover the
losses incurred by the mortgage insurance funds established in
support of these programs. In the early years of FHA, each
program, such as the 207, the 220, or the 221 program had its
own mortgage insurance fund. This became cumbersome. Congress
in 1965 combined into one fund, the General Insurance Fund, all
of the FHA programs except for the basic 203(b) single-family
and the cooperative programs.
There also was established in 1968, a Special Risk
Insurance Fund in recognition of the fact that some of the
programs being carried out under the aegis of FHA were designed
to take a greater risk in order to accomplish such goals as
housing low-income families or making housing available in
older, declining urban areas. While the same mortgage insurance
premium was collected with respect to these undertakings, it
was recognized up front that the premium would not be
sufficient to cover anticipated losses and that Congress would
need to appropriate funds on occasion to make up for shortfalls
in the Special Risk Fund.
While the Special Risk Fund still exists, for budgetary
purposes, it has been lumped in with the General Insurance Fund
and there is little, if any, distinction between the two. While
erasing that distinction--as was the distinction between the
various separate funds erased with the establishment of the
General Insurance Fund in 1965--may make it easier for the
accountants to keep their books, it should not be used as one
of the bases for increasing the mortgage insurance premium. It
might be reasonable to consider shifting some of the riskier
insurance programs now covered by the General Insurance Fund
into a revitalized Special Risk Fund.
The FHA multifamily programs carry out an important
societal responsibility of our Government. They have done that
successfully over the past 60 some years. The efforts to meet
that responsibility should not be lessened now through a 60
percent increase in the mortgage insurance premium. This
increase will not stop the FHA multifamily housing programs,
but it will certainly limit the programs' ability to serve
those with modest income.
The proposed increase in the mortgage insurance premium is
like a new tax being added on to the rent of the many thousands
of tenants who need the modest cost, decent housing these
programs are designed to provide. Incidentally, we, the AFL-CIO
Housing Investment Trust and I, did not talk about this until
just a few minutes ago. There is no question that this increase
will be passed through to the tenants of the housing, or the
housing will not be built. In either case, the new tax will
decrease the ability of the FHA multifamily programs to serve
as broad a range of the population as possible.
I would like to digress from my statement for a moment and
cite back to 1983-1984, when it was decided to increase the
premium on the 203(b), the single-family program, the Mutual
Mortgage Insurance Program. That was done for budgetary
reasons, just as I think some of what is occurring now is being
done for budgetary reasons. It was a big hit, resulting in
reducing the so-called anticipated budget deficit. But it also
contributed to a huge increase in the fund, so that now we have
the large amount of surplus funds that Senator Allard mentioned
and others have mentioned and some Members of Congress have
focused on as the basis for using this as a subsidy program.
But we made a mistake then because we increased the cost of
housing and we also decreased some of the sound aspects of
homeownership in order to make up for that difference in
increased costs.
Of all the arcana perpetrated by our Government on its
people, probably nothing is quite as arcane as the so-called
credit subsidy calculations carried out with respect to the FHA
multifamily insurance programs. As I understand it, they, HUD
and OMB, posit the incurrence of costs far in the future based
on the unlikely replication of the circumstances and
occurrences of the past. These calculations seem more designed
to frustrate the ability to meet our Nation's housing needs
rather than designed to facilitate meeting these needs. Whether
the calculations made under the premises established by OMB are
accurate, neither I nor probably anyone else outside of OMB can
really understand. What we can understand, however, is that a
result of the credit subsidy concept, we have had several
stoppages over the last 8 years in the production of
multifamily housing for those whose housing needs cannot be met
without the support of the FHA mortgage insurance.
This is inexcusable, and even more inexcusable is the
refusal of OMB to allow HUD to use the $40 million made
available last year in an emergency supplemental. We have an
emergency of not being able to meet the continued need for
decent housing, which cannot otherwise be served.
One of the problems which has bedeviled the FHA multifamily
housing programs in the last few years has been the inability
to increase the multifamily mortgage limits. That the
Administration has recognized and has waged a 25 percent
increase in those limits NHC strongly supports that. We suggest
that Congress move that legislation, and at the same time, it
might be appropriate to direct HUD to restore the maximum \1/2\
percent mortgage insurance rate and find ways to avoid the
frequent interruption of multifamily production, which has
occurred over the last 8 years as a result of the institution
of the credit subsidy concept.
Mr. Chairman, thank you very much.
Senator Reed. Thank you Mr. Coan. We appreciate it.
Let me begin by asking each of the panel members the same
question. Basically from Secretary Weicher's testimony, it
seems that the policy, or at least what they suggest might
happen by raising the premium at the same time of not claiming
more subsidy money in terms of credit, that it will be easier
for developers and housing producers to navigate the program
and they will not have to worry about the starts and stops, in
a sense. He said it will be less expensive, so it will be an
incentive. Do you think that is going to be the case, Mr.
Petrie?
Mr. Petrie. I do not. I do think--and I happen to have
projects that face the 30 basis point increase, and it
increases the cost by at least 4 to 5 percent, and it increases
the amount of equity, which then increases the return, which
means that we are going to have to charge higher rents. The
issue comes down to is a big question from the standpoint of
why did they pick 30 basis points.
I can tell you where it comes from. They used a default
rate of 28.65 percent for 2002. It had a credit subsidy rate of
2.27 percent. If they raised the MIP 30 basis points, it
becomes neutral. They backed into the 30 basis points. If the
credit subsidy rate would have been 2.5 percent, their credit
subsidy rate, they would have been asking for an increase of 35
basis points. This was not something that was studied. This was
something that was backed into on a slide rule, and it was
something that we think, based on the knowledge that we have,
is not needed.
I want to make one distinction. The MMI fund is a fund. The
money is held in there for the purposes of the payment of those
participants. The GASRI, any funds that come in that make money
go straight to the Treasury. They are not held. The funds that
you appropriate are held by OMB, okay? What happens is that if
you overappropriate funds, they are still held over there until
they decide that they are no longer needed.
So the problem we have had here is that they
overappropriated, because they have been too conservative. When
we consider the $1.5 billion, if you go back to 1992, there is
1.51 percent. The reestimate based on the 2000 budget shows in
the 221(b)(4) program it was a negative 2.29 percent. That
means in 1992, that cohort of loans made money. Yet you still
appropriated money that is still being held by OMB. Yet we have
to come back and ask for more money for a program that makes
money. We do not think that is fair. We do not think that is
good government.
Senator Reed. Thank you, Mr. Petrie.
Mr. Kelly, again, you are a developer. Do you think the
increase in the premium is going to make it easier for you to
produce housing, or will it be otherwise?
Mr. Kelly. No, sir. First and foremost, as a developer of
any kind of successful property, the project has to pencil out.
And while certainty the process is a factor, the inability to
pencil out a project from the get-go will lead you to walk away
from it.
In many of these projects, 3 to 4 percent increase in high-
cost areas where rents are, say, $1,000, $40 a month on a unit
certainly could be a killer. The alternative is increased
equity in the project. That again is something that we all make
a decision on how much money we can afford to put in any one
project. And again, I think these kinds of increases can
certainly kill a project.
Senator Reed. Mr. Roark, from your perspective?
Mr. Roark. I echo what my colleagues on the panel just
mentioned. There is significant imbalance between housing
supply and demand. If a developer cannot pass the higher costs
through as rent increases, they have to take a significant
reduction of return on capital, or simply not do the
transaction. They will invest capital someplace else around the
country or in whatever vehicle they want to put it in, and
projects will not be built.
We have a lot of transactions that are in this position
right now that we have been following. And when they reprice
the transaction with approximately 30 basis point increase, the
developer has to come up with $500,000 worth of equity on a $20
million deal just to go to closing. And with interest rates
going up and down, and with the credit subsidy issue,
unresolved, the uncertainty is really affecting the development
community.
Senator Reed. Thank you. If I can ask Mr. Coan to make a
comment. And also you might allude in your comment to the need
for this type of housing. Secretary Weicher pointed out that
this is not for low-income people that we subsidize but for the
typical working class couples that are the backbone of most
neighborhoods.
Mr. Coan. Yes, Mr. Chairman, that is what our study shows.
Historically, these programs have been aimed at modest-income
people. The original 207 program had that goal. The 221(d)(4)
program talks about the low- and moderate-income persons.
Actually in candor, you cannot serve low-income persons without
some kind of a subsidy, but you can reach moderate-income
people. But the more you add on to the cost, the less able you
are to do that.
I am not a builder, but I am a lawyer who represents
builders and lenders, including one of these at the table here.
I know very well that this is a major factor if you are
penciling out the tight type of calculations you have to do in
order to go forward with this kind of project.
Senator Reed. Thank you, Mr. Coan.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I think the panel raises a good point about the need to
ensure that the default rate is being properly calculated. I
ask that they provide us with their calculations and
recommendations for our Committee to review.
However, I do have one concern. I heard a reference to the
default rate of the 1990's. I just want all of us to remember,
you know, the 1990's was a time of unprecedented economic
growth in our history where we had that kind of economic growth
over that long period. But we also had the 1980's, where we had
some economic problems during the 1980's and the housing agency
was particularly impacted.
So my question is that maybe we should also include the
1980's, for example. We have two decades there where there is a
lot of difference, and there were some changes in rules and
regulations that probably are going to be difficult to compare.
It seems to me like the proper answer is somewhere between
those two decades. I do not know how we reach that figure, but
it seems to me that could be something we need to look at.
Maybe members of the panel, Mr. Petrie, would like to respond
to some of those allegations.
Mr. Petrie. I think you make a very good point with regard
to the recession. The 1990's were a good time, a good economic
period. We would like to point out that we went back to 1987 in
one of our studies. From 1987 to 1998, the five major programs
of FHA had default rates of 4.32; 221(d), 4.74; 223(f), .82;
health care, 3.7; and hospitals, .17. They generated $336
million in revenue on $21.892 billion, which is a negative 1.54
percent credit subsidy rate back to 1987.
The key to the early 1980's is that our real estate
industry today is based on a cash flow business. Appreciation
and tax laws have little effect on us. Any change in tax law
will basically probably encourage building more than it would
anything else. But right now, it would not detour building,
which happened then because of the retroactive nature of it,
they quit supporting their projects.
But today, we look at it from the standpoint that it would
have little effect. We do not think it would be increasing
depreciation, which is going to reduce the budgetary income. So
from our standpoint, we are a little more insulated than we
were in 1986.
But the main factor is, you only have to make--we have
looked at the numbers already--two minor adjustments. If you
move right now, when they look at the notes sold, when they
take notes and they sell them to the secondary market, OMB is
only giving them 90 percent of their historical actuals. If you
give HUD 100 percent of its historical actual note sales and
decrease the default rate from 28.7 to 23.6, you are in a
negative credit subsidy rate for the 221(d)(4) program. Twenty-
three point six is not a giveaway or nonconservative default
rate when the programs were operating at less than 5 percent
today.
That is the frustrating part from our aspect. It does not
take much to get us there, and that is all we are saying is we
need your help, along with HUD and OMB, to bridge this gap, and
we can be there in 2002 and not need the 30 basis point
increase which we believe is not needed if they are making this
kind of money. It is just more money. The way we look at it, it
is not for safety and soundness of the programs. It goes
straight to the Treasury.
Senator Reed. Essentially what has happened is, this is a
way that you recapture money originally allocated for housing
and use it for any other program in the Federal Government?
Mr. Petrie. Yes, sir.
Senator Reed. In a way, it represents in tight budget years
backing away from housing support and putting it into any
number of other programs out of the way of housing, and money
that we authorize, assuming it is all going to be spent on
housing one way or other, ends up being spent otherwise.
Senator Allard. Mr. Chairman, these kind of programs could
be an overassessment. You could end up in an unallocated fund.
Senator Reed. Thank you, Senator.
Mr. Coan. Senator Allard, I would question the points you
raised. I think one has to realize that this is a very inexact
science. In the budget appendix that came out for this coming
fiscal year 2002, 2001's estimate is a negative subsidy outlay
of $216 million. Just last year it was estimated as only $8
million negative outlay.
They are off by over $200 million. And that is true
throughout this whole process. That is why I refer to this as
the most arcane process going. It is not possible really to
understand it. And I have been working at this for about 40
years, and I do not understand it, and these gentlemen, now
they have the program that OMB uses and perhaps might
ultimately learn how to understand it.
But it is susceptible to manipulation. That is a serious
concern that you Members of the Senate ought to have--that
these figures can be manipulated to do whatever any
Administration wants to do. That is inappropriate, and these
changes can only be done by legislative action, not by the
manipulation by somebody at OMB.
Senator Allard. I think if members of the panel could show
us how they derive their figures, I think it would be helpful,
and we will ask HUD to come forward and show us how they do
their figures and do some comparisons.
Senator Reed. I would in response to the point that was
just raised, I do think it is appropriate to salute Secretary
Martinez and Secretary Weicher for sharing the information for
the first time. I think that is something very commendable, and
that we should salute them on the record for that effort. I
appreciate that very much, and I join with Senator Allard in
asking that you would share with us not only your conclusions
but also whatever model they gave you, and maybe we could
pursue it further.
The final question, and that is, is this information in
these models being assessed by anyone outside the housing
community? This is not to suggest you are not objective.
[Laughter.]
Senator Reed. But is there anyone out there looking at
this? Your center, Mr. Coan, is looking at this? An academician
who has got expertise?
[No response.]
Senator Reed. In that case, that might be something that we
could inspire and sponsor.
Thank you all for your testimony. The hearing is adjourned.
[Whereupon, at 3:50 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF JOHN C. WEICHER
Assistant Secretary for Housing, FHA Commissioner
U.S. Department of Housing and Urban Development
July 24, 2001
Chairman Reed, Ranking Member Allard, distinguished Members of the
Subcommittee, thank you for inviting me to testify on the FHA
Multifamily Housing Mortgage Insurance Program.
In your letter of invitation you express interest in three issues:
the impending increase in mortgage insurance premiums; program credit
subsidy rates; and, the Administration's proposed increase in the per
unit mortgage loan limits.
Mortgage Insurance Premium Increase
The National Housing Act authorizes the Secretary to set the
premium charge for insurance of mortgages. The range within which the
Secretary may set the charges must be between \1/4\ of 1 percent per
annum (25 basis points) and 1 percent per annum (100 basis points) of
the principal obligation of the mortgage outstanding at any time. The
mortgage insurance premium (MIP) for most multifamily mortgage
insurance programs has been set by regulation at \1/2\ of 1 percent of
the average outstanding principal balance of the mortgage per year. (A
different calculation is used for the construction period to account
for the disbursement of mortgage proceeds during construction.)
In fiscal year 2001, Congress appropriated $101 million for credit
subsidy. The Department effectively obligated all of the available
credit subsidy by May, for reasons that I described in my confirmation
hearing at that time. At the end of fiscal year 2000 the Department ran
out of credit subsidy, and promptly used the first $12 million of
credit subsidy for fiscal year 2001 to fund the projects left over in
the pipeline. Also, there was an unexpected increase in applications in
the 221(d)(3) program--multifamily housing sponsored by nonprofits--
which carries a higher credit subsidy rate than most other FHA
mutifamily programs. Some of these projects should have been treated as
having for-profit sponsors. In recent years, the number of Section
221(d)(3) commitments has varied, but they did account for about 13
percent of the credit subsidy obligated in fiscal year 2000. This year,
it accounts for 40 percent. If the fiscal year 2000 activity level had
continued this year, FHA would have obligated approximately $23 million
less in credit subsidy, and we would not have this problem.
As the Department exhausted its credit subsidy, we advised all
field offices to halt the issuance of FHA commitments conditioned on
credit subsidy. To meet the need for multifamily housing, the Secretary
then decided to request a supplemental appropriation of $40 million in
credit subsidy and at the same time to implement a premium increase. On
July 2, the Department published a notice in the Federal Register
increasing the multifamily mortgage insurance premium for the programs
requiring credit subsidy to \8/10\ of 1 percent or 80 basis points. The
rule and notice become effective on August 1 and field offices will be
authorized to resume issuing commitments for the positive credit
subsidy programs. All FHA commitments issued on or after that date for
the specified programs, primarily our Section 221(d)(3) and 221(d)(4)
new construction/substantial rehabilitation programs, will be processed
at the higher premium. Projects in the headquarters queue for credit
subsidy with outstanding FHA commitments will be allowed to proceed to
closing at the lower premium subject to the availability of credit
subsidy in fiscal year 2001. The increase will lower the credit subsidy
rates.
The purpose of these proposals is both to resume the production of
needed multifamily housing, and to put FHA's basic multifamily program
on a demand basis, like the 203(b) program for single-family mortgage
insurance. This is the third time in 8 years that FHA has run out of
credit subsidy before the end of the fiscal year. The Secretary wants
to eliminate the erractic behavior that has plagued our multifamily
programs, and make sure that this situation does not happen again. The
premium increase of 30 basis points achieves these purposes. It is on
target with the Administration's proposal in the fiscal year 2002
budget.
Credit Subsidy Rates
Under the Federal Credit Reform Act of 1990, HUD, like all other
Federal agencies with loan programs, is required to estimate the
probable cost to the agency of its programs and must request credit
subsidy as part of its budget each fiscal year to cover those costs. In
calculating the credit subsidy estimates, HUD has engaged contractors
who looked at the historic loan performance of FHA's major programs--
prepayments, claims, the income FHA receives from application/
inspection fees, mortgage insurance premiums, and recoveries from note
and property sales. This analysis becomes the basis of the credit
subsidy rate in each year's Federal budget. Loan performance has
greatly improved in recent years. In fiscal year 2001 FHA's major new
construction program, Section 221(d)(4) required a subsidy of 3.35
cents for each dollar of loan insured. That is down from 7.12 cents
last year and 11.96 in 1996.
The industry has questioned the underlying data used in the credit
subsidy calculations and the underlying assumptions. At my confirmation
hearing I promised to conduct a complete reanalysis of the methodology,
and make a new judgment as to the appropriate credit subsidy rate and
the appropriate MIP. We are now in the middle of that analysis.
Meanwhile, we have provided the industry with the credit subsidy
computer model and assumptions, and it is my understanding that they
are conducting a parallel analysis. My staff met with industry
representatives 3 weeks ago and agreed to further analyze some issues
that were particularly important, in their view. The industry also
believes that the 1986 changes in tax law, and more recent changes in
FHA underwriting standards, are not given adequate weight in the credit
subsidy analysis. In our work, we are evaluating their concerns and how
they might be accounted for. Once the staff analysis is complete, I
will make recommendations to the Secretary and to the Office of
Management and Budget as to whether the credit subsidy rates and the
MIP should be changed. As I mentioned, the Secretary now has statutory
authority to change the MIP; under that authority, the Department
issued an interim rule on July 2, which allows the Secretary to raise
or lower the MIP within the range of his statutory authority.
FHA Statutory Per Unit Limits
The National Housing Act includes per unit limits by bedroom size
for the various new construction/substantial rehabilitation programs
with a maximum adjustment of 140 percent (with exceptions for Alaska,
Guam, and Hawaii) where the Secretary determines it is necessary on a
project-by-project basis. The base limits in the National Housing Act
have not been raised since 1992. The effect has been to limit the use
of the FHA multifamily mortgage insurance programs in high cost areas
of the country like Boston, New York, Philadelphia, Chicago, and San
Francisco because the FHA maximum insurable mortgage would be
controlled by the mortgage limits rather than economic considerations
such as debt service or replacement cost. This would result in much
greater equity requirements for developers in those areas, and a
disincentive to use the programs.
In analyzing construction cost data for 74 selected cities across
the country, we found that construction costs had increased an average
of 25 percent since 1992. For that reason the Secretary and the
President have proposed an increase of 25 percent in the base limits.
Individual projects will still be able to take advantage of the maximum
140 percent adjustment where feasible and appropriate. We believe this
will encourage the construction of much needed multifamily rental
housing in the major metropolitan areas across the country.
This concludes my statement, Mr. Chairman. Thank you again for the
opportunity to appear before you.
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PREPARED STATEMENT OF MICHAEL F. PETRIE
President, P/R Mortgage and Investment Corporation, Indianapolis,
Indiana
On Behalf of Mortgage Bankers Association of America
July 24, 2001
Mr. Chairman, and Members of the Subcommittee, my name is Michael
Petrie, and I am President of P/R Mortgage and Investment Corporation
in Indianapolis, Indiana. I am appearing before you today in my
capacity as Chairman of the Commercial Real Estate/Multifamily Housing
Board of Governors of the Mortgage Bankers Association of America
(MBA).\1\ MBA is grateful for the opportunity to present our views to
your Subcommittee today on the important issue of the FHA multifamily
credit subsidy.
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\1\ MBA is the national association representing the real estate
finance industry. Headquartered in Washington, DC, the association
works to ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand homeownership prospects
through increased affordability; and to extend access to affordable
housing to all Americans. MBA promotes fair and ethical lending
practices and fosters excellence and technical know-how among real
estate finance professionals through a wide range of educational
programs and technical publications. Its membership of approximately
2,800 companies includes all elements of real estate finance; mortgage
companies, mortgage brokers, commercial banks, thrifts, life insurance
companies and others in the mortgage lending field. For additional
information visit MBA's Web site: www.mbaa.org.
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I have spent over 20 years in the commercial real estate finance
industry. Before joining P/R Mortgage and Investment Corporation, I
worked at Merchants National Corporation, where I rose to the rank of
Executive Vice President and head of the Commercial Real Estate
Division. My present firm, P/R Mortgage & Investment Corporation was
started in 1990, has financed over $700 million in multifamily
mortgages and the firm currently services $550 million in loans. Since
inception, the firm has never had a 30 day delinquency on any loan.
I am also an active volunteer in affordable housing; I served 8
years on the Board of the Indianapolis Neighborhood Housing Partnership
and am currently on the Mayor's Indianapolis Housing Strategy Task
Force. I was previously a Chairman of Near North Development
Corporation Board of Directors and served on the Board of United
Northwest Area CDC. I have served 16 years as President of Kenwood
Place, Inc., an inner city 97 unit Section 202 housing development for
the elderly, and 4 years as President of Unity Park, Inc., an inner
city 60 unit Section 8 family development.
What Are the FHA Multifamily Programs and How Do They Work?
The Federal Housing Administration (FHA) was created under the
National Housing Act of 1934. It was developed initially to attract
private and public sector credit into the housing market to meet
mortgage financing needs of low-, moderate-, and middle-income
Americans by insuring long-term, fully amortizing single-family and
multifamily mortgages. From its beginning, a major responsibility of
FHA has been to enhance the Nation's multifamily housing stock. FHA
facilitates the construction and maintenance of multifamily housing by
providing mortgage insurance to finance the construction, purchase,
rehabilitation, or the refinancing of rental housing, cooperatives, and
condominiums. Over the years, FHA has been expanded to include programs
for the finance of special needs groups such as the elderly and
disabled. Each of the programs is referred to by the section of the
National Housing Act, as amended, under which it is authorized.
FHA's multifamily mortgage insurance programs enable qualified
borrowers to obtain long-term, fixed rate, nonrecourse, financing for a
variety of multifamily property types affordable to low- and moderate-
income families. Out of the cash flow of a property approved for FHA-
insured financing, the borrower pays a mortgage insurance premium (MIP)
to the lender which is then passed through to FHA in return for the
insurance. The MIP charged is intended to compensate FHA for its risk
and the cost of doing business, including the expected cost of default.
However, despite an acute need for affordable rental housing
throughout the Nation, over the past 4 years, the FHA has insured fewer
than 130,000 units in the entire country. The reason for our testimony
here today is to address the program constraints in the FHA multifamily
programs and to find solutions to improve and strengthen the FHA
programs to provide affordable rental units.
Why Is It Important To Raise the FHA Multifamily Loan Limits?
First, I would like to commend Senator Corzine and Senator Carper
for introducing S. 1163. This bill would increase the maximum mortgage
limits for the FHA multifamily programs. These limits have not been
increased since 1992 and construction costs alone have risen since
then, on average, by 25 percent. S. 1163 is particularly helpful in
that it not only increases the limits by 25 percent, but it also
provides for an annual adjustment factor to the limits so that we do
not face this same problem again in a few years.
The fact that the maximum mortgage limits have not been increased
in almost 10 years has virtually shut down the FHA multifamily
insurance programs in many high-cost markets. In most major cities in
this country, and many second-tier cities, it is impossible to produce
new housing using the FHA programs. In cities like Boston, where almost
120 percent of all working families have critical housing needs and
there is only a 2.7 percent vacancy rate, it is vitally important to
produce new housing. Yet, because of the maximum mortgage limits, no
new FHA new construction or substantial rehabilitation loans were
approved in Boston in 2000. Even in second-tier cities like my hometown
of Indianapolis, the maximum mortgage limits have made it difficult to
do FHA-insured loans.
S. 1163 is key to making FHA insurance a useful tool in high-cost
areas, and we fully support the bill. We suggest that the Senators
consider adding a provision to their bill to allow the Secretary the
discretion, on a project-by-project basis, to increase the loan limit's
high-cost factor to the one currently allowed for Alaska and Hawaii.
This would provide the Secretary the ability to address needs in
particularly high-cost areas like Boston, New York, or San Francisco
where land and development expenses are particularly high.
As important as this issue is, approving higher loan limits alone
will accomplish little without addressing the fundamental issue now
facing the FHA program--the lack of credit subsidy. Without credit
subsidy or without an accurate accounting that demonstrates when credit
subsidy is needed, there will be no new construction with FHA
insurance, and the increase in the loan limits would be a hollow
victory.
What Is Credit Subsidy?
While many people believe calculating the credit subsidy rates for
FHA's mortgage insurance programs is merely an accounting detail, it is
clear this accounting detail has shut down the FHA new production
programs for months at a time for 2 years in a row and resulted in the
loss of new affordable housing. We believe it is time these ``details''
are brought to light and publicly debated so an accurate accounting of
these programs can be achieved.
The Federal Credit Reform Act changed the budgetary treatment of
credit programs, effective for fiscal year 1992. The Act requires
Congress to appropriate funds for the ``estimated long-term cost to the
Government of a direct loan or loan guarantee.'' It states that ``the
cost of a loan guarantee shall be the net present value when a
guaranteed loan is disbursed of the cash flow from (i) estimated
payments by the Government to cover defaults and delinquencies,
interest subsidies, and other payments, and (ii) the estimated payments
to the Government including origination and other fees, penalties, and
recoveries.''
Since 1992, the Department of Housing and Urban Development (HUD)
and the Office of Management and Budget (OMB) have determined that most
of the FHA insurance programs that support the new construction of
multifamily housing require an annual appropriation of credit subsidy.
This credit subsidy is supposed to serve as a loan loss reserve for the
programs.
We believe that HUD and OMB, since the beginning of credit reform,
have overestimated the long-term cost to the Government of the FHA
multifamily insurance programs. This overestimation has resulted in
unnecessary money being appropriated for these programs and, therefore,
``wasted.''
Since the arrival of Secretary Martinez and Dr. Weicher at HUD,
both HUD and OMB have been very generous in sharing information about
the calculation of the credit subsidy rates for the FHA multifamily
programs. Greater access to the formula, as well as detailed
explanations of the assumptions used, has been provided to MBA. We
appreciate their openness and their willingness to share their data. It
is invaluable in our ability to evaluate the performance of these
programs and how we proceed in the future to continue to provide
greater access to affordable rental housing in the most efficient
method possible.
What Is the Current Credit Subsidy Crisis and
How Did It Get To This Point?
It appears from our analysis of the data provided to us that there
are two key drivers of the calculation. The first is the cumulative
claims rate which, put simply, is the percentage of loans originated
each year that are expected to default and result in a claim on the
insurance fund during the life of those loans. The second is when in
the life of those loans the claims are expected to occur.
For the cumulative claims rate, HUD and OMB are currently using 28
percent. This is based on the entire experience of the Section 220 and
221(d)(4) programs, beginning in 1956. As you can imagine, those rates
vary widely--from zero percent for loans originated in 1995 and 1999 to
64.8 percent for loans originated in 1983. The highest claims rates
are, not surprisingly, for loans originated in years affected by major
tax changes: the early 1970's and the early 1980's. By removing those
years from the calculation or by reducing their weight in the
calculation, the credit subsidy rate would drop dramatically. Another
way to approach the cumulative claims rate would be to focus more on
the most recent experience of the programs. Since HUD made significant
underwriting changes in 1991, their default and claims experience has
improved dramatically. From the data HUD has provided to MBA, the
cumulative claims rate has been less than 4 percent for every year from
1992 through 2000.
In my experience as a lender at a bank, when we created loan loss
reserves, we looked at the experience of loans similar to loans we were
currently underwriting. No one expects that we will ever experience
again the devastation in real estate markets that was the result of the
tax changes that began with the accelerated depreciation in 1981 and
ended with the Tax Reform Act of 1986 which eliminated, retroactively,
various tax incentives. If we did expect such a downturn in the real
estate market, no one would be investing in real estate today. HUD's
assumptions for credit subsidy should eliminate the experiences of that
unusual period and should more heavily weight the recent experience,
which reflects how financial institutions are underwriting loans today.
As I mentioned, the other key driver in the credit subsidy
calculation is the point at which any of these loans will result in a
claim. HUD and OMB have heavily front end-loaded the claims. Their
calculations assume that 9.3 percent of the loans will result in a
claim in the first 3 years of the mortgage and 14.3 percent will result
in a claim in the first 5 years of the loan. This approach has an
immense impact on the credit subsidy rate.
The impact of HUD's assumptions are evident from the numbers called
``reestimates'' that appear in the HUD budget. Until recently, the
Federal budget included ``reestimates'' of the credit subsidy needed
for each origination year since 1992, the year credit reform was
implemented. The reestimates reflect the history of the loans
originated in those years and clearly demonstrate that the original
calculations were excessively high. For example, loans originated in
1992 had an original credit subsidy rate of 1.51 percent and a
reestimated rate in the fiscal year 2000 budget of -2.29 percent. For
1993 loans, the rate dropped from 12.41 percent to 3.70 percent.
Similar reductions were evident in subsequent years until HUD and OMB
stopped reestimating the rates for loans originated in 1997 and beyond.
We believe that HUD and OMB need to review their assumptions, and base
their default predictions on more recent experience with loans
underwritten since 1991.
What Has Happened With the Annual Appropriation for Credit Subsidy?
By our estimates, Congress has appropriated over $1.4 billion since
1992 for credit subsidy for the FHA multifamily programs. None of these
funds have been expended. In fact, based on the reestimates in the
budget, HUD and OMB do not expect a large portion of these funds ever
to be needed for these programs. Perhaps there is a way to recapture
and reuse some of this excess credit subsidy. At the very least, we
need to recognize that credit subsidy should not be continually
appropriated and never used.
Why Does MBA Oppose the Increase In the Mortgage Insurance Premium?
Based on what we have seen and what we believe to be the correct
credit subsidy rates for these programs, MBA thinks it is unnecessary
and inappropriate for HUD to increase the mortgage insurance premiums
(MIP) on many of these programs. The increase from 50 basis points to
80 basis points to be implemented by HUD is an unnecessary increase
that was calculated by using the current, and we believe, flawed
formula and assumptions, and HUD merely selected the MIP level that
would make the programs breakeven, and, therefore, require less credit
subsidy.
This premium increase will have a number of adverse affects on the
production of housing. First, for those properties in markets where a
rent increase is possible, rents to tenants will also increase by
approximately 3.5 to 4 percent. Second, for properties where the market
will not support a rent increase, the owner will be required to put
substantially more equity into the property. If the owner does not have
access to additional equity capital, the property simply will not be
built. None of these outcomes is beneficial to the families that need
affordable housing, nor to the communities that could benefit from the
production of new housing.
Why Increase the Mortgage Insurance Premium Now?
We have asked HUD to delay the implementation of the premium
increase until a full review of the credit subsidy formula can be
completed and an accurate rate determined. They have responded by
publishing the regulation and notice implementing the change effective
August 1. We believe this was done to ensure that the $40 million they
hoped to have appropriated for fiscal year 2001 would be sufficient to
fund all loans in the pipeline this year. Based on Congress' actions
last week and their failure to appropriate any credit subsidy, we are
asking HUD again to reconsider the MIP increase and hope that you and
your Subcommittee will add your voice to ours in asking for a delay in
implementation of any premium increase.
Our concern today, Mr. Chairman, is accuracy, but it is also
timing. The Congress cannot afford to keep appropriating millions of
dollars that are not needed and never used. The developers and mortgage
bankers who depend upon these programs for financing cannot operate in
this unpredictable and volatile environment. The families who need
affordable rental housing cannot wait for it to be built.
We need more accurate credit subsidy rates calculated as soon as
possible. And we need Congress to include those rates in the fiscal
year 2002 HUD/VA Appropriations bill now being considered in the House
of Representatives and the Senate. Without this quick response, we will
be faced with another year of unnecessary appropriations and/or an
unjustified and excessive increase in the MIP.
How Has the Action Last Week On the Supplemental Appropriations Bill
Exacerbated the Crisis?
While I understand that it is not the primary focus of this
hearing, I would be remiss if I did not mention the action by the
Congress last week during consideration of the Defense Supplemental
Appropriations Act. Through the hard work of you and many of your
colleagues on the Banking Committee, both the Senate and House versions
of the supplemental included $40 million in credit subsidy for the FHA
multifamily insurance programs. This appropriation was needed to end
the shutdown of the programs, which began in April when FHA fully
committed the $101 million initially appropriated for the programs for
this fiscal year.
In unexplained action, the conferees on the bill eliminated the $40
million from the bill, possibly to fund other priorities, even though
both chambers of Congress had approved it. Clearly, the conferees did
not understand the impact of their actions. Without a supplemental
appropriation, the FHA new construction and substantial rehabilitation
programs will be shut down until October 1. This will mean that
approximately $1 billion of new construction of affordable rental
housing will not get underway this year and may never be built. Forty
million dollars is not much money, particularly in a $7 billion
supplemental appropriation. However, since it was deleted, we will have
delayed indefinitely, and perhaps lost, construction on $1 billion of
housing. Housing, as you know, is an excellent economic stimulation
tool. These projects could have generated more than 24,000 new jobs,
more than $126 million in new local taxes and fees, and more than $255
million in new Federal taxes. Unfortunately, an opportunity appears to
be gone. And, certainly the rental housing is desperately needed.
There are only two ways that these programs can be restarted before
the new
fiscal year begins. The Administration can release the $40 million
already appropriated by Congress last December as an emergency
supplemental for these programs or Congress can approve a new $40
million supplemental, perhaps in the
fiscal year 2002 HUD/VA Appropriations bill, if it continues to move
quickly through the Congress. We urge you, Senator Reed, to recommend
to the Appropriations Committee to consider adding these supplemental
funds to the fiscal year 2002 bill. These monies have already been
appropriated and they should be used to restart the program. The Senate
in the Defense Supplemental Appropriations bill removed all
restrictions on that original appropriation. If that same language
could be included in the fiscal year 2002 HUD/VA Appropriations bill or
another appropriations vehicle that is moving quickly through Congress,
we can end this shutdown and begin construction already started this
year on much-needed housing.
We look forward to working with you, Mr. Chairman, your
Subcommittee, and other Members of Congress to reexamine the
calculation process and the data used to determine the subsidy rate.
Our industry stands ready to ``break the logjam'' so thousands of
affordable rental units may be produced across the country. Thank you
for the opportunity to testify here today.
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PREPARED STATEMENT OF KEVIN KELLY
President, Leon N. Weiner & Associates, Wilmington, Delaware
On Behalf of the National Association of Home Builders
July 24, 2001
Introduction
On behalf of the 203,000 members firms of the National Association
of Home Builders, I want to thank you for calling this hearing on the
Federal Housing Administration's multifamily mortgage insurance
programs. My name is Kevin Kelly and I am a builder from Wilmington,
Delaware. I currently serve as President of Leon N. Weiner &
Associates, Inc., a Wilmington based home building development and
property management firm. The Weiner organization and its affiliates
have developed and constructed more than 4,500 homes, 9,000 apartments
as well as several hotels, office, and retail facilities.
Overview
The Federal Housing Administration's (FHA) multifamily mortgage
insurance programs support new construction and substantial
rehabilitation of apartments and are a cornerstone of efforts to meet
the critical need for affordable rental housing. These programs, which
require Federal budget appropriations in the form of credit subsidy,
have been shut down because funding for fiscal year 2001 has been
exhausted since April. Furthermore, the Administration's budget request
for fiscal year 2002 is also inadequate.
To address the credit subsidy shortage, the United States
Department of Housing and Urban Development (HUD) plans to increase the
mortgage insurance premium for these programs, which will relieve the
need for credit subsidy but will undercut the ability of the programs
to provide affordable rental housing. NAHB opposes the premium increase
as unnecessary and burdensome. The current credit subsidy requirements
are based on flawed calculations, which, if corrected, would allow the
FHA multifamily mortgage insurance programs to operate without credit
subsidy appropriations or premium increases.
Before the suspension of credit subsidy, these programs were not
functioning effectively in a number of key markets due to outdated
limits on the size of mortgage that can be insured by FHA. Legislation
to increase the loan limits has been introduced in both the United
States House of Representatives and Senate and NAHB supports such
efforts.
Affordable Rental Housing Shortage
Two recent studies have documented a worsening shortage of
affordable housing, particularly affordable rental housing. According
to the latest ``The State of the Nation's Housing'' report from Harvard
University's Joint Center for Housing Studies, 14 million Americans had
severe housing cost burdens at the close of the decade. The report says
that a family that earns the equivalent of a full-time job at minimum
wage cannot afford the fair market rent for a two-bedroom apartment
anywhere in the country. In 24 States, according to the report, even
households with two earners cannot afford the fair market rent for an
apartment without paying more than 30 percent of their income. The
report also discusses the imbalance between the supply of affordable
units and the growing demand for them. It also points out that the
limited production of units affordable to low- and moderate-income
households is troubling and likely to cause the critical housing needs
problem to spread further to moderate-income families.
The National Housing Conference's Center for Housing Policy also
recently released a new report, ``Paycheck to Paycheck: Working
Families and the Cost of Housing in America,'' with similar findings
regarding the increasing housing cost pressure on low- and moderate-
income families. The report reveals signs of persistent and worsening
housing affordability for working families in all parts of the country,
including cities, suburbs and rural areas, despite the recent economic
prosperity. Workers in municipal jobs, such as teachers and police
officers, and in the services sectors, such as janitors, licensed
practical nurses, and salespeople, fall into this group of people and
are a large and growing component of many local economies. The growth
in such jobs, however, is not matched by the growth in the supply of
affordable housing, creating an increasingly difficult situation.
According to the report, in 1999 there were 13 million American
families that had a critical housing need, which is defined as paying
more than 50 percent of their income for housing or living in severely
inadequate housing. The proportion of low- to moderate-income working
families with critical housing needs has risen from 23 percent in 1997
to 28.5 percent in 1999, going from 3 million to 3.7 million. For
renters, the report finds that a janitor or retail salesperson could
afford a one-bedroom unit in most of the 60 areas, but in not one of
these areas could they afford a two-bedroom unit without paying
considerably more than 30 percent of their income for rent. The report
also points out that for many people in service-related occupations,
including teachers and police officers, two earners in the household
are required to pay for housing costs.
The worsening housing affordability situation for low- and
moderate-income working families is exacerbated by inadequate mortgage
loan limits and shutdowns in the FHA multifamily mortgage insurance
programs, which are the chief vehicles for meeting the housing needs of
these families.
Credit Subsidy for FHA Multifamily Mortgage Insurance Programs
Each year, HUD must request an appropriation from Congress in an
amount estimated to be the probable cost to the Agency of all
multifamily mortgages it insures (the credit subsidy). Such
appropriations are required by the Federal Credit Reform Act, which
applies to all Federal direct loan and guarantee programs. The purpose
is to recognize the potential cost of these programs in the Federal
budget. For each program, the required credit subsidy is the dollar
amount of losses that are expected over the life of the loans that are
made or guaranteed in the budget year. The Office of Management and
Budget (OMB) establishes subsidy rates for each Federal loan and
guarantee program, based on an evaluation of the historical performance
of those programs. The subsidy rates determine the amount of money that
must be appropriated for any given level of program activity. (Programs
that produce income rather than losses are assigned, what is called, a
negative subsidy rate. Higher activity levels in these programs, which
include the FHA single-family mortgage insurance program, increase
Federal budget revenues.)
Each of the different FHA multifamily mortgage insurance programs
has been assigned an individual credit subsidy rate. It is estimated
that HUD will require more than $250 million in credit subsidy to
operate these programs in fiscal year 2001. Only $101 million was
appropriated, and that amount was exhausted before the end of April
2001. Such a shortfall means the loss of production of 50,000 units of
affordable rental housing. In addition, the President's fiscal year
2002 budget proposal for HUD seeks almost no credit subsidy funding for
multifamily mortgage insurance. The budget instead proposes to increase
the mortgage insurance premiums for these programs, which would nearly
eliminate the need for credit subsidy but undercut the ability of the
programs to provide affordable rental housing.
NAHB believes that the assumptions used by OMB to determine the
credit subsidy requirement for FHA multifamily mortgage insurance
programs are incorrect. For example, the OMB model for the Section
221(d)(4) program places too much weight on the performance of loans
from the early 1980's, which were insured under much weaker
underwriting standards than employed today and were impacted by the
unprecedented retroactive provisions of the 1986 Tax Act. Section
221(d)(4) mortgages insured after 1991 have a cumulative default rate
of 5.5 percent, while OMB's model employs a cumulative default rate of
28 percent. OMB's assumptions on recovery from asset disposition,
particularly note sales, are also excessively pessimistic. In addition,
the model incorrectly assumes that all loans with loan management set-
aside assistance (LMSA) result in immediate claims. Finally, the model
combines unrelated, poorer performing programs in the credit subsidy
rate calculations for the Section 221(d)(4) program.
The multifamily mortgage insurance programs are performing well,
experiencing cumulative default rates that are significantly below the
level that OMB used in calculating the credit subsidy rates. If OMB
revised its model and assumptions to
address the problems outlined above, the Section 221(d)(4) program
would have a negative credit subsidy rate and would not require credit
subsidy appropriations or an increase in insurance premium. NAHB is
seeking an immediate review and revision of the OMB credit subsidy
model and urges Congress to make the results effective for the fiscal
year 2002 budget.
FHA Multifamily Mortgage Insurance Premiums
HUD currently has the statutory authority to set the mortgage
insurance premium for multifamily programs from \1/4\ to 1 percent of
outstanding principal balance per annum. HUD's current regulation sets
specific percentages within the
authorized range; that is, most of the mortgage insurance programs are
set at \1/2\ of 1 percent.
HUD and the Administration have announced support for a $40 million
supplemental appropriation for FHA multifamily credit subsidy for
fiscal year 2001 and are moving forward with an interim rule to
increase the multifamily mortgage insurance premium from 50 to 80 basis
points. HUD published the interim rule on July 2, 2001. HUD believes
that the combination of supplemental credit subsidy and premium
increase will allow a restart of the FHA multifamily mortgage insurance
programs and support their operation through the end of this fiscal
year. The premium increase, which HUD has said will remain in effect at
least through the end of fiscal year 2002, will mean that only a
minimal level of credit subsidy will be required in the next fiscal
year.
The interim rule revises current regulations to permit the
Secretary to set the mortgage insurance premiums by program within the
full range of HUD's statutory authority through notices. On August 1,
2001, the date the interim rule becomes effective, HUD will raise the
MIP from 0.5 percent to 0.8 percent. Programs for which the raise
applies include the Section 221(d)(4) program, which is the main
program supporting new construction of affordable rental properties,
the programs under Sections 207, 220, 221(d)(3), 231, 234(d), and
241(a), as well as the HOPE 6 projects under Sections 207, 220,
221(d)(4), and 231. A notice setting the new premium rates accompanies
the interim rule.
HUD is raising the premium without undertaking analysis of its need
or impact. The premium change will go into effect without opportunity
for public comment. Comments on the rule will not be considered until
after the comment period closes on August 31, 2001. NAHB believes this
to be inappropriate for a change of this magnitude. As stated above,
NAHB believes the premium increase will unnecessarily hamper efforts to
meet affordable rental housing needs. The increase will significantly
impair the capacity of the FHA multifamily mortgage insurance programs
to address the Nation's critical need for affordable rental housing.
Analysis by industry experts shows that the premium increase would
result in rent increases of 3 to 4 percent, which would undermine the
capacity of this program to serve moderate- and lower-income families.
In some cases, builders would decide not to go forward with projects,
resulting in the loss of affordable rental units. It should be noted
that these projections reflect the current low level of interest rates.
Should interest rates fluctuate upward, the impact on affordability
would be even more onerous.
FHA Multifamily Mortgage Limits
Another factor contributing to the shortage of affordable rental
housing, especially in high-cost areas, is the fact that the FHA
multifamily mortgage limits have not been increased since 1992.
Construction, land, and other costs have increased dramatically during
that period. The Annual Construction Cost Index, published by the
Census Bureau, increased over 23 percent. Preliminary results from a
recent survey conducted by NAHB's Economics Department show that land
costs in 10 metropolitan areas have increased by an average of 25
percent over the past 8 years.
These rising construction and other costs have resulted in a
shortage of affordable rental units. Rent increases now exceed
inflation in all regions of the country, and new affordable units are
increasingly rare. Because of current dollar limits on loans, FHA
insurance cannot be used to help finance construction in a number of
high-cost urban areas. Statistics published by FHA show that in high-
cost areas, such as New York and Philadelphia, only a few multifamily
loans providing new or substantially rehabilitated affordable rental
units have been insured in the last 6 years.
NAHB has proposed that the current statutory mortgage limits be
increased 25 percent, which is consistent with reported increases in
construction and land costs. The limits should also be indexed based on
increases in the Annual Construction Cost Index. Increasing the dollar
limits for multifamily loans that can be insured by FHA will foster the
development of affordable housing, especially in high-cost center city
areas where it is needed most. The NAHB proposal includes increases in
limits on loans for: (1) rental housing in urban areas where local
governments have undertaken concentrated revitalization efforts; (2)
cooperative housing projects; (3) rental housing for the elderly; (4)
new construction or substantial rehabilitation of apartments by both
for-profit and nonprofit sponsors; (5) condominium developments; and,
(6) refinancing of rental properties. Eligible borrowers under these
FHA programs may include private for-profit developers, public
agencies, and nonprofit organizations.
NAHB strongly supports the legislation that has been introduced to
raise the FHA multifamily mortgage limits--Senate version, S. 1163,
introduced by Senators Jon Corzine (D-NJ) and Thomas R. Carper (D-DE),
and H.R. 1629, introduced in the House by Representatives Marge Roukema
(R-NJ) and Barney Frank (D-MA). Also, it is significant that the
Secretary of HUD, Mel Martinez, has expressed the Administration's
support for such a proposal.
In conclusion, the FHA multifamily insurance programs are critical
to the delivery of much needed affordable housing to working families.
Considering the pressing need for housing, we respectfully request
Members of the Senate Banking and Appropriations Committees to take
steps to ensure that unnecessary disruptions to the program are
minimized and the programs work as effectively and efficiently as
possible. Further, we seek your support of S. 1163 and enlist your help
in securing its passage. NAHB stands ready to assist in these efforts
and thanks you in advance for your assistance.
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PREPARED STATEMENT OF PATTON H. ROARK, JR.
Executive Vice President and Portfolio Manager
AFL-CIO Housing Investment Trust, Washington, DC
July 24, 2001
Good afternoon, Mr. Chairman and Members of the Subcommittee. My
name is Patton Roark and I serve as the Executive Vice President and
Portfolio Manager for the AFL-CIO Housing Investment Trust.
On behalf of the Trust, let me first thank you for the opportunity
to testify today on FHA's multifamily housing program. We applaud you
for holding today's hearing on major issues facing FHA's multifamily
program, which arise in the context of a national crisis of multifamily
housing production. My testimony will focus on HUD's recently proposed
60 percent increase in the FHA 221(d)(4) mortgage insurance premium--
from 50 to 80 basis points--and the implications of this increase for
the
future of this critically important multifamily loan program. We
believe that the proposed increase will further depress the production
of much needed rental housing and negatively affect the quality of life
of working families in housing markets across the United States.
I will also comment on the credit subsidy rates for FHA multifamily
mortgage insurance premiums. We question the underlying assumptions and
data used to arrive at credit subsidy rates. We have utilized a version
of the credit subsidy model obtained by the Mortgage Bankers
Association from HUD and applied assumptions and data derived from
actual transactions in the FHA 2001 pipeline. Based on this analysis,
at an increased mortgage insurance premium of 80 basis points, FHA
would appear to earn excess revenues at the expense of multifamily
projects and, ultimately, of tenants. A significantly lower premium
increase--or perhaps no increase at all in the current 50 basis point
premium--may be, necessary to achieve revenue neutrality for the
221(d)(4) program, even assuming a goal of revenue neutrality. What we
are asking today is to lift the shroud of secrecy that determines the
supposed ``cost'' to the Treasury of the program and require that OMB
and HUD work with the industry to develop a fiscally responsible
subsidy model and mortgage insurance rate.
In addition, I will comment on the need to address stagnant
statutory loan limits and the stop-and-go character of the program due
to insufficient credit subsidy that are further compromising FHA's
effectiveness.
The AFL-CIO Housing Investment Trust recommends that Congress take
a number of steps to ensure greater multifamily housing production and
a stronger FHA:
Require that HUD and OMB inform Congress and the public
regarding the real impact of the proposed increase in the mortgage
insurance premium on housing production and rent inflation--before
implementing any increase.
Require a full and open public discussion of the model and
assumptions used in deriving the credit subsidy rate for FHA's
multifamily insurance programs.
Increase statutory loan limits by at least the 25 percent
proposed by Secretary Martinez and provided for in legislation
introduced by Senator Corzine. Loan limits should be indexed to
assure program effectiveness on an ongoing basis and additional
flexibility should be provided in loan limits for high cost areas.
Grandfather projects currently in FHA's 2001 pipeline at the
current 50 basis point premium level.
Request that OMB immediately release $40 million in already
appropriated emergency credit subsidy funds for fiscal year 2001.
Appropriate sufficient credit subsidy for fiscal year 2002 to
allow the 221(d)(4) program to operate on a full-year basis at the
50 basis point premium level pending the full and open resolution
of the mortgage insurance and credit subsidy issues, as we have
recommended.
Background On the AFL-CIO Housing Investment Trust
The AFL-CIO Housing Investment Trust is a $2.5 billion fixed-income
fund
registered with the Securities and Exchange Commission under the
Investment Company Act of 1940. The Trust specializes in investing in
Agency-Insured Mortgage-Backed Securities for over 400 investors,
including both union and public
employee pension plans. The Trust is one of the industry's largest
investors in FHA-Insured Mortgages and currently invests up to $400
million annually through the Section 221(d)(4) Multifamily Construction
Mortgage program.
Thirty five years ago, the AFL-CIO founded the Trust's predecessor,
the AFL-CIO Mortgage Investment Trust, with the dual goals of providing
a vehicle for the prudent investment of union pension assets and of
using those assets to stimulate housing production that would benefit
workers and their communities. Over the last 35 years, the Trust and
its predecessor have financed over 65,000 units of rental housing
through investments in FHA-insured mortgages, securities backed by FHA-
insured mortgages, and other mortgage-backed securities. My comments
are derived from the Trust's unique perspective on real estate
development, capital market trading and asset management.
The Multifamily Housing Production Crisis
The issues being reviewed by the Subcommittee today arise in the
context of a national crisis in rental housing production. The United
States is barely producing enough new rental housing to compensate for
losses from the inventory due to age, condominium conversion, and other
causes. The number of all rental units in the United States increased
by just 2.3 percent during the 1990's. Over the same period, population
increased by 13.2 percent and the number of households increased by
14.7 percent. The result is a predictable imbalance of housing supply
and demand. In major markets across the country, increases in rents
have far outstripped inflation and growth in incomes. That is why,
according to the Joint Center for Housing Studies at Harvard, after a
decade of unprecedented economic growth in the United States, 14
million American households--that is one in eight--now pay over half
their income for housing or live in substandard apartments. Rising
rents are pricing working families out of the rental housing market. We
are simply not producing enough rental housing.
The Need for An Effective FHA
Historically, FHA has played a critical role in assuring the
production of an adequate supply of new multifamily housing, whether in
responding to the crisis of the Great Depression or the need for
housing following World War II. During the 1970's and the 1980's, FHA
was a major force in the market for financing of rental housing and the
country achieved high levels of rental housing production. In 1980, FHA
insured 42 percent of the dollar volume of all multifamily loans.
During the 1980's, the country achieved a multifamily production level
of over 4.5 million units.
During the decade of the 1990's, FHA stepped back from its
leadership role in multifamily housing production. By 1997, FHA's
multifamily loan market share had dropped to just over 10 percent.
During the 1990's, only 2.5 million new rental housing units were
produced, just over half of production levels during the 1980's,
contributing directly to the crisis in rental housing supply and
escalating rents.
FHA plays a unique role in the multifamily housing industry. Its
stated mission includes maintaining rental housing opportunities,
contributing to the building of healthy neighborhoods and communities,
and stabilizing credit markets in times of economic disruption.
Through the 221(d)(4) program, FHA provides insurance for
multifamily loans, which allows institutional investors, like the AFL-
CIO Housing Investment Trust, to buy securities backed by these loans.
The resulting capital market efficiencies lower the cost of capital for
projects resulting in lower rents and more projects that are
economically feasible.
FHA's insurance program offers some significant advantages that are
unique in the industry:
Mortgage insurance covering both construction and permanent
loans. Alternative sources of mortgage loan insurance or guarantees
do not cover loans during the construction period. As a result,
such alternative sources tend to be used more to refinance
existing, stabilized projects than to the create new housing units.
Allowing institutional investment in construction loans drives down
construction loan interest rates, reduced project costs, lower rent
requirements in underwriting, and increasing affordability.
Fixed, rather than floating, construction and permanent loan
rates. This provides predictability to developers, who are
otherwise exposed to significant interest rate risk during the
development period. Risk reduction translates into lower returns
required by equity investors, reducing project costs, and lowering
required rents.
A 40 year loan amortization period, which reduces loan
payments and rent levels needed to meet debt service. Alternative
sources of credit enhancement in the market have amortization
periods of 30 years or less.
A 90 percent maximum loan-to-value ratio for insured loans.
This results in an equity requirement of only 10 percent of total
project costs. Alternative sources of multifamily financing require
equity levels of 20 percent to 35 percent. Generally, capital
markets expect equity rates of return to be at least double
mortgage interest rates because of the increased risk of holding
equity rather than debt. Why is this relevant to affordability?
When the portion of project costs covered by equity is increased,
it increases the overall cost of funds. When the cost of funds is
increased, it increases the rents necessary to make the project
feasible, given prudent underwriting. When required rents are
increased, either tenants must pay the difference, or the project
is not built. Either way, the result is that fewer American
families can afford a place to live.
In summary, each of these components of the FHA multifamily program
increases the willingness of developers to build and investors to
invest in harder to serve areas. Each component reduces the cost of
financing for multifamily projects, thus enabling the development of
apartments with affordable rents for working families.
Obstacles To FHA's Effectiveness
Despite the importance of the unique financing tools that the FHA
offers, FHA's multifamily loan production has declined over the past
decade due to a number of factors:
The time required to process FHA transactions has been
substantially longer than that required for private transactions.
For developers, time is money. To address this, HUD introduced the
Multifamily Accelerated Processing (MAP) Program, effective this
year. Early reports on this program are encouraging.
Statutory loan limits are too low. These limits have not been
adjusted since 1992. This has made the 221(d)(4) program unworkable
in high cost markets, precisely where the need is greatest. For
this reason, last year there were no FHA loans issued in markets
such as New York, Boston, Providence, San Francisco, San Jose,
Syracuse, Cincinnati, Birmingham, and many more. Secretary Martinez
has proposed to address this problem and legislation has been
introduced by Senator Corzine that would increase statutory loan
limits by 25 percent. We strongly support an increase by at least
25 percent. We also support indexing the increase in statutory loan
limits to assure continued program effectiveness and recommend that
additional flexibility be provided for high cost areas.
The stop-and-go character of the program, due to disputes over
credit subsidy, frustrates developers who have played by the rules
and relied on the availability of FHA loans. In fiscal year 2000,
the 221(d)(4) program was effectively shut down in June. In this
fiscal year 2001, the program was shut down in April. The Trust is
currently working with developers of projects totaling
approximately $100 million, representing over 600 badly needed
rental units, who are preparing to walk away from existing FHA loan
commitments that cannot be acted on. Their future interest in FHA's
programs will depend on assurances that the programs can be relied
upon.
The Impact of An Increased Mortgage Insurance Premium
Now HUD is proposing a 60 percent increase in the cost of FHA
mortgage insurance. This increase will add costs to the development of
multifamily housing and directly contribute to decreased housing
affordability in the markets FHA serves.
According to the 2002 Budget, HUD forecasts that $3 billion in FHA-
insured 221(d)(4) mortgage commitments will be issued in fiscal year
2002. The proposed 30 basis point increase in the mortgage insurance
premium would effectively be a tax of approximately $105 million--
present value of the increase over 40 years--on new multifamily
projects. For these development projects to remain viable, this $105
million must be absorbed by tenants through rent increases--further
escalating the affordability crisis facing working families.
The premium increase could also result in a long-term process of
adverse selection that reduces the integrity of the FHA's existing
portfolio. Developers who choose to finance through FHA and who have
strong, financially viable projects in the most stable markets, may
subsequently choose to prepay and refinance out of the FHA program at
the first opportunity, leaving only the weaker projects in the FHA
portfolio. This tendency to prepay high-premium FHA loans may also be
reflected in the capital markets' pricing of the securities--requiring
a higher yield because of the increase in prepayment risk.
An increase in the mortgage insurance premium is not justified by
high default rates in the insured portfolio. The AFL-CIO Housing
Investment Trust has invested over $1.25 billion in FHA-insured
multifamily loans over the past 10 years. The Trust, one of the
industry's largest investors in such loans, has experienced cumulative
defaults of slightly over 1 percent of that total. HUD's statistics
back up our experience. Since 1990, the default rate for all loans
under the full 221(d)(4) program has averaged about 1 percent annually.
For loans originated after 1990, the annual default rate is even
lower--just over half that. Why then is HUD proposing to increase
mortgage insurance premiums now?
It is important also to be cognizant of current economic
conditions. Federal Reserve Chairman Alan Greenspan testified to
Congress last week that the economy remains depressed, notwithstanding
an unprecedented seven reductions in the Federal funds rate and the
prospect of fiscal stimulus through the tax reduction package enacted
by Congress and the President. FHA has long been seen as providing a
stimulus to the economy by promoting housing construction and thereby
creating jobs in construction and related industries. The multiplier
effect associated with these jobs is felt throughout the economy. If
increasing the mortgage insurance premium by 60 percent risks reducing
the production of rental housing at a time when it is sorely needed, a
question that this Subcommittee must wrestle with is whether now is the
time to risk elimination of these construction and related jobs.
The Need For Independent Critical Evaluation of the
Proposed Premium Increase and Credit Subsidy Model
In proposing a substantial increase in the mortgage insurance
premium through an interim rule that changes the premium during a
fiscal year, HUD is acting precipitously. Department staff do not
appear to have adequately consulted with developers, bankers,
investors, tenants, housing advocates, or others knowledgeable in the
industry or impacted by the decision. HUD is acting without
independently verified information regarding the potential near-term
and long-term impact of this change on rental housing production or on
rent levels.
Moreover, HUD is proposing a fundamental rule change in the middle
of the game. This has created serious uncertainty and a lack of
confidence in capital markets and among developers. It will layer new
costs on pending projects not only because of higher premiums but also
due to the need for reunderwriting and new
financial feasibility studies.
To restore investor and borrower confidence in the FHA program as
well as address the need to increase rental housing production, HUD
should immediately contract for an independent critical evaluation of
the proposed premium increase and its likely impact on rental housing
production and rent inflation. The methodology as well as the results
of the study should be made available to Congress and the public within
90 days. A decision to increase the mortgage insurance premium should
not be made without a disciplined and open process that examines the
likely impacts of such a decision.
Congress should request that the Office of Management and Budget
make public the model and the assumptions and data used to determine
credit subsidy levels for the FHA multifamily insurance program. We
applied data and assumptions derived from current projects in FHA's
2001 pipeline to the FHA Multifamily Budgetary Cash Flow Model obtained
by the Mortgage Bankers Association from HUD. Our results are
substantially different from those apparently arrived at by FHA and
OMB. Our preliminary analysis strongly suggests that a premium of 80
basis points may not be required to offset the actual default risks
insured by the program. Our understanding is that certain defaulted
projects from the 1970's and 1980's--underwritten under programs and
using standards no longer in use today--are skewing the default ratio
derived in the model. Such projects do not reflect current risks.
If FHA and OMB fairly evaluate the current default risk of the
multifamily portfolio using data from the past 10 years, they will
likely conclude that a 60 percent increase in insurance premiums is not
necessary to create a revenue neutral program, even assuming a goal of
revenue neutrality. Without an open examination of the model and the
assumptions and data that went into it, these conclusions remain
preliminary. What we can say definitively is that public policy matters
as important as the future of FHA and the availability of housing at
affordable rents should not be determined behind a shroud of secrecy.
Allow Projects Now Stuck In FHA's Pipeline To Go Forward and
Assure Future Program Continuity
We recommend that Congress request that OMB immediately release the
$40 million in emergency credit subsidy which has already been
appropriated for fiscal year 2001 to allow projects now stuck in FHA's
production pipeline to go forward.
Moreover, FHA should allow projects, for which it has invited firm
commitments, to be provided financing at the current 50 basis point
premium. Developers have relied on the availability of FHA financing at
substantial expense. FHA has completed preliminary underwriting and
expressed a desire to provide financing. It is a waste of both project
and taxpayer resources to mandate that such projects be restructured by
developers and then reunderwritten by FHA. By allowing these projects
to be financed, the credibility of the FHA insurance program will be
enhanced as a reliable financing option and thousands of badly needed
rental units will be able to start construction immediately.
To avoid program disruptions next year, sufficient credit subsidy
must be appropriated for fiscal year 2002 to assure that the 221(d)(4)
program can remain operational through the entire fiscal year at the 50
basis point premium level, pending a full and open resolution of the
issues of credit subsidy and appropriate insurance premium level, as we
are recommending.
Conclusion
Multifamily housing production in the United States is lagging far
behind population growth and household formation--the usual indicators
of housing demand. The result is a crisis of housing affordability that
is hurting working families in major housing markets across the
country. The crisis is predictable, but not inevitable.
To reverse the decline in national rental housing production, FHA
must be allowed to do more, not less. FHA programs have played a
critical role in rental housing production in the past and with a
renewed commitment and appropriate changes, these programs can help
lead the country out of its current housing production crisis.
Unfortunately, the current HUD proposal to increase mortgage insurance
premiums is a step in the wrong direction. It will increase the cost of
rental housing production and reduce developer and investor confidence
in FHA programs, hastening the erosion of FHA's role in multifamily
lending. This is not a desirable outcome and certainly not one that we
should back into without full and open discussion and debate.
Mr. Chairman, we appreciate the opportunity to testify before this
Subcommittee. I would also like at this point to submit a letter from
President John Sweeney of the AFL-CIO, on behalf of the 40 million
Americans who live in labor households. President Sweeney and many
State and local labor leaders hear every day about the impact that the
housing crisis is having on working men and women and their families,
across the Nation. He joins us in urging that FHA resume its historic
leadership position in supporting the production of multifamily
housing.
Mr. Chairman, I would be pleased to answer any questions and to
brief the Subcommittee staff at any time.
Thank you.
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PREPARED STATEMENT OF CARL A.S. COAN, JR
Executive Committee Member, National Housing Conference
July 24, 2001
Mr. Chairman and Members of the Subcommittee, I am Carl A.S. Coan,
Jr. and I appear here on behalf of the National Housing Conference for
which I am a Director and a member of the Executive Committee. We
appreciate this opportunity to present our views on the FHA Multifamily
Housing Mortgage Insurance Program.
NHC was founded in 1931, 3 years before the National Housing Act
became law. During all these years, NHC has supported FHA and its
various programs to help Americans become better housed. These programs
have been essential in helping to achieve the significant progress that
has taken place over the past 70 years. Yet much still needs to be
done.
NHC's research affiliate, the Center for Housing Policy, last month
released a study, entitled ``Paycheck to Paycheck: Working Families and
the Cost of Housing in America.'' This study followed up on the
Center's report of last year, entitled ``Housing America's Working
Families.'' Both studies found that over 13 million families in 1997,
and again in 1999, had critical housing needs, for example, they either
spent more than 50 percent of their incomes on housing or they lived in
a seriously substandard unit. While many of these families were elderly
or on welfare or had only a marginal attachment to the labor force, in
1997 22 percent, about three million households, were working families
earning between $10,700 a year--the equivalent of a full-time job at
the minimum wage--and 120 percent of the area median income, a figure
well in excess of $50,000 in some of our more expensive urban areas. In
1999, this percentage increased to 28 percent, and the number of
households to over 3.7 million. These are the families the FHA
multifamily unsubsidized programs were designed to serve.
Starting with the original 207 program as it was revised in 1938,
then through the 608 program enacted during the Second World War, next
through the 221(d)(4) program enacted in 1961 and various permutations
since then, the FHA multifamily programs have always been aimed
principally at providing housing for families of modest income. And
because that goal was achieved so successfully in many cases, these
programs have frequently been called upon, with the addition of a
subsidy element, to provide housing for low-income families--those
earning 80 percent or less of the median income in most cases. The
basic structure of the unsubsidized multifamily program was the
foundation upon which the subsidy assistance was added, serving as the
vehicle for the provision of hundreds of thousands of housing units for
low-income families.
During this 60 year period, the mortgage insurance premium charged
on multifamily mortgages has for the most part been \1/2\ of 1 percent.
This premium has generally been adequate to cover the losses incurred
by the mortgage insurance funds established in support of these
programs. In the early years of FHA, each program, such as 207, 220, or
221, had its own mortgage insurance fund. This became cumbersome and
Congress in 1965 combined into one fund, the General Insurance Fund,
all of the FHA programs except for the basic 203(b) single-family and
the cooperative programs.
There also was established in 1968 a Special Risk Insurance Fund,
in recognition of the fact that some of the programs being carried out
under the aegis of FHA were designed to take a greater risk in order to
accomplish such goals as housing low-income families or making housing
available in older, declining urban areas. While the same mortgage
insurance premium was collected with respect to these undertakings, it
was recognized up front that the premium would not be sufficient to
cover anticipated losses and that Congress would need to appropriate
funds on occasion to make up for shortfalls in the Special Risk Fund.
While the Special Risk Fund still exists, for budgetary purposes it
has been lumped with the General Insurance Fund and there is little, if
any, distinction between the two. While erasing that distinction--as
was the distinction between the various separate funds erased with the
establishment of the General Insurance Fund in 1965--may make it easier
for the accountants to keep their books, it should not be used as one
of the bases for increasing the mortgage insurance premium as the
Administration announced it intends to do as of August 1. And it might
be reasonable to consider shifting some of the riskier insurance
programs now covered by the General Insurance Fund into a revitalized
Special Risk Fund.
The FHA multifamily programs carry out an important societal
responsibility of our Government, and they have done that successfully
over the past 60 years. The efforts to meet that responsibility should
not be lessened now through a 60 percent increase in the mortgage
insurance premium. This increase will not stop the FHA multifamily
housing programs, but it will certainly limit the programs ability to
serve those of modest income that the programs were designed to serve.
The proposed increase in the mortgage insurance premium is like a
new tax being added on to the rent of the many thousands of tenants who
need the modest-cost, decent housing these programs are designed to
provide. There is no question that this increase will be passed through
to the tenants or the housing will not be built. In either case, this
new tax will decrease the ability of the FHA multifamily programs to
serve as broad a range of the population as possible.
Of all the arcana perpetrated by our Government on its people,
probably nothing is quite as arcane as the so-called credit subsidy
calculations carried out with respect to the FHA multifamily insurance
programs. As I understand it, they posit the incurrence of costs far in
the future, based on the unlikely replication of the circumstances and
occurrences of the past. They seem more designed to frustrate the
ability to meet our Nation's housing needs, rather than to facilitate
meeting those needs. Whether the calculations made under the premises
established by OMB are accurate, neither I nor probably anyone else
outside of OMB can really understand. What we can understand, however,
is that as a result of the credit subsidy concept, we have had several
stoppages over the last 8 years in the production of multifamily
housing for those whose housing needs cannot be met without the support
of the FHA mortgage insurance.
This is inexcusable, and even more inexcusable is the refusal of
OMB to allow HUD to use the $40 million made available last year in an
emergency supplemental. OMB has taken the position that no emergency
exists and therefore it could not meet the requirements spelled out in
the legislation for releasing that $40 million; we believe that an
emergency did and does exist because of the continued need for decent
housing in markets which cannot otherwise be adequately served.
One of the problems that has bedeviled the FHA multifamily
insurance programs in recent years has been the failure to increase the
maximum per unit mortgage limits since the last increase in 1992. This,
at least, the Administration has recognized and has urged that Congress
enact a 25 percent increase in those limits. NHC strongly supports that
increase and urges this Subcommittee to move as soon as possible the
legislation providing for that increase. We suggest, however, that at
the same time it might be appropriate to direct HUD to restore the
maximum \1/2\ percent mortgage insurance premium and to find ways to
avoid the frequent interruption to FHA multifamily production that have
occurred over the last 8 years as a result of the institution of the
credit subsidy concept.
Mr. Chairman, I would like to thank you for this opportunity to
present our views and concerns and would be pleased to answer any
questions that you may have.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD FROM MICHAEL F.
PETRIE
Q.1. What would be an appropriate index for setting future
increases in loan limits?
A.1. Generally, the loan limits have been most limiting on the
new construction and substantial rehabilitation programs. While
the cost of land, impact fees, and other development costs have
increased significantly, these costs vary widely across markets
and a national index would be difficult to determine. However,
the cost of construction is generally the largest factor in
increasing costs and is more uniform across markets. The Census
Bureau publishes, annually, a Construction Cost Index. We
recommend that the amount of increase each year in this index
be used to adjust the maximum mortgage limits.
Q.2. Please provide us with the data and your analysis that
indicates HUD and OMB have overestimated the long-term cost to
the Government of the FHA multifamily insurance program, and
that a premium of 80 basis points may not be required to offset
the actual default risks insured by the program.
A.2. In 1999, MBA commissioned a study by Abt Associates that
reviewed FHA data for the four most active multifamily
programs. Abt performed a cash flow analysis for each of the
programs and used actual HUD data for January 1987 through
September 30, 1998. (These dates were chosen because they are
after the 1986 Tax Reform Act but include the 1987-1991 real
estate recession.)
The attached tables demonstrate that both the Section
221(d)(3) and 221(d)(4) programs make money for the Government
with total claims rates of 8.16 percent and 4.76 percent,
respectively. The experience since fiscal year 1998 has been
even more positive which would increase the positive cash flows
of these programs.
There are generally two types of risk that HUD must
consider when setting an estimated default rate. The first is
underwriting risk or the risk that loans will be poorly
underwritten and not be able to achieve the rents necessary for
the project to be economically feasible. HUD made significant
underwriting changes in 1991 that have proven to be successful
in that few loans have resulted in claims in the early years of
the mortgage.
Using HUD's own data, the average default rate for the
first 3 years of the Section 221(d)(4) loans originated from
1992 through 1998 was 1.65 percent and the average rate for the
first 5 years for loans originated since 1992 was also 1.65
percent. (See attached chart.) This compares to the rates
assumed by HUD and OMB in their credit subsidy calculation of
9.3 percent for 3 years and 14.3 percent for 5 years.
The second type of risk is economic risk or the risk that
the economy in the region or the neighborhood will deteriorate
such that the owner can no longer achieve the rents necessary
to maintain the property and make the mortgage payments. This
risk has not been adequately tested since 1992 because of the
sustained economic expansion the country has experienced since
1991. The issue then becomes, what level of defaults should be
estimated to take into account an economic recession? HUD is
using approximately 28.5 percent for the Section 221(d)(4)
program, which results in the need for an 80 basis point MIP.
If you were to lower that rate to 21 percent--more than 12
times the actual average rates since 1992--there would be no
need for credit subsidy or an increase in the MIP above 50
basis points.
Even the Administration realizes that their credit subsidy
rate estimates have been significantly higher than actual
experience. Until recently, the Federal budget included
``reestimates'' of the credit subsidy needed for each year
since 1992. The reestimates reflect the actual experience of
the loans originated in those years and clearly demonstrate
that the original calculations were excessively high. For
example, Section 221(d)(4) loans originated in 1992 had an
original credit subsidy rate of 1.51 percent and a reestimated
rate in the fiscal year 2000 budget of -2.29 percent. For 1993
loans, the rate dropped from 12.41 percent to 3.7 percent.
Similar reductions were evident in subsequent years until HUD
and OMB stopped reestimating the rates for loans originated in
1997 and beyond. Clearly, the Congress has over-appropriated
for credit subsidy for this program--even at a 50 basis point
mortgage insurance premium.
RESPONSE TO WRITTEN QUESTION OF SENATOR ALLARD FROM KEVIN KELLY
Q.1 What would be an appropriate index for setting future
increases in loan limits?
A.1. The National Association of Home Builders recommends
that future FHA Mortgage Loan Limit increases be indexed to the
U.S. Bureau of the Census Annual Construction Cost Index. This
index is used to derive the annual value of general
construction costs put into place and is a measure of the
impact of inflation on construction costs. It is the best
readily available index published on an annual basis.