Subcommittee on Housing and Transportation

Hearing on the FHA Multifamily Housing Mortgage Insurance Program. 3

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.

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 FY 2001 has been exhausted since April. Furthermore, the Administration’s budget request for FY 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the suspension of credit subsidy, these programs were not functioning effectively in a number of key markets due to outdated limits on the size of mortgage that can be insured by FHA.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.

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 shut-downs in the FHA multifamily mortgage insurance programs, which are the chief vehicles for meeting the housing needs of these families.

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 FY 2001. Only $101 million was appropriated, however, 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 FY 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 would 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 1980s, 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 FY 2002 budget.

HUD currently has the statutory authority to set the mortgage insurance premium for multifamily programs from one-fourth to one percent of outstanding principal balance per annum. HUD's current regulation sets specific percentages within the authorized range; e.g., most of the mortgage insurance programs are set at one-half of one percent.

HUD and the Administration have announced support for a $40 million supplemental appropriation for FHA multifamily credit subsidy for FY 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 FY 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 3-4 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.

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. In addition, 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 eight 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 – the 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 as 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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