Mr. Chairman and Members of the Subcommittee, I am Shekar Narasimhan, President and CEO of Washington Mortgage Financial Group, Ltd. Our company originates and services loans for Fannie Mae, Freddie Mac, insurance companies, and private mortgage conduits, as well as loans insured by the Federal Housing Administration (FHA). We service over $7 billion in loans, of which $3.5 billion represent FRA-insured mortgages. Of the FHAinsured loans, 23 percent are secured by projects that are upported by some form of housing assistance payments.
I am very pleased today to address the Subcommittee on behalf of the Mortgage Bankers Association of America (MBA).1 Washington Mortgage has been a member of MBA for more than 10 years, and I have been an active participant in NIBA's many activities throughout that period. I am the Chairman of MBA's Multifamily and Commercial Legislative Subcommittee, the immediate past Chairman of MBA's Multifamily Steering Committee and a member of MBA's Board of Governors.
Today's hearing on S. 513, a bill to address the many problems relating to the Section 8 rental assistance program, is one of great importance. MBA applauds the Chairman's efforts to restructure the financing and reduce tenant rents for those FHA-insured multifamily projects with above-market rents that currently receive Section 8 subsidies.
MBA believes S. 513 accomplishes the two primary objectives of reducing the long-term cost of the Section 8 program while preserving the HUD-assisted affordable housing stock. It also provides a variety of tools, including FHA multifan-dly mortgage insurance, that will be needed to successfully restructure rents and mortgages in a manner consistent with the program's goals. It also provides HUD with well-needed direction in implementing the initiatives described in S. 513 while granting the agency some flexibility in how it carries out program requirements.
We appreciate your recent modification of Section 104(a)(2) of the bill that addresses the procedures by which the mortgage restructuring plans are to be written. We understand that the current draft now requires the following: that such plans "shall be developed by the owner, together with the servicing mortgagee, with a participating administrative entity."
We believe that including the servicing mortgagee as an equal participant with the owner in proposing a mortgage restructuring plan will add tremendous value to the process by expediting the mortgage restructuring, reducing the cost to the government, and assuring that an effective and fair balance will be struck among the goals of maintaining housing affordability, reducing Section 8 expenditures and "right-sizing" the restructured mortgages. NIBA believes this was an important change and removes one of our association's two major concerns about S. 513.
We also applaud you on the timeliness of this hearing. We believe it is critical to implement the Section 8 reform and restructuring initiatives as quickly as possible. We strongly encourage you and your colleagues to complete work on this important legislation before the end of the year, and offer our assistance and expertise in that endeavor.
For all the reasons stated above, NMA supports S. 513 and looks forward to working with the Subcommittee to assure its enactment.
Let me also take a few moments to focus the Subcommittee's attention on several areas we believe should be improved before completion. One involves a provision that, if left in the bill, would cause a significant problem for the lending community. Two others are suggestions for improvements we encourage you to consider. I would also like to briefly describe to you MIBA's proposal to reform FHA's multifamily programs to permit their future operations without the need for FHA insurance.
The language in Section 107(a)(1) of the bill would permit HUD or its designee to force a mortgagee (on behalf of a trustee or lender) to accept a partial payment of claim (prepayment), in a mortgage restructuring, in direct contradiction to the pre-existing contract of insurance entered into by HUD and the mortgagee. This provision, therefore, grants HUD the authority to abrogate its FHA insurance contract with secured mortgagees as a tool to restructure mortgages.
We feel strongly that this provision is unwarranted and ill-advised, and respectfully encourage you to remove it from the proposed bill. We understand it was included in the legislation because of concern that mortgagees might hold the mortgage restructuring process hostage by insisting that they (on behalf of a trustee or investor) be paid off in full, rather than accept a partial payment of claim.
Although we understand such a concern, we believe the proposed language attempts to solve the perception of a possible problem by prescribing a medicine that will "cure the disease by killing the patient." We also believe the provision reflects a misunderstanding of market realities, lenders'/investors' motivations for making an FHA-insured loan, and the relationship between the lender/investor and its/their loan servicer/mortgagee.
We believe this provision would likely cause significant disruptions in the financial markets and, indeed, would undermine the efficacy of the mortgage insurance and securitization programs of the FHA and Government National Mortgage Administration (GNMA) mortgage insurance and underwriting programs. If the government breaches its contractual obligations, as authorized by this provision, investors may be unwilling to commit their capital for affordable multifamily housing in the future because of the fear of future Congressionally imposed contract abrogations.
Such a provision would also be contrary to all legal precedents and would have far- reaching repercussions that would be far more costly than alternative approaches. It would certainly foster the filing of a number of costly and time-consuming lawsuits. Such lawsuits would distract the government's attention from other priorities, slow down the process of restructuring mortgages within the program and, to some degree, assure the failure of the proposed legislation. In short, the cost to the government in time, legal costs, and the perception that the Federal government will not stand by its contractual obligations, will far exceed any costs that would be incurred from the very few mortgagees who might attempt to delay the restructuring process.
Finally, MBA would like to query whether the provision will stand up to a constitutional challenge because it purports to remove a contractual remedy that arises under state law.
For all these reasons, we strongly encourage you to seek a more reasoned approach to addressing your concerns with respect to this issue. We look forward to continuing to work with the Subcommittee and its staff to remove this objectionable provision.
As noted above, NMA very much appreciates your willingness to include qualified mortgagees to participate in the process of restructuring the mortgages. We believe that including them in this process substantially improves the legislation and will help assure that the reforms you seek to impose will be effective and successful.
NMA also believes that Section 104(a)(2), the portion of the legislation that addresses mortgage restructuring issues, would be further improved by describing such procedures in greater detail. NIBA has prepared a detailed protocol for quickly and efficiently developing a mortgage restructuring plan, and has provided the Subcommittee staff with its recommendations. These recommendations are based on the procedure currently described in the legislation, but spell out the responsibilities of the parties involved in the restructuring in greater detail and describe a timetable to assure their timely completion.
We believe the legislation would be greatly improved if NMA's recommendations with respect to this issue were included, either in the statute itself, or in report language.
S.513 looks to the FHA multifamily mortgage insurance fund as the source of capital for partial or full prepayments of mortgages to be restructured under the proposed legislation. Because of the potential impact the proposed legislation could have on the FHA fund, we respectfully request that the Subcommittee include language to protect the fund from negative budget and credit scoring impact that could undermine the continued viability of FHA's multifamily programs.
FRA insurance is one of the few federal programs that currently fosters the production of new or rehabilitated affordable rental housing across the country. It also is critical to the production of nursing homes, assisted living housing and hospitals. We believe that, to protect the fund, language must be included that specifically safeguards the currently operating FHA insurance programs from unintended adverse impacts from the solutions to the Section 8 program in the legislation. Only in this manner can we assure that in solving one problem we do not create another.
MNA has prepared several provisions that would accomplish this important objective, and delivered them to the Subcommittee staff. Included is a provision that would permit mortgages to be restructured without the need to appropriate funds for credit subsidy for each mortgage to be restructured under your plan. We encourage you to incorporate these recommendations in the proposed legislation.
MBA believes the FHA multifamily mortgage insurance programs can operate without the need for an annual appropriation for credit subsidy. MBA has, therefore, developed a detailed set of recommendations that would improve program policies, procedures and underwriting practices that could assure that, exclusive of personnel and administrative costs, they could, collectively, operate at a profit or break even.
MBA respectfully encourages the Subcommittee to consider these recommendations and incorporate them in S. 513 at some point before final approval. In this manner constructive refornLs that help reduce the cost of operating one of HUD's critical progranLs would be set in place and would allow additional staff resources to be allocated to Section 8 reform activities and other important programs.
On behalf of the Mortgage Bankers Association of America and myself, we would like to thank you for this opportunity to address these important issues. We commend the
sponsors of this legislation on the hard work and leadership that has been shown in
undertaking to reform the Section 8 programs. Please do not hesitate to call on MBA as
the Subcommittee proceeds with its work on the bill. We look forward to working with
the Subcommittee to complete the legislation and to gain approval by the Senate Banking
Committee and the Congress as a whole.
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