Low per-unit mortgage base limits constitute a significant flaw in an otherwise highly worthwhile Federal Housing Administration (FHA) mortgage insurance program. The limits have choked off a valuable source of financing for housing development in New York City and other high-cost cities like Boston, San Francisco, Chicago, and Los Angeles. The limits should be raised significantly to keep pace with the rising costs of housing development.

Here’s the problem: Recent mortgage activity under this program, known as Sec. 221(d)(4), based on data provided by the Department of Housing and Urban Development (HUD), demonstrates incredibly low usage of the program across the nation for multi-story buildings with elevators. Of the 478 multifamily projects that received a final endorsement between 2002 and 2008 and were not financed under federal government programs—in other words, were privately financed—only 31 (6.5 percent) were FHA-insured elevator apartment buildings, and most of those were financed from 2004 to 2006.

Only three elevator projects nationwide have been financed under the Sec. 221 program in the last two years. What happened? The low per-unit mortgage base limits on FHA insurance make the program practically unavailable in high-cost areas, where elevator buildings are more common. The per-unit cap is higher for elevator building units, but not nearly high enough to be viable in high-cost urban areas.

The base limits were just minimally increased in April 2009. While the increase is a positive sign, these last increases do not take into account the much greater increases in construction and development costs since the last base increase in 2002. The limits continue to be too low in many metropolitan areas where mid- to high-rise elevator buildings are more common. The National Housing Act permits adjustments for high-cost areas on an areawide basis of up to 240 percent above otherwise applicable levels and up to 270 percent on a project-by-project basis.

But this is still not sufficient for high-cost areas. Nonluxury, affordable elevator buildings in Boston, New York City, Los Angeles, San Francisco, and Chicago have development costs of approximately $300,000 per unit. Mixed-income buildings, such as “80/20s”–usually located in the more expensive parts of these cities so that they can use the high market-rate rents to cross-subsidize the affordable units—often have costs over $500,000 per unit, not including land purchase.

For example, it would cost approximately $50 million to construct a 100-unit building in Manhattan for hard and soft costs alone. Loans are often sized at 80 percent of value or cost. A loan of 80 percent of cost would be at least $40 million, or $400,000 per unit. The current FHA base limit per two-bedroom unit is approximately $68,000 per unit. With the existing high-cost area boost of 270 percent the base limit is increased to approximately $183,000 per unit, leaving a gap of $217,000 per unit that would need to be financed somehow to make the project feasible.

I believe the most efficient solution would be to increase base limits for elevator buildings in high-cost areas to approximately $150,000 for a two-bedroom unit and similarly for other sized units. At a base limit of $150,000, the existing high-cost boost would be sufficient to achieve an insurable loan amount of $400,000 per unit.

Ironically, the program known as HUD Sec. 221 has a great track record. Sec. 221-insured mortgages facilitate the new construction or substantial rehabilitation of multifamily rental and co-op housing across the United States. In fiscal year 2007, for example, the program insured mortgages for 104 projects with 16,219 housing units, totaling $1 billion.

Given current economic conditions and high construction costs, it’s likely that much of that construction would not have been financed without the substantial benefit of Sec. 221 FHA insurance. FHA’s federal guarantee against lender losses in case of borrower default make capital more readily available to developers. Divided into two main subsections, Sec. 221(d)(3) is used by nonprofit developers, and Sec. 221(d)(4) is used by for-profit developers.

The program allows for long-term mortgages (up to 40 years) that can be financed with Government National Mortgage Association (GNMA) mortgage-backed securities. The availability of this type of housing development financing is critical, especially as financing from other sectors of the lending community has dramatically slowed.

Sec. 221-insured mortgages may be used to finance construction of detached, semi-detached, row, walk-up, or elevator rental or co-op housing containing five or more units. The program, authorized under the National Housing Act, imposes limitations on the per-unit multifamily mortgage amount that may be insured, based on building type–elevator or non-elevator–and number of bedrooms.

Because this FHA program offers a seamless construction-to-permanent loan, it is critically important to the housing industry, now more than ever. In the current economic environment where many other financing options are no longer available, it is vital to make FHA mortgage insurance more accessible for elevator building projects and in high-cost areas.

Judith Calogero is CEO of the New York Housing Conference.