The Mortgage Bankers Association (MBA) has taken up a fight to keep the Federal Housing Administration (FHA) from damaging one of its most popular financing vehicles for multifamily housing.
The MBA held its annual National Policy Conference at Capitol Hill in April and made a concentrated lobbying effort to remove a proposed FHA mortgage insurance premium (MIP) rate hike from the 2007 federal budget proposal. The plan to increase the MIP from 45 to 77 basis points would add 10% to the cost of doing most FHA deals, resulting in rent increases of as much as 5%, say lenders. This would come at a time when construction costs are skyrocketing and interest rates and local property taxes are rising as well.
“With the Congress-ional Budget Office [CBO] analysis and a huge outcry from the [housing and building] industries, there’s a good probability that this won’t go into effect,” said Karl Reinlein, senior vice president and managing director of FHA programs for GMAC Commercial Mortgage Corp.
At first, the Office of Management and Budget justified the proposal by stating that the increased MIP would generate $150 million annually in additional revenue. But CBO argued that FHA volume would actually decline, resulting in only $20 million annually in additional revenue.
Members of Congress were not familiar with these aspects of the proposed budget, said Dee McClure, CWCapital senior vice president and Department of Housing and Urban Development (HUD) national program director.
“After speaking with them, they realized that the proposed revenue generated by the MIP increase would not solve the nation’s deficit problems,” she said. “The $20 million per year is meaningless compared to the harm it would do to preserve moderate-income housing and has ramifications on construction jobs and the tax base.”
MBA predicts that the proposed increase would cut future FHA volume by half.
Lenders make recommendations
HUD has said that the MIP change would “address cases where subsidies are provided for construction of projects that are not limited to low- and moderate-income persons and therefore not achieving the program’s public purpose” in order to “offset taxpayer costs for loans to those projects.”
But Tom Booher, president and CEO of PNC MultiFamily Capital, responded that, nationally, at least 85% to 90% of FHA projects are serving families at the area median income or below without using subsidies.
Some FHA programs, such as projects financed by the low-income housing tax credit, would be exempt from the proposed MIP increase. However, tax credit projects make up no more than 25% of the overall FHA volume.
“HUD should change its definition of affordable housing to be more inclusive,” recommended Booher.
Lenders say the MIP should continue to reflect the decreasing risks in the multifamily lending marketplace instead of being abused as a back-door way to make up for government budget shortfalls. For the past three years, the MIP has actually dropped from 80 to 45 basis points.
The MIP’s intended function is to offset the risk exposure that the government has under the mortgage insurance program, said Bud Malone, a consultant and former lender for the FHA industry.
“FHA should continue doing what it’s been doing by tying the cost of the program to an actual analysis of what it costs to provide mortgage insurance,” said Booher. This results in the MIP coming down, which makes underwriting costs lower and helps deals get done.
Lenders also believe there are more positive ways for FHA to promote affordable housing. For example, FHA could make Sec. 202 seniors housing refinancing easier to process. There are about 4,500 Sec. 202 projects that could be refinanced now, but lenders are still waiting for more guidance.
“They should loosen the [cumbersome] rules and make them more reflective of the fact that they are HUD-held mortgages,” said Reinlein.
“No one else is recapitalizing Sec. 202 like FHA,” said Mark Beisler, president and chief operating officer for Red Capital Group. “The nicer projects are being picked up by Fannie Mae and Freddie Mac, but the general Sec. 202 projects would fall into disrepair without FHA.”