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HUD No. 02-021
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February 6, 2002

HUD Announces Major Reduction in FHA Apartment Financing; More Families to Benefit from Affordable Housing

WASHINGTON - U.S. Department of Housing and Urban Development today announced substantial reductions in the mortgage insurance premiums for most Federal Housing Administration apartment loan programs. The reductions, part of the President's FY 2003 budget, will lower the cost of building over 50,000 new affordable rental apartments each year.

"This announcement means more American families will be able to find affordable housing," said HUD Secretary Mel Martinez. "By reducing the cost of building new apartments, we will also be assisting communities in renewing their neighborhoods and revitalizing their housing stocks."

The annual premium on FHA's most popular program, Section 221(d)(4) for new construction loans, will be cut from 80 basis points to 57 basis points. FHA expects to insure $3.5 billion worth of apartment projects under this program in FY 2003; total savings will be over $8 million annually, or $320 million over the 40 year insurance term.

"Three times over the last eight years HUD has been forced to shut down our multifamily mortgage insurance programs because of lack of credit subsidy," Assistant Secretary for Housing-Federal Housing Commissioner John C. Weicher explained, during the Mortgage Bankers Association Convention in Orlando, FL, today.

"Last year, Secretary Martinez committed to a comprehensive review of the credit subsidy program," Weicher added. "We examined the statistical techniques that were used to analyze loan performance; we thoroughly updated and refined FHA's data and incorporated the major tax law changes in the 1980s that affected the profitability of multifamily housing. Through our review, we were able to lower premiums, create a self-sustaining program, provide the industry with stable financing at a much lower cost, and provide thousands of new opportunities for rental housing across the country."

The improved FHA analysis will also result in reduced premiums for the Section 207 Manufactured Home Park development program and the Section 220 Mixed-Use apartment development loan program. Both premiums will be cut from 80 basis points to 61 basis points, reflecting the specific risk of loss calculated for these loan guarantees.

On a few programs, FHA continues to require credit subsidy, because the insurance premiums do not cover the expected losses over the life of the loans. Congress must appropriate these subsidies before FHA can insure any loan. As a result of the analysis, credit subsidy rates will be cut for two of these programs. The required subsidy will be 3.93 percent for Section 221(d)(3) for apartment projects developed by nonprofit organizations, down from 8.89 percent this year. The required subsidy will be 6.35 percent for Section 241(a) Supplemental Loans for Apartments, down from 28.16 percent. The overall request for FHA credit subsidies in the President's FY 2003 budget remains at $15 million, the same amount appropriated in FY 2002. The reduced subsidy rates mean that the $15 million credit subsidy will allow FHA to insure more projects in these programs, and increase its total multifamily mortgage guarantees for apartments, nursing homes, and hospitals by more than 56 percent in FY 2003, to a total of $10.8 billion.

In another move designed to expand the supply of rental housing, FHA late last year raised its multi-family loan limits by 25 percent, the first such increase since 1992.



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