Statement before the
John C. Weicher, Assistant Secretary for Housing
Senate Committee on Banking,
Housing, and Urban Affairs
Subcommittee on Housing and Transportation
July 24, 2001
Reed, Ranking Member Allard, distinguished Members of the Subcommittee,
thank you for inviting me to testify on the FHA Multifamily Housing
Mortgage Insurance Program.
your letter of invitation you express interest in three issues:
the impending increase in mortgage insurance premiums; program credit
subsidy rates; and, the Administration's proposed increase in the
per-unit mortgage loan limits.
Insurance Premium Increase
National Housing Act authorizes the Secretary to set the premium
charge for insurance of mortgages. The range within which the Secretary
may set the charges must be between one-fourth of one percent per
annum (25 basis points) and one percent per annum (100 basis points)
of the principal obligation of the mortgage outstanding at any time.
The mortgage insurance premium (MIP) for most multifamily mortgage
insurance programs has been set by regulation at one-half of one
percent of the average outstanding principal balance of the mortgage
per year. (A different calculation is used for the construction
period to account for the disbursement of mortgage proceeds during
In FY 2001, Congress appropriated $101 million for credit subsidy.
The Department effectively obligated all of the available credit
subsidy by May, for reasons that I described in my confirmation
hearing at that time. At the end of FY 2000 the Department ran out
of credit subsidy, and promptly used the first $12 million of credit
subsidy for FY 2001 to fund the projects left over in the pipeline.
Also, there was an unexpected increase in applications in the 221(d)(3)
program - multifamily housing sponsored by nonprofits - which carries
a higher credit subsidy rate than most other FHA multifamily programs.
Some of these projects should have been treated as having for-profit
sponsors. In recent years, the number of Section 221(d)(3) commitments
has varied, but they did account for about 13 percent of the credit
subsidy obligated in FY 2000. This year, it accounts for 40 percent.
If the FY 2000 activity level had continued this year, FHA would
have obligated approximately $23 million less in credit subsidy,
and we would not have this problem.
the Department exhausted its credit subsidy, we advised all field
offices to halt the issuance of FHA commitments conditioned on credit
subsidy. To meet the need for multifamily housing, the Secretary
then decided to request a supplemental appropriation of $40 million
in credit subsidy and at the same time to implement a premium increase.
On July 2, the Department published a notice in the Federal Register
increasing the multifamily mortgage insurance premium for the programs
requiring credit subsidy to eight tenths of one percent or 80 basis
points. The rule and notice become effective on August 1 and field
offices will be authorized to resume issuing commitments for the
positive credit subsidy programs. All FHA commitments issued on
or after that date for the specified programs, primarily our Section
221(d)(3) and 221(d)(4) new construction/substantial rehabilitation
programs, will be processed at the higher premium. Projects in the
Headquarters queue for credit subsidy with outstanding FHA commitments
will be allowed to proceed to closing at the lower premium subject
to the availability of credit subsidy in FY 2001. The increase will
lower the credit subsidy rates.
purpose of these proposals is both to resume the production of needed
multifamily housing, and to put FHA's basic multifamily program
on a demand basis, like the 203(b) program for single-family mortgage
insurance. This is the third time in eight years that FHA has run
out of credit subsidy before the end of the fiscal year. The Secretary
wants to eliminate the stops and starts that have plagued our multifamily
programs, and make sure that this situation does not happen again.
The premium increase of 30 basis points achieves these purposes.
It is in line with the Administration's proposal in the FY 2002
the Federal Credit Reform Act of 1990, HUD, like all other federal
agencies with loan programs, is required to estimate the probable
cost to the agency of its programs and must request credit subsidy
as part of its budget each fiscal year to cover those costs. In
calculating the credit subsidy estimates, HUD has engaged contractors
who looked at the historic loan performance of FHA's major programs
- prepayments, claims, the income FHA receives from application
/inspection fees, mortgage insurance premiums and recoveries from
note and property sales. This analysis becomes the basis of the
credit subsidy rate in each year's Federal budget. Loan performance
has greatly improved in recent years. In FY 2001 FHA's major new
construction program, Section 221(d)(4) required a subsidy of 3.35
cents for each dollar of loan insured. That is down from 7.12 cents
last year and 11.96 in 1996.
industry has questioned the underlying data used in the credit subsidy
calculations and the underlying assumptions. At my confirmation
hearing I promised to conduct a complete reanalysis of the methodology,
and make a new judgment as to the appropriate credit subsidy rate
and the appropriate MIP. We are now in the middle of that analysis.
Meanwhile, we have provided the industry with the credit subsidy
computer model and assumptions, and it is my understanding that
they are conducting a parallel analysis. My staff met with industry
representatives three weeks ago and agreed to further analyze some
issues that were particularly important, in their view. The industry
also believes that the 1986 changes in tax law, and more recent
changes in FHA underwriting standards, are not given adequate weight
in the credit subsidy analysis. In our work, we are evaluating their
concerns and how they might be accounted for . Once the staff analysis
is complete, I will make recommendations to the Secretary and to
the Office of Management and Budget as to whether the credit subsidy
rates and the MIP should be changed. As I mentioned, the Secretary
now has statutory authority to change the MIP; under that authority,
the Department issued an interim rule on July 2, which allows the
Secretary to raise or lower the MIP within the range of his statutory
Statutory Per Unit Limits
National Housing Act includes per unit limits by bedroom size for
the various new construction/substantial rehabilitation programs
with a maximum adjustment of 140%(with exceptions for Alaska, Guam
and Hawaii) where the Secretary determines it is necessary on a
project-by-project basis. The base limits in the National Housing
Act have not been raised since 1992. The effect has been to limit
the use of the FHA multifamily mortgage insurance programs in high
cost areas of the country like Boston, New York, Philadelphia, Chicago
and San Francisco because the FHA maximum insurable mortgage would
be controlled by the mortgage limits rather than economic considerations
such as debt service or replacement cost. This would result in much
greater equity requirements for developers in those areas, and a
disincentive to use the programs.
analyzing construction cost data for 74 selected cities across the
country, we found that construction costs had increased an average
of 25% since 1992. For that reason the Secretary and the President
have proposed an increase of 25% in the base limits. Individual
projects will still be able to take advantage of the maximum 140%
adjustment where feasible and appropriate. We believe this will
encourage the construction of much needed multifamily rental housing
in the major metropolitan areas across the country.
concludes my statement, Mr. Chairman. Thank you again for the opportunity
to appear before you.
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