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Statement of John C. Weicher
Assistant Secretary for Housing - Federal Housing Commissioner
before the
Subcommittee on Housing and
Community Opportunity
Committee on Financial Services
U.S. House of Representatives
July 22, 2003
Chairman Ney, Ranking Member Waters, distinguished members of
the Subcommittee on Housing and Community Opportunity, on behalf
of Secretary Martinez, thank you for inviting the Department to
testify on the subject of H.R. 1985, the FHA Multifamily Loan Limit
Adjustment Act of 2003. We appreciate this opportunity to provide
the Committee with the Department's comments on this proposed legislation.
The Administration and the Department are firmly committed to having
FHA participate as a strong and effective player in the financing
of rental housing nationwide. We have taken several major actions
in that effort. First, we have put the multifamily insurance programs
on a sound actuarial basis, enabling most of them to operate without
the need for appropriated credit subsidy. Second, we have instituted
an annual process of updating the mortgage insurance premiums, so
that they continue to operate on a breakeven basis. Third, we have
established a much faster underwriting process, saving the industry
time and money. Fourth, we asked Congress for a 25 percent increase
in the multifamily mortgage limits - the first increase in 10 years.
Secretary Martinez called for this increase shortly after taking
office.
This Administration inherited serious problems in FHA's basic multifamily
housing insurance program-the Section 221(d)(4) program. This program
previously required a credit subsidy allocation pursuant to the
Federal Credit Reform Act enacted in 1990. Three times in eight
years, the program was closed down because the available credit
subsidy allocation was exhausted. The last time was in May 2001,
when the Department was forced to suspend multifamily insurance
processing. To prevent further such closures, the Department determined
to place the program on a break-even basis. This necessitated raising
the premium from 50 basis points to 80 basis points for FY 2002.
Many in the industry were very concerned by this necessary increase.
They worried that it would weaken the viability of the program and
its ability to serve moderate-income families. That did not happen.
In FY 2002, FHA insured 2.8 billion worth of Section 221(d)(4) projects,
nearly double the FY2001 total, and the largest volume in twenty
years.
At the same time that the premium was raised, the Department made
a commitment to conduct a systematic analysis of the process used
to determine the break-even premium and the credit subsidy rate.
This was the first such re-analysis since Credit Reform was enacted
in 1990. We found that the Section 221(d)(4) program could be operated
on a break-even basis at a much lower premium - 57 basis points.
This premium went into effect at the beginning of FY 2003. In addition,
we instituted a process of annual re-analyses, to determine what
the appropriate premium should be. As a result, the premium will
be cut to 50 basis points in October, the start of FY 2004.
We also conducted this analysis for each of our other multifamily
programs, and have been able to reduce either the premium or the
credit subsidy for nearly every other multifamily program. All but
four of our programs are now self-supporting, and do not require
credit subsidy.
These efforts by this Administration have ensured that the 221(d)(4)
program will not repeat the experience of past shutdowns. Mortgage
bankers and developers are assured that they can continue to bring
loans to the Department.
Moreover, once applications come to the Department, we now process
them faster. All loan applications are now processed under the Department's
Multifamily Accelerated Processing, or MAP, initiative. MAP was
instituted on a national basis in FY2001. MAP provides guaranteed
processing time frames, and it has resulted in a significant increase
in mortgage applications and endorsements.
Our other major initiative has been to increase the mortgage limits.
As I mentioned, shortly after assuming office Secretary Martinez
called for a 25 percent increase in the statutory loan limits -
the first such increase in a decade. Congress enacted that request
in 2002.
Also in 2002, Congress approved indexing the FHA mortgage limits
in Section 5 of the FHA Downpayment Simplification Act of 2002,
commencing in January 2004. This indexing will further increase
the loan limits, year by year. It will enable FHA to keep pace with
inflation and changing economic conditions, and to meet the needs
of families seeking moderately priced rental housing. Clearly, annual
adjustments provide a better way to compensate for increased costs
than by providing periodic dollar increases. The 2002 increase represented
a catch-up for the inflation that occurred during the preceding
decade. As indexing will not take effect until 2004, the Department
cannot at this time determine to what extent it will increase FHA
mortgage activities.
Thanks to all of these changes, in FY 2002 FHA insured over $7
billion worth of projects for all multifamily insured housing programs
combined. This is our highest overall production level since the
inception of the mortgage insurance programs. The projections for
FY 2003 indicate that we will be exceeding the FY 2002 numbers.
Through the first three quarters of FY 2003, 913 loan commitments
for a total of $5.3 billion have been issued, a nine percent increase
in mortgage activity compared to last year at this time, with one
quarter remaining in the fiscal year. Having set a record last year,
we appear to be on course to break it this year. Based on the increasing
number of loan commitments over the last two years, the Department
believes that the FHA multifamily mortgage insurance products, under
current limits, meet the market needs in the great majority of this
country.
Moreover, we are seeing applications from high-cost metropolitan
areas that have not participated in the program in years - Philadelphia,
Baltimore, here in Washington DC, and Seattle.
At the same time, I am pleased to report that the Department continues
working vigorously to assist sponsors to close Section 202 Capital
Advance projects to ensure that this needed affordable housing is
built for low-income, elderly persons. We inherited a long pipeline
of projects that had been approved years before, and we cleaned
out that pipeline. In 2001, there were 48 projects that had been
in the pipeline for at least four years - double the processing
schedule established by the Department. Today, there are only 6
projects remaining. Although it is not the topic of this hearing,
Mr. Chairman, I want to bring this to your attention as further
evidence of the Department's commitment to provide affordable housing
for people who need it.
However, there are areas where FHA insurance products are underutilized,
such as San Francisco, Los Angeles, Boston, and New York. Based
on discussions with our Field Office personnel and industry groups,
there appears to be a variety of reasons for the lack of multifamily
production in these areas. These reasons include: 1) suitable sites
are not readily available; 2) available sites often have substantial
environmental issues that render them cost prohibitive; 3) available
sites are located in areas that are not marketable (i.e. no public
transportation) and 4) regulatory barriers which add years to processing
times. These local market issues will remain regardless of the proposed
legislation.
Traditionally, FHA mortgage insurance has served an important public
purpose by insuring projects that are affordable to low-to-moderate
income families. It's important to make sure that FHA continues
to serve that purpose -- that increases in the mortgage limits do
not put FHA into higher-income housing, at the expense of moderately
priced rental properties. That could be the case if the regulatory,
environmental, and other problems mentioned above are the main reasons
why multifamily housing is not being built in some areas. Increases
in FHA loans limits must be carefully scrutinized for their net
impact on affordable housing and these benefits must be weighed
against any increased risk that the FHA Fund would face. It is worth
noting that the national rental vacancy rate is 9.4 percent, the
highest level in forty years. Given this, it is important that FHA
exercise prudent underwriting and control of credit risk in an environment
where there is a risk of over-supply of housing. At the same time,
we certainly recognize that rental housing is more expensive in
some markets than in others.
When we raised the mortgage limits, The Department made a commitment
to study the impact of the increase, with particular reference to
high-cost areas. We are now conducting that study, looking at 18
months' experience with the new limit. This study will be completed
this fall and will provide the data to determine if further increases
to the mortgage limitations are warranted to serve high-cost markets.
Until then, the Department is not in a position to support this
proposed legislation at this time.
Content Archived: June 25, 2010
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