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					                   FHA-Related Comments from
                Responses to MHC Solicitation Letter

Bank of America                                       Chicago Mutual Housing
                                                      Network
How can access to capital for homeownership
(for refinancing as well as purchase) be              How can we best provide the capital to
improved for those who currently fall through         finance the rehabilitation needs of the
the gaps?                                             affordable housing stock (both public housing
                                                      and assisted inventory?
The notable exception to this observation
concerns low-value, owner-occupied houses             Our recommendation is to re-capitalize
in depressed markets. These homeowners                HUD’s Section 221(d) 3 mortgage program
often have little or no equity in their homes         (dating from the 1960’s), which has been the
and have difficulty securing capital for              most successful HUD mortgage programs
needed repairs and occasional improvements.           ever created, with a low default ratio. The
In these situations, access to capital might be       renewal of this loan program will spur the
enhanced through some type of systematic              production of affordable cooperative housing
retooling of the FHA Title 1 program.                 in Chicago. Chicago area cooperatives that
                                                      benefit from this mortgage program include
There are two areas FHA Title 1 retooling
                                                      London Towne Houses in the Pullman
should emphasize. First, use of FHA Title 1
                                                      neighborhood. Established in 1964, the 803-
should be linked and coordinated with
                                                      unit development benefits from a 1% FHA
structural code enforcement efforts of local
                                                      guaranteed mortgage allowing families to live
government. Additionally, a homogeneous
                                                      in the development today for as little as $400
secondary market for the insured loans needs
                                                      per month. Overall, cooperative loans have
to be created. A limited number of
                                                      proven to be the FHA’s top performing loans
institutional bulk purchasers could perform a
                                                      in the portfolio, outperforming any other
role analogous to that of Fannie Mae and
                                                      FHA loan program (Source: 1995 study by
Freddie Mac for first mortgages.
                                                      the Urban Institute and the National
How can the multifamily housing finance               Cooperative Bank.)
delivery system be improved for housing
production and preservation?                          The Enterprise Foundation
Experiment with delegated underwriting for            The FHA ACA program allows local
FHA multifamily. Ideas include:                       governments and qualified nonprofit
                                                      organizations to purchase FHA-owned homes
      Use a risk share with risk share burn-         at a discount for rehabilitation and resale to
       off model;                                     buyers in distressed communities. The
      Limit delegation to well-capitalized,          program, created in 1998, promotes several
       federally supervised entities; and             important objectives: increasing
                                                      homeownership for low-income people;
      Engineer a new version of FHA-                 stabilizing distressed neighborhoods; taking
       delegated underwriting after studying          foreclosed homes off the federal
       moral hazard and perverse incentive            government’s hands; limiting losses from
       problems of the 1980s.                         future foreclosures; and preventing real estate
                                                      speculation that exacerbates neighborhood
                                                      blight and homeownership disparities. (An


                                                  1
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
additional benefit, once the program is                 did last year in the Conference Report of
operating at scale, could be a freeing up of            HUD’s Fiscal Year 2001 Appropriations Bill.
resources now deployed for homeownership,
such as HOME, to help alleviate acute rental            Fannie Mae
housing needs of extremely low-income                   FHA should consider a risk-sharing program
people.)                                                that would marry the government’s ability to
To date, 15 jurisdictions have ACA                      take a higher level of risk than the private
Agreements with HUD in place, with                      sector with the private sector’s ability to
thousands of homes in the potential pipeline.           better measure and manage risk. The
In addition, 10 jurisdictions are in                    Commission could consider looking at Fannie
negotiations with the Department and 16                 Mae’s partnership with Self-Help and the
others have formally expressed interest in              Ford Foundation as a model.
participating. This high level of interest in a         …
program that HUD has done little to promote
attests to its great potential.                         Housing policy should place greater emphasis
                                                        on the small rental property inventory. This
HUD and its ACA partners have                           inventory provides the majority of affordable
constructively negotiated many major details            rental housing opportunities in this country.
of how the program should work in each                  FHA risk-sharing pilots could increase lender
community. One major sticking point is the              and secondary market participation and
discount price for which HUD will sell its              advance understanding about the financing
foreclosed homes to cities and nonprofits.              needs of this stock.
The ACA program statute gives the
Department broad flexibility to sell homes at           The Housing Partnership
a price that allows their feasible rehabilitation       Network
and resale; the law does not prescribe a
percentage or price limit. Regrettably, HUD             Mentions importance of homeownership
by draft regulation has limited the maximum             counseling to FHA loan loss mitigation and
discount amount of 75 percent to homes                  foreclosure avoidance.
valued at $50,000 or less. That is simply too           C. Improving Disposition of FHA Single-
low a level to allow the program to work in             Family Homes
high-cost urban areas. As a result, some ACA
jurisdictions will have to seek additional              Creative strategies to dispose of the inventory
federal, state or local government subsidies to         of foreclosed FHA single-family homes
carry out their ACA programs. This                      continue to provide opportunities for
unnecessary inefficiency will allow the                 affordable homeownership and stabilizing
problem of FHA foreclosures to worsen faster            neighborhoods. Efforts should build on the
than communities trying to combat it can                policies of new Asset Control Area (ACA)
respond.                                                program. Partnerships among HUD, local
                                                        governments, and high-capacity nonprofits
We encourage the Commission to                          should be structured to recycle FHA
recommend that Congress direct HUD to                   properties in bulk.
implement the ACA program in general and
its discount provision in particular in the             Background
flexible manner the law allows, as Congress


                                                    2
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
Over the last 15 years, HUD has pursued a             from federal sources; confusion on the roles
variety of initiatives to sell homes that were        of HUD’s private Marketing and
foreclosed under FHA mortgage programs.               Management (M&M) contractors; and a
These efforts have tended to be piecemeal,            general slowness in bringing communities
reflecting tension among the policy goals of          into the program.
improving properties and neighborhoods,
                                                      Though initially unenthusiastic about the
supporting affordable homeownership, and
                                                      program, HUD is now moving to expand
recovering as much as possible of insurance
                                                      Asset Control Agreements to additional cities.
claims. As a result, properties often remain in
                                                      HUD is also addressing some of the
the disposition process too long, and become
                                                      weaknesses through a rulemaking process.
blighting eyesores suffering from
deterioration and vandalism. In some cases,           Maximizing the Partnership Opportunity
when the are finally sold, properties are             Technical changes can help the program.
bought by predatory resellers who make                There are also opportunities to realize more
substandard repairs, and then lease or resell         fully the potential of the
the homes to unsuspecting families.                   federal/local/nonprofit partnership structure.
In 1998 Congress created the ACA program.             Continued efforts to improve ACA operations
It was an effort to reconcile conflicting             should focus on four objectives:
federal priorities and take advantage of the                Bring properties back to market
potential of partnerships with local                         quickly and in bulk, preserving their
governments and nonprofits. Local                            economic value and minimizing
governments and nonprofits would agree to                    blighting impacts;
purchase all foreclosed assets within a
defined geographic area, rehabilitate them,                 Perform quality rehabilitation so that
and make them available for affordable                       the properties remain neighborhood
homeownership. Properties would be                           assets into the future;
appraised and then sold to the local                        Create thousands of affordable homes
partnership at a discount, depending upon the                for sale; and
amount of rehabilitation needed.
                                                            Stabilize communities by increasing
ACA programs are now well underway in                        homeownership.
Chicago, Cleveland, Miami, Rochester and
San Bernardino, with a few other cities,              ACA partnerships should be further
notably Los Angeles, getting started. These           strengthened by establishing risk-sharing
initial efforts are demonstrating the strength        compacts between HUD and the local
of the concept. Thousands of properties are           nonprofits responsible for acquiring,
moving through rehabilitation and into                rehabilitating, and reselling the properties.
affordable homeownership. The early                   First, HUD, the local government, and the
experiences also highlight some weaknesses            nonprofit would agree on minimum standards
in the program design. For example, there             for rehabilitation. HUD would then contribute
have been difficulties in agreeing on appraisal       the properties, and the nonprofit would secure
and rehabilitation standards; insufficient            financing to rehabilitate, market and resell
discounts that force non-profit buyers to             them. Net proceeds from the sales (after
obtain other development subsidies, often             repayment of rehabilitation financing) would


                                                  3
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
be shared between HUD and the non-profit                    of resolving entire portfolios are
on a portfolio basis. The nonprofit would use               shared with the federal partner.
its proceeds to pay for its costs to run the
                                                     The ACA program was intended to create
program and/or for reinvestment in other
                                                     partnerships between HUD and strong local
affordable homes, including ACA properties
                                                     organizations. The risk-sharing partnership
and other housing development activities.
                                                     will realize the full potential of these
This arrangement improves the current                relationships. The Network believes HUD has
program by:                                          the authority under the existing statute to
                                                     engage in a partnership of this nature.
      Aligning the interests of the federal
       government, the local government and          Institute for Community
       the nonprofit. The nonprofit does well
       by being efficient, keeping
                                                     Economics / Community
       rehabilitation costs down (within the         Land Trust Network
       agreed-upon standards), and by                FHA has been reluctant to purchase CLT
       generating sales proceeds that                mortgages without insisting on the addition of
       reimburse part of HUD’s mortgage              an onerous “Rider” which requires that resale
       insurance claim.                              restrictions be extinguished, thereby defeating
      Streamlining the acquisition and              the purpose of permanent affordability. Some
       development process. The depth of             CLTs have encountered problems in
       HUD’s involvement and regulation is           obtaining project financing due to problems
       reduced by eliminating individual             with securing FHA insurance where the
       appraisals and rehabilitation standards       mortgages contain resale restrictions. ICE is
       for each property. These cost the             currently working with FHA officials to have
       government time, effort and money,            those insurability barriers eliminated. A
       and continue to involve HUD in                federal ‘long-term affordability/ resale
       monitoring activities. Sharing                restriction’ policy backed by specific
       financial incentives and risks, HUD           legislation that would address the concerns of
       would encourage entrepreneurial and           the lending community, FHA and those of the
       experienced nonprofits to administer          secondary market would eliminate the need
       the program with cost efficiency, scale       for ICE and individual CLTs to negotiate
       and impact.                                   solutions on a time-consuming case by case
                                                     basis.
      Using the FHA insurance fund to
       subsidize rehabilitation and resale           Manufactured Housing
       costs of HUD-owned properties to
       lower-income families. Rather than
                                                     Institute
       burden local or state governments, or         How can we best provide the capital to
       indeed other HUD programs, to                 finance the rehabilitation needs of the
       provide gap subsidies, the insurance          affordable housing stock?
       fund is the appropriate source to             Many lower-income homeowners reside in
       absorb these costs.                           aging manufactured home communities that
      Encouraging local participation by            are in need of upgrading. FHA’s 207(m)
       spreading risk. The risks and rewards         program is supposed to provide financing to


                                                 4
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
developers seeking to upgrade these older           and homebuyer education and counseling
communities. However, the regulations have          programs. The FHA, VA and RHS all offer
been in place since the 1970s and have not          homeownership programs that require very
kept pace with the changing nature of the           low downpayment or no downpayment by the
manufactured housing industry, thus making          borrower and flexible underwriting
it difficult, if not impossible, for many           guidelines. Because of these features, these
developers to utilize this program. In              programs play a critical role in expanding
addition, many local HUD offices around the         homeownership opportunities.
country have no familiarity with the program,
                                                    The FHA home mortgage insurance program
do not promote it or are unwilling to work
                                                    needs to be expanded and strengthened.
with developers seeking to utilize the
                                                    Because of its low downpayment
program. The 207(m) program should be
                                                    requirements and flexible underwriting
reviewed and HUD should be encouraged to
                                                    guidelines, the FHA program serves families
work with the industry to revitalize the
                                                    who would not qualify for conventional
program as a way to upgrade these older
                                                    financing. As a result, 80% of FHA
communities.
                                                    homebuyers are first time buyers and nearly
McAuley Institute                                   42% are minorities. These percentages far
                                                    exceed the conventional mortgage market.
[Supports National Housing Trust Fund               But the FHA program could do more, if
funded out of FHA “surplus.”]                       several legislative and regulatory changes
To lower the cost of acquisition, the               were made to it to make it even more useable.
Commission should recommend that FHA                A comprehensive list of these changes is
foreclosed properties be given or sold at           included in the attached MBA Blueprint, but
nominal cost to nonprofits willing to               the legislative changes specifically would
guarantee long-term affordability. Other            include:
surplus government property should be                     Making permanent the streamlined
disposed of similarly.                                     downpayment calculation for FHA
Mortgage Bankers                                           mortgages that will expire on
                                                           December 31, 2002. Several years ago
Association of America                                     the Congress changed the formula for
How can access to capital for homeownership                calculating the downpayment
(for refinancing as well as purchase) be                   requirements for FHA loans to make
improved for those who currently fall through              them more affordable and
the gaps?                                                  understandable to the borrower. Now,
                                                           these provisions should be
MBA believes that access to capital for                    permanently extended. If the
homeownership for those that fall through the              provisions are not extended, the
gaps (low and moderate incomes families,                   downpayment requirements for FHA
minorities, etc.) is best achieved by                      loans will significantly increase on
maintaining a strong commitment to the                     January 1, 2003.
Federal government’s homeownership
programs (FHA,VA and RHS) and by                          Providing diversification of FHA’s
providing comprehensive financial literacy                 product mix by allowing FHA to
                                                           insure hybrid adjustable rate


                                                5
               FHA-Related Comments from
            Responses to MHC Solicitation Letter
    mortgages (ARMs) and other new and                   county maximum loan amounts for
    innovative loan products (at least on a              reverse mortgages, because this is a
    limited basis), as the marketplace                   program that serves seniors who
    dictates, without requiring FHA to                   already own their homes and are just
    have specific legislative authority for              trying to convert their equity into
    each product. This change would                      additional monthly income. Therefore,
    foster innovation and allow FHA to                   under current law, a senior living in
    respond more quickly to changes in                   Des Moines in a home worth
    the marketplace. (Hybrid ARMs have                   $175,000 can obtain a FHA insured
    an initial fixed interest rate for the               reverse mortgage for only $132,000
    first 3-10 years with adjustments to                 (the maximum FHA loan amount in
    the interest rate annually thereafter.               Des Moines) while a senior living in
    Hybrid ARMs are commonly referred                    San Francisco with a home worth
    to as 3/1, 5/1, 7/1 and 10/1 ARMs. A                 $175,000 can obtain a FHA insured
    hybrid ARM usually has an initial                    reverse mortgage for the full $175,000
    interest rate that is lower than a 30                because the FHA loan limit in San
    year fixed rate loan and is less risky               Francisco is $239,250. The FHA loan
    than a one year ARM because of the                   limit for reverse mortgages should be
    initial fixed interest rate period.)                 uniform nationwide so that there is no
                                                         disparate treatment of seniors in this
   Establishing a uniform, nationwide
                                                         way.
    loan limit for FHA Home Equity
    Conversion Mortgages (reverse                 …
    mortgages) that is equal to the FHA           There is only one program backed by the
    high cost mortgage limit. A reverse           Federal government that is specifically
    mortgage can be used by senior                targeted for residential renovation lending
    homeowners who are “house rich” but           and that is the FHA Section 203k program.
    “cash poor” to convert the equity in          While this FHA program has flexible
    their homes into a monthly cash               underwriting guidelines and standards, it does
    payment. But use of the reverse               not currently permit participation by private
    mortgage program is limited because           investors. FHA suspended the program for
    of the restriction on loan amounts in         investors back in 1996 because of increases in
    the FHA program. FHA loan amounts             losses due to these loans. However, private
    for its “forward’ or regular mortgages        investors are often the first to risk capital to
    are limited and vary from county to           renovate properties in distressed
    county, depending on housing costs in         neighborhoods, so suspending this program
    the area. Presently, the maximum              for investors certainly has hurt neighborhood
    FHA loan amount can range from                revitalization efforts. MBA believes that the
    $132,000 to $239,250. In this way,            Section 203k program could be reinstated for
    FHA programs are focused primarily            private investors with the implementation of
    on low and moderate income families           reasonable safeguards to reduce risk, such as
    purchasing a home. These county by            imposing a limit on the number of FHA loans
    county loan limits also apply to FHA          an investor can have at any one time or
    reverse mortgages. However, there is
    no rationale for having county by


                                              6
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
reducing maximum loan to value ratios on              and that between 1997 and 1999, that overall
these mortgages.                                      number rose by almost 700,000 -- a 23
                                                      percent increase in just two years. Focusing
…
                                                      on the medium income groups, the number of
A NEW MULTIFAMILY PRODUCTION                          families earning 50 to 80% of median income
PROGRAM                                               with critical housing needs increased 31%
This nation is experiencing unprecedented             and the 80 to 120% of median income group
economic prosperity, yet one out of every             rose a dramatic 77%. The studies also note
seven American families has a critical                that vital municipal workers like teachers and
housing need, including millions of working           police officers are increasingly vulnerable
families. The problem is not only one of              and the lack of decent, affordable housing is
affordability, but there is also a shortage of        increasingly being seen as a significant
decent rental housing in many areas,                  impediment to local economic growth. With
particularly our urban areas.                         this as background, it is clear that there is a
                                                      need for a federal program to address the
At the end of the last session of Congress,           housing needs of this segment of the
there was a growing consensus that the                population.
federal government should support programs
that produce housing for families with critical       The federal government has tried a number of
housing needs. In fact, the Low Income                different approaches to providing housing
Housing Tax Credit program (the one federal           over the last 50 years. The most successful of
program designed to produce new housing)              these rely heavily on a public/private
was expanded in December from $1.25 per               partnership that encourages the private sector
capita to $1.75 per capita in 2002 (a 40%             to produce housing with support provided by
increase). This, coupled with the approval in         the federal government. In particular, the
October of 79,000 incremental vouchers, are           FHA mortgage insurance programs have been
important steps forward in providing housing          extremely successful in producing new and
to those who have critical housing needs.             rehabilitated housing with little or no cost to
                                                      the federal government.
These programs are, however, targeted to
families whose income is below 60% of area            Partnering FHA mortgage insurance with an
median income. There is currently no                  interest rate subsidy will, in most markets,
program that is designed to provide rental            encourage private production of rental
housing for working families from 60% to              housing at rents that would be within the
100% of median income who are unable to               reach of families at 60% to 100% of median
find decent, affordable housing near where            income, a group that is not currently being
they work.                                            served by housing programs. Such a program
                                                      could be used in conjunction with the tax
Recent reports published by the National              credit program or vouchers, where
Housing Conference, entitled "Housing                 appropriate, to meet the needs of lower
America's Working Families" and "Paycheck             income families in a percentage of the units.
to Paycheck: Working Families and the Cost            This type of mixed income development
of Housing in America", find that more than           should receive less resistance from
3.7 million low-to moderate-income working            neighborhoods and provide a viable
families had critical housing needs in 1997           community for all the families that live there.


                                                  7
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
Elements of the Program                                Distributions would be limited to the owners
                                                       of the property for the greater of 20 years or
The program would reduce the cost of
                                                       the life of the loan (and the loan could not be
financing by providing an interest rate
                                                       prepaid for the first 20 years).
subsidy which would bring the market
interest rate down to a fixed interest rate that       This type of shallow subsidy could produce
is significantly below market (i.e., 4%) to            approximately 100,000 units per year for a
allow for lower rents.                                 cost to the government of $3 billion per year,
                                                       assuming an average cost to build of
The most efficient and cost-effective means
                                                       $150,000 per unit, market interest rates at 8%
to do this is through use of the FHA insurance
                                                       and subsidized rates at 4%.
programs coupled with GNMA mortgage
backed securities (MBSs). The budget cost              The program should provide a level playing
would be the difference between par and the            field for property ownership with no
competitive sale of the MBSs to private                preference given to non-profit entities or tax-
investors at a discount reflecting the lower           paying companies. Rather, consideration
interest rate.                                         should be given to the most efficient producer
                                                       of the housing to assure that the program is
To make the FHA insurance programs
                                                       implemented quickly at the lowest possible
workable, we need an increase in the FHA
                                                       cost.
maximum mortgage limits and a solution to
the credit subsidy problem.                            Distribution of funds would be through the
                                                       same entities that receive HOME funds with a
The program needs to work seamlessly with
                                                       formula that takes into account housing
other federal programs such as HOME, tax
                                                       needs, housing condition, vacancy rates and
credits, project-based vouchers, etc. to
                                                       construction costs. The city or state allocating
achieve a mix of incomes. The reduced
                                                       agency would decide which properties would
interest rate should produce rents affordable
                                                       receive the subsidized interest rate, after a
to 60-100% of median families, but other
subsidies will be needed to address lower-             preliminary indication is received from FHA
                                                       that the project would be feasible and
income families.
                                                       insurable.
The only income restrictions would be that
                                                       To encourage the removal of local barriers,
90% of the units must be affordable to
                                                       90% of the funds would be distributed by
families at less than 100% of area median
                                                       formula with the remaining 10% distributed
income.
                                                       to communities that remove barriers and/or
To address the needs of lower-income                   otherwise facilitate the developments.
families, 15-25% of units in each property
would be available for voucher recipients or           Mortgage Guaranty
otherwise restricted in accordance with the            Insurance Corporation
requirements of the other programs used (e.g.
HOME or tax credits).                                  FHA Risk Sharing Would Improve Loan
                                                       Performance and Reduce Taxpayer
Income restrictions and availability for               Exposure
voucher recipients would be imposed for the
life of the property.                                  We believe the time has come for the FHA to
                                                       share risk in its 203(b) program with the


                                                   8
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
private sector. It is our opinion that risk          level of borrower diversity. Every one out of
sharing would result in immediate                    two borrowers served through NRC's
improvement in loan performance, reduce              NeighborWorks organizations, for example,
U.S. taxpayers' exposure to default losses;          are minority. We believe this type of support
and enable the FHA to stretch its guaranty to        must be a critical element of any FHA risk-
serve more homebuyers.                               sharing program, especially if expanded
                                                     underwriting criteria are employed.
One of the reasons for the FHA's historic
poor loan performance is its "direct                 What's most important to note about FHA
endorsement" approach to underwriting                risk sharing is that it has great potential to be
which enables lenders to apply the FHA               a "win-win" outcome for all. The federal
guaranty with little recourse. FHA                   government (i.e.: taxpayers) reduces its
underwriting guidelines are not materially           exposure to default losses. Borrowers benefit
different from conventional conforming               from broader access to market-price
affordable housing underwriting criteria; yet        mortgages. Private-sector lenders and insurers
FHA fixed-rate mortgages (FRMs) default              are given the opportunity to expand their
three to five times more often than                  markets. And, if done correctly, FHA risk
conventional conforming affordable housing           sharing can align the interests of the
FRMs. The primary difference between                 government, borrowers, lenders, insurers, and
conventional and government mortgage                 community-based organizations, such as
underwriting is execution. Stiffer recourse          housing counseling agencies.
measures in the conventional market -- a
direct result of risk sharing -- promotes more       Mortgage Insurance
responsible lending and focuses underwriters         Companies of America:
on a borrower's ability to maintain long-term        Second document on Web
homeownership. Consequently, if the FHA
were to engage in a risk-sharing arrangement         site
with the private sector, we would advocate           The First Time Homebuyers Act
that a third-party private sector participant
underwrite to current (or possibly expanded)         The First Time Homebuyers Act is a new
FHA criteria.                                        public-private partnership that will make
                                                     buying a home more widely available to
Another contributor to the success of                many Americans, particularly those buyers
conventional conforming affordable housing           who have traditionally had difficulty
programs is outreach and borrower                    obtaining a loan in the past – including
preparedness programs provided by                    minorities, first-time home buyers and low-
organizations like Neighborhood                      and moderate-income Americans.
Reinvestment Corporation's NeighborWorks
and Washington, D.C.-based HomeFree.                 The innovation behind this public private
These groups provide pre-purchase and post-          partnership is that it introduces private
purchase borrower support that makes a               mortgage insurance into the Ginnie Mae
difference in a borrower's ability to sustain        program, allowing the private sector to join
long-term homeownership. Additionally, their         the FHA and VA in supporting the risk on
ability to assist in outreach through                certain Ginnie Mae loans. That means if loans
community-based channels results in a higher         default, the taxpayers alone will no longer
                                                     bear the primary burden for those losses.


                                                 9
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
Losses would be spread between the                      concentration of FHA and VA support leaves
government and the private sector. Having               less FHA and VA funding available for
more places to spread the risk will result in           potential homebuyers in the mortgage market
more sources of capital to expand                       with between three- and ten-percent to put
homeownership.                                          down on a house. The First Time
                                                        Homebuyers Act is designed to make loans to       Formatted
There would be considerable housing policy
                                                        serve that group - those with a down payment
advantages to this initiative as well. Potential                                                          Formatted
                                                        of more than three percent and less than ten
homebuyers would experience new choices
                                                        percent. As a result, the initiative is
and innovations when seeking a mortgage.
                                                        specifically designed to complement, not
For instance, there are essentially only two
                                                        compete with, the current FHA program.
automated scoring systems used to determine
                                                        Ginnie Mae’s ability to securitize more loans
who is approved and rejected for home loans,
                                                        in the 90 percent to 97 percent loan-to-value
those owned and controlled by the secondary
                                                        range will result in a larger, stronger market
mortgage entities Fannie Mae and Freddie
                                                        for homebuyers who can afford down
Mac.
                                                        payments within that range (three-to-ten
With this initiative, potential homebuyers              percent).
would have access to several automated
                                                        In addition, because The First Time
scoring systems. Most potential homebuyers,
                                                        Homebuyers Act offers so-called “life of
especially those, who are repeatedly rejected
                                                        loan” mortgage insurance coverage, the
by lenders, don’t realize that today, many
                                                        program makes investing in Ginnie Mae
different lenders use the same scoring
systems, the systems owned and controlled by            securities much more attractive to Wall
                                                        Street, ensuring an even more abundant
Fannie Mae and Freddie Mac. With public-
                                                        supply of mortgage money for low and
private partnership, they would have greater
                                                        moderate income consumers. While Ginnie
opportunities for loan approval. With greater
                                                        Mae and investors receive life of loan
choice, increased competition and access to
                                                        protection, the homebuyer also benefits
Ginnie Mae, many new affordable loans
                                                        because – like homeowners in the private
could be made.
                                                        mortgage market – they will be able to stop
Additionally, it’s important to note that FHA-          paying mortgage insurance premiums once
insured loans have a default rate two to three          they have reduced their remaining balance to
times higher than loans insured by the private          78 % of the value of their home. Wall Street
conventional market. In addition to spreading           will also be attracted to the new Ginnie Mae
some of the default risk, the new public                securities because the private insurers will be
private partnership will give the government            responsible for the first 30 percent of loss on
access to the innovative private sector                 any eligible loan.
technology and default management tools
used to help keep families in their homes               Benefits to Lenders
when they run into financial trouble.                   The private mortgage market wants to help
                                                        expand and support the government mortgage
How it works
                                                        market not only because it is good housing
At least half of all FHA and VA loans are               policy that will help more families realize the
made to buyers who have down payments of                American dream of home ownership, but also
three percent or less. That extensive                   because it makes good economic and business


                                                   10
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
sense. Lenders will benefit from the increased         loans simply compounds the risk to the
size of the government mortgage market                 Federal Government.”
created through the program. Lenders are also
                                                       FACT: The mission of FHA is to reach
better protected against borrower default by
                                                       families who otherwise could not get home
the deeper insurance coverage the program
                                                       loans, yet each year the FHA actually brings
offers in comparison to conventional lending.
                                                       hundreds of millions of dollars into the U.S.
Additionally, lenders get greater control over
                                                       Treasury. The public-private partnership will
underwriting decisions: under the initiative
                                                       introduce private sector risk management
they can choose from the variety of diverse
                                                       tools, proven to reduce defaults and
underwriting systems and programs made
                                                       delinquencies. The Congressional Budget
available by private companies, rather than
                                                       Office has determined that the public-private
being limited to only the two currently
                                                       partnership would bring additional funds into
available through Fannie Mae and Freddie
                                                       the Treasury.
Mac.
The First Time Homebuyers Act: A win-                  National Association of
win-win proposition                                    Home Builders
The First Time Homebuyers Act is a win-                FHA Single Family and Multifamily
win-win: consumers benefit through lower               Mortgage Insurance Programs
costs, more choice and options, and through
                                                       Since 1934, the Federal Housing
the expansion of mortgage availability – often
                                                       Administration (FHA) single family mortgage
to those who have been shut out in the past.
                                                       insurance programs administered by the U.S.
Taxpayers benefit through the expansion of
                                                       Department of Housing & Urban
homeownership in a public private
                                                       Development (HUD) have enabled millions
partnership that diminishes the impact of
                                                       of families to purchase and/or renovate homes
potential homeowner default risk on the
                                                       when other financing sources have not been
government in the event of a national – or
                                                       available.
even a regional – economic downturn. Ginnie
Mae will benefit by getting the full use of the        While the FHA programs continue to serve a
tools and technology that has enabled the              vital function within the housing finance
private market to be outstanding at                    system, the legislative, regulatory and policy
underwriting loans and terrific at keeping             framework under which these programs
people at risk of default in their homes.              operate are often unnecessarily restrictive and
Lenders benefit from the increased size of the         burdensome. For example, many of FHA’s
government mortgage market created by                  requirements date back to a time when few
forming this innovative public-private                 communities had building codes and
partnership.                                           inspection processes. Today, uniform
                                                       building codes provide for the construction
…
                                                       and rehabilitation of affordable safe and
Third Document                                         sanitary housing.
Myth: “The FHA suffers from an inability to            Numerous steps have been taken by HUD in
properly manage risk and suffers dangerously           recent years to streamline the FHA mortgage
high default rates. Allowing them, through a           insurance programs. However, FHA program
public-private partnership, to make more               requirements still remain that make these


                                                  11
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
programs more costly for those home buyers               and is seeking higher mortgage limits.
who can least afford it. By contrast with                Funding problems could be relieved by
privately insured low- and no-down payment               instituting more up-to-date and accurate
programs with straightforward compliance                 assumptions in the model that is used to
requirements, the FHA programs are more                  determine the federal budget appropriations
costly and paperwork intensive for home                  needed to operate the programs. The
builders and purchasers alike.                           alternative of raising mortgage insurance
                                                         premiums would only further impair the
Additional steps should be taken to continue
                                                         effectiveness of FHA in meeting affordable
to lessen the burden for all participants in the
                                                         housing needs. While the path to improved
FHA loan process, to maintain a strong FHA
                                                         program performance seems clear, much
insurance fund, and to keep the FHA
                                                         work remains to be done.
competitive with private sector alternatives.
                                                         …
On the multifamily side FHA is even further
behind. This is disturbing because FHA is the            A number of steps are necessary to improve
only federal program that supports production            the flow of capital for housing production
and rehabilitation of affordable rental housing          financing, including:
units for a range of incomes, not just the very
                                                                creation of a fully functioning
low end of the market.
                                                                 secondary market for housing
Lengthy application and processing delays                        production financing;
due to unnecessary red tape have made the
                                                                development of delivery systems by
programs noncompetitive and, in some cases,
                                                                 regulated and non-regulated financial
have created major gaps in the housing
                                                                 institutions to facilitate the
finance system. In addition, due to funding
                                                                 securitization of ADC loans;
limits, the programs have been subjected to a
series of start-stop cycles that have resulted in               support of the housing-related GSEs
significant losses of time and money to                          for residential ADC financing,
developers. Another major factor in the                          including Federal Home Loan Bank
ineffectiveness of the FHA multifamily                           System programs for ADC lending
mortgage insurance programs has been the                         and clarification that Fannie Mae and
outdated mortgage limits, which have not                         Freddie Mac have the authority to
been increased since 1992. Construction and                      purchase and package residential
land costs have risen 25 percent over that                       ADC loans;
period, making the program unworkable in
                                                                development and implementation of
many major urban areas. Finally, FHA has
                                                                 FASIT securities structures for
lost many of its experienced and talented
                                                                 residential ADC loans;
multifamily staffers to the private sector or
retirement. The lack of adequate multifamily                    requiring banking regulators to report
staff in the field has further dulled FHA’s                      and publish separate breakouts on the
competitive abilities.                                           activity and performance of residential
Some of these problems are being addressed.                      ADC loans;
HUD is testing new, streamlined multifamily                     establishment of a FHA program to
mortgage insurance processing procedures                         insure housing production loans; and,


                                                    12
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
       creation of pension fund and state            needs of American families who make up our
        housing finance agency programs for           lowest income populations. While these
        housing production financing.                 families continue to need assistance, it is
                                                      clearly time to recognize that public policy
…
                                                      focused exclusively on the lowest-income
New Multifamily Rental Production                     Americans does not begin to address the
There is a need for a new multifamily housing         scope of the problem. NAHB estimates that at
production program that would meet the                least 60,000 to 70,000 new multifamily units
affordable rental housing needs of households         annually are needed for America to begin to
with incomes between 60 percent and 100               meet the housing needs of working families.
percent of median income, America’s                   This new production initiative would reaffirm
“working poor,” achieving an annual                   the goal established by Congress in the 1949
production goal of between 60,000 and                 Housing Act to “provide a decent home and
70,000 multifamily units.                             suitable living environment for every
The unprecedented economic expansion that             American family.” The new program would
our country has enjoyed for the better part of        be targeted to households with incomes
the past decade has done little to solve              between 60 and 100 percent of area median
America’s affordable housing crisis. In fact,         income (115 percent in high cost areas) who
an estimated three million moderate-income            are not currently served by federal or other
working families continue to pay more than            publicly supported housing programs. Mixed-
half their incomes for housing or live in             income projects would be encouraged and
severely deteriorated housing units.                  set-asides of funds for the production of
                                                      housing for the elderly (some with service
A report published by the National Housing            components), small projects, and rural
Conference’s Center for Housing Policy                housing development opportunities should be
noted that more than 730,000 working                  considered. Up to 25 percent of the funds
families with one or more blue-collar workers         would be provided to lower or very-low
spend more than half their incomes for                income residents, with additional assistance
housing as do more than 550,000 service               through increased funding for vouchers, tax
workers and a similar number of retail sales          credit increases, HOME or Community
workers. The report went on to say that vital         Development Block Grant funds to fill any
municipal workers – such as teachers and              remaining funding gaps.
police officers – are also increasingly
vulnerable. More than 220,000 teachers,               The specific forms of assistance are not as
police, and public safety officers across the         important as whether the program provides an
country currently spend more than half their          incentive to keep an owner in the program.
income for housing, and the problem is                Currently, there is no reward for operating
growing worse. In short, the study says that          Section 8 or tax credit developments
having a job does not guarantee a family will         efficiently (for example, higher management
have a decent place to live at an affordable          fees or the ability to take out excess cash
cost.                                                 flow). The Millennial Housing Commission is
                                                      interested in how to structure a program that
Federal housing policy for the past 20 years          keeps sponsors in, beyond the usual fees,
has been targeted almost exclusively to the           residual income and bonuses. It is important


                                                 13
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
not to provide just an upfront incentive, such                Cooperatives, the Mortgage Bankers
as a developer fee, because then sponsors can                 Association, and the Cooperative
lose interest, which puts the property at risk.               Housing Coalition propose a 23%
Assistance must provide incentives for                        increase in the Section 213 per unit
sponsors to own and maintain the property                     mortgage limits. It is important to
over the long term.                                           note that 213 requires no
To assist in filling any financing gaps, the                  Congressional appropriation and no
new program should be compatible with                         credit subsidy because of its unique
existing housing and community development                    status as a separate mutual fund.
programs such as CDBG, HOME, FHA                             *activate the 203n program.
Mortgage Insurance, and the tax credit                        Legislation for the 203n FHA co-op
program. Very low-income residents would                      share loan financing program has long
be limited to up to 25 percent of an entire                   been on the books, but HUD has
development to further promote income                         failed to implement the program in
mixing and make these developments more                       any meaningful way. Market
acceptable to local communities and                           acceptance of cooperative ownership
neighborhoods.                                                would be aided greatly by an active
Funds could be allocated to states on a per                   203n program for unsubsidized co-
capita basis. This could be coupled with some                 ops.
minimum “bonus” award to those who reduce                    *appropriate funds for training
barriers and regulatory burdens related to                    FHA and VA staff. Underwriting co-
affordable housing production as well as to                   op loans and appraising co-op
those that provide state or local contributions               buildings involve specialized
either monetary or in-kind.                                   knowledge that can be easily
                                                              transferred with training.
National Association of
Housing Cooperatives                                   National Association of
Several modest changes to current law and              Local Housing Finance
programs would make the co-op model even               Agencies
more attractive and increase its use and
                                                       We recommend that the Commission urge
availability as a means of providing
                                                       Congress to enact a 25% increase in the
homeownership for moderate income
                                                       statutory FHA multifamily insurance limits
families. They are:
                                                       and be indexed based on increases in the
      *raise the per unit mortgage limits             Annual Construction Cost Index. Unlike the
       under Section 213 of the National               single-family limits, the multifamily limits
       Housing Act. Section 213 statutory              have not been increased since 1992.
       mortgage limits got out of synch with           Construction, land and other costs have
       other FHA multifamily programs in               increased 23% according to the Annual
       the 1980’s. In addition, the last               Construction Cost Index published by the
       increase across the board in FHA                Census Bureau. According to NAHB land
       multifamily programs was 1992. The              costs have increased in 10 metropolitan areas
       National Association of Housing                 by 25% in there past 8 years. Increasing these


                                                  14
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
limits is key as they are used in other                  35, at 61 percent. However, despite these
programs.                                                important gains, persistent homeownership
                                                         disparities between whites and minorities
National Association of                                  narrowed slightly. The NATIONAL
Realtors                                                 ASSOCIATION OF REALTORS® believes
                                                         continued efforts must be undertaken to
Closing the Homeownership Gap
                                                         provide opportunities to underserved
       Support and promote administrative               populations to achieve the dream of
        relaxation of HUD policy regarding               homeownership. With the introduction of
        owner-occupancy ratios under the                 low-downpayment products, flexible
        FHA condominium insurance                        underwriting standards, and improved risk
        program                                          assessment tools, the mechanisms exist to
                                                         close our nation's homeownership gap. We
       Support and promote legislation
                                                         recommend the following to complement the
        modifying the FHA adjustable-rate
                                                         innovation and outreach undertaken by the
        mortgage product to accommodate a
                                                         real estate industry:
        hybrid FHA ARM and eliminate the
        loan cap on ARMs                                       Support and promote administrative
                                                                relaxation of HUD policy regarding
Creating Underwriting/Financing
                                                                owner-occupancy ratios under the
Incentives
                                                                FHA condominium insurance
       Lengthen the amortization period for                    program. Currently, HUD requires
        FHA mortgage loans beyond the                           that condominium developments be at
        existing 30-year term                                   least 51 percent owner-occupied
                                                                before individual units can be deemed
       Make permanent the FHA
                                                                eligible for FHA-insured loans. The
        downpayment simplification
                                                                policy is restrictive because it limits
        calculation
                                                                sales and homeownership
Stimulating Affordable Rental Housing                           opportunities, particularly in market
       Increase the FHA multifamily loan                       areas comprised of significant
        limits                                                  condominium developments and first-
                                                                time homebuyers. It is important to
…                                                               note that the condo market has
Closing the Homeownership Gap                                   matured since adoption of the 51
                                                                percent rule. Liquidity risk has
Fueled by the nation's strong economic                          dramatically declined as the market
prosperity, the national homeownership rate                     has matured which, in turn, has fueled
reached a new annual high of 67.7 percent in                    the growth and popularity of condo
2000 and continues to climb across all                          ownership as a viable homeownership
geographic regions, age groups and ethnic                       tool. In support of this, our research
groups. All-time high rates were set for                        has determined that nationwide sales
minorities, at 48.2 percent; Hispanics, at 46.7                 of previously owned condominiums
percent; central city residents, at 51.9 percent;               and cooperatives climbed to a record
households headed by females, at 53.3                           level of 763,000 units in the three
percent; and married couples younger than


                                                    15
                    FHA-Related Comments from
                 Responses to MHC Solicitation Letter
        months of 2001, up 5.8 percent from            that the cost, terms, and availability of
        721,000 during the previous quarter.           mortgage financing are of critical importance
                                                       to the level of homeownership. While our
       Support and promote legislation
                                                       mortgage finance system provides a steady
        modifying the FHA adjustable-rate
                                                       and reliable source of market-rate mortgage
        mortgage product to accommodate a
                                                       money, transaction costs linked to home
        hybrid FHA ARM and eliminate the
                                                       purchase and financing remain high. For
        loan cap on the aggregate number of
                                                       many potential homebuyers, the lack of cash
        ARMs that FHA may insure annually.
                                                       available to accumulate the required
        The FHA adjustable-rate mortgage
                                                       downpayment and closing costs is a key
        experience has demonstrated it to be a
                                                       impediment to purchasing a home. Other
        viable and sound product that has
                                                       households do not have sufficient available
        evolved into a standard home
                                                       income to make the monthly payments on
        financing tool and patterned by other
                                                       mortgages financed at market interest rates
        mortgage providers. A "hybrid" ARM
                                                       for standard loan terms. To address these
        provides a mix of adjustable-rate and
                                                       barriers, the NATIONAL ASSOCIATION
        fixed-rate features, providing a useful
                                                       OF REALTORS® recommends the
        avenue of homeownership especially
                                                       following:
        for first-time homebuyers. The hybrid
        ARM carries a fixed rate for an initial              Lengthen the amortization period for
        period of time -- customarily three to                FHA mortgage loans beyond the
        seven years -- followed by rate                       existing 30-year term. Currently, the
        adjustments once a year for the                       term of the mortgage insured under
        balance of the 30-year loan term.                     the FHA single-family mortgage
                                                              insurance program cannot exceed
…
                                                              thirty years. Extending the life of the
Creating Underwriting/Financing                               loan above thirty years would reduce
Incentives                                                    the monthly mortgage payment,
Mortgage financing is readily available in the                allowing more households to qualify
United States due principally to a competitive                for a mortgage and, hence, increase
marketplace, stable home values and a                         homeownership opportunities.
thriving capital market infrastructure.                       Research conducted by the
Nevertheless, some forms of homeownership                     NATIONAL ASSOCIATION OF
financing are not adequately available in all                 REALTORS® has determined that
markets. Moreover, mortgage financing is not                  approximately 52 percent of American
always adequately available in certain                        households currently can qualify to
neighborhoods or areas, particularly those                    purchase the U.S. median priced home
communities that are experiencing an                          of $139,000 with a 30-year mortgage.
economic downturn.. To facilitate affordable                  This amounts to approximately 54.7
housing and generate new homeownership                        million households. Extending the life
opportunities, the continuous availability of                 of the loan to 35 years would enable
mortgage financing is a critical ingredient.                  almost 54 percent of American
                                                              households to qualify for a $139,000
The NATIONAL ASSOCIATION OF                                   home, representing an increase of 1.4
REALTORS® has continuously maintained                         million households. And, extending


                                                  16
                FHA-Related Comments from
             Responses to MHC Solicitation Letter
    the life of the loan to 40 years would              ask the lender if a credit scoring
    permit almost 55 percent of                         system was used, what characters or
    households to qualify for                           factors are used in that system, and the
    homeownership, an increase of 2.6                   best ways to improve or better the
    million households above current                    mortgage application.
    levels.
                                                       Encourage the use of rental payment
   Make permanent the FHA                              history as credit information to
    downpayment simplification                          improve access to credit in the
    calculation. In 1996 Congress                       homebuying process. With the
    approved legislation simplifying the                movement of major lenders to
    FHA downpayment calculation as a                    automated processing to streamline
    two-year pilot program in Alaska and                the availability of mortgage credit,
    Hawaii. Simplifying the calculation                 credit scoring is an emerging issue
    made it easier for FHA borrowers to                 that will significantly influence
    understand the downpayment process                  mortgage credit availability and
    and it made the downpayment on an                   definitions of creditworthiness.
    FHA loan more affordable.                           Consequently, the types of supporting
    Recognizing the benefits resulting                  information to be collected and used
    from the simplification process, in                 for developing appropriate scoring
    1998 Congress extended the                          models and predicting borrower
    calculation another two years and                   creditworthiness is a key factor. If
    made it applicable nationwide. In                   properly utilized and framed with
    2000 Congress extended the                          appropriate consumer safeguards,
    simplification calculation 27-months,               automated underwriting has the
    to December 31, 2002. The                           potential of making mortgage credit
    NATIONAL ASSOCIATION OF                             more widely available at lower costs.
    REALTORS® believes that the                         However, the challenge is to ensure
    simplified downpayment calculation                  that automated underwriting does not
    should be made a permanent feature                  perpetuate racial disparities in the loan
    of the FHA single-family mortgage                   process and to identify loan
    insurance program.                                  repayment predictor mechanisms that
                                                        do not disadvantage special
   Support legislation that provides for
                                                        populations. Tracking rental payment
    detailed disclosure of mortgage
                                                        history may serve as a useful predictor
    lending credit scores including
                                                        in determining the creditworthiness of
    meaningful explanatory data.
                                                        a borrower and, hence, their
    Consumers need to be fully informed
                                                        acceptance for mortgage credit. With
    as they make a decision to accept a
                                                        the FHA single-family mortgage
    mortgage offered by a lender. The
                                                        program stronger than ever, we
    disclosure should permit a borrower to
                                                        believe the timing is appropriate for
    evaluate the situation if denied credit,
                                                        FHA to return to its mission as
    or if the rate or credit terms do not
                                                        mortgage finance innovator and take
    meet the borrower's criteria. Further,
                                                        the lead and implement this
    consumers should be empowered to
                                                        recommendation.


                                               17
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
…                                                          Very simply, tax credits provide
                                                           investors a dollar-for-dollar reduction
Stimulating Affordable Rental Housing
                                                           in their federal tax liability in
The need for affordable housing is well                    exchange for providing financing to
documented in various research reports from                develop affordable housing. One such
a variety of institutions and interest groups,             program, the Low Income Housing
with one out of every seven American                       Tax Credit (LIHTC), has a
families having a critical housing need,                   tremendous record of success for
including millions of working families. The                producing affordable housing. Yet, its
problem is not only one of affordability but               reach is restricted by guidelines that
also one comprising inventory shortages in                 limit the income levels of tenants and
many areas of the country. Very simply,                    rent levels of apartment units. Further,
families should not have to pay more than                  participation by owners and investors
half their income for housing nor live in                  is limited because of the numerous
severely dilapidated homes. Our country is                 administrative rules and regulations,
built on the foundation that a decent home in              lengthy application process and
a suitable living environment is a basic tenet             burdensome compliance forms that
of American life.                                          must be submitted and completed.
The NATIONAL ASSOCIATION OF                               Increase the FHA multifamily loan
REALTORS® believes that federal mortgage                   limits. Despite our nation's economic
finance and assisted-housing programs that                 growth and prosperity, millions of
have proven records for producing and                      working American families are facing
preserving affordable housing must not only                a housing affordability crisis. This is
be preserved but strengthened and provided                 exacerbated by the continuing decline
with significant additional resources.                     of the nation's affordable housing
Moreover, to encourage homeownership                       stock. The increased demand for
opportunities for all Americans and increase               housing coupled with diminished
the supply of affordable housing nationwide,               supply is straining housing units
necessary initiatives, programs and policies               nationwide, thrusting policymakers to
must be developed and supported by key                     devise useful solutions and
policymakers.                                              approaches to stimulate new
       Eliminate disincentives to tax credit              affordable housing opportunities.
        programs to stimulate broader and                  Absent new and immediate solutions
        increased affordable housing                       to the problem, a more feasible and
        opportunities. Tax credits have served             direct approach to stimulate the
        a useful purpose by providing equity               availability of affordable rental
        investments for affordable rental                  housing entails modifications to
        housing. They have served as                       existing federal programs to spur new
        enormously successful tools in not                 production and substantial
        only producing affordable housing but              rehabilitation. Increasing the FHA
        also in attracting owners and investors            multifamily loan limits by 25 percent
        to finance the construction and                    represents a plausible solution to the
        rehabilitation of affordable housing.              affordable housing crisis. The loan
                                                           limits for FHA multifamily insurance


                                                  18
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
       have not been revised upward since              supplemental appropriation of $40 million
       1992, contributing significantly to             approved by Congress December 2000 is not
       FHA's inability to be a viable source           being made available for use. The effect of
       for rental housing.                             the shutdowns is jeopardizing the production
                                                       of thousands of critical affordable housing
…
                                                       units. Without these important funds many
FHA Multifamily Mortgage Insurance                     projects will not be built and developers who
Programs                                               have invested significant dollars in up-front
Reform credit subsidy and commit increased             costs for land options, plans and
resources to FHA multifamily programs to               specifications and other pre-development
ensure their uninterrupted operation.                  costs will lose those investments.
Beginning 1992 the Federal Credit Reform               HUD's Property Disposition Program
Act significantly altered the budgetary
                                                       Remove the disincentives of marketing
treatment of credit programs including loan
                                                       properties through HUD's Management and
guarantee programs. Under the Credit Reform
                                                       Marketing Sales Contract program to improve
Act FHA is required to estimate its net costs
                                                       the availability of HUD real estate-owned
to the government of insuring new mortgage
                                                       properties and reduce government inventory
loans in addition to estimating the losses from
                                                       and program costs. Currently, HUD disposes
anticipated defaults on loans in its current
                                                       of its foreclosed inventory stock through
portfolio. The Act requires that federal
                                                       private management and marketing
agencies have budget authority to cover a
                                                       companies who are under contract to the
program's cost to the government in advance,
                                                       Department for all aspects of property
before new loan guarantee commitments are
                                                       disposition. Because the contractors operate
made. As a result agencies must determine
                                                       under incentive-based criteria to obtain the
needed credit subsidy on a program-by-
                                                       best price for sales within the quickest
program basis, based on whether the
                                                       timeframe to maintain low costs to the
programs represent a cost to the government,
                                                       government, this process does not always
break even, or make a profit. Consequently,
                                                       result in timely and correct information being
new multifamily loan volume that FHA may
                                                       made available to the public regarding
insure is limited by the amount of budget
                                                       properties for acquisition. NAR has
authority FHA is provided for credit subsidy.
                                                       consistently maintained that local
For the second year in a row, the credit               REALTORS® must be involved in the sale of
subsidy process has contributed to HUD                 HUD-owned properties to facilitate the
halting insurance activity for multifamily             availability of information about and
mortgages principally because of a depletion           marketing of affected properties. We also
of subsidy funding for FHA's multifamily               encourage the Department to require the
programs. In FY2001 Congress appropriated              management and marketing contractors to
only $101 million which was exhausted by               feature regular training and education
April 19. In FY2000 HUD announced on                   sessions on behalf of the local real estate
July17, 2000 that all credit subsidy was               community to increase broker participation
committed and that firm commitments would              and prospective purchasers
be conditioned upon the availability of credit
subsidy. Furthermore, an emergency


                                                  19
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter

National Housing                                      had run out of credit subsidy funds. HUD
                                                      recently increased the multifamily insurance
Conference                                            premium by 30 basis points to make the
The FHA should play a vital role in the               program “self sufficient.” While the
execution of an affordable housing plan of            Department’s goal of reducing the program’s
action. NHC supports efforts to streamline            dependency on appropriated funds is
and improve the efficiency of FHA. However,           laudable, it should also be noted that the
any effort to modernize or improve                    higher premium will cause a further reduction
operational efficiency should not be                  in the amount of new affordable housing
undertaken if FHA’s core mission is eroded            produced.
or diminished. FHA should not be enhanced             Because of the deleterious effect this increase
to compete with the GSE’s or others in the            will have on affordable housing production,
private market. Conversely, the private               the Commission should call for a detailed
market should not be expected or called upon          analysis of FHA’s loan loss reserve model to
to address special market needs that are              determine exactly how much credit subsidy is
clearly the responsibility and mission of             needed to fund the program. Furthermore,
FHA.                                                  since default loss differs among property
National Leased Housing                               types, an across-the-board premium increase
                                                      may be inappropriate. Redistribution of the
Association                                           premium may allow the government to fund
[Under “project-based vouchers”:]                     higher risk properties with lower premiums,
                                                      but the disruption that could result due to
FHA Financing: A new subparagraph (F)                 losses in one property type versus another
should be added that for purposes of                  could outweigh the political benefit of
underwriting a loan insured under the                 pursuing this approach.
National Housing Act, the Secretary may
assume that any section 8 rental assistance           Expand Fannie Mae and Freddie Mac
contract relating to a project will be renewed        Construction Lending Activities
for the term of such loan.                            A key element of expanding the nation’s
                                                      supply of low- and moderate-income housing
National Low Income                                   is finding ways for the secondary market to
Housing Coalition                                     provide more capital for construction and
                                                      substantial rehabilitation. The regulatory
[Supports National Housing Trust Fund                 goals of the GSEs, Fannie Mae and Freddie
funded out of FHA “surplus.”]                         Mac, should be revised to direct more capital
                                                      toward the production and substantial
National Multi Housing                                rehabilitation of moderate-income housing.
Council                                               Already, 90 percent of the GSEs’ mortgage
Multifamily Insurance Programs-Credit                 funding is directed at multifamily properties
Subsidy                                               serving families at or below 100 percent of
                                                      AMI, however almost all of their
For the last two years, HUD has shut down             construction/forward commitment financing
the FHA multifamily insurance program                 is targeted at properties with a majority of
before the end of the fiscal year because it          units serving families at or below 60 percent


                                                 20
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
of AMI. Further, there are no incentives for          The Commission should recommend an
the GSEs to finance mixed-income rental               evaluation of the current risk-sharing program
properties.                                           to develop reform recommendations that
                                                      would expand its use and make it more
Making this happen is a difficult proposition,
                                                      effective.
however, and will take more than simply
setting new goals. One approach would be to           Multifamily Insurance-Program
encourage a broader use of the HUD/FHA                Improvements
risk-sharing program with Fannie Mae and
                                                      The HUD FHA mortgage insurance program
Freddie Mac. Because of the requirements of
                                                      is typically not widely used by the private
the risk-sharing program, the GSEs
                                                      multifamily developers. There are many
participation has been limited on a relative          reasons why this is the case. The costs
basis to their overall mortgage lending
                                                      associated with obtaining an FHA insured
activities secured by multifamily properties.
                                                      multifamily loan and the processing time
The GSE’s construction lending could be
                                                      required to obtain the loan is significantly
expanded for low-income and moderate-
                                                      greater than other market sources. Some
income properties if HUD’s requirements
                                                      NMHC/NAA members say that the amount of
were more responsive to the market and to
                                                      capital at risk to secure an FHA loan can be
general lending practices. The value of this
                                                      as much as two to three times higher than for
approach is that it does not require any
                                                      conventional financing. It is a complex, time-
federal credit subsidy funding because it
                                                      consuming process. In order to have a HUD
poses only a limited amount of risk to the
                                                      loan approved, a developer needs to provide a
government.                                           complete development plan and specifications
The current HUD risk sharing program                  with certified costs of development (i.e.,
requirements limit the application of the             contractor bids awarded or approved). The
government insurance in a variety of ways,            cost associated with control of the property
including, but not limited to:                        (title, taxes, insurance), maintaining
                                                      contractor bids over an extended and
      It cannot be used to preserve expiring-
                                                      sometimes uncertain period, changes in
       use products, such as balloon
                                                      underwriting throughout the loan approval
       mortgages and pool-based programs
                                                      process, and the impact of fluctuating interest
       that have been effectively
                                                      rates creates a significant burden to a
       implemented by the GSEs and are
                                                      developer prior to final HUD approval. The
       widely used in the market.
                                                      risk undertaken many times far outweighs the
      It does not support many of the                rewards.
       lending programs available through
                                                      Additionally, these extensive requirements
       the GSEs, such as variable rate
                                                      should be compared to the requirements of
       products, credit facility products,
                                                      other finance products and programs
       mezzanine debt and other products
                                                      available to apartment developers, including
       that could be effectively used to
                                                      state housing finance agencies, Fannie Mae,
       preserve and develop affordable
                                                      Freddie Mac, Federal Home Loan Banks,
       housing.
                                                      commercial banks, community banks and
      It is burdened with ineffective and            other financial institutions. Despite recent
       unnecessary regulatory requirements.           improvements, FHA’s multifamily insurance


                                                 21
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
program still needs to be more competitive.          Education and Information
The Commission should recommend that a
                                                     The FHA multifamily insured loan programs
programmatic comparison be undertaken with
                                                     have lost favor with many developers as other
the goal of making the HUD program more
                                                     capital sources have stepped up to provide
competitive with programs in the private
                                                     more attractive financing alternatives.
market.
                                                     Inconsistent loan processing, constant
HUD has made effective programmatic                  changes in loan underwriting during the loan
changes to its multifamily insurance                 review process, extensive delays and
programs through the Multifamily                     uncertainty coupled with program disruptions
Accelerated Processing (MAP) system. These           in funding have steered the market away from
improvements have been well received by              FHA multifamily insured loans. However, the
multifamily developers, but without adequate         program can become, once again, a viable
staffing levels and resources and adequate           financing alternative for the production of
credit subsidy to keep the program operating,        multifamily housing. The FHA insured
these improvements are moot.                         multifamily loan program, for all of its
                                                     weaknesses, still provides attractive terms
Moreover, several program requirements
                                                     (long-term fixed rate construction/permanent
during the life of the loan are not
                                                     financing, higher leverage than most market
representative of the market. For example,
                                                     rate financing alternatives, and reasonable
requiring a 24-month replacement reserve
                                                     interest rates). To do this HUD needs to
account for a well-maintained property with
                                                     continue to improve the program
strong cash flow is unnecessary. Replacement
reserve requirements should consider                 administration begun with the MAP effort,
                                                     seek changes to make the program more
property condition, outstanding debt levels,
                                                     competitive with market financing
the property manager’s credentials, and more.
                                                     alternatives and then rebuild its credibility
HUD also layers numerous inspection
                                                     with the market place. The program
requirements on owners for different
                                                     improvements are critical and must be
programs (e.g., loan servicing and housing
                                                     undertaken. Following any effort to improve
vouchers). These disparate inspections should
                                                     the program, the government needs to expand
be standardized. A uniform inspection
                                                     its outreach, education and training to the
standard for all HUD programs would reduce
                                                     market. It is and will be critical to re-build
operational costs for the agency and for
                                                     confidence in the FHA multifamily insurance
owners, which in turn, would help reduce the
cost of housing for the end user.                    programs, to restore credibility, and to attract
                                                     experienced, quality multifamily development
These are just a few examples; there are many        firms. Government resources would be well
more. Therefore, we recommend that                   spent in streamlining the program and then
Congress require HUD to convene a group of           providing extensive outreach to the broader
industry experts to recommend programmatic           development community.
changes for all of HUD’s multifamily
programs, including FHA multifamily                  National Neighborhood
insurance, Section 8 vouchers, and programs          Housing Network
operated by the Office of Multifamily
Housing Assistance and Restructuring                 The government’s own funds are at stake
(OMHAR).                                             when Federal Housing Administration (FHA)


                                                22
                   FHA-Related Comments from
                Responses to MHC Solicitation Letter
mortgages and Neighborhood Reinvestment               Gains in community and asset development
loans fall prey to unregulated lenders. The           are increasing threatened by predatory
National Neighborhood Housing Network                 lending practices, in the form of payday
supports the Predatory Lending Consumer               loans, and inappropriately structured home
Protection Act of 2001 (H.R.1051) to amend            equity loans, or home improvement loans.
HOEPA, introduced by Representative John
                                                      There are several legislative proposals
LaFalce, and soon to be introduced by
                                                      (including H.R. 1051 and H.R. 1053) aimed
Senator Paul Sarbanes. NNHN also supports
                                                      at curbing the abusive/predatory lending
the Equal Credit Enhancement and
                                                      practices of primarily unregulated lenders.
Neighborhood Protection Act of 2001
                                                      Predatory lenders are using very sophisticated
(H.R.1053) to amend HMDA, introduced by
                                                      technology and data mining techniques
Representative John LaFalce.
                                                      designed to strip vulnerable home owners
We ask the Millennial Housing Commission              (including the elderly, minorities, immigrants
to support legislation that would prohibit            and low-income households) of the equity
predatory lending practices and protect home          they currently have in their homes. These
equity for low-income and minority                    practices can undermine the federal
households.                                           government’s own affordable housing and
                                                      community revitalization efforts, and is
National Rural Housing                                resulting in disproportionate delinquencies
Coalition                                             and defaults in FHA-insured properties.
Rural households are less likely to receive           The Millennial Housing Commission should
government-assisted mortgages. According to           encourage:
the 1995 American Housing Survey, 14.6                   support of legislative/regulatory efforts
percent of non-metro and 24 percent of metro              aimed at curbing predatory lending
residents receive federal assistance. Only six            practices, and
percent of Federal Housing Administration
(FHA) FY 1996 assistance went to non-metro               increased resources in support of federal
areas. On a per-capita basis, rural counties              prosecution of the most abusive offenders.
fared worse with FHA, getting only $25 per            Recommended Strategies:
capita versus $264 in metro areas. Only about
10% of HUD Section 8 assistance finds it                 Expansion of Full Cycle Lending-style
way to rural America. Rural experience with               counseling programs for pre-purchase and
the Veterans Affairs housing program is                   post-purchase homebuyer education.
similar, with only about 11 percent going to             More HUD housing counseling funds, and
non-metro areas and per-capita spending in                expanded incentives for consumers and
rural counties at only about one-third that of            third parties to pay the costs of obtaining
metro areas.                                              Full Cycle Lending-style programs.
Neighborhood Reinvestment                                Other strategies and increased
Corporation                                               enforcement to aggressively combat
                                                          abusive/predatory lending practices.
Support efforts that prohibit/end
predatory lending practices



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