New rules slated to take effect on Oct. 1 will effectively reduce borrowers' leverage on most multifamily and health care loans backed by the Federal Housing Administration. Unless rescinded by the Department of Housing and Urban Development, the regulations will increase annual mortgage insurance premiums (MIPs) by 71%.
FHA mortgage insurance guarantees that the federal government will cover losses in the event of a default. Borrowers buy the insurance to obtain lower interest rates on multifamily loans, and experts say the programs are a key ingredient in the creation of affordable rental housing.
The planned hike, introduced in the Bush administration's 2007 budget, will increase the overhead on those projects, putting upward pressure on rents and limiting the borrower's leverage, according to the Mortgage Bankers Association (MBA).
“There's really not one good thing that can be said about this [proposal]” says Michael Petrie, president of P/R Mortgage & Investment Corp. in Carmel, Ind. “The increase in mortgage insurance premiums amounts to a tax on those that can least afford to pay — renter households.” Petrie is the MBA's chief representative in a campaign to block the increase.
Net effect on borrowers
A developer who qualifies for a $10 million loan under the current program would qualify for about $500,000 less under the new rules, rendering many projects financially unfeasible, contends the MBA. For those loans that remain viable, the borrower would need to increase rents by 5% to cover the added cost of the mortgage insurance premium, reducing affordability to renters.
The MBA and several other groups have been lobbying against the rate hike since the president unveiled his budget last spring. More recently, 120 members of the House endorsed a July 26 letter urging HUD Secretary Alphonso Jackson to withdraw the premium increase.
In the Senate, 24 members echoed the same sentiments in their own letter to HUD on Aug. 9. Unfortunately for the plan's detractors, HUD doesn't need Congressional approval to enact the regulatory change.
Whys and why nots
The Bush administration claims the FHA programs aren't fulfilling the public purpose of providing housing for low-income renters. Properties financed through the Low-Income Housing Tax Credit (LIHTC) program are exempt from the rate hike. Industry groups counter that tax credits are only a part of the affordable housing market, and that the low mortgage rates available with FHA backing enable a wide range of properties to serve low-income families.
In 12 states for which data is available, more than half of all FHA-backed rental units are affordable to households earning 60% of local median income, reports the National Association of Home Builders, which excluded properties receiving other subsidies in its analysis. In six of the 12 states, more than a quarter of FHA-backed rental units serve families earning less than 30% of median income.
“To suggest that only tax-credit-assisted properties are affordable and provide a public purpose is misguided,” wrote a coalition of 11 real estate and health care associations in a March 13 letter to the Senate Appropriations Committee. “FHA programs have a strong public purpose, providing a key source of affordable rental housing.”
FHA as a revenue source
HUD expects the higher MIPs to boost revenue by $150 million. The agency says that the funds will offset administrative costs. The Federal Credit Reform Act of 1990, however, mandates that administrative costs on loan guarantee programs are to be paid through budget allocations rather than program revenue.
FHA programs are intended to cover their own costs, but they collect enough premiums to cover an 18% default rate. The actual default rate is around 2%. That means MIPs should drop rather than increase, argues Petrie of P/R Mortgage.
The FHA had been working with the MBA to bring the premiums closer in line with program costs, and lowered MIPs in each of the past three years. The proposed changes reverse that policy. “These premiums are being raised as a tax to raise income for the U.S. Treasury,” Petrie says. “It's bad policy, and it's bad faith.”
Calls for further study
This summer, House and Senate appropriations committees advised HUD to research potential adverse effects of increased MIPs and report back to Congress. The House committee noted that higher fees would raise housing costs, concluding that “imposing further constraints on FHA rental housing development makes little sense.”
HUD announced on June 28 its intention to raise premiums. As of late August, HUD had yet to announce whether it planned to withdraw the proposed premium increase. “The public comment period on this notice ended [July 28],” says Brian Montgomery, a federal housing commissioner. “We are currently reviewing comments received.”
Matt Hudgins is an Austin-based reporter who writes regularly on economic issues and governmental affairs. He can be reached at email@example.com