The White House has again proposed a fee increase for multifamily loan guarantees from the Federal Housing Administration, just six months after rescinding a similar proposal that sparked heated opposition from Congress and the lending industry.
“If Congress thought this wasn’t a good idea last year, how is it any better of an idea this year, when there’s more of a need for rental housing?” says Michael Petrie, president of P/R Mortgage & Investment Corp. in Indianapolis. Petrie led the Mortgage Bankers Association’s campaign to block the mortgage insurance premium (MIP) increase last year.
FHA mortgage insurance commits the federal government to cover a lender’s losses in the event of a default. Borrowers buy the insurance to achieve lower interest rates on multifamily loans, and experts say the programs are a key ingredient in the creation of affordable rental housing.
The 2008 budget proposal increases the borrower’s cost for FHA mortgage insurance from 45 basis points to as much as 56 basis points, an increase of more than 35%. That is less than last year’s proposed 71% increase, which was rejected in September by the U.S. Department of Housing and Urban Development. Yet opponents, including Petrie, contend even this year’s smaller proposed increase is bad policy.
“If it’s a stupid idea to raise it 35 basis points, then I guess it’s half as stupid to raise it 16 basis points,” Petrie says. “In an era when you need affordable rental housing, why in the world would you have a policy that increases the cost for rental housing? It’s outright dumb.”
The 2008 budget plan has already drawn sharp criticism from real estate groups and is the subject of letters circulating in both the House and Senate to rally opposition to the increased premium.
“An increase in premium fees will translate directly into higher rents and lead to the production of fewer affordable units, thereby reducing availability and affordability of rental housing,” write House Financial Services committee members Barney Frank (D-Mass.) and Gary Miller (R-Calif.) in their letter urging other House members to oppose the proposal.
Senators are said to be adding their signatures to another letter penned by Sens. Evan Bayh (D-Ind.) and Chuck Hagel (R-Neb.), in which the lawmakers urge HUD Secretary Alphonso Jackson to give Congress an opportunity to carefully review and evaluate consequences of the proposed increases before they are implemented.
HUD officials declined to comment for this report. A public comment period is expected to begin after the proposed premium increase is announced in the Federal Register, but it is unknown when that announcement will occur. Real estate organizations aren’t waiting for a public comment period to express their disapproval, however.
The Mortgage Bankers Association has already fired off a letter to Rob Portman, director of the Office of Management Budget, expressing “strong disappointment” in the administration’s 2008 budget proposal related to FHA multifamily mortgage insurance premiums, and the Ginnie Mae mortgage-backed securities program. The budget office has proposed a new up-front administrative fee for Ginnie Mae.
In his May 2 letter to Portman, MBA Chairman John Robbins estimates the proposed insurance premium hike will drive up rental rates by 2.5% in properties with FHA-backed mortgages. “This rent increase will affect the teachers, firefighters and other working Americans who typically occupy many of these apartments,” Robbins writes.
Further, the MBA contends loan volumes among FHA lenders will contract by approximately 40% if the increase is implemented. Robbins writes that the resulting lower loan volume would reduce expected revenues by more than $49 million, “which is more than the excess income expected to be generated by the fee increase.” Loan quality will suffer as well, because the highest-quality loans will be financed through alternative means, leaving only those with the highest risk profiles in the FHA program, Robbins argues.
“The increase in the mortgage insurance premium for many of the multifamily programs is simply a tax on these programs to provide funding for other parts of the budget,” Robbins writes.
Petrie agrees, and is careful to place responsibility for the proposal on the Bush administration’s Office of Management and Budget (OMB), rather than HUD. “All (OMB) is doing is raising these fees because they want to make more money for the Treasury, yet they say they don’t raise taxes,” he says. “It doesn’t wash. This is a tax on rental housing.”