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[Senate Hearing 107-534]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-534

                        FHA MULTIFAMILY HOUSING
                       MORTGAGE INSURANCE PROGRAM

=======================================================================

                                HEARING

                               before the

               SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

   THE EXAMINATION OF THE FEDERAL HOUSING ADMINISTRATION MULTIFAMILY 
HOUSING MORTGAGE INSURANCE PROGRAM, FOCUSING ON THE IMPENDING INCREASE 
 IN MORTGAGE INSURANCE PREMIUMS, PROGRAM CREDIT SUBSIDY RATES, AND THE 
ADMINISTRATION'S PROPOSED INCREASE IN THE PER-UNIT MORTGAGE LOAN LIMITS

                               __________

                             JULY 24, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

80-477              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
___________________________________________________________________________
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

               Jonathan Miller, Professional Staff Member

         Melody H. Fennel, Republican Professional Staff Member

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

               Subcommittee on Housing and Transportation

                   JACK REED, Rhode Island, Chairman

                 WAYNE ALLARD, Colorado, Ranking Member

THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JON S. CORZINE, New Jersey           RICHARD C. SHELBY, Alabama
CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
CHARLES E. SCHUMER, New York         CHUCK HAGEL, Nebraska
DANIEL K. AKAKA, Hawaii

                       Kara Stein, Legal Counsel

                 John Carson, Republican Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 24, 2001

                                                                   Page

Opening statement of Senator Reed................................     1

Opening statements, prepared statements, or comments of:
    Senator Allard...............................................     4
    Senator Akaka................................................     6
    Senator Corzine..............................................    10
    Senator Carper...............................................    11

                               WITNESSES

John C. Weicher, Commissioner, Federal Housing Administration, 
  U.S. Department of Housing and Urban Development...............     2
    Prepared statement...........................................    30
Michael F. Petrie, President, P/R Mortgage and Investment 
  Corporation, Indianapolis, Indiana on Behalf of Mortgage 
  Bankers Association of America.................................    18
    Prepared statement...........................................    31
    Response to written questions of Senator Allard..............    45
Kevin Kelly, President, Leon N. Weiner and Associates, 
  Wilmington, Delaware on Behalf of the National Association of 
  Home Builders..................................................    19
    Prepared statement...........................................    35
    Response to written questions of Senator Allard..............    49
Patton H. Roark, Jr., Exectuive Vice President and Portfolio 
  Manager, AFL-CIO Housing Investment Trust, Washington, DC......    21
    Prepared statement...........................................    38
Carl A.S. Coan, Jr., Executive Committee Member, National Housing 
  Conference.....................................................    43

              Additional Material Supplied for the Record

Letter submitted by Patton H. Roark, Jr. from John Sweeney, 
  President, AFL-CIO dated July 24, 2001.........................    50
Statement of the National Association of Realtors................    52

                                 (iii)

 
           FHA MULTIFAMILY HOUSING MORTGAGE INSURANCE PROGRAM

                              ----------                              

                         TUESDAY, JULY 24, 2001

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                Subcommittee on Housing and Transportation,
                                                    Washington, DC.

    The Subcommittee met at 2 p.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Jack Reed (Chairman of 
the Subcommittee) presiding.

             OPENING STATEMENT OF SENATOR JACK REED

    Senator Reed. Let me call the hearing to order. Good 
afternoon. I would like to welcome all of our witnesses and 
everyone to today's hearing on the Federal Housing 
Administration Multifamily Housing Program.
    The Federal Government has tried a number of different 
approaches to provide housing over the past 50 years. The FHA 
Mortgage programs is a public/private partnership that 
encourages the private sector to produce housing with support 
from the Federal Government. It is been one of our most 
successful efforts.
    The FHA Multifamily Insurance enables moderate income 
working families to obtain affordable rental housing. FHA 
multifamily programs currently insure more than $41 million 
worth of mortgage loans that support over 14,000 multifamily 
properties containing 1.8 million housing units.
    Unfortunately, this year, for the second consecutive year, 
the multifamily insurance programs have been shut down because 
they have used up their annual appropriated credit subsidy or 
loan loss reserve. This happened approxiamately 3 months ago on 
April 19, 2001, 5 months before the end of the fiscal year. 
Experts estimate that if we fail to get the programs up and 
running again, 55,000 apartments will not be constructed or 
rehabilitated this fiscal year.
    Last December, Congress recognized that the multifamily 
insurance programs might need additional credit subsidies so we 
provided a supplemental appropriation of $40 million for this 
purpose, making the release of funds contingent upon the 
declaration of an emergency by HUD.
    Despite requests from many Members on this Committee to 
release the $40 million of credit subsidies, the Administration 
has decided not to declare such an emergency, and the $40 
million has not been released. Many of us hope that the fiscal 
year 2001 supplemental conference report was going to include a 
provision allowing the $40 million to flow with no conditions 
attached. This provision appears to have not been included in 
the conference report.
    However, even if this additional credit subsidy were 
released, this still would only sustain the multifamily program 
for only a few months, not until the end of the fiscal year on 
September 30, 2001.
    At the same time, the Administration has determined on its 
own, with almost no input from either Congress or stakeholders, 
that the solution to this problem is to raise the FHA 
multifamily insurance premiums. This proposed 50 percent 
premium increase will become effective on August 1, 2001, which 
brings us to the reason for the hearing today.
    As of today, we have the following results, programs that 
have been shut down since April 19, 2001. Repeated requests by 
Members of Congress, including myself, that HUD declare an 
emergency and allow the $40 million appropriated last December 
to flow to the FHA multifamily insurance programs, but to no 
avail.
    A 60 percent increase in the premiums and many of the 
multifamily programs which arguably will increase the cost of 
this housing causing builders to decide not to build or to 
raise rents, thus decreasing affordability.
    An unsuccessful attempt to fix the problem in the 
Supplemental Appropriations bill and what appears to be a 
problematic method of calculating how much credit subsidy the 
programs need, that still has not been fixed.
    In summary, we look forward to the testimony of our 
witnesses today, and hope that you will help us untangle this 
cluster of interrelated issues and get the FHA multifamily 
programs back on their feet.
    We will have two panels of witnesses. The first panel will 
consist of Mr. John Weicher, the Assistant Secretary for 
Housing and Urban Development and the FHA Commissioner.
    On our second panel, we will hear from a number of the 
stakeholders involved in the FHA multifamily insurance programs 
and I will introduce the second panel a bit later. We will be 
asking all witnesses this afternoon to address the probable 
effect of the recent increase in mortgage insurance premiums, 
the accuracy of current price subsidy rates, and their views 
about the proposals to increase FHA multifamily loan money.
    Before I recognize Secretary Weicher, I would like to 
indicate that I will recognize Committee Members as they arrive 
at appropriate times so they may make opening statements.
    But at this time, Mr. Secretary, we appreciate your 
testimony. As you know, we will make, as part of the record, 
your written text if you would like to summarize or in any way 
abbreviate your testimony. We will ask you to try to keep your 
comments to 5 minutes.
    Mr. Secretary.

                  STATEMENT OF JOHN C. WEICHER

              ASSISTANT SECRETARY, FHA COMMISSIONER

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Weicher. Thank you, Mr. Chairman. I want to thank you 
for inviting me to testify about the FHA Multifamily Mortgage 
Insurance Program this afternoon.
    With me today is Joseph Malloy, Deputy Director of FHA's 
Office of Multifamily Development. We are glad to have the 
opportunity to discuss the Subcommittee's concerns about the 
program. I am going to discuss each of the three issues in turn 
that you mentioned in your letter of invitation, starting with 
the mortgage insurance premium increase.
    The National Housing Act authorizes the Secretary to set 
the premium charge within a range of 25 basis points and 100 
basis points on the principal obligation of the mortgage 
outstanding at any point in time. The MIP for most multifamily 
mortgage insurance programs has been set by regulation at 50 
basis points.
    In fiscal year 2001, Congress appropriated $101 million for 
credit subsidy. The Department effectively obligated all the 
available credit subsidy by May for reasons that I described in 
my confirmation hearing before you in May. At the end of fiscal 
year 2000, the Department ran out of credit subsidy for that 
year, and promptly used the first $12 million of credit subsidy 
for fiscal year 2001 to fund the projects that were left over 
in the pipeline. Also, there was an unexpected increase in 
applications in the 221(d)(3) program project sponsored by 
nonprofits and that program carries a higher subsidy rate than 
most other FHA multifamily programs. Some of these projects 
should have been treated as if they had for-profit sponsors. In 
recent years, the number of 221(d)(3) commitments has varied, 
but they accounted for about 13 percent of the credit subsidy 
obligated in fiscal year 2000, less than 10 percent in earlier 
years. This year, 221(d)(3) accounts for 40 percent of our 
commitments, and that is completely unexpected. If the fiscal 
year 2000 activity level had continued this year, FHA would 
have obligated approximately $23 million less in credit 
subsidy, and we would probably not have this problem.
    As the Department exhausted credit subsidy, we advised all 
field offices to halt the issuances of commitments conditioned 
on credit subsidy in the April 19 mortgagee letter. To meet the 
need for multifamily housing, the Secretary then decided to 
request a supplemental appropriation of $40 million for credit 
subsidy for the
remainder of this fiscal year, and at the same time to 
implement a premium interest. On July 2, the Department 
published a notice in the Federal Register increasing the 
mortgage insurance premium to \8/10\ of 1 percent, 80 basis 
points. The rule and the notice become effective on August 1. 
At that time, field offices will be authorized to resume 
issuing commitments for the 221(d)(4) and other positive credit 
subsidy programs. All FHA commitments issued on or after that 
date will be processed at the higher premium. Projects in the 
headquarters' queue for credit subsidy already, those without 
outstanding FHA commitments will be allowed to proceed to 
closing at the lower premium of 50 basis points subject to the 
availability of credit subsidy in fiscal year 2001. The 
increase in the premium rate will lower the credit subsidy 
rates in the future.
    The purpose of these proposals is both to resume the 
production of needed multifamily housing and to put FHA's basic 
multifamily program on a demand basis, similar to the 203(b) 
program for single family mortgages. This is the third time in 
8 years that FHA has run out of credit subsidy before the end 
of the fiscal year. The Secretary wants to eliminate the stops 
and starts that plague our programs and make sure that this 
situation does not happen again. The premium increase of 30 
basis points achieves these purposes. It is also in line with 
the Administration's proposal in the fiscal year 2002 budget.
    Turning to credit subsidy rates. HUD, like all other 
Federal agencies under the Federal Credit Reform Act of 1990, 
is required to estimate the probable cost to the Agency of its 
programs and must request credit subsidy as part of its budget 
in each fiscal year to cover those costs. In calculating the 
credit subsidy estimates, we look at historic loan performance 
of our major programs--prepayments, claims, the income FHA 
receives from application/inspection fees, and other sources of 
incomes, mortgage insurance premiums, and recoveries from note 
and property sales. This analysis becomes the basis for the 
credit subsidy rate in the Federal budget. The performance has 
improved greatly in recent years. In 2001, the (d)(4) subsidy 
rate is a little over 3 cents on the dollar, down from 7 cents 
last year and 12 cents in 1996.
    At my confirmation hearing, I promised to conduct a 
complete reanalysis of the methodology, and make a new judgment 
as to the appropriate credit subsidy rate and the appropriate 
MIP. We are now in the middle of that analysis. Meanwhile, we 
have provided the industry with a computer model and 
assumptions, and it is my understanding that they are 
conducting a parallel analysis. And I notice Mr. Petrie's 
testimony makes reference to the cooperative effort we have 
engaged in. Once our work is completed, I will make 
recommendations to the Secretary and to OMB as to whether the 
credit subsidy rates and the MIP should be changed. The 
Secretary, as I mentioned, does have the statutory authority to 
change the MIP, and that is the basis on which we issued the 
interim rule on July 2, allowing him to raise or lower the MIP 
within the range of the statutory authority.
    To summarize, very quickly on the loan limits, we are 
proposing a 25 percent increase in the basic loan limits across 
the board nationally. This is the first increase since 1992. It 
matches the increase in construction costs, the national 
increase in the index, since 1992, which is about 25 percent as 
well.
    The result of this will be to increase and to encourage the 
construction of much needed multifamily rental housing in the 
major metropolitan areas across the country. I understand the 
increase has been included in the Senate Appropriations bill 
but not in the House bill. We hope the Conference Committee 
will adopt the Senate position to facilitate the production of 
multifamily housing.
    That concludes my statement, Mr. Chairman. Thank you for 
the opportunity to appear before you.
    Senator Reed. Thank you very much, Mr. Secretary.
    Let me recognize the Ranking Member of the Subcommittee, 
Senator Allard.

                COMMENTS OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I know we are anxious to get 
to the questioning. I would just ask unanimous consent that my 
opening statement be made a part of the record, behind the 
Chairman's.
    Senator Reed. Without objection.
    Senator Allard. I would just comment that this is an 
important hearing. There are changes that are happening in 
multifamily housing and issues this Subcommittee needs to look 
at seriously.
    I think the Administration is trying to take a responsible 
position as far as budgeting is concerned. I want to commend 
them for that, and look forward to the questioning and response 
period.
    Senator Reed. Thank you very much, Senator. Let me begin, 
Mr. Secretary.
    In your testimony, I heard your statement that Secretary 
Martinez requested a $40 million supplemental request. That 
request was granted, I understand, with the caveat that an 
emergency should be declared, or am I confused?
    Mr. Weicher. I believe that is not accurate, Mr. Chairman. 
We included a $40 million request as part of the 
Administration's supplemental proposal. And at the same time, 
we announced an intention to increase the premium to 80 basis 
points. We intended to 
resolve the question about the emergency and operating within 
the budget limits by including the $40 million in the 
supplemental fully offset, and we were expecting, up until last 
Thursday, that we would be reopening the program on that basis 
on August 1.
    Senator Reed. In a sense, we have battling supplementals. 
Last December, there was a supplemental that had emergency 
language in place, and then subsequent to that, there was a 
supplemental request by the Administration for $40 million.
    Mr. Weicher. That is right, on a nonemergency normal basis.
    Senator Reed. Which raises the question to me which was can 
you give us the rationale why you would not declare an 
emergency in a program that is so important and that a 
shortfall that could have been remedied by simply declaring an 
emergency, at least partially remedied.
    Mr. Weicher. Mr. Chairman, the Administration policy has 
been and remains to operate within the normal budget process, 
except in very unusual situations, and we are perfectly 
prepared to allocate the $40 million in credit subsidy within 
the supplemental.
    It is the Administration's view that emergencies are 
responses to natural disasters, to problems of that magnitude, 
not to temporary suspensions in on-going programs. That is what 
has been at issue here and what remains at issue.
    We felt the way to handle this was on the normal order, $40 
million appropriated in the normal process, within the spending 
caps established and the supplemental fully offset, and on that 
basis, we are certainly prepared to go forward.
    But we do not see and Congress does not see this as an 
emergency or see this as worth funding in the normal way. It 
makes it harder to argue that it is an emergency. It is our 
feeling that we have tried very hard to work out a problem 
which we did not like and which the industry did not like and 
which Congress did not like certainly. We are sorry that the 
product has come out this way in the supplemental.
    Senator Reed. Let me turn to you a moment for the whole 
issue of the subsidy rates and the controversy that has 
developed about the accuracy of the calculations. There is a 
contention that the credit rates are not being calculated 
accurately and that in fact less money is required to be 
appropriated for FHA programs to satisfy the requirements of 
the Credit Act.
    If this is the case, then we could find ourselves in a much 
better position where Congress could appropriate less money, 
HUD is able to keep premiums lower, and the programs which 
operate. Indeed, I think it could be a win-win. You have 
already indicated you are reviewing carefully the methodology. 
Do you have any at least preliminary conclusions with respect 
to the level of subsidy that is necessary?
    Mr. Weicher. No, Senator, I do not. We are literally in the 
middle of the process at this point. I am satisfied that we are 
proceeding in an appropriate way to do the analysis that we 
have set up the analytical framework properly.
    I have not seen any results at this point that I consider 
to be properly done within that framework. It is a process of 
deciding how to do it and then a process of getting the correct 
data entered into it.
    And we are in the middle of doing a statistical analysis 
within the framework that we have created. It is a high 
priority, I can assure you, and we intend to be done with the 
analysis by the end of the fiscal year barring some unexpected 
problem. But at this point I am not in any position to indicate 
results.
    Senator Reed. Let me cease for the moment and just suggest 
that we do a second round.
    Senator Allard. That would be fine.
    Senator Reed. Let me recognize Senator Akaka, who has just 
joined us and who is the newest Member of the Subcommittee, and 
ask you if you would have an opening statement that you would 
like to present at this time?

              STATEMENT OF SENATOR DANIEL K. AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman, Senator 
Allard. I commend you for holding this hearing today that will 
address the housing issues facing many low and moderate income 
families involved in the Federal Housing Administration's 
multifamily insurance programs.
    I also wish to thank Mr. John Weicher, the FHA Commissioner 
and Assistant Secretary for the Department of Housing and Urban 
Development and other witnesses for coming today to testify 
before this Subcommittee.
    This Subcommittee has a responsibility that was known many 
years ago. It goes all the way back to 1934. Since then, this 
Government has been very active in helping average folks get 
housing and FHA has gone through many changes to carry out its 
mission.
    According to the National Low Income Housing Coalition, 
approximately 44 percent of Hawaii's renters are unable to 
afford a 2 bedroom unit. The Coalition has calculated that 
Hawaii's average rent for a 2 bedroom is $859. Therefore, a 
worker in Hawaii would need to earn $16.52 per hour working 40 
hours per week in order to afford an $859 unit. That is what we 
are faced with in Hawaii. Mr. Chairman, I ask that my statement 
be placed in the record.
    Once again, I am pleased the Chairman is willing to hold a 
hearing and look forward to hearing the witnesses today. Thank 
you.
    Senator Reed. Thank you.
    Senator Allard, questions.
    Senator Allard. Thank you, Mr. Chairman.
    I just want to point out to Members of the Subcommittee and 
the panel that Denver, Colorado has had the highest increase 
over the last 10 years in the cost of housing of any place in 
the country. They have a 43 percent increase. So personally, I 
am interested in making sure that we have a program that is as 
self-sufficient as possible and one that will meet our issues 
of affordable housing. I want to follow up a little bit on the 
questioning that the Chairman has started out on, $40 million 
in credit subsidy.
    Now, you said in your statement that we have 3 years here 
where we have a $40 million supplemental, is that right? Did I 
misunderstand that? What were you talking about over that 3 
years?
    Mr. Weicher. Three times in the last 8 years, we have run 
out of credit subsidy before the end of the fiscal year.
    Senator Allard. I see, and then you have come in and asked 
for more, is that what you have done?
    Mr. Weicher. Last year, when HUD ran out at the end of the 
fiscal year, they simply took the projects that were in the 
pipeline, funded them out of the 2001 appropriation so that the 
first $12 million of this year's projects, the first $12 
million in credit subsidies for this year's projects were 
projects that had been proposed and were in the pipeline in the 
year 2000.
    Senator Allard. I guess that was my question. There is a 
$40 million credit subsidy provided through a supplemental 
appropriation last year, am I correct?
    Mr. Weicher. During the calendar year. During the present 
fiscal year but at the end of the last calendar year.
    Senator Allard. Part of the problem for me is that it 
sounds like it is forward funding, pulling it into the current 
year to make your shortfalls up. Is that what is happening?
    Mr. Weicher. The full credit subsidy allocation for last 
year and the full appropriation for last year was used on 
projects that were in the pipeline and approved in fiscal year 
2000. We had an excess demand for credit subsidy at the end of 
fiscal year 2000, and that excess demand was funded with money 
that you appropriated for fiscal year 2001. Then at the end of 
the calendar year, Congress appropriated this emergency 
supplemental $40 million for fiscal year 2001.
    Senator Allard. I would like to compliment, as a Member of 
the Budget Committee, the Administration for trying to 
straighten that out. I recall, Mr. Chairman, at a previous 
hearing that we had, that we had $12 billion of unobligated 
funds in HUD. That was a previous hearing that we had.
    The Chairman and I served together on another Subcommittee, 
probably one of the most expensive Subcommittees, because we 
are dealing with missile programs and such. We could take your 
unobligated funds and have a tough time spending them on that 
particular Subcommittee where we have a lot of defense.
    I want to compliment you on trying to establish some sanity 
in this budget process. The forward funding issue is one of 
those things that I think is deceptive, and it is quite 
difficult for some of the Members to understand. I agree with 
that. I also want to compliment you on not trying to abuse the 
emergency funding process. Because when you have the emergency 
funding process, the disadvantage of it from a policy 
standpoint is that it gets considered part of the funding. The 
disadvantage to the Administration there is it becomes part of 
the base. So it kind of shortfalls you on the other side.
    So I agree with you that if you make this part of the 
regular funding process, I think it works much better for those 
of us who are concerned about the policy issues. And also the 
Administration is trying to hold some responsible funding and 
spread the stream of funding for your programs, and that is 
also important to you.
    Is it the Department's view that the FHA Multifamily 
Housing Mortgage Insurance Program should be self-financing in 
the same manner as FHA's single-family programs?
    Mr. Weicher. That is certainly what we are trying to do 
with the 221(d)(4) program, which is our base multifamily 
program. If we can do that--and we believe that an 80 basis 
point premium does that--then we will no longer need to have 
hearings where we try to deal with this kind of problem, and we 
will no longer need supplementals for credit subsidy or 
emergency appropriations or anything else along that line any 
more than we now do with 203(b), which works effectively 
without the need for anybody to appropriate anything.
    Senator Allard. We have your single-family program that has 
the surplus. In fact, that was part of our issue last year is 
how you are going to spend that surplus. You had too much. I 
notice here on multiple families, we have just the opposite. We 
are not able to meet the needs of the program. So I do agree 
there needs to be some adjustment there if you want to make it 
self-sufficient. I think from a budget standpoint, it makes a 
lot more sense. Please discuss FHA's intention to raise 
insurance premiums, specifically how raising insurance premiums 
could lower the amount of credit subsidy FHA needs to pay off 
insurance claims.
    Mr. Weicher. We have to pay an insurance claim from 
basically two sources. It either has to be through the money we 
have received in mortgage insurance premiums or it has to be 
from money that Congress appropriates. And for many years, I 
think back to 1970, it has been necessary to have 
appropriations for the multifamily insurance programs. The 
premium income has not covered the losses on claims.
    And so from year to year, there has been this requirement 
for an appropriation. If we raise the insurance premium, every 
dollar that we raise the insurance premium reduces by a dollar 
the amount of credit subsidy that needs to be appropriated. We 
do not measure it in those terms. We talk about basis points 
and the one in terms of the insurance premium rather than 
dollar amounts. We talk about dollar amounts in credit 
subsidies. But there is a very direct relationship.
    And by raising the premium to 80 basis points, we will 
bring in for every billion dollars worth of mortgages, we would 
bring in an extra $3 million worth of revenue. Three million 
dollars per year enables us to avoid the need for credit 
subsidy and to avoid the need for appropriations. We believe 
that we can pay the claims we will incur out of the premium 
income. We will be able to cover our losses, and we will have a 
program which is operating on a fiscally solvent basis.
    Senator Allard. Mr. Chairman, I see my time has expired. 
Are we going to have a second round after this?
    Senator Reed. Yes. Thank you, Senator.
    Senator Akaka, any questions.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Mr. Weicher, I believe that the Administration sets the 
credit subsidy based on the history of defaults and losses in 
the program. In your review of the credit subsidy methodology, 
you have found that the current process takes into account 
changes in tax policy and other economic situations that can 
affect default rates or changes in HUD's underwriting 
procedures over the past decade that have lowered default 
rates. Have you found that the current process does this? And 
does it take into account tax policy and other economic 
situations?
    Mr. Weicher. The procedures that have been followed take 
into account the historical experience of FHA over the life of 
the program. The procedures that we are working on attempt to 
identify the separate effects of changes in tax policy, of 
which we have had several over the years, most recently in 
1986.
    We take into account specifically also changes in 
underwriting procedures. And there was a major change in 1991. 
And we take into account changes in economic circumstances, 
whether the economy is strong or whether the economy is in 
recession. And we try to identify the separate effects of each 
of those so that we can go forward in estimating the experience 
of the program, estimating the losses that we will incur, and 
the prepayments will incur, which also affect our premium 
income, and on that basis to identify how much if any credit 
subsidy we will need.
    It is not an easy process. You are trying to disentangle 
three different important factors so that we can look forward 
analytically to what happens under the underwriting standards 
that we now have and expect to have and under the tax laws that 
we now have and expect to have and under the economic 
circumstances that we can expect to have. It is difficult and 
time consuming, but we think at the end of it we will have more 
information than we had before.
    I might say that this is not the first time that the 
analytical framework has been reviewed and modified. It 
happened 4 years ago I believe, and of course it was originally 
set up in 1992. And then from year to year, there are minor 
adjustments so that the actual credit subsidy rate is modified 
based on the additional experience we have even when we are not 
doing a major reanalysis.
    But it seemed to me that the industry representatives that 
I spoke to on this raised serious concerns that I thought 
should be investigated freshly. So we started doing that after 
this Committee confirmed me and I was sworn in by the 
Secretary.
    Senator Akaka. Thank you so much for that response. I am 
always concerned how far back concerning the history and 
calculating this, and I am glad to see there are flexibilities 
in here. I am concerned that credit subsidy rates may not be 
accurate and that less money may need to be appropriated for 
the FHA programs in the GI, SI funds. If this were the case, we 
could find ourselves in a win-win situation. Congress could 
appropriate less money. HUD could keep premiums at 50 basis 
points, and the programs could continue to operate.
    You testified that you are reviewing how the Administration 
sets limits. What is your analysis of whether less credit 
subsidy is actually needed for these programs?
    Mr. Weicher. We have not yet completed the analysis, 
Senator. Therefore, we really do not have a judgment at this 
point as to whether the credit subsidy rate or the premiums 
should be changed. At this point we are operating under the 
best evidence we have so far. And the best evidence we have is 
that the program will be able to cover its costs at the 80 
basis point premium that the Administration has requested.
    Where our analysis will come out at this point I do not 
know. We are, as I said in response to the Chairman's earlier 
question, we are in the middle of the process. I am satisfied 
that we have a solid analytical framework for the work we are 
doing. But we do not yet have results.
    I have spent a professional career personally doing the 
kind of work that we are doing here using the same sort of 
analytical techniques, and I know that when you start on an 
exercise like this, it takes time and effort, and you always 
find in the process that you did not do something quite right 
the first time, and you make a choice and do A instead of B, 
and then you decide maybe I ought to see if D makes the 
difference. And it is not an easy process.
    But I am sure we are proceeding in an appropriate way. And 
when we have results, we will be making recommendations to you. 
And I would be delighted to be able to operate this program on 
a demand basis at an appropriate mortgage insurance premium.
    Senator Akaka. Do you have an idea of when the time might 
be when you would be able to do that?
    Mr. Weicher. I believe I said to the Chairman that we 
expect to complete this analysis by the end of the fiscal year. 
That is certainly our target.
    Senator Akaka. Thank you, Mr. Chairman. My time is up.
    Senator Reed. Thank you, Senator Akaka.
    Senator Corzine, would like to make an opening statement?

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Mr. Chairman, I appreciate you holding 
this hearing. I have a statement that we can put in the record. 
I also understand that increasing the loan limits, which is 
something Senator Carper and I have proposed, is generally 
noncontroversial. There are a number of those on the 
Subcommittee and in the Administration who support it. I would 
like to make sure that I hear that in reality. Certainly I 
believe it will make a difference in the interest of private 
construction to enter this arena.
    On the other issues, though, I have the same kinds of 
concerns that I am sure other people are voicing. There is a 
huge need for affordable housing. Broadly speaking, there is 
almost a 9 year wait for multifamily FHA-sponsored housing. In 
Newark, we have an incredibly high cost rental housing market, 
across New Jersey, whether the middle-class or lower-income 
families. And I think the lack of utilization of this $40 
million is hard for me to understand, given its relatively 
small position in the overall budget process with such an 
incredible need. I know this is not unique with New Jersey. It 
is true across the country. My question is more of a statement. 
Why are we not moving forward on something that seems so 
obvious and there seems to be general agreement?
    Mr. Weicher. Senator Corzine, the Administration proposed 
to include $40 million in credit subsidy in the supplemental 
appropriation which the President sent up, and each House 
approved it separately and the Conference Committee dropped it. 
It was our view that the $40 million would be appropriately 
spent within the normal budgetary process with a full offset 
within the spending caps. And until last week, we expected that 
we would be reopening this program with the $40 million in 
credit subsidy next week.
    Senator Corzine. Is there emergency authority that would 
allow you to sidestep the fact that it is not in the Conference 
Report?
    Mr. Weicher. The Administration has taken the view since 
the beginning that this program would be funded through the 
normal budget process and not on an emergency basis. The 
Administration has wanted to operate within the budget 
framework and not start spending outside the budget process. 
Funds that we spent should be accounted and be offset through 
the normal, regular budgetary procedures. We were prepared and 
still are prepared to implement the program, to reopen the 
program on that basis.
    The Administration is not prepared to declare an emergency. 
The Administration is quite surprised that Congress is 
unwilling to approve the $40 million when, as far as we could 
see, there was no controversy whatsoever about the $40 million 
as it went through the supplemental appropriations process.
    Senator Corzine. And I suppose if there were an amendment 
when the VA/HUD appropriation process comes onto the floor that 
we would be able to count on the Administration's support?
    Mr. Weicher. If you are proposing a $40 million credit 
subsidy for this fiscal year through the fiscal year 2002 
appropriation, I am not sure when that is likely to become law. 
But typically it becomes law very close to the end of the 
fiscal year if not after the end of the fiscal year, and then 
we are into fiscal year 2002. And we will have projects in the 
pipeline which will then be covered under the fiscal year 2002 
rules, presumably under the 80 basis point premium that the 
Administration has announced.
    I am not sure how a $40 million appropriation is part of 
the fiscal year 2002 appropriation. Forty million dollars 
supplemental for 2001 would in fact benefit the projects which 
are now here.
    Senator Corzine. Thank you.
    Senator Reed. Thank you.
    Senator Carper, do you want to make an opening statement? 
Then do you want to recognize all the witnesses in the next 
panel?

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. I would like to recognize them all. Kevin 
Kelly is here from Delaware, President of Leon Weiner & 
Associates. Kevin has been in the housing business forever, as 
long as many of us have been alive.
    [Laughter.]
    Senator Carper. And people in the audience who laughed know 
him well. I am one of the people. Kevin Kelly is going to be on 
the second panel, and I have to start presiding at three 
o'clock, so I probably will not be here to hear all that he is 
going to say. But we are delighted that you are here.
    A question for Mr. Weicher. I just want to say to Senator 
Corzine, I appreciate the opportunity to work with him in what 
appears to be maybe the only noncontroversial thing John and I 
have done this year with lifting the limits on multifamily 
housing.
    I just want to understand, Mr. Weicher, if I could, I just 
got in here in January. I understand there was some work done 
last year to try to provide the $40 million. It got caught up 
in the supplemental appropriation. Your Administration had the 
ability to free that money up by declaring an emergency, but 
chose not to. Then it was put in an appropriations bill, but 
then dropped out in conference. I know you have probably been 
trying to explain what is going on here.
    Mr. Weicher. We do not quite know exactly what is going on. 
We were surprised as anyone to hear at the end of last week 
that the Conference Committee had dropped the $40 million from 
the supplemental, which, as far as we could see, was equally as 
noncontroversial as raising the mortgage limits by 25 percent. 
We thought we had a solution which provided the resources to 
continue operating the program for the remainder of the fiscal 
year that provided them within the normal budgetary process, 
provided them with the full offset, proper scoring, and we 
could go ahead with the program. And we had been expecting it 
until the end of last week.
    We had been expecting that on August 1 we would reopen the 
program. We have projects in the pipeline, projects in the 
queue and projects with approval, subject to the availability 
of funds to receive credit subsidy and we expected that we 
would be back in business. And it appears now that while we 
have some small amounts of money that have not yet been 
appropriated because they have not yet been allocated to us 
when we reopen the program, we will not be able to fund all of 
the projects that have already been approved.
    We really do regret that the appropriations Conference 
Committee found other uses for the funds. We thought that $40 
million would solve the problem that had bothered us since very 
early in the Administration.
    Senator Carper. Is there any way to fix it at this late 
date, or is it a done deal?
    Mr. Weicher. I do not know how you would deal with that 
other than through an amendment to the supplemental 
appropriation. I doubt if it would provide funds in time to be 
available during the current fiscal year, as I understand you 
all will be working on the conference on the HUD/VA 
appropriation bill during the recess, and that seems to be the 
normal schedule. But it seems unlikely to me that you would 
then have the legislation passed and have the President sign it 
in time to make much of a difference in the present fiscal 
year.
    Senator Carper. Why not just declare an emergency?
    Mr. Weicher. Because the Administration does not believe 
that you should be operating outside of the normal budget 
process. We believe this program should be funded as other 
programs are funded, as part of the normal budget, normal 
appropriations process, and we are more than ready to proceed 
on that basis.
    The Administration has indicated from the beginning that it 
was not willing to declare an emergency simply to avoid the 
budget rules. That remains the Administration's position.
    Senator Carper. Could I ask one more question? I understand 
there are a number of projects in the pipeline waiting for 
additional credit subsidy. In order to move forward, any idea 
what might be the impact of a change in premiums on those 
projects?
    Mr. Weicher. I do not think we have tried to calculate that 
for individual projects or for projects that are now in the 
pipeline. Some will be approved, because there is the money 
that was not yet allocated when we suspended the program in 
April. For those projects, it does not matter.
    We do know that we are talking about an increase of about 2 
percent in rents from the calculations that we had done earlier 
when we made our proposal back in May I believe, May or June, 
so we know that this could make a little bit of a difference in 
the rent levels on the moderate-income and middle-income 
projects, assuming a project owner chooses to increase rents.
    And in return for that, we will have a program which will 
be operating on a demand basis like the 203(b) home mortgage 
program, and we will no longer need credit subsidy, and we will 
be able to insure any project that meets our underwriting 
guidelines without worrying about competing with other projects 
that are in the pipeline and without having to worry about 
whether we have $40 million or $8 million or $101 million in 
credit subsidies that we have appropriated at the beginning of 
the fiscal year, and we think at that point our job and your 
job will be much easier.
    Senator Carper. Thank you.
    Mr. Chairman, thank you.
    Senator Reed. Thank you.
    Mr. Secretary, we have covered the machinations of the 
budget process, which has resulted in bringing us to this 
place. But what concerns me more is the policies adopted by 
HUD.
    Essentially what you have decided to do by raising the 
insurance premiums and not aggressively seeking subsidies is to 
reduce the subsidies going into the multifamily units, 
increasing rents to renters, impeding the production of units 
when these projects become more expensive to developers, at a 
time when we face a crisis in housing across this country; 
housing for people who are working just to get affordable 
rents, that is independent of whether or not you declare an 
emergency or whether or not it is in the supplemental 
conference. You have decided now going forward that you are 
going to raise the price of this to the developers and to 
renters of this housing at a time when we need to do more to 
make housing more affordable. Now I think that is the effect. 
Do you disagree?
    Mr. Weicher. I think we are doing several things here, 
Senator we are making it possible for the industry to produce 
multifamily housing on its own production schedule without 
having to worry about getting it into this fiscal year or next 
fiscal year, getting it in under the $86 million 221(d)(4) 
credit subsidy that it appropriated last fall. That is going to 
make life easier for developers, and that is going to, to some 
extent, as it makes it easier, will make it less expensive for 
them to produce housing. We do not have to worry about the 
budgeting and appropriations procedures that you all go through 
and we go through in the process of operating this program. I 
think that is a major step forward, and it is highly desirable 
to be able to do that.
    Senator Reed. Do you have any estimates of how much money 
you are going to save the developers, translated into reduced 
rents?
    Mr. Weicher. No I do not, Senator. But I am reasonably sure 
that if you make the job easier for them it will get translated 
into reduced rents.
    Senator Reed. There is another view. You can make it less 
expensive for them by subsidizing what they do. They also like 
that too.
    Mr. Weicher. Certainly. And if Congress were to continue to 
provide subsidies on the scale on which it has provided 
subsidies in the past, we would operate the program on that 
basis.
    Senator Reed. It seems to me, Mr. Secretary, you have 
rejected that approach by saying you do not want to take 
subsidies. You want to increase the mortgage premiums and 
create, as you say, a demand basis for this housing program. If 
you are not asking for the money, it makes it difficult for 
Congress to give the money.
    Mr. Weicher. We believe, Senator, that the proposal that we 
have made, the Administration made for an 80 basis point 
premium and a demand program is the appropriate way to operate 
this program. The Section 221(d)(4) program is not a program 
under which rents are subsidized. We are not dealing with low-
income renters here. We are dealing with moderate- and middle-
income renters, people who are not dependent on Federal 
assistance to live in decent housing. It is certainly desirable 
to have a larger stock of affordable multifamily housing. We 
believe that the approach that we are taking here contributes 
to that.
    Senator Allard. Mr. Chairman, would you yield just briefly? 
It seems to me, Mr. Chairman, that if we have a program that is 
self-sufficient, that means those dollars are going to be 
available throughout the year. And that to me means more 
affordable housing, not less. And when you have this subsidy 
coming in at the whim of Congress or you have to break budget 
rules to do that, then I do not think that provides a reliable 
source of revenue.
    If you have a reliable source of revenue coming in through 
the years to get these projects going, it provides more money 
for the program so that you have more opportunity for 
affordable housing. So to me it seems like they are on the 
right track when you provide some self-sufficiency.
    That is what is happening in the single-family when we have 
a program here, single families, we have premiums that we are 
providing for that. So that is a consistent program that gets 
funded throughout the year. That way, it goes to the surplus.
    So it seems to me like this, if you really want more 
affordable housing in the multifamily area, I think this is the 
right way to go, and I will yield back. And you can have some 
of my time, Mr. Chairman.
    Senator Reed. Just one additional question. It goes to the 
legal basis for the determination of the Secretary by notice, 
and not by notice and comment rulemaking, of this change. I 
have had some conversations with the Appropriations Committee 
staff who indicate that this may not be appropriate.
    Let me ask, Mr. Secretary, did the General Counsel at HUD 
render an opinion as to the legal sufficiency of this notice 
rather than a rulemaking process?
    Mr. Weicher. Senator, we issued an interim rule 
implementing the Secretary's statutory authority to vary the 
premium between 25 basis points and 100 basis points. Certainly 
that interim rule would not have come out of the Department 
without the concurrences of the General Counsel. It does not 
come out without the General Counsel's belief that this is an 
appropriate and legal procedure for the Department to follow.
    Having done that, that rule allows the Secretary by notice 
to vary the premium within that range of 25 basis points to 100 
basis points, and the notice that we have issued, on July 2, is 
in conformity with the interim rule, and we are proceeding on 
the basis that we understand--and I am not a lawyer--but we 
understand to be perfectly consistent under the statute. And we 
know of no problem there.
    Senator Reed. Could you provide us whatever documentation 
the Counsel provided, Mr. Secretary?
    Mr. Weicher. I do not know what documentation it will be, 
but I will ask the General Counsel or the Secretary for 
information.
    Senator Reed. Thank you.
    Senator Allard.
    Senator Allard. Mr. Chairman, I want to kind of just for 
the record ask you this question. We have had multifamily 
housing developers argue that increasing premiums will have an 
adverse impact on them and could decrease the number of 
affordable units being built. So I was just curious.
    I know that you have a study that is going to give you a 
more firm answer, but when you decide to increase the basis 
points by 30, what sort of figures were you looking at that 
determined that you needed to increase the basis points by 30? 
I know it is just kind of you are waiting for that study to 
come in and more specifically identify what the amount really 
needs to be, but you sort of gave a guesstimate. I wonder if 
you could share with this Subcommittee how you arrive at that 
guesstimate?
    Mr. Weicher. It is an estimate, Senator Allard, but it is 
not a guesstimate. There is a model now in place on which the 
credit subsidy is based. And as I was responding to Senator 
Akaka earlier, we look at the information that we have from our 
past experience in the multifamily programs, what our premium 
income is, what our prepayments are, what our claims are or our 
losses per claim, and on that basis, we calculate whether the 
projects that we are insuring are in fact going to cover, the 
losses on those projects are going to be covered by the 
insurance premium income that we get or whether we are going to 
run a deficit or need a subsidy.
    The calculation that comes from that analytical framework 
that we now have in place and was last systematically reviewed 
in 1996, the analysis that we now have in place indicates that 
the break-even premium is 80 basis points. It is an estimate. 
It necessarily is an estimate, and from year to year it is 
always going to be off in one direction or another to some 
minor extent, but the best estimate that we have at this point 
until our work is completed is that the break-even premium is 
80 basis points. And it was on that basis that the Secretary 
went forward with the notice under the rule.
    Senator Allard. Thank you. In single-family loan limits, 
they are indexed to changes in the conforming limits for Fannie 
Mae, would it be possible to index the multifamily loan limits 
in such a way? Could you share with me some pros and cons on 
that issue?
    Mr. Weicher. It would be possible, Senator Allard. Our 
basis is that since we were proposing a 25 percent increase in 
the multifamily loan limits in order to take account of the 
effects of inflation over the last 8 years, we would like to 
get that in place before we start entertaining new changes in 
the procedure.
    The advantage is that we would be able to continue serving 
essentially the same client population from year to year as we 
saw a little more inflation, although 25 percent over 8 years 
is not a large amount of inflation per year.
    The disadvantage would be that it is different from single-
family in that you really have to decide whether are you 
looking at construction costs, whether you are trying to look 
at rent levels for your index, whether you are trying to look 
at income levels for your index. It is harder in this context 
than it is in a single-family case where you index to a market 
price for units of which several million sell every year. If 
you start to index to construction costs on this basis, there 
is necessarily a little bit more uncertainty. And I think we 
would want to do a fairly thorough analysis of the alternatives 
before we put into place an annual indexing formula.
    Senator Allard. On the premium rates, the third point that 
you were suggesting up to the 80, you were suggesting that 
these would probably take effect at the end of this fiscal 
year.
    Mr. Weicher. Under the notice that we issued, they would 
take effect on August 1. However, that was in the expectation 
that we would have the $40 million supplemental. At this point, 
it will go into effect for any practical purpose on October 1.
    Senator Allard. I was wondering if there is going to be a 
lag time from when you incur the liability and when you collect 
the premium. I was not sure how that would work out in the next 
fiscal year. So you are thinking that if this gets applied here 
on August 1 and you begin to build up that reservoir, so by the 
time you get into the next fiscal year you have enough in your 
premium reservoir there that you will not be coming into the 
2002 year to pay your premiums. That premium increase will take 
care of that cost. Is that correct?
    Mr. Weicher. In the remainder of this fiscal year, we 
expect to receive zero premium income under the 80 basis 
points, because we will not be insuring any loans at the 80 
basis points. The program in that sense will start new with an 
80 basis point premium starting with projects that are approved 
on and insured on October 1.
    We will have no credit subsidy in the 221(d)(4) on October 
1, and we will simply be operating a demand program that will 
be bringing in 80 basis point premiums month by month, year by 
year, and then we will be paying claims just as we do under 
203(b).
    The timing of it will I think not really be a problem. We 
will be collecting premium income before we start to see any 
claims. There are few claims in the first year of one of these 
programs. And then there will be a very few. But we will 
bringing in premium income before we incur any claims.
    Senator Allard. Mr. Chairman, I just want to make a few 
more comments.
    Senator Reed. Please go ahead.
    Senator Allard. Just as a final note as we draw this panel 
to a close, I just want to make clear that I am very supportive 
of raising the loan limits. As I noted earlier, Denver has had 
the highest increase in construction costs in the Nation of 43 
percent from 1992 to today. I think it is important that we 
raise those loan limits.
    I think it is also important to note that if this program 
is made self-sufficient and if it is run like a business, we 
will be able to support for more development of affordable 
housing. It is difficult to see how FHA can compete effectively 
with the starts and stops of the current environment.
    So we should do two things here, I believe: Raise the loan 
limits and make the program self-sufficient as we go forward. 
The FHA single-family program is self-sufficient. It works very 
well. And it is a good pattern for us to follow. Thank you, Mr. 
Chairman.
    Senator Reed. Thank you, Senator Allard.
    Thank you, Mr. Weicher, for your thoughtful, careful 
testimony. Thank you very much.
    Mr. Weicher. Thank you, Senator.
    Senator Reed. I would like to call the next panel. If they 
would come forward, please.
    [Pause.]
    Let me welcome the panel and introduce our witnesses. 
First, Mr. Michael Petrie. Mr. Petrie is appearing on behalf of 
the Mortgage Bankers Association of America. He is President of 
P/R Mortgage and Investment Corporation, Indianapolis, Indiana, 
and a current Chairman of the Commercial Real Estate/
Multifamily Housing Board of Governors. We want to welcome you, 
Mr. Petrie.
    Next, Mr. Kevin Kelly, who has previously been introduced 
by my colleague, Senator Carper. Kevin is President of Leon 
Weiner & Associates, Wilmington, Delaware, a home building, 
development, and property management firm. Mr. Kelly is 
testifying today on behalf of the National Association of Home 
Builders and is currently serving on the NAHB Executive 
Committee.
    Next to Mr. Kelly is Mr. Patton H. Roark, Jr., appearing on 
behalf of the AFL-CIO Housing Investment Trust. He is currently 
Executive Vice President and Investments and Portfolio Manager 
of the Trust. The AFL-CIO Housing Trust has invested over $3 
million in units of single and multifamily housing nationwide.
    And finally, we are joined by Mr. Carl A.S. Coan. Mr. Coan 
is a senior partner in the firm of Coan & Lyon, and he is 
testifying on behalf of the National Housing Conference. He is 
the National Housing Conference Director and Executive 
Committee member.
    Before you begin, gentlemen, I would like to thank you all 
for your written statements and indicate they will be made part 
of the record and ask you if you would observe our 5 minute 
time limit for oral testimony. I thank you again for joining 
us. And Mr. Petrie, you may begin.

           STATEMENT OF MICHAEL F. PETRIE, PRESIDENT

            P/R MORTGAGE AND INVESTMENT CORPORATION

                          ON BEHALF OF

            MORTGAGE BANKERS ASSOCIATION OF AMERICA

    Mr. Petrie. Thank you, Mr. Chairman, Members of the 
Subcommittee. The reason for our testimony here today is to 
address the constraints in the FHA multifamily programs and to 
find solutions to improve and strengthen the FHA programs to 
provide affordable rental units.
    We have always seen the FHA programs as a public/private 
partnership and look forward to working with the Congress and 
Mr. Weicher as he takes over the FHA programs to strengthen 
this partnership.
    First I would like to commend Senators Corzine and Carper 
for introducing Senate bill 1163. This bill would increase the 
maximum mortgage limits for FHA multifamily programs. These 
limits have not been increased since 1992, and construction 
costs alone have risen since then, on average, of 25 percent. 
The fact that the maximum mortgage limits have not been 
increased in almost 10 years has virtually shut down the FHA 
multifamily insurance programs in many high-cost urban markets.
    As important as this issue is, however, approving higher 
loan limits alone will accomplish little without addressing the 
issue of credit subsidy. Without credit subsidy, or more 
importantly, without an accurate accounting that demonstrates 
that credit subsidy is not needed, there will be virtually no 
new construction with FHA insurance, and the increase in loan 
limits will be a hollow victory.
    As we have stated in our written testimony, the Federal 
Credit Reform Act changed the budgetary treatment of credit 
programs to require an analysis before loans are insured of the 
long-term cost of the programs.
    We believe that HUD and OMB since the beginning of credit 
reform in 1992 have overestimated the cost to the Government of 
the FHA multifamily insurance programs. This overestimation has 
distorted the HUD budget by requiring appropriations that were 
not needed and by underreporting income from profitable 
programs.
    Since the arrival of Secretary Martinez and Mr. Weicher, 
both HUD and OMB have been very generous in sharing information 
about the calculation of the credit subsidy rates. It appears 
from our analysis of the data they have provided that there are 
2 key drivers to the credit subsidy rate. The first is the 
cumulative claims rate which, put simply, is the percentage of 
loans originated each year that are expected to default and 
result in a claim. The second is the point at which these 
claims are expected to occur. For the cumulative claims rate, 
HUD and OMB are currently using a 28 percent default rate. This 
is based on the entire experience of the programs since 1956.
    The highest claims rates are for loans originated in years 
affected by major tax changes, the early 1970's and the early 
1980's. By removing those years from the calculation or by 
reducing their weight in the calculation, the credit subsidy 
rate would drop dramatically. Another way to approach the 
cumulative claims rate would be to focus more on the recent 
experience of the programs.
    In 1991, FHA implemented significant underwriting changes. 
Since then, the claims experience has been excellent, actually 
less than 4 percent. We believe that HUD's assumptions for 
credit subsidy should eliminate the experience of those unusual 
periods and should be more heavily weighted to recent 
experience which reflects how FHA is underwriting loans today.
    As I mentioned, the other key factor in the credit subsidy 
calculation is the point at which these loans will result in a 
claim which has been heavily front-loaded. This approach has an 
adverse impact on the credit subsidy rate.
    Because of the very favorable claims experience on loans 
originated since 1992, the reestimated credit subsidy rates 
have dropped dramatically from the original rates. Congress has 
appropriated over $1.4 billion since 1992 for credit subsidy. 
More importantly, none of these funds have been expended. And 
based on the budget, HUD and OMB do not expect a large portion 
of these funds ever to be needed.
    Based on our experience and review of the data, we believe 
that these programs make money at the current 50 basis point 
MIP, and do not require a credit subsidy appropriation. A 
correctly calculated credit subsidy rate would be negative and 
therefore MBA thinks the 30 basis point increase in the 
mortgage insurance premium being implemented by HUD is 
unnecessary.
    We have asked HUD to delay the implementation of the 
premium increase until a full review of the credit subsidy 
formula can be completed and an accurate rate determined.
    Our concern today, Mr. Chairman, is accuracy, it is also 
timing. We need accurate credit subsidy rates calculated by 
September 1. And we need Congress to include those rates in the 
fiscal year 2002 HUD/VA appropriations bill now being 
considered in the House of Representatives and the Senate.
    We look forward to working with you, Mr. Chairman, and your 
Subcommittee and other Members of Congress, HUD, and OMB to 
reexamine the calculation process and the data used to 
determine the subsidy rate. Thank you for the opportunity to 
testify today.
    Senator Reed. Thank you.
    Mr. Kelly.

                    STATEMENT OF KEVIN KELLY

             PRESIDENT, LEON N. WEINER & ASSOCIATES

                          ON BEHALF OF

           THE NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Kelly. Thank you, Chairman Reed, Members of the Housing 
Subcommittee. As indicated earlier, I am speaking on behalf of 
the 203,000 member firms of the National Association of Home 
Builders. NAHB wishes to express its appreciation to the 
Members of the Subcommittee for holding this hearing on the FHA 
mortgage insurance programs.
    At your request, I will confine my comments to a proposal 
to increase the FHA mortgage insurance loan limits, HUD's 
proposed interim rules to increase mortgage insurance premiums, 
and the need for credit subsidy and appropriation.
    Earlier this year, HUD Secretary Mel Martinez announced the 
Administration's support for increasing the FHA multifamily 
loan limits. NAHB applauds the Administration for this 
initiative, and thanks Members of this Subcommittee, 
particularly Senator Corzine and my own Senator Carper, for 
introducing S. 1163, legislation to increase the loan limits by 
25 percent.
    The FHA multifamily loan limits have not been increased 
since 1992. NAHB's economics department studies show that 
construction, land, and other costs in 10 metropolitan areas 
around the country have increased about 25 percent over the 
past 8 years.
    Because of the current dollar limits on these loans, FHA 
mortgage insurance cannot be used to help finance construction 
in a number of high cost areas. NAHB, as part of the Affordable 
Rental Housing Coalition, supports S. 1163 as one means of 
addressing the shortage of affordable rental housing.
    Congressional appropriations of adequate levels of credit 
subsidy as a necessary part of the functioning of the FHA 
multifamily insurance programs. This appropriation is required 
by the Federal Credit Reform Act which applies to all Federal 
direct loan and guarantee programs.
    OMB determines the subsidy rates based in part on an 
evaluation of the historic performance of these programs in 
recognition of potential costs to the Federal government.
    Higher loan activities in these programs could have 
budgetary impacts. Due to the exhaustion of credit subsidy, the 
FHA multifamily programs have been shut down since April. An 
estimated $250 million in credit subsidy is needed to operate 
these programs for fiscal year 2001, while only $101 million 
was appropriated for this period.
    The Administration requests that only $15 million in credit 
subsidy appropriations for fiscal year 2002. This undermines 
the ability of the programs to provide affordable rental 
housing.
    The question of how much subsidy is actually required is a 
fundamental issue. NAHB questions the assumptions used by OMB 
to determine the credit subsidy requirements.
    Utilizing the Section 221(d)(4) program, as an example, OMB 
over-emphasizes performance of loans from the early 1980's 
which were insured under weaker underwriting standards than 
today.
    Section 221(d)(4) insured mortgages after 1991 have a 
cumulative default rate of 5.5 percent, while OMB's model 
employs a cumulative default rate of 28 percent. Other 
assumptions used by OMB are also excessively pessimistic.
    NAHB believes that these programs are performing well, 
experience cumulative default rates that are significantly 
below the levels OMB uses. If OMB revised its models and 
assumptions in the Section 221(d)(4) program would have a 
negative credit subsidy rate and would not require credit 
subsidy appropriations or an increase in insurance premiums.
    NAHB seeks immediate review and revision of the OMB credit 
subsidy model and we urge Congress to make the results 
effective for fiscal year 2002.
    The Administration has pursued another route to address the 
need for an appropriation of credit subsidy. Recently, HUD 
exercised its statutory authority to set mortgage insurance 
premiums for multifamily programs by publishing an interim rule 
increasing the premiums for multifamily programs from 50 to 80 
basis points.
    NAHB believes that this increase will significantly impair 
the capacity of multifamily mortgage insurance programs to 
deliver affordable rental housing.
    Analysis by industry experts shows that the premium 
increase would result in rental increases of 3 to 4 percent, 
which would undermine the capacity of the program to serve 
moderate- and lower-income families. In some cases, builders 
would forego projects.
    It should also be noted that these projections reflect the 
current low level of interest rates. Should interest rates 
fluctuate upward, the impact on affordability would even be 
more onerous. NAHB believes that the Administration has acted 
precipitously by issuing this rule at this time. It has put the 
cart before the horse. We have seen no studies documenting the 
need for a 30 basis point increase in the premium structure.
    In fact, many acknowledge that perhaps OMB should review 
its assumptions in calculating the credit subsidy. Furthermore, 
the rule is scheduled to take effect on August 1, prior to the 
receipt of any public comment.
    We do not believe the premium increase should take effect 
prior to the study of the credit subsidy or input from the 
lending and housing industry.
    We hope that the Congress will appropriate the sufficient 
credit subsidy to keep the programs running while working with 
the Administration to resolves these complex issues. This 
concludes my remarks, Mr. Chairman.
    Senator Reed. Thank you, Mr. Kelly.
    Mr. Roark.

               STATEMENT OF PATTON H. ROARK, JR.

         EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER

                AFL-CIO HOUSING INVESTMENT TRUST

    Mr. Roark. Good afternoon, Mr. Chairman, Members of the 
Subcommittee. On behalf of the AFL-CIO Housing Investment 
Trust, let me first thank you for the opportunity to testify 
and applaud you for holding today's hearings on major issues 
related to FHA's multifamily program.
    I would like to submit for the record my full written 
testimony but will recognize that the time allotted to me for 
my remarks that will highlight my testimony.
    There is a national housing crisis, and crisis within the 
production community. My testimony will focus on HUD's recently 
proposed 60 percent hike in the FHA 221(d)(4) mortgage 
insurance program and its impact on the loan program.
    I will also comment on the accuracy of the credit subsidy 
rates and the need to increase the statutory loan limits. The 
AFL-CIO Housing Investment Trust recommends that Congress take 
a number of steps to ensure greater multifamily housing 
production and a stronger FHA.
    We recommend that HUD and OMB inform Congress and the 
public of the real impact of the increase in the cost on 
housing insurance on housing costs and rent inflation before 
implementing any increase.
    Second, require full and open discussion of the model and 
the assumptions used in deriving the credit subsidy rates for 
FHA's mortgage insurance programs.
    And finally, increase statutory loan limits by at least 25 
percent provided for in the legislation and introduced by 
Senators Corzine and Carper.
    In addition, loan limits to be indexed to ensure program 
effectiveness on an ongoing basis and additional flexibility 
should be provided and loan limits for high cost areas.
    The number of all rental units in the United States 
increased by just 2.3 percent during the 1990's. During the 
same period, the number of households increased by 14.7 
percent. The result is a predictable imbalance between housing 
supply and demand. In major markets across the country, 
increases in rents have far outstripped inflation and income 
growth. Rising rents are pricing working families right out of 
the rental housing market. We are simply not producing enough 
rental housing.
    Through the 221(d)(4) program that provides mortgage 
insurance for both construction and permanent loans, which 
allows institutional investors like the AFL-CIO Housing 
Investment Trust to buy securities backed by these loans. This 
credit enhancement provides lower cost of capital borne by 
projects and results in the production of housing units and 
rent affordability. The impact of the increased mortgage 
insurance premium will cause negative production and will cause 
rent inflation.
    According to the 2002 budget, HUD forecasts that $3 billion 
in FHA-insured 221(d)(4) mortgage commitments will be issued in 
fiscal year 2002. The proposed 30 basis point hike in the 
mortgage insurance premium would effectively be a tax of 
approximately $105 million on new multifamily projects. For 
these development projects to remain viable, the $105 million 
must be absorbed by tenants through rent increases further 
escalating the affordability crisis facing working families.
    I have received the FHA multifamily budget model. Based on 
my review and the consultation with senior economists at MBA, I 
can only say that the model assumptions do not reflect the 
default experience of the last decade, and that independent 
review is needed on all assumptions to determine validity.
    The model, as mentioned, is very sensitive in three key 
assumptions; the seasoning curve, cumulative default rates, and 
recovery rates upon property disposition. Each assumption used 
in the calculation appears to be biased toward the actual 
default experience of 1970 through 1989, and not over the last 
10 years.
    From 1974 to 1990, FHA operated under a coinsured lending 
and underwriting program. During this time, FHA delegated loan 
underwriting, third party reporting, and commitment authority 
to lenders. The program lacked significant internal controls to 
prevent waste, abuse, and resulted in significant losses to FHA 
and taxpayers.
    In addition to the program's flaws, the Tax Reform Act of 
1986 changed the commercial real estate landscape. In 1990, 
however, the Coinsurance Underwriting Program was officially 
terminated and was replaced with full insurance.
    Since then, to the credit of FHA, significant steps have 
been taken to restore the integrity of the program. Today, 
lenders are monitored, very stringent underwriting processes 
and standards are followed, and only FHA has the authority to 
commit to mortgage insurance.
    Mr. Chairman, this is a key point. The default experience 
for production after 1990 has declined dramatically. However, 
the model assumes a default rate of 28 percent. If a fair, 
independent third party evaluates the current and future 
default risk of the multifamily portfolio, using the data from 
the last 10 years, we suspect that the 60 percent increase in 
the mortgage insurance premium would not be necessary.
    What we are asking today is to lift the shroud of secrecy 
that determines the supposed cost to the Treasury of the 
program and require FHA and OMB to work with the industry to 
develop a fiscally responsible subsidy model and mortgage 
insurance rates.
    Mr. Chairman, I would like to submit a letter from 
President John Sweeny of the AFL-CIO on behalf of the 40 
million Americans who live in labor households. President John 
Sweeney and many State and local labor leaders hear every day 
about the impact that the housing crisis is having on working 
men and women and their families across the Nation.
    He joins us in urging FHA to resume its historic leadership 
position supporting the production of multifamily housing. Mr. 
Chairman, I would be pleased to answer any questions or to 
brief the Subcommittee at any time.
    Senator Reed. Thank you, Mr. Roark.
    Mr. Coan.

                STATEMENT OF CARL A.S. COAN, JR.

                   EXECUTIVE COMMITTEE MEMBER

                  NATIONAL HOUSING CONFERENCE

    Mr. Coan. Thank you, Mr. Chairman. I am Carl Coan. I appear 
here on behalf of the National Housing Conference of which I am 
a director and member of the Executive Committee. We appreciate 
this opportunity.
    NHC was founded in 1931, 3 years before the National 
Housing Act became law. During all these years, NHC has 
supported FHA and its various programs to help Americans become 
better housed. These programs have been essential in helping to 
achieve the significant progress that has taken place over the 
past 70 years, yet much still needs to be done.
    Our research affiliate, the Center for Housing Policy, last 
month released a study entitled ``Paycheck to Paycheck: Working 
Families and the Cost of Housing in America.'' We have brought 
multiple copies up here and have them outside, and we have 
given the Staff copies as well. This study followed up on the 
Center's report last year entitled ``Housing America's Working 
Families.'' Both studies found that over 13 million families in 
1997 and again in 1999 had critical housing needs. For example, 
they either spend more than 50 percent of their income on 
housing, or they live in a seriously substandard unit. Many of 
these families were on welfare or had only a marginal 
attachment to the labor force. In 1997, 22 percent, about 3 
million households, were working families earning between 
$10,700 a year--the equivalent of a full time job at minimum 
wage--and 120 percent of the area median income, a figure well 
in excess of $50,000 in some of our more expensive urban areas. 
In 1999, this percentage increased to 28 percent and the number 
of households that are fully working households increased to 
over 3.7 million. These are the families for which the FHA 
unsubsidized multifamily programs were designed to serve.
    Starting with the original 207 program as it was revised in 
1938, then through the 608 program enacted during the Second 
World War, next through the 221(d)(4) program enacted in 1961 
and various permutations since then, the FHA multifamily 
programs have always been aimed principally at providing 
housing for families of modest income. And because that goal 
was achieved so successfully in many cases, these programs have 
frequently been called upon to provide housing for low-income 
families.
    During this over 60 year period, the mortgage insurance 
premium charged on multifamily mortgages has for the most part 
been \1/2\ of 1 percent. Incidentally, I started in FHA in 
1958, it was half a percent then, and I guess it will be until 
August 1. This premium has generally been adequate to cover the 
losses incurred by the mortgage insurance funds established in 
support of these programs. In the early years of FHA, each 
program, such as the 207, the 220, or the 221 program had its 
own mortgage insurance fund. This became cumbersome. Congress 
in 1965 combined into one fund, the General Insurance Fund, all 
of the FHA programs except for the basic 203(b) single-family 
and the cooperative programs.
    There also was established in 1968, a Special Risk 
Insurance Fund in recognition of the fact that some of the 
programs being carried out under the aegis of FHA were designed 
to take a greater risk in order to accomplish such goals as 
housing low-income families or making housing available in 
older, declining urban areas. While the same mortgage insurance 
premium was collected with respect to these undertakings, it 
was recognized up front that the premium would not be 
sufficient to cover anticipated losses and that Congress would 
need to appropriate funds on occasion to make up for shortfalls 
in the Special Risk Fund.
    While the Special Risk Fund still exists, for budgetary 
purposes, it has been lumped in with the General Insurance Fund 
and there is little, if any, distinction between the two. While 
erasing that distinction--as was the distinction between the 
various separate funds erased with the establishment of the 
General Insurance Fund in 1965--may make it easier for the 
accountants to keep their books, it should not be used as one 
of the bases for increasing the mortgage insurance premium. It 
might be reasonable to consider shifting some of the riskier 
insurance programs now covered by the General Insurance Fund 
into a revitalized Special Risk Fund.
    The FHA multifamily programs carry out an important 
societal responsibility of our Government. They have done that 
successfully over the past 60 some years. The efforts to meet 
that responsibility should not be lessened now through a 60 
percent increase in the mortgage insurance premium. This 
increase will not stop the FHA multifamily housing programs, 
but it will certainly limit the programs' ability to serve 
those with modest income.
    The proposed increase in the mortgage insurance premium is 
like a new tax being added on to the rent of the many thousands 
of tenants who need the modest cost, decent housing these 
programs are designed to provide. Incidentally, we, the AFL-CIO 
Housing Investment Trust and I, did not talk about this until 
just a few minutes ago. There is no question that this increase 
will be passed through to the tenants of the housing, or the 
housing will not be built. In either case, the new tax will 
decrease the ability of the FHA multifamily programs to serve 
as broad a range of the population as possible.
    I would like to digress from my statement for a moment and 
cite back to 1983-1984, when it was decided to increase the 
premium on the 203(b), the single-family program, the Mutual 
Mortgage Insurance Program. That was done for budgetary 
reasons, just as I think some of what is occurring now is being 
done for budgetary reasons. It was a big hit, resulting in 
reducing the so-called anticipated budget deficit. But it also 
contributed to a huge increase in the fund, so that now we have 
the large amount of surplus funds that Senator Allard mentioned 
and others have mentioned and some Members of Congress have 
focused on as the basis for using this as a subsidy program. 
But we made a mistake then because we increased the cost of 
housing and we also decreased some of the sound aspects of 
homeownership in order to make up for that difference in 
increased costs.
    Of all the arcana perpetrated by our Government on its 
people, probably nothing is quite as arcane as the so-called 
credit subsidy calculations carried out with respect to the FHA 
multifamily insurance programs. As I understand it, they, HUD 
and OMB, posit the incurrence of costs far in the future based 
on the unlikely replication of the circumstances and 
occurrences of the past. These calculations seem more designed 
to frustrate the ability to meet our Nation's housing needs 
rather than designed to facilitate meeting these needs. Whether 
the calculations made under the premises established by OMB are 
accurate, neither I nor probably anyone else outside of OMB can 
really understand. What we can understand, however, is that a 
result of the credit subsidy concept, we have had several 
stoppages over the last 8 years in the production of 
multifamily housing for those whose housing needs cannot be met 
without the support of the FHA mortgage insurance.
    This is inexcusable, and even more inexcusable is the 
refusal of OMB to allow HUD to use the $40 million made 
available last year in an emergency supplemental. We have an 
emergency of not being able to meet the continued need for 
decent housing, which cannot otherwise be served.
    One of the problems which has bedeviled the FHA multifamily 
housing programs in the last few years has been the inability 
to increase the multifamily mortgage limits. That the 
Administration has recognized and has waged a 25 percent 
increase in those limits NHC strongly supports that. We suggest 
that Congress move that legislation, and at the same time, it 
might be appropriate to direct HUD to restore the maximum \1/2\ 
percent mortgage insurance rate and find ways to avoid the 
frequent interruption of multifamily production, which has 
occurred over the last 8 years as a result of the institution 
of the credit subsidy concept.
    Mr. Chairman, thank you very much.
    Senator Reed. Thank you Mr. Coan. We appreciate it.
    Let me begin by asking each of the panel members the same 
question. Basically from Secretary Weicher's testimony, it 
seems that the policy, or at least what they suggest might 
happen by raising the premium at the same time of not claiming 
more subsidy money in terms of credit, that it will be easier 
for developers and housing producers to navigate the program 
and they will not have to worry about the starts and stops, in 
a sense. He said it will be less expensive, so it will be an 
incentive. Do you think that is going to be the case, Mr. 
Petrie?
    Mr. Petrie. I do not. I do think--and I happen to have 
projects that face the 30 basis point increase, and it 
increases the cost by at least 4 to 5 percent, and it increases 
the amount of equity, which then increases the return, which 
means that we are going to have to charge higher rents. The 
issue comes down to is a big question from the standpoint of 
why did they pick 30 basis points.
    I can tell you where it comes from. They used a default 
rate of 28.65 percent for 2002. It had a credit subsidy rate of 
2.27 percent. If they raised the MIP 30 basis points, it 
becomes neutral. They backed into the 30 basis points. If the 
credit subsidy rate would have been 2.5 percent, their credit 
subsidy rate, they would have been asking for an increase of 35 
basis points. This was not something that was studied. This was 
something that was backed into on a slide rule, and it was 
something that we think, based on the knowledge that we have, 
is not needed.
    I want to make one distinction. The MMI fund is a fund. The 
money is held in there for the purposes of the payment of those 
participants. The GASRI, any funds that come in that make money 
go straight to the Treasury. They are not held. The funds that 
you appropriate are held by OMB, okay? What happens is that if 
you overappropriate funds, they are still held over there until 
they decide that they are no longer needed.
    So the problem we have had here is that they 
overappropriated, because they have been too conservative. When 
we consider the $1.5 billion, if you go back to 1992, there is 
1.51 percent. The reestimate based on the 2000 budget shows in 
the 221(b)(4) program it was a negative 2.29 percent. That 
means in 1992, that cohort of loans made money. Yet you still 
appropriated money that is still being held by OMB. Yet we have 
to come back and ask for more money for a program that makes 
money. We do not think that is fair. We do not think that is 
good government.
    Senator Reed. Thank you, Mr. Petrie.
    Mr. Kelly, again, you are a developer. Do you think the 
increase in the premium is going to make it easier for you to 
produce housing, or will it be otherwise?
    Mr. Kelly. No, sir. First and foremost, as a developer of 
any kind of successful property, the project has to pencil out. 
And while certainty the process is a factor, the inability to 
pencil out a project from the get-go will lead you to walk away 
from it.
    In many of these projects, 3 to 4 percent increase in high-
cost areas where rents are, say, $1,000, $40 a month on a unit 
certainly could be a killer. The alternative is increased 
equity in the project. That again is something that we all make 
a decision on how much money we can afford to put in any one 
project. And again, I think these kinds of increases can 
certainly kill a project.
    Senator Reed. Mr. Roark, from your perspective?
    Mr. Roark. I echo what my colleagues on the panel just 
mentioned. There is significant imbalance between housing 
supply and demand. If a developer cannot pass the higher costs 
through as rent increases, they have to take a significant 
reduction of return on capital, or simply not do the 
transaction. They will invest capital someplace else around the 
country or in whatever vehicle they want to put it in, and 
projects will not be built.
    We have a lot of transactions that are in this position 
right now that we have been following. And when they reprice 
the transaction with approximately 30 basis point increase, the 
developer has to come up with $500,000 worth of equity on a $20 
million deal just to go to closing. And with interest rates 
going up and down, and with the credit subsidy issue, 
unresolved, the uncertainty is really affecting the development 
community.
    Senator Reed. Thank you. If I can ask Mr. Coan to make a 
comment. And also you might allude in your comment to the need 
for this type of housing. Secretary Weicher pointed out that 
this is not for low-income people that we subsidize but for the 
typical working class couples that are the backbone of most 
neighborhoods.
    Mr. Coan. Yes, Mr. Chairman, that is what our study shows. 
Historically, these programs have been aimed at modest-income 
people. The original 207 program had that goal. The 221(d)(4) 
program talks about the low- and moderate-income persons. 
Actually in candor, you cannot serve low-income persons without 
some kind of a subsidy, but you can reach moderate-income 
people. But the more you add on to the cost, the less able you 
are to do that.
    I am not a builder, but I am a lawyer who represents 
builders and lenders, including one of these at the table here. 
I know very well that this is a major factor if you are 
penciling out the tight type of calculations you have to do in 
order to go forward with this kind of project.
    Senator Reed. Thank you, Mr. Coan.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I think the panel raises a good point about the need to 
ensure that the default rate is being properly calculated. I 
ask that they provide us with their calculations and 
recommendations for our Committee to review.
    However, I do have one concern. I heard a reference to the 
default rate of the 1990's. I just want all of us to remember, 
you know, the 1990's was a time of unprecedented economic 
growth in our history where we had that kind of economic growth 
over that long period. But we also had the 1980's, where we had 
some economic problems during the 1980's and the housing agency 
was particularly impacted.
    So my question is that maybe we should also include the 
1980's, for example. We have two decades there where there is a 
lot of difference, and there were some changes in rules and 
regulations that probably are going to be difficult to compare. 
It seems to me like the proper answer is somewhere between 
those two decades. I do not know how we reach that figure, but 
it seems to me that could be something we need to look at. 
Maybe members of the panel, Mr. Petrie, would like to respond 
to some of those allegations.
    Mr. Petrie. I think you make a very good point with regard 
to the recession. The 1990's were a good time, a good economic 
period. We would like to point out that we went back to 1987 in 
one of our studies. From 1987 to 1998, the five major programs 
of FHA had default rates of 4.32; 221(d), 4.74; 223(f), .82; 
health care, 3.7; and hospitals, .17. They generated $336 
million in revenue on $21.892 billion, which is a negative 1.54 
percent credit subsidy rate back to 1987.
    The key to the early 1980's is that our real estate 
industry today is based on a cash flow business. Appreciation 
and tax laws have little effect on us. Any change in tax law 
will basically probably encourage building more than it would 
anything else. But right now, it would not detour building, 
which happened then because of the retroactive nature of it, 
they quit supporting their projects.
    But today, we look at it from the standpoint that it would 
have little effect. We do not think it would be increasing 
depreciation, which is going to reduce the budgetary income. So 
from our standpoint, we are a little more insulated than we 
were in 1986.
    But the main factor is, you only have to make--we have 
looked at the numbers already--two minor adjustments. If you 
move right now, when they look at the notes sold, when they 
take notes and they sell them to the secondary market, OMB is 
only giving them 90 percent of their historical actuals. If you 
give HUD 100 percent of its historical actual note sales and 
decrease the default rate from 28.7 to 23.6, you are in a 
negative credit subsidy rate for the 221(d)(4) program. Twenty-
three point six is not a giveaway or nonconservative default 
rate when the programs were operating at less than 5 percent 
today.
    That is the frustrating part from our aspect. It does not 
take much to get us there, and that is all we are saying is we 
need your help, along with HUD and OMB, to bridge this gap, and 
we can be there in 2002 and not need the 30 basis point 
increase which we believe is not needed if they are making this 
kind of money. It is just more money. The way we look at it, it 
is not for safety and soundness of the programs. It goes 
straight to the Treasury.
    Senator Reed. Essentially what has happened is, this is a 
way that you recapture money originally allocated for housing 
and use it for any other program in the Federal Government?
    Mr. Petrie. Yes, sir.
    Senator Reed. In a way, it represents in tight budget years 
backing away from housing support and putting it into any 
number of other programs out of the way of housing, and money 
that we authorize, assuming it is all going to be spent on 
housing one way or other, ends up being spent otherwise.
    Senator Allard. Mr. Chairman, these kind of programs could 
be an overassessment. You could end up in an unallocated fund.
    Senator Reed. Thank you, Senator.
    Mr. Coan. Senator Allard, I would question the points you 
raised. I think one has to realize that this is a very inexact 
science. In the budget appendix that came out for this coming 
fiscal year 2002, 2001's estimate is a negative subsidy outlay 
of $216 million. Just last year it was estimated as only $8 
million negative outlay.
    They are off by over $200 million. And that is true 
throughout this whole process. That is why I refer to this as 
the most arcane process going. It is not possible really to 
understand it. And I have been working at this for about 40 
years, and I do not understand it, and these gentlemen, now 
they have the program that OMB uses and perhaps might 
ultimately learn how to understand it.
    But it is susceptible to manipulation. That is a serious 
concern that you Members of the Senate ought to have--that 
these figures can be manipulated to do whatever any 
Administration wants to do. That is inappropriate, and these 
changes can only be done by legislative action, not by the 
manipulation by somebody at OMB.
    Senator Allard. I think if members of the panel could show 
us how they derive their figures, I think it would be helpful, 
and we will ask HUD to come forward and show us how they do 
their figures and do some comparisons.
    Senator Reed. I would in response to the point that was 
just raised, I do think it is appropriate to salute Secretary 
Martinez and Secretary Weicher for sharing the information for 
the first time. I think that is something very commendable, and 
that we should salute them on the record for that effort. I 
appreciate that very much, and I join with Senator Allard in 
asking that you would share with us not only your conclusions 
but also whatever model they gave you, and maybe we could 
pursue it further.
    The final question, and that is, is this information in 
these models being assessed by anyone outside the housing 
community? This is not to suggest you are not objective.
    [Laughter.]
    Senator Reed. But is there anyone out there looking at 
this? Your center, Mr. Coan, is looking at this? An academician 
who has got expertise?
    [No response.]
    Senator Reed. In that case, that might be something that we 
could inspire and sponsor.
    Thank you all for your testimony. The hearing is adjourned.
    [Whereupon, at 3:50 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

                 PREPARED STATEMENT OF JOHN C. WEICHER
           Assistant Secretary for Housing, FHA Commissioner
            U.S. Department of Housing and Urban Development
                             July 24, 2001

    Chairman Reed, Ranking Member Allard, distinguished Members of the 
Subcommittee, thank you for inviting me to testify on the FHA 
Multifamily Housing Mortgage Insurance Program.
    In your letter of invitation you express interest in three issues: 
the impending increase in mortgage insurance premiums; program credit 
subsidy rates; and, the Administration's proposed increase in the per 
unit mortgage loan limits.

Mortgage Insurance Premium Increase
    The National Housing Act authorizes the Secretary to set the 
premium charge for insurance of mortgages. The range within which the 
Secretary may set the charges must be between \1/4\ of 1 percent per 
annum (25 basis points) and 1 percent per annum (100 basis points) of 
the principal obligation of the mortgage outstanding at any time. The 
mortgage insurance premium (MIP) for most multifamily mortgage 
insurance programs has been set by regulation at \1/2\ of 1 percent of 
the average outstanding principal balance of the mortgage per year. (A 
different calculation is used for the construction period to account 
for the disbursement of mortgage proceeds during construction.)
    In fiscal year 2001, Congress appropriated $101 million for credit 
subsidy. The Department effectively obligated all of the available 
credit subsidy by May, for reasons that I described in my confirmation 
hearing at that time. At the end of fiscal year 2000 the Department ran 
out of credit subsidy, and promptly used the first $12 million of 
credit subsidy for fiscal year 2001 to fund the projects left over in 
the pipeline. Also, there was an unexpected increase in applications in 
the 221(d)(3) program--multifamily housing sponsored by nonprofits--
which carries a higher credit subsidy rate than most other FHA 
mutifamily programs. Some of these projects should have been treated as 
having for-profit sponsors. In recent years, the number of Section 
221(d)(3) commitments has varied, but they did account for about 13 
percent of the credit subsidy obligated in fiscal year 2000. This year, 
it accounts for 40 percent. If the fiscal year 2000 activity level had 
continued this year, FHA would have obligated approximately $23 million 
less in credit subsidy, and we would not have this problem.
    As the Department exhausted its credit subsidy, we advised all 
field offices to halt the issuance of FHA commitments conditioned on 
credit subsidy. To meet the need for multifamily housing, the Secretary 
then decided to request a supplemental appropriation of $40 million in 
credit subsidy and at the same time to implement a premium increase. On 
July 2, the Department published a notice in the Federal Register 
increasing the multifamily mortgage insurance premium for the programs 
requiring credit subsidy to \8/10\ of 1 percent or 80 basis points. The 
rule and notice become effective on August 1 and field offices will be 
authorized to resume issuing commitments for the positive credit 
subsidy programs. All FHA commitments issued on or after that date for 
the specified programs, primarily our Section 221(d)(3) and 221(d)(4) 
new construction/substantial rehabilitation programs, will be processed 
at the higher premium. Projects in the headquarters queue for credit 
subsidy with outstanding FHA commitments will be allowed to proceed to 
closing at the lower premium subject to the availability of credit 
subsidy in fiscal year 2001. The increase will lower the credit subsidy 
rates.
    The purpose of these proposals is both to resume the production of 
needed multifamily housing, and to put FHA's basic multifamily program 
on a demand basis, like the 203(b) program for single-family mortgage 
insurance. This is the third time in 8 years that FHA has run out of 
credit subsidy before the end of the fiscal year. The Secretary wants 
to eliminate the erractic behavior that has plagued our multifamily 
programs, and make sure that this situation does not happen again. The 
premium increase of 30 basis points achieves these purposes. It is on 
target with the Administration's proposal in the fiscal year 2002 
budget.

Credit Subsidy Rates
    Under the Federal Credit Reform Act of 1990, HUD, like all other 
Federal agencies with loan programs, is required to estimate the 
probable cost to the agency of its programs and must request credit 
subsidy as part of its budget each fiscal year to cover those costs. In 
calculating the credit subsidy estimates, HUD has engaged contractors 
who looked at the historic loan performance of FHA's major programs--
prepayments, claims, the income FHA receives from application/
inspection fees, mortgage insurance premiums, and recoveries from note 
and property sales. This analysis becomes the basis of the credit 
subsidy rate in each year's Federal budget. Loan performance has 
greatly improved in recent years. In fiscal year 2001 FHA's major new 
construction program, Section 221(d)(4) required a subsidy of 3.35 
cents for each dollar of loan insured. That is down from 7.12 cents 
last year and 11.96 in 1996.
    The industry has questioned the underlying data used in the credit 
subsidy calculations and the underlying assumptions. At my confirmation 
hearing I promised to conduct a complete reanalysis of the methodology, 
and make a new judgment as to the appropriate credit subsidy rate and 
the appropriate MIP. We are now in the middle of that analysis. 
Meanwhile, we have provided the industry with the credit subsidy 
computer model and assumptions, and it is my understanding that they 
are conducting a parallel analysis. My staff met with industry 
representatives 3 weeks ago and agreed to further analyze some issues 
that were particularly important, in their view. The industry also 
believes that the 1986 changes in tax law, and more recent changes in 
FHA underwriting standards, are not given adequate weight in the credit 
subsidy analysis. In our work, we are evaluating their concerns and how 
they might be accounted for. Once the staff analysis is complete, I 
will make recommendations to the Secretary and to the Office of 
Management and Budget as to whether the credit subsidy rates and the 
MIP should be changed. As I mentioned, the Secretary now has statutory 
authority to change the MIP; under that authority, the Department 
issued an interim rule on July 2, which allows the Secretary to raise 
or lower the MIP within the range of his statutory authority.

FHA Statutory Per Unit Limits
    The National Housing Act includes per unit limits by bedroom size 
for the various new construction/substantial rehabilitation programs 
with a maximum adjustment of 140 percent (with exceptions for Alaska, 
Guam, and Hawaii) where the Secretary determines it is necessary on a 
project-by-project basis. The base limits in the National Housing Act 
have not been raised since 1992. The effect has been to limit the use 
of the FHA multifamily mortgage insurance programs in high cost areas 
of the country like Boston, New York, Philadelphia, Chicago, and San 
Francisco because the FHA maximum insurable mortgage would be 
controlled by the mortgage limits rather than economic considerations 
such as debt service or replacement cost. This would result in much 
greater equity requirements for developers in those areas, and a 
disincentive to use the programs.
    In analyzing construction cost data for 74 selected cities across 
the country, we found that construction costs had increased an average 
of 25 percent since 1992. For that reason the Secretary and the 
President have proposed an increase of 25 percent in the base limits. 
Individual projects will still be able to take advantage of the maximum 
140 percent adjustment where feasible and appropriate. We believe this 
will encourage the construction of much needed multifamily rental 
housing in the major metropolitan areas across the country.
    This concludes my statement, Mr. Chairman. Thank you again for the 
opportunity to appear before you.
                               ----------
                PREPARED STATEMENT OF MICHAEL F. PETRIE
   President, P/R Mortgage and Investment Corporation, Indianapolis, 
                                Indiana
          On Behalf of Mortgage Bankers Association of America
                             July 24, 2001

    Mr. Chairman, and Members of the Subcommittee, my name is Michael 
Petrie, and I am President of P/R Mortgage and Investment Corporation 
in Indianapolis, Indiana. I am appearing before you today in my 
capacity as Chairman of the Commercial Real Estate/Multifamily Housing 
Board of Governors of the Mortgage Bankers Association of America 
(MBA).\1\ MBA is grateful for the opportunity to present our views to 
your Subcommittee today on the important issue of the FHA multifamily 
credit subsidy.
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    \1\ MBA is the national association representing the real estate 
finance industry. Headquartered in Washington, DC, the association 
works to ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand homeownership prospects 
through increased affordability; and to extend access to affordable 
housing to all Americans. MBA promotes fair and ethical lending 
practices and fosters excellence and technical know-how among real 
estate finance professionals through a wide range of educational 
programs and technical publications. Its membership of approximately 
2,800 companies includes all elements of real estate finance; mortgage 
companies, mortgage brokers, commercial banks, thrifts, life insurance 
companies and others in the mortgage lending field. For additional 
information visit MBA's Web site: www.mbaa.org.
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    I have spent over 20 years in the commercial real estate finance 
industry. Before joining P/R Mortgage and Investment Corporation, I 
worked at Merchants National Corporation, where I rose to the rank of 
Executive Vice President and head of the Commercial Real Estate 
Division. My present firm, P/R Mortgage & Investment Corporation was 
started in 1990, has financed over $700 million in multifamily 
mortgages and the firm currently services $550 million in loans. Since 
inception, the firm has never had a 30 day delinquency on any loan.
    I am also an active volunteer in affordable housing; I served 8 
years on the Board of the Indianapolis Neighborhood Housing Partnership 
and am currently on the Mayor's Indianapolis Housing Strategy Task 
Force. I was previously a Chairman of Near North Development 
Corporation Board of Directors and served on the Board of United 
Northwest Area CDC. I have served 16 years as President of Kenwood 
Place, Inc., an inner city 97 unit Section 202 housing development for 
the elderly, and 4 years as President of Unity Park, Inc., an inner 
city 60 unit Section 8 family development.
What Are the FHA Multifamily Programs and How Do They Work?
    The Federal Housing Administration (FHA) was created under the 
National Housing Act of 1934. It was developed initially to attract 
private and public sector credit into the housing market to meet 
mortgage financing needs of low-, moderate-, and middle-income 
Americans by insuring long-term, fully amortizing single-family and 
multifamily mortgages. From its beginning, a major responsibility of 
FHA has been to enhance the Nation's multifamily housing stock. FHA 
facilitates the construction and maintenance of multifamily housing by 
providing mortgage insurance to finance the construction, purchase, 
rehabilitation, or the refinancing of rental housing, cooperatives, and 
condominiums. Over the years, FHA has been expanded to include programs 
for the finance of special needs groups such as the elderly and 
disabled. Each of the programs is referred to by the section of the 
National Housing Act, as amended, under which it is authorized.
    FHA's multifamily mortgage insurance programs enable qualified 
borrowers to obtain long-term, fixed rate, nonrecourse, financing for a 
variety of multifamily property types affordable to low- and moderate-
income families. Out of the cash flow of a property approved for FHA-
insured financing, the borrower pays a mortgage insurance premium (MIP) 
to the lender which is then passed through to FHA in return for the 
insurance. The MIP charged is intended to compensate FHA for its risk 
and the cost of doing business, including the expected cost of default.
    However, despite an acute need for affordable rental housing 
throughout the Nation, over the past 4 years, the FHA has insured fewer 
than 130,000 units in the entire country. The reason for our testimony 
here today is to address the program constraints in the FHA multifamily 
programs and to find solutions to improve and strengthen the FHA 
programs to provide affordable rental units.

Why Is It Important To Raise the FHA Multifamily Loan Limits?
    First, I would like to commend Senator Corzine and Senator Carper 
for introducing S. 1163. This bill would increase the maximum mortgage 
limits for the FHA multifamily programs. These limits have not been 
increased since 1992 and construction costs alone have risen since 
then, on average, by 25 percent. S. 1163 is particularly helpful in 
that it not only increases the limits by 25 percent, but it also 
provides for an annual adjustment factor to the limits so that we do 
not face this same problem again in a few years.
    The fact that the maximum mortgage limits have not been increased 
in almost 10 years has virtually shut down the FHA multifamily 
insurance programs in many high-cost markets. In most major cities in 
this country, and many second-tier cities, it is impossible to produce 
new housing using the FHA programs. In cities like Boston, where almost 
120 percent of all working families have critical housing needs and 
there is only a 2.7 percent vacancy rate, it is vitally important to 
produce new housing. Yet, because of the maximum mortgage limits, no 
new FHA new construction or substantial rehabilitation loans were 
approved in Boston in 2000. Even in second-tier cities like my hometown 
of Indianapolis, the maximum mortgage limits have made it difficult to 
do FHA-insured loans.
    S. 1163 is key to making FHA insurance a useful tool in high-cost 
areas, and we fully support the bill. We suggest that the Senators 
consider adding a provision to their bill to allow the Secretary the 
discretion, on a project-by-project basis, to increase the loan limit's 
high-cost factor to the one currently allowed for Alaska and Hawaii. 
This would provide the Secretary the ability to address needs in 
particularly high-cost areas like Boston, New York, or San Francisco 
where land and development expenses are particularly high.
    As important as this issue is, approving higher loan limits alone 
will accomplish little without addressing the fundamental issue now 
facing the FHA program--the lack of credit subsidy. Without credit 
subsidy or without an accurate accounting that demonstrates when credit 
subsidy is needed, there will be no new construction with FHA 
insurance, and the increase in the loan limits would be a hollow 
victory.

What Is Credit Subsidy?
    While many people believe calculating the credit subsidy rates for 
FHA's mortgage insurance programs is merely an accounting detail, it is 
clear this accounting detail has shut down the FHA new production 
programs for months at a time for 2 years in a row and resulted in the 
loss of new affordable housing. We believe it is time these ``details'' 
are brought to light and publicly debated so an accurate accounting of 
these programs can be achieved.
    The Federal Credit Reform Act changed the budgetary treatment of 
credit programs, effective for fiscal year 1992. The Act requires 
Congress to appropriate funds for the ``estimated long-term cost to the 
Government of a direct loan or loan guarantee.'' It states that ``the 
cost of a loan guarantee shall be the net present value when a 
guaranteed loan is disbursed of the cash flow from (i) estimated 
payments by the Government to cover defaults and delinquencies, 
interest subsidies, and other payments, and (ii) the estimated payments 
to the Government including origination and other fees, penalties, and 
recoveries.''
    Since 1992, the Department of Housing and Urban Development (HUD) 
and the Office of Management and Budget (OMB) have determined that most 
of the FHA insurance programs that support the new construction of 
multifamily housing require an annual appropriation of credit subsidy. 
This credit subsidy is supposed to serve as a loan loss reserve for the 
programs.
    We believe that HUD and OMB, since the beginning of credit reform, 
have overestimated the long-term cost to the Government of the FHA 
multifamily insurance programs. This overestimation has resulted in 
unnecessary money being appropriated for these programs and, therefore, 
``wasted.''
    Since the arrival of Secretary Martinez and Dr. Weicher at HUD, 
both HUD and OMB have been very generous in sharing information about 
the calculation of the credit subsidy rates for the FHA multifamily 
programs. Greater access to the formula, as well as detailed 
explanations of the assumptions used, has been provided to MBA. We 
appreciate their openness and their willingness to share their data. It 
is invaluable in our ability to evaluate the performance of these 
programs and how we proceed in the future to continue to provide 
greater access to affordable rental housing in the most efficient 
method possible.

What Is the Current Credit Subsidy Crisis and
How Did It Get To This Point?
    It appears from our analysis of the data provided to us that there 
are two key drivers of the calculation. The first is the cumulative 
claims rate which, put simply, is the percentage of loans originated 
each year that are expected to default and result in a claim on the 
insurance fund during the life of those loans. The second is when in 
the life of those loans the claims are expected to occur.
    For the cumulative claims rate, HUD and OMB are currently using 28 
percent. This is based on the entire experience of the Section 220 and 
221(d)(4) programs, beginning in 1956. As you can imagine, those rates 
vary widely--from zero percent for loans originated in 1995 and 1999 to 
64.8 percent for loans originated in 1983. The highest claims rates 
are, not surprisingly, for loans originated in years affected by major 
tax changes: the early 1970's and the early 1980's. By removing those 
years from the calculation or by reducing their weight in the 
calculation, the credit subsidy rate would drop dramatically. Another 
way to approach the cumulative claims rate would be to focus more on 
the most recent experience of the programs. Since HUD made significant 
underwriting changes in 1991, their default and claims experience has 
improved dramatically. From the data HUD has provided to MBA, the 
cumulative claims rate has been less than 4 percent for every year from 
1992 through 2000.
    In my experience as a lender at a bank, when we created loan loss 
reserves, we looked at the experience of loans similar to loans we were 
currently underwriting. No one expects that we will ever experience 
again the devastation in real estate markets that was the result of the 
tax changes that began with the accelerated depreciation in 1981 and 
ended with the Tax Reform Act of 1986 which eliminated, retroactively, 
various tax incentives. If we did expect such a downturn in the real 
estate market, no one would be investing in real estate today. HUD's 
assumptions for credit subsidy should eliminate the experiences of that 
unusual period and should more heavily weight the recent experience, 
which reflects how financial institutions are underwriting loans today.
    As I mentioned, the other key driver in the credit subsidy 
calculation is the point at which any of these loans will result in a 
claim. HUD and OMB have heavily front end-loaded the claims. Their 
calculations assume that 9.3 percent of the loans will result in a 
claim in the first 3 years of the mortgage and 14.3 percent will result 
in a claim in the first 5 years of the loan. This approach has an 
immense impact on the credit subsidy rate.
    The impact of HUD's assumptions are evident from the numbers called 
``reestimates'' that appear in the HUD budget. Until recently, the 
Federal budget included ``reestimates'' of the credit subsidy needed 
for each origination year since 1992, the year credit reform was 
implemented. The reestimates reflect the history of the loans 
originated in those years and clearly demonstrate that the original 
calculations were excessively high. For example, loans originated in 
1992 had an original credit subsidy rate of 1.51 percent and a 
reestimated rate in the fiscal year 2000 budget of -2.29 percent. For 
1993 loans, the rate dropped from 12.41 percent to 3.70 percent. 
Similar reductions were evident in subsequent years until HUD and OMB 
stopped reestimating the rates for loans originated in 1997 and beyond. 
We believe that HUD and OMB need to review their assumptions, and base 
their default predictions on more recent experience with loans 
underwritten since 1991.

What Has Happened With the Annual Appropriation for Credit Subsidy?
    By our estimates, Congress has appropriated over $1.4 billion since 
1992 for credit subsidy for the FHA multifamily programs. None of these 
funds have been expended. In fact, based on the reestimates in the 
budget, HUD and OMB do not expect a large portion of these funds ever 
to be needed for these programs. Perhaps there is a way to recapture 
and reuse some of this excess credit subsidy. At the very least, we 
need to recognize that credit subsidy should not be continually 
appropriated and never used.

Why Does MBA Oppose the Increase In the Mortgage Insurance Premium?
    Based on what we have seen and what we believe to be the correct 
credit subsidy rates for these programs, MBA thinks it is unnecessary 
and inappropriate for HUD to increase the mortgage insurance premiums 
(MIP) on many of these programs. The increase from 50 basis points to 
80 basis points to be implemented by HUD is an unnecessary increase 
that was calculated by using the current, and we believe, flawed 
formula and assumptions, and HUD merely selected the MIP level that 
would make the programs breakeven, and, therefore, require less credit 
subsidy.
    This premium increase will have a number of adverse affects on the 
production of housing. First, for those properties in markets where a 
rent increase is possible, rents to tenants will also increase by 
approximately 3.5 to 4 percent. Second, for properties where the market 
will not support a rent increase, the owner will be required to put 
substantially more equity into the property. If the owner does not have 
access to additional equity capital, the property simply will not be 
built. None of these outcomes is beneficial to the families that need 
affordable housing, nor to the communities that could benefit from the 
production of new housing.

Why Increase the Mortgage Insurance Premium Now?
    We have asked HUD to delay the implementation of the premium 
increase until a full review of the credit subsidy formula can be 
completed and an accurate rate determined. They have responded by 
publishing the regulation and notice implementing the change effective 
August 1. We believe this was done to ensure that the $40 million they 
hoped to have appropriated for fiscal year 2001 would be sufficient to 
fund all loans in the pipeline this year. Based on Congress' actions 
last week and their failure to appropriate any credit subsidy, we are 
asking HUD again to reconsider the MIP increase and hope that you and 
your Subcommittee will add your voice to ours in asking for a delay in 
implementation of any premium increase.
    Our concern today, Mr. Chairman, is accuracy, but it is also 
timing. The Congress cannot afford to keep appropriating millions of 
dollars that are not needed and never used. The developers and mortgage 
bankers who depend upon these programs for financing cannot operate in 
this unpredictable and volatile environment. The families who need 
affordable rental housing cannot wait for it to be built.
    We need more accurate credit subsidy rates calculated as soon as 
possible. And we need Congress to include those rates in the fiscal 
year 2002 HUD/VA Appropriations bill now being considered in the House 
of Representatives and the Senate. Without this quick response, we will 
be faced with another year of unnecessary appropriations and/or an 
unjustified and excessive increase in the MIP.
How Has the Action Last Week On the Supplemental Appropriations Bill
Exacerbated the Crisis?
    While I understand that it is not the primary focus of this 
hearing, I would be remiss if I did not mention the action by the 
Congress last week during consideration of the Defense Supplemental 
Appropriations Act. Through the hard work of you and many of your 
colleagues on the Banking Committee, both the Senate and House versions 
of the supplemental included $40 million in credit subsidy for the FHA 
multifamily insurance programs. This appropriation was needed to end 
the shutdown of the programs, which began in April when FHA fully 
committed the $101 million initially appropriated for the programs for 
this fiscal year.
    In unexplained action, the conferees on the bill eliminated the $40 
million from the bill, possibly to fund other priorities, even though 
both chambers of Congress had approved it. Clearly, the conferees did 
not understand the impact of their actions. Without a supplemental 
appropriation, the FHA new construction and substantial rehabilitation 
programs will be shut down until October 1. This will mean that 
approximately $1 billion of new construction of affordable rental 
housing will not get underway this year and may never be built. Forty 
million dollars is not much money, particularly in a $7 billion 
supplemental appropriation. However, since it was deleted, we will have 
delayed indefinitely, and perhaps lost, construction on $1 billion of 
housing. Housing, as you know, is an excellent economic stimulation 
tool. These projects could have generated more than 24,000 new jobs, 
more than $126 million in new local taxes and fees, and more than $255 
million in new Federal taxes. Unfortunately, an opportunity appears to 
be gone. And, certainly the rental housing is desperately needed.
    There are only two ways that these programs can be restarted before 
the new 
fiscal year begins. The Administration can release the $40 million 
already appropriated by Congress last December as an emergency 
supplemental for these programs or Congress can approve a new $40 
million supplemental, perhaps in the 
fiscal year 2002 HUD/VA Appropriations bill, if it continues to move 
quickly through the Congress. We urge you, Senator Reed, to recommend 
to the Appropriations Committee to consider adding these supplemental 
funds to the fiscal year 2002 bill. These monies have already been 
appropriated and they should be used to restart the program. The Senate 
in the Defense Supplemental Appropriations bill removed all 
restrictions on that original appropriation. If that same language 
could be included in the fiscal year 2002 HUD/VA Appropriations bill or 
another appropriations vehicle that is moving quickly through Congress, 
we can end this shutdown and begin construction already started this 
year on much-needed housing.
    We look forward to working with you, Mr. Chairman, your 
Subcommittee, and other Members of Congress to reexamine the 
calculation process and the data used to determine the subsidy rate. 
Our industry stands ready to ``break the logjam'' so thousands of 
affordable rental units may be produced across the country. Thank you 
for the opportunity to testify here today.
                               ----------
                   PREPARED STATEMENT OF KEVIN KELLY
      President, Leon N. Weiner & Associates, Wilmington, Delaware
         On Behalf of the National Association of Home Builders
                             July 24, 2001

Introduction
    On behalf of the 203,000 members firms of the National Association 
of Home Builders, I want to thank you for calling this hearing on the 
Federal Housing Administration's multifamily mortgage insurance 
programs. My name is Kevin Kelly and I am a builder from Wilmington, 
Delaware. I currently serve as President of Leon N. Weiner & 
Associates, Inc., a Wilmington based home building development and 
property management firm. The Weiner organization and its affiliates 
have developed and constructed more than 4,500 homes, 9,000 apartments 
as well as several hotels, office, and retail facilities.
Overview
    The Federal Housing Administration's (FHA) multifamily mortgage 
insurance programs support new construction and substantial 
rehabilitation of apartments and are a cornerstone of efforts to meet 
the critical need for affordable rental housing. These programs, which 
require Federal budget appropriations in the form of credit subsidy, 
have been shut down because funding for fiscal year 2001 has been 
exhausted since April. Furthermore, the Administration's budget request 
for fiscal year 2002 is also inadequate.
    To address the credit subsidy shortage, the United States 
Department of Housing and Urban Development (HUD) plans to increase the 
mortgage insurance premium for these programs, which will relieve the 
need for credit subsidy but will undercut the ability of the programs 
to provide affordable rental housing. NAHB opposes the premium increase 
as unnecessary and burdensome. The current credit subsidy requirements 
are based on flawed calculations, which, if corrected, would allow the 
FHA multifamily mortgage insurance programs to operate without credit 
subsidy appropriations or premium increases.
    Before the suspension of credit subsidy, these programs were not 
functioning effectively in a number of key markets due to outdated 
limits on the size of mortgage that can be insured by FHA. Legislation 
to increase the loan limits has been introduced in both the United 
States House of Representatives and Senate and NAHB supports such 
efforts.

Affordable Rental Housing Shortage
    Two recent studies have documented a worsening shortage of 
affordable housing, particularly affordable rental housing. According 
to the latest ``The State of the Nation's Housing'' report from Harvard 
University's Joint Center for Housing Studies, 14 million Americans had 
severe housing cost burdens at the close of the decade. The report says 
that a family that earns the equivalent of a full-time job at minimum 
wage cannot afford the fair market rent for a two-bedroom apartment 
anywhere in the country. In 24 States, according to the report, even 
households with two earners cannot afford the fair market rent for an 
apartment without paying more than 30 percent of their income. The 
report also discusses the imbalance between the supply of affordable 
units and the growing demand for them. It also points out that the 
limited production of units affordable to low- and moderate-income 
households is troubling and likely to cause the critical housing needs 
problem to spread further to moderate-income families.
    The National Housing Conference's Center for Housing Policy also 
recently released a new report, ``Paycheck to Paycheck: Working 
Families and the Cost of Housing in America,'' with similar findings 
regarding the increasing housing cost pressure on low- and moderate-
income families. The report reveals signs of persistent and worsening 
housing affordability for working families in all parts of the country, 
including cities, suburbs and rural areas, despite the recent economic 
prosperity. Workers in municipal jobs, such as teachers and police 
officers, and in the services sectors, such as janitors, licensed 
practical nurses, and salespeople, fall into this group of people and 
are a large and growing component of many local economies. The growth 
in such jobs, however, is not matched by the growth in the supply of 
affordable housing, creating an increasingly difficult situation. 
According to the report, in 1999 there were 13 million American 
families that had a critical housing need, which is defined as paying 
more than 50 percent of their income for housing or living in severely 
inadequate housing. The proportion of low- to moderate-income working 
families with critical housing needs has risen from 23 percent in 1997 
to 28.5 percent in 1999, going from 3 million to 3.7 million. For 
renters, the report finds that a janitor or retail salesperson could 
afford a one-bedroom unit in most of the 60 areas, but in not one of 
these areas could they afford a two-bedroom unit without paying 
considerably more than 30 percent of their income for rent. The report 
also points out that for many people in service-related occupations, 
including teachers and police officers, two earners in the household 
are required to pay for housing costs.
    The worsening housing affordability situation for low- and 
moderate-income working families is exacerbated by inadequate mortgage 
loan limits and shutdowns in the FHA multifamily mortgage insurance 
programs, which are the chief vehicles for meeting the housing needs of 
these families.

Credit Subsidy for FHA Multifamily Mortgage Insurance Programs
    Each year, HUD must request an appropriation from Congress in an 
amount estimated to be the probable cost to the Agency of all 
multifamily mortgages it insures (the credit subsidy). Such 
appropriations are required by the Federal Credit Reform Act, which 
applies to all Federal direct loan and guarantee programs. The purpose 
is to recognize the potential cost of these programs in the Federal 
budget. For each program, the required credit subsidy is the dollar 
amount of losses that are expected over the life of the loans that are 
made or guaranteed in the budget year. The Office of Management and 
Budget (OMB) establishes subsidy rates for each Federal loan and 
guarantee program, based on an evaluation of the historical performance 
of those programs. The subsidy rates determine the amount of money that 
must be appropriated for any given level of program activity. (Programs 
that produce income rather than losses are assigned, what is called, a 
negative subsidy rate. Higher activity levels in these programs, which 
include the FHA single-family mortgage insurance program, increase 
Federal budget revenues.)
    Each of the different FHA multifamily mortgage insurance programs 
has been assigned an individual credit subsidy rate. It is estimated 
that HUD will require more than $250 million in credit subsidy to 
operate these programs in fiscal year 2001. Only $101 million was 
appropriated, and that amount was exhausted before the end of April 
2001. Such a shortfall means the loss of production of 50,000 units of 
affordable rental housing. In addition, the President's fiscal year 
2002 budget proposal for HUD seeks almost no credit subsidy funding for 
multifamily mortgage insurance. The budget instead proposes to increase 
the mortgage insurance premiums for these programs, which would nearly 
eliminate the need for credit subsidy but undercut the ability of the 
programs to provide affordable rental housing.
    NAHB believes that the assumptions used by OMB to determine the 
credit subsidy requirement for FHA multifamily mortgage insurance 
programs are incorrect. For example, the OMB model for the Section 
221(d)(4) program places too much weight on the performance of loans 
from the early 1980's, which were insured under much weaker 
underwriting standards than employed today and were impacted by the 
unprecedented retroactive provisions of the 1986 Tax Act. Section 
221(d)(4) mortgages insured after 1991 have a cumulative default rate 
of 5.5 percent, while OMB's model employs a cumulative default rate of 
28 percent. OMB's assumptions on recovery from asset disposition, 
particularly note sales, are also excessively pessimistic. In addition, 
the model incorrectly assumes that all loans with loan management set-
aside assistance (LMSA) result in immediate claims. Finally, the model 
combines unrelated, poorer performing programs in the credit subsidy 
rate calculations for the Section 221(d)(4) program.
    The multifamily mortgage insurance programs are performing well, 
experiencing cumulative default rates that are significantly below the 
level that OMB used in calculating the credit subsidy rates. If OMB 
revised its model and assumptions to 
address the problems outlined above, the Section 221(d)(4) program 
would have a negative credit subsidy rate and would not require credit 
subsidy appropriations or an increase in insurance premium. NAHB is 
seeking an immediate review and revision of the OMB credit subsidy 
model and urges Congress to make the results effective for the fiscal 
year 2002 budget.

FHA Multifamily Mortgage Insurance Premiums
    HUD currently has the statutory authority to set the mortgage 
insurance premium for multifamily programs from \1/4\ to 1 percent of 
outstanding principal balance per annum. HUD's current regulation sets 
specific percentages within the 
authorized range; that is, most of the mortgage insurance programs are 
set at \1/2\ of 1 percent.
    HUD and the Administration have announced support for a $40 million 
supplemental appropriation for FHA multifamily credit subsidy for 
fiscal year 2001 and are moving forward with an interim rule to 
increase the multifamily mortgage insurance premium from 50 to 80 basis 
points. HUD published the interim rule on July 2, 2001. HUD believes 
that the combination of supplemental credit subsidy and premium 
increase will allow a restart of the FHA multifamily mortgage insurance 
programs and support their operation through the end of this fiscal 
year. The premium increase, which HUD has said will remain in effect at 
least through the end of fiscal year 2002, will mean that only a 
minimal level of credit subsidy will be required in the next fiscal 
year.
    The interim rule revises current regulations to permit the 
Secretary to set the mortgage insurance premiums by program within the 
full range of HUD's statutory authority through notices. On August 1, 
2001, the date the interim rule becomes effective, HUD will raise the 
MIP from 0.5 percent to 0.8 percent. Programs for which the raise 
applies include the Section 221(d)(4) program, which is the main 
program supporting new construction of affordable rental properties, 
the programs under Sections 207, 220, 221(d)(3), 231, 234(d), and 
241(a), as well as the HOPE 6 projects under Sections 207, 220, 
221(d)(4), and 231. A notice setting the new premium rates accompanies 
the interim rule.
    HUD is raising the premium without undertaking analysis of its need 
or impact. The premium change will go into effect without opportunity 
for public comment. Comments on the rule will not be considered until 
after the comment period closes on August 31, 2001. NAHB believes this 
to be inappropriate for a change of this magnitude. As stated above, 
NAHB believes the premium increase will unnecessarily hamper efforts to 
meet affordable rental housing needs. The increase will significantly 
impair the capacity of the FHA multifamily mortgage insurance programs 
to address the Nation's critical need for affordable rental housing. 
Analysis by industry experts shows that the premium increase would 
result in rent increases of 3 to 4 percent, which would undermine the 
capacity of this program to serve moderate- and lower-income families. 
In some cases, builders would decide not to go forward with projects, 
resulting in the loss of affordable rental units. It should be noted 
that these projections reflect the current low level of interest rates. 
Should interest rates fluctuate upward, the impact on affordability 
would be even more onerous.

FHA Multifamily Mortgage Limits
    Another factor contributing to the shortage of affordable rental 
housing, especially in high-cost areas, is the fact that the FHA 
multifamily mortgage limits have not been increased since 1992. 
Construction, land, and other costs have increased dramatically during 
that period. The Annual Construction Cost Index, published by the 
Census Bureau, increased over 23 percent. Preliminary results from a 
recent survey conducted by NAHB's Economics Department show that land 
costs in 10 metropolitan areas have increased by an average of 25 
percent over the past 8 years.
    These rising construction and other costs have resulted in a 
shortage of affordable rental units. Rent increases now exceed 
inflation in all regions of the country, and new affordable units are 
increasingly rare. Because of current dollar limits on loans, FHA 
insurance cannot be used to help finance construction in a number of 
high-cost urban areas. Statistics published by FHA show that in high-
cost areas, such as New York and Philadelphia, only a few multifamily 
loans providing new or substantially rehabilitated affordable rental 
units have been insured in the last 6 years.
    NAHB has proposed that the current statutory mortgage limits be 
increased 25 percent, which is consistent with reported increases in 
construction and land costs. The limits should also be indexed based on 
increases in the Annual Construction Cost Index. Increasing the dollar 
limits for multifamily loans that can be insured by FHA will foster the 
development of affordable housing, especially in high-cost center city 
areas where it is needed most. The NAHB proposal includes increases in 
limits on loans for: (1) rental housing in urban areas where local 
governments have undertaken concentrated revitalization efforts; (2) 
cooperative housing projects; (3) rental housing for the elderly; (4) 
new construction or substantial rehabilitation of apartments by both 
for-profit and nonprofit sponsors; (5) condominium developments; and, 
(6) refinancing of rental properties. Eligible borrowers under these 
FHA programs may include private for-profit developers, public 
agencies, and nonprofit organizations.
    NAHB strongly supports the legislation that has been introduced to 
raise the FHA multifamily mortgage limits--Senate version, S. 1163, 
introduced by Senators Jon Corzine (D-NJ) and Thomas R. Carper (D-DE), 
and H.R. 1629, introduced in the House by Representatives Marge Roukema 
(R-NJ) and Barney Frank (D-MA). Also, it is significant that the 
Secretary of HUD, Mel Martinez, has expressed the Administration's 
support for such a proposal.
    In conclusion, the FHA multifamily insurance programs are critical 
to the delivery of much needed affordable housing to working families. 
Considering the pressing need for housing, we respectfully request 
Members of the Senate Banking and Appropriations Committees to take 
steps to ensure that unnecessary disruptions to the program are 
minimized and the programs work as effectively and efficiently as 
possible. Further, we seek your support of S. 1163 and enlist your help 
in securing its passage. NAHB stands ready to assist in these efforts 
and thanks you in advance for your assistance.

                               ----------
               PREPARED STATEMENT OF PATTON H. ROARK, JR.
             Executive Vice President and Portfolio Manager
            AFL-CIO Housing Investment Trust, Washington, DC
                             July 24, 2001

    Good afternoon, Mr. Chairman and Members of the Subcommittee. My 
name is Patton Roark and I serve as the Executive Vice President and 
Portfolio Manager for the AFL-CIO Housing Investment Trust.
    On behalf of the Trust, let me first thank you for the opportunity 
to testify today on FHA's multifamily housing program. We applaud you 
for holding today's hearing on major issues facing FHA's multifamily 
program, which arise in the context of a national crisis of multifamily 
housing production. My testimony will focus on HUD's recently proposed 
60 percent increase in the FHA 221(d)(4) mortgage insurance premium--
from 50 to 80 basis points--and the implications of this increase for 
the 
future of this critically important multifamily loan program. We 
believe that the proposed increase will further depress the production 
of much needed rental housing and negatively affect the quality of life 
of working families in housing markets across the United States.
    I will also comment on the credit subsidy rates for FHA multifamily 
mortgage insurance premiums. We question the underlying assumptions and 
data used to arrive at credit subsidy rates. We have utilized a version 
of the credit subsidy model obtained by the Mortgage Bankers 
Association from HUD and applied assumptions and data derived from 
actual transactions in the FHA 2001 pipeline. Based on this analysis, 
at an increased mortgage insurance premium of 80 basis points, FHA 
would appear to earn excess revenues at the expense of multifamily 
projects and, ultimately, of tenants. A significantly lower premium 
increase--or perhaps no increase at all in the current 50 basis point 
premium--may be, necessary to achieve revenue neutrality for the 
221(d)(4) program, even assuming a goal of revenue neutrality. What we 
are asking today is to lift the shroud of secrecy that determines the 
supposed ``cost'' to the Treasury of the program and require that OMB 
and HUD work with the industry to develop a fiscally responsible 
subsidy model and mortgage insurance rate.
    In addition, I will comment on the need to address stagnant 
statutory loan limits and the stop-and-go character of the program due 
to insufficient credit subsidy that are further compromising FHA's 
effectiveness.
    The AFL-CIO Housing Investment Trust recommends that Congress take 
a number of steps to ensure greater multifamily housing production and 
a stronger FHA:

 Require that HUD and OMB inform Congress and the public 
    regarding the real impact of the proposed increase in the mortgage 
    insurance premium on housing production and rent inflation--before 
    implementing any increase.
 Require a full and open public discussion of the model and 
    assumptions used in deriving the credit subsidy rate for FHA's 
    multifamily insurance programs.
 Increase statutory loan limits by at least the 25 percent 
    proposed by Secretary Martinez and provided for in legislation 
    introduced by Senator Corzine. Loan limits should be indexed to 
    assure program effectiveness on an ongoing basis and additional 
    flexibility should be provided in loan limits for high cost areas.
 Grandfather projects currently in FHA's 2001 pipeline at the 
    current 50 basis point premium level.
 Request that OMB immediately release $40 million in already 
    appropriated emergency credit subsidy funds for fiscal year 2001.
 Appropriate sufficient credit subsidy for fiscal year 2002 to 
    allow the 221(d)(4) program to operate on a full-year basis at the 
    50 basis point premium level pending the full and open resolution 
    of the mortgage insurance and credit subsidy issues, as we have 
    recommended.
Background On the AFL-CIO Housing Investment Trust
    The AFL-CIO Housing Investment Trust is a $2.5 billion fixed-income 
fund 
registered with the Securities and Exchange Commission under the 
Investment Company Act of 1940. The Trust specializes in investing in 
Agency-Insured Mortgage-Backed Securities for over 400 investors, 
including both union and public 
employee pension plans. The Trust is one of the industry's largest 
investors in FHA-Insured Mortgages and currently invests up to $400 
million annually through the Section 221(d)(4) Multifamily Construction 
Mortgage program.
    Thirty five years ago, the AFL-CIO founded the Trust's predecessor, 
the AFL-CIO Mortgage Investment Trust, with the dual goals of providing 
a vehicle for the prudent investment of union pension assets and of 
using those assets to stimulate housing production that would benefit 
workers and their communities. Over the last 35 years, the Trust and 
its predecessor have financed over 65,000 units of rental housing 
through investments in FHA-insured mortgages, securities backed by FHA-
insured mortgages, and other mortgage-backed securities. My comments 
are derived from the Trust's unique perspective on real estate 
development, capital market trading and asset management.

The Multifamily Housing Production Crisis
    The issues being reviewed by the Subcommittee today arise in the 
context of a national crisis in rental housing production. The United 
States is barely producing enough new rental housing to compensate for 
losses from the inventory due to age, condominium conversion, and other 
causes. The number of all rental units in the United States increased 
by just 2.3 percent during the 1990's. Over the same period, population 
increased by 13.2 percent and the number of households increased by 
14.7 percent. The result is a predictable imbalance of housing supply 
and demand. In major markets across the country, increases in rents 
have far outstripped inflation and growth in incomes. That is why, 
according to the Joint Center for Housing Studies at Harvard, after a 
decade of unprecedented economic growth in the United States, 14 
million American households--that is one in eight--now pay over half 
their income for housing or live in substandard apartments. Rising 
rents are pricing working families out of the rental housing market. We 
are simply not producing enough rental housing.

The Need for An Effective FHA
    Historically, FHA has played a critical role in assuring the 
production of an adequate supply of new multifamily housing, whether in 
responding to the crisis of the Great Depression or the need for 
housing following World War II. During the 1970's and the 1980's, FHA 
was a major force in the market for financing of rental housing and the 
country achieved high levels of rental housing production. In 1980, FHA 
insured 42 percent of the dollar volume of all multifamily loans. 
During the 1980's, the country achieved a multifamily production level 
of over 4.5 million units.
    During the decade of the 1990's, FHA stepped back from its 
leadership role in multifamily housing production. By 1997, FHA's 
multifamily loan market share had dropped to just over 10 percent. 
During the 1990's, only 2.5 million new rental housing units were 
produced, just over half of production levels during the 1980's, 
contributing directly to the crisis in rental housing supply and 
escalating rents.
    FHA plays a unique role in the multifamily housing industry. Its 
stated mission includes maintaining rental housing opportunities, 
contributing to the building of healthy neighborhoods and communities, 
and stabilizing credit markets in times of economic disruption.
    Through the 221(d)(4) program, FHA provides insurance for 
multifamily loans, which allows institutional investors, like the AFL-
CIO Housing Investment Trust, to buy securities backed by these loans. 
The resulting capital market efficiencies lower the cost of capital for 
projects resulting in lower rents and more projects that are 
economically feasible.
    FHA's insurance program offers some significant advantages that are 
unique in the industry:

 Mortgage insurance covering both construction and permanent 
    loans. Alternative sources of mortgage loan insurance or guarantees 
    do not cover loans during the construction period. As a result, 
    such alternative sources tend to be used more to refinance 
    existing, stabilized projects than to the create new housing units. 
    Allowing institutional investment in construction loans drives down 
    construction loan interest rates, reduced project costs, lower rent 
    requirements in underwriting, and increasing affordability.
 Fixed, rather than floating, construction and permanent loan 
    rates. This provides predictability to developers, who are 
    otherwise exposed to significant interest rate risk during the 
    development period. Risk reduction translates into lower returns 
    required by equity investors, reducing project costs, and lowering 
    required rents.
 A 40 year loan amortization period, which reduces loan 
    payments and rent levels needed to meet debt service. Alternative 
    sources of credit enhancement in the market have amortization 
    periods of 30 years or less.
 A 90 percent maximum loan-to-value ratio for insured loans. 
    This results in an equity requirement of only 10 percent of total 
    project costs. Alternative sources of multifamily financing require 
    equity levels of 20 percent to 35 percent. Generally, capital 
    markets expect equity rates of return to be at least double 
    mortgage interest rates because of the increased risk of holding 
    equity rather than debt. Why is this relevant to affordability? 
    When the portion of project costs covered by equity is increased, 
    it increases the overall cost of funds. When the cost of funds is 
    increased, it increases the rents necessary to make the project 
    feasible, given prudent underwriting. When required rents are 
    increased, either tenants must pay the difference, or the project 
    is not built. Either way, the result is that fewer American 
    families can afford a place to live.

    In summary, each of these components of the FHA multifamily program 
increases the willingness of developers to build and investors to 
invest in harder to serve areas. Each component reduces the cost of 
financing for multifamily projects, thus enabling the development of 
apartments with affordable rents for working families.
Obstacles To FHA's Effectiveness
    Despite the importance of the unique financing tools that the FHA 
offers, FHA's multifamily loan production has declined over the past 
decade due to a number of factors:

 The time required to process FHA transactions has been 
    substantially longer than that required for private transactions. 
    For developers, time is money. To address this, HUD introduced the 
    Multifamily Accelerated Processing (MAP) Program, effective this 
    year. Early reports on this program are encouraging.
 Statutory loan limits are too low. These limits have not been 
    adjusted since 1992. This has made the 221(d)(4) program unworkable 
    in high cost markets, precisely where the need is greatest. For 
    this reason, last year there were no FHA loans issued in markets 
    such as New York, Boston, Providence, San Francisco, San Jose, 
    Syracuse, Cincinnati, Birmingham, and many more. Secretary Martinez 
    has proposed to address this problem and legislation has been 
    introduced by Senator Corzine that would increase statutory loan 
    limits by 25 percent. We strongly support an increase by at least 
    25 percent. We also support indexing the increase in statutory loan 
    limits to assure continued program effectiveness and recommend that 
    additional flexibility be provided for high cost areas.
 The stop-and-go character of the program, due to disputes over 
    credit subsidy, frustrates developers who have played by the rules 
    and relied on the availability of FHA loans. In fiscal year 2000, 
    the 221(d)(4) program was effectively shut down in June. In this 
    fiscal year 2001, the program was shut down in April. The Trust is 
    currently working with developers of projects totaling 
    approximately $100 million, representing over 600 badly needed 
    rental units, who are preparing to walk away from existing FHA loan 
    commitments that cannot be acted on. Their future interest in FHA's 
    programs will depend on assurances that the programs can be relied 
    upon.

The Impact of An Increased Mortgage Insurance Premium
    Now HUD is proposing a 60 percent increase in the cost of FHA 
mortgage insurance. This increase will add costs to the development of 
multifamily housing and directly contribute to decreased housing 
affordability in the markets FHA serves.
    According to the 2002 Budget, HUD forecasts that $3 billion in FHA-
insured 221(d)(4) mortgage commitments will be issued in fiscal year 
2002. The proposed 30 basis point increase in the mortgage insurance 
premium would effectively be a tax of approximately $105 million--
present value of the increase over 40 years--on new multifamily 
projects. For these development projects to remain viable, this $105 
million must be absorbed by tenants through rent increases--further 
escalating the affordability crisis facing working families.
    The premium increase could also result in a long-term process of 
adverse selection that reduces the integrity of the FHA's existing 
portfolio. Developers who choose to finance through FHA and who have 
strong, financially viable projects in the most stable markets, may 
subsequently choose to prepay and refinance out of the FHA program at 
the first opportunity, leaving only the weaker projects in the FHA 
portfolio. This tendency to prepay high-premium FHA loans may also be 
reflected in the capital markets' pricing of the securities--requiring 
a higher yield because of the increase in prepayment risk.
    An increase in the mortgage insurance premium is not justified by 
high default rates in the insured portfolio. The AFL-CIO Housing 
Investment Trust has invested over $1.25 billion in FHA-insured 
multifamily loans over the past 10 years. The Trust, one of the 
industry's largest investors in such loans, has experienced cumulative 
defaults of slightly over 1 percent of that total. HUD's statistics 
back up our experience. Since 1990, the default rate for all loans 
under the full 221(d)(4) program has averaged about 1 percent annually. 
For loans originated after 1990, the annual default rate is even 
lower--just over half that. Why then is HUD proposing to increase 
mortgage insurance premiums now?
    It is important also to be cognizant of current economic 
conditions. Federal Reserve Chairman Alan Greenspan testified to 
Congress last week that the economy remains depressed, notwithstanding 
an unprecedented seven reductions in the Federal funds rate and the 
prospect of fiscal stimulus through the tax reduction package enacted 
by Congress and the President. FHA has long been seen as providing a 
stimulus to the economy by promoting housing construction and thereby 
creating jobs in construction and related industries. The multiplier 
effect associated with these jobs is felt throughout the economy. If 
increasing the mortgage insurance premium by 60 percent risks reducing 
the production of rental housing at a time when it is sorely needed, a 
question that this Subcommittee must wrestle with is whether now is the 
time to risk elimination of these construction and related jobs.

The Need For Independent Critical Evaluation of the
Proposed Premium Increase and Credit Subsidy Model
    In proposing a substantial increase in the mortgage insurance 
premium through an interim rule that changes the premium during a 
fiscal year, HUD is acting precipitously. Department staff do not 
appear to have adequately consulted with developers, bankers, 
investors, tenants, housing advocates, or others knowledgeable in the 
industry or impacted by the decision. HUD is acting without 
independently verified information regarding the potential near-term 
and long-term impact of this change on rental housing production or on 
rent levels.
    Moreover, HUD is proposing a fundamental rule change in the middle 
of the game. This has created serious uncertainty and a lack of 
confidence in capital markets and among developers. It will layer new 
costs on pending projects not only because of higher premiums but also 
due to the need for reunderwriting and new 
financial feasibility studies.
    To restore investor and borrower confidence in the FHA program as 
well as address the need to increase rental housing production, HUD 
should immediately contract for an independent critical evaluation of 
the proposed premium increase and its likely impact on rental housing 
production and rent inflation. The methodology as well as the results 
of the study should be made available to Congress and the public within 
90 days. A decision to increase the mortgage insurance premium should 
not be made without a disciplined and open process that examines the 
likely impacts of such a decision.
    Congress should request that the Office of Management and Budget 
make public the model and the assumptions and data used to determine 
credit subsidy levels for the FHA multifamily insurance program. We 
applied data and assumptions derived from current projects in FHA's 
2001 pipeline to the FHA Multifamily Budgetary Cash Flow Model obtained 
by the Mortgage Bankers Association from HUD. Our results are 
substantially different from those apparently arrived at by FHA and 
OMB. Our preliminary analysis strongly suggests that a premium of 80 
basis points may not be required to offset the actual default risks 
insured by the program. Our understanding is that certain defaulted 
projects from the 1970's and 1980's--underwritten under programs and 
using standards no longer in use today--are skewing the default ratio 
derived in the model. Such projects do not reflect current risks.
    If FHA and OMB fairly evaluate the current default risk of the 
multifamily portfolio using data from the past 10 years, they will 
likely conclude that a 60 percent increase in insurance premiums is not 
necessary to create a revenue neutral program, even assuming a goal of 
revenue neutrality. Without an open examination of the model and the 
assumptions and data that went into it, these conclusions remain 
preliminary. What we can say definitively is that public policy matters 
as important as the future of FHA and the availability of housing at 
affordable rents should not be determined behind a shroud of secrecy.
Allow Projects Now Stuck In FHA's Pipeline To Go Forward and
Assure Future Program Continuity
    We recommend that Congress request that OMB immediately release the 
$40 million in emergency credit subsidy which has already been 
appropriated for fiscal year 2001 to allow projects now stuck in FHA's 
production pipeline to go forward.
    Moreover, FHA should allow projects, for which it has invited firm 
commitments, to be provided financing at the current 50 basis point 
premium. Developers have relied on the availability of FHA financing at 
substantial expense. FHA has completed preliminary underwriting and 
expressed a desire to provide financing. It is a waste of both project 
and taxpayer resources to mandate that such projects be restructured by 
developers and then reunderwritten by FHA. By allowing these projects 
to be financed, the credibility of the FHA insurance program will be 
enhanced as a reliable financing option and thousands of badly needed 
rental units will be able to start construction immediately.
    To avoid program disruptions next year, sufficient credit subsidy 
must be appropriated for fiscal year 2002 to assure that the 221(d)(4) 
program can remain operational through the entire fiscal year at the 50 
basis point premium level, pending a full and open resolution of the 
issues of credit subsidy and appropriate insurance premium level, as we 
are recommending.

Conclusion
    Multifamily housing production in the United States is lagging far 
behind population growth and household formation--the usual indicators 
of housing demand. The result is a crisis of housing affordability that 
is hurting working families in major housing markets across the 
country. The crisis is predictable, but not inevitable.
    To reverse the decline in national rental housing production, FHA 
must be allowed to do more, not less. FHA programs have played a 
critical role in rental housing production in the past and with a 
renewed commitment and appropriate changes, these programs can help 
lead the country out of its current housing production crisis. 
Unfortunately, the current HUD proposal to increase mortgage insurance 
premiums is a step in the wrong direction. It will increase the cost of 
rental housing production and reduce developer and investor confidence 
in FHA programs, hastening the erosion of FHA's role in multifamily 
lending. This is not a desirable outcome and certainly not one that we 
should back into without full and open discussion and debate.
    Mr. Chairman, we appreciate the opportunity to testify before this 
Subcommittee. I would also like at this point to submit a letter from 
President John Sweeney of the AFL-CIO, on behalf of the 40 million 
Americans who live in labor households. President Sweeney and many 
State and local labor leaders hear every day about the impact that the 
housing crisis is having on working men and women and their families, 
across the Nation. He joins us in urging that FHA resume its historic 
leadership position in supporting the production of multifamily 
housing.
    Mr. Chairman, I would be pleased to answer any questions and to 
brief the Subcommittee staff at any time.
    Thank you.

                               ----------
                PREPARED STATEMENT OF CARL A.S. COAN, JR
        Executive Committee Member, National Housing Conference
                             July 24, 2001
    Mr. Chairman and Members of the Subcommittee, I am Carl A.S. Coan, 
Jr. and I appear here on behalf of the National Housing Conference for 
which I am a Director and a member of the Executive Committee. We 
appreciate this opportunity to present our views on the FHA Multifamily 
Housing Mortgage Insurance Program.
    NHC was founded in 1931, 3 years before the National Housing Act 
became law. During all these years, NHC has supported FHA and its 
various programs to help Americans become better housed. These programs 
have been essential in helping to achieve the significant progress that 
has taken place over the past 70 years. Yet much still needs to be 
done.
    NHC's research affiliate, the Center for Housing Policy, last month 
released a study, entitled ``Paycheck to Paycheck: Working Families and 
the Cost of Housing in America.'' This study followed up on the 
Center's report of last year, entitled ``Housing America's Working 
Families.'' Both studies found that over 13 million families in 1997, 
and again in 1999, had critical housing needs, for example, they either 
spent more than 50 percent of their incomes on housing or they lived in 
a seriously substandard unit. While many of these families were elderly 
or on welfare or had only a marginal attachment to the labor force, in 
1997 22 percent, about three million households, were working families 
earning between $10,700 a year--the equivalent of a full-time job at 
the minimum wage--and 120 percent of the area median income, a figure 
well in excess of $50,000 in some of our more expensive urban areas. In 
1999, this percentage increased to 28 percent, and the number of 
households to over 3.7 million. These are the families the FHA 
multifamily unsubsidized programs were designed to serve.
    Starting with the original 207 program as it was revised in 1938, 
then through the 608 program enacted during the Second World War, next 
through the 221(d)(4) program enacted in 1961 and various permutations 
since then, the FHA multifamily programs have always been aimed 
principally at providing housing for families of modest income. And 
because that goal was achieved so successfully in many cases, these 
programs have frequently been called upon, with the addition of a 
subsidy element, to provide housing for low-income families--those 
earning 80 percent or less of the median income in most cases. The 
basic structure of the unsubsidized multifamily program was the 
foundation upon which the subsidy assistance was added, serving as the 
vehicle for the provision of hundreds of thousands of housing units for 
low-income families.
    During this 60 year period, the mortgage insurance premium charged 
on multifamily mortgages has for the most part been \1/2\ of 1 percent. 
This premium has generally been adequate to cover the losses incurred 
by the mortgage insurance funds established in support of these 
programs. In the early years of FHA, each program, such as 207, 220, or 
221, had its own mortgage insurance fund. This became cumbersome and 
Congress in 1965 combined into one fund, the General Insurance Fund, 
all of the FHA programs except for the basic 203(b) single-family and 
the cooperative programs.
    There also was established in 1968 a Special Risk Insurance Fund, 
in recognition of the fact that some of the programs being carried out 
under the aegis of FHA were designed to take a greater risk in order to 
accomplish such goals as housing low-income families or making housing 
available in older, declining urban areas. While the same mortgage 
insurance premium was collected with respect to these undertakings, it 
was recognized up front that the premium would not be sufficient to 
cover anticipated losses and that Congress would need to appropriate 
funds on occasion to make up for shortfalls in the Special Risk Fund.
    While the Special Risk Fund still exists, for budgetary purposes it 
has been lumped with the General Insurance Fund and there is little, if 
any, distinction between the two. While erasing that distinction--as 
was the distinction between the various separate funds erased with the 
establishment of the General Insurance Fund in 1965--may make it easier 
for the accountants to keep their books, it should not be used as one 
of the bases for increasing the mortgage insurance premium as the 
Administration announced it intends to do as of August 1. And it might 
be reasonable to consider shifting some of the riskier insurance 
programs now covered by the General Insurance Fund into a revitalized 
Special Risk Fund.
    The FHA multifamily programs carry out an important societal 
responsibility of our Government, and they have done that successfully 
over the past 60 years. The efforts to meet that responsibility should 
not be lessened now through a 60 percent increase in the mortgage 
insurance premium. This increase will not stop the FHA multifamily 
housing programs, but it will certainly limit the programs ability to 
serve those of modest income that the programs were designed to serve.
    The proposed increase in the mortgage insurance premium is like a 
new tax being added on to the rent of the many thousands of tenants who 
need the modest-cost, decent housing these programs are designed to 
provide. There is no question that this increase will be passed through 
to the tenants or the housing will not be built. In either case, this 
new tax will decrease the ability of the FHA multifamily programs to 
serve as broad a range of the population as possible.
    Of all the arcana perpetrated by our Government on its people, 
probably nothing is quite as arcane as the so-called credit subsidy 
calculations carried out with respect to the FHA multifamily insurance 
programs. As I understand it, they posit the incurrence of costs far in 
the future, based on the unlikely replication of the circumstances and 
occurrences of the past. They seem more designed to frustrate the 
ability to meet our Nation's housing needs, rather than to facilitate 
meeting those needs. Whether the calculations made under the premises 
established by OMB are accurate, neither I nor probably anyone else 
outside of OMB can really understand. What we can understand, however, 
is that as a result of the credit subsidy concept, we have had several 
stoppages over the last 8 years in the production of multifamily 
housing for those whose housing needs cannot be met without the support 
of the FHA mortgage insurance.
    This is inexcusable, and even more inexcusable is the refusal of 
OMB to allow HUD to use the $40 million made available last year in an 
emergency supplemental. OMB has taken the position that no emergency 
exists and therefore it could not meet the requirements spelled out in 
the legislation for releasing that $40 million; we believe that an 
emergency did and does exist because of the continued need for decent 
housing in markets which cannot otherwise be adequately served.
    One of the problems that has bedeviled the FHA multifamily 
insurance programs in recent years has been the failure to increase the 
maximum per unit mortgage limits since the last increase in 1992. This, 
at least, the Administration has recognized and has urged that Congress 
enact a 25 percent increase in those limits. NHC strongly supports that 
increase and urges this Subcommittee to move as soon as possible the 
legislation providing for that increase. We suggest, however, that at 
the same time it might be appropriate to direct HUD to restore the 
maximum \1/2\ percent mortgage insurance premium and to find ways to 
avoid the frequent interruption to FHA multifamily production that have 
occurred over the last 8 years as a result of the institution of the 
credit subsidy concept.
    Mr. Chairman, I would like to thank you for this opportunity to 
present our views and concerns and would be pleased to answer any 
questions that you may have.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD FROM MICHAEL F. 
                             PETRIE

Q.1. What would be an appropriate index for setting future 
increases in loan limits?

A.1. Generally, the loan limits have been most limiting on the 
new construction and substantial rehabilitation programs. While 
the cost of land, impact fees, and other development costs have 
increased significantly, these costs vary widely across markets 
and a national index would be difficult to determine. However, 
the cost of construction is generally the largest factor in 
increasing costs and is more uniform across markets. The Census 
Bureau publishes, annually, a Construction Cost Index. We 
recommend that the amount of increase each year in this index 
be used to adjust the maximum mortgage limits.

Q.2. Please provide us with the data and your analysis that 
indicates HUD and OMB have overestimated the long-term cost to 
the Government of the FHA multifamily insurance program, and 
that a premium of 80 basis points may not be required to offset 
the actual default risks insured by the program.

A.2. In 1999, MBA commissioned a study by Abt Associates that 
reviewed FHA data for the four most active multifamily 
programs. Abt performed a cash flow analysis for each of the 
programs and used actual HUD data for January 1987 through 
September 30, 1998. (These dates were chosen because they are 
after the 1986 Tax Reform Act but include the 1987-1991 real 
estate recession.)
    The attached tables demonstrate that both the Section 
221(d)(3) and 221(d)(4) programs make money for the Government 
with total claims rates of 8.16 percent and 4.76 percent, 
respectively. The experience since fiscal year 1998 has been 
even more positive which would increase the positive cash flows 
of these programs.
    There are generally two types of risk that HUD must 
consider when setting an estimated default rate. The first is 
underwriting risk or the risk that loans will be poorly 
underwritten and not be able to achieve the rents necessary for 
the project to be economically feasible. HUD made significant 
underwriting changes in 1991 that have proven to be successful 
in that few loans have resulted in claims in the early years of 
the mortgage.
    Using HUD's own data, the average default rate for the 
first 3 years of the Section 221(d)(4) loans originated from 
1992 through 1998 was 1.65 percent and the average rate for the 
first 5 years for loans originated since 1992 was also 1.65 
percent. (See attached chart.) This compares to the rates 
assumed by HUD and OMB in their credit subsidy calculation of 
9.3 percent for 3 years and 14.3 percent for 5 years.
    The second type of risk is economic risk or the risk that 
the economy in the region or the neighborhood will deteriorate 
such that the owner can no longer achieve the rents necessary 
to maintain the property and make the mortgage payments. This 
risk has not been adequately tested since 1992 because of the 
sustained economic expansion the country has experienced since 
1991. The issue then becomes, what level of defaults should be 
estimated to take into account an economic recession? HUD is 
using approximately 28.5 percent for the Section 221(d)(4) 
program, which results in the need for an 80 basis point MIP. 
If you were to lower that rate to 21 percent--more than 12 
times the actual average rates since 1992--there would be no 
need for credit subsidy or an increase in the MIP above 50 
basis points.
    Even the Administration realizes that their credit subsidy 
rate estimates have been significantly higher than actual 
experience. Until recently, the Federal budget included 
``reestimates'' of the credit subsidy needed for each year 
since 1992. The reestimates reflect the actual experience of 
the loans originated in those years and clearly demonstrate 
that the original calculations were excessively high. For 
example, Section 221(d)(4) loans originated in 1992 had an 
original credit subsidy rate of 1.51 percent and a reestimated 
rate in the fiscal year 2000 budget of -2.29 percent. For 1993 
loans, the rate dropped from 12.41 percent to 3.7 percent. 
Similar reductions were evident in subsequent years until HUD 
and OMB stopped reestimating the rates for loans originated in 
1997 and beyond. Clearly, the Congress has over-appropriated 
for credit subsidy for this program--even at a 50 basis point 
mortgage insurance premium.

RESPONSE TO WRITTEN QUESTION OF SENATOR ALLARD FROM KEVIN KELLY

    Q.1 What would be an appropriate index for setting future 
increases in loan limits?

    A.1. The National Association of Home Builders recommends 
that future FHA Mortgage Loan Limit increases be indexed to the 
U.S. Bureau of the Census Annual Construction Cost Index. This 
index is used to derive the annual value of general 
construction costs put into place and is a measure of the 
impact of inflation on construction costs. It is the best 
readily available index published on an annual basis.

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