MBA, NAHB Voice Opposition to Increased Multifamily MIP

Representatives of both the Mortgage
Bankers Association (MBA) and the National Association of Home Builders (NAHB)
testified before the House Committee on Financial Services’ Subcommittee on
Insurance, Housing and Community Opportunity Thursday.  The committee heard from stakeholders on the
oversight of the Federal Housing Administration’s Multifamily Insurance
Programs
.

Rodrigo Lopez, President and CEO of
AmeriSphere Multifamily Finance in Omaha, Nebraska spoke on behalf of MBA.  Lopez told the committee members that the
recent housing crisis had spotlighted rental housing and the critical
importance of FHA’s countercyclical role. 
One in three American households lives in rental housing today, he said,
and most Americans will rent at some point in their lives.

During the recession, as other rental
market participants pulled back, FHA significantly increased its presence.   Private
capital is coming back, he said, but FHA remains critical in many markets and
for many types of properties, particularly older affordable ones that other
investors are less willing to finance.

Even while FHA’s multifamily programs
have been providing critical liquidity to the market, they continue to have low
delinquency rates and show positive cash flow. 
Lopez referenced a 2011 MBA study that found that FHA multifamily and
healthcare loans originated between 1992 and 2010 have generated $927 million
in positive net cash flows. New tighter underwriting standards should further
improve loan performance going forward, he said.

MBA commissioned
its study because of the lack of good data on multifamily programs from the
Department of Housing and Urban Development (HUD).  What data is available, Lopez said, is
difficult to separate out from information on single family loans.   “Congress should require HUD to
separate the multifamily loans from the single family loans in the GI/SRI fund
in order to provide policymakers with a better understanding of the financial
performance of the multifamily programs.”

In order
for FHA continue to sustain the housing market’s long-term vigor it needs adequate
resources to operate effectively. Lopez pointed out that over the last four
years HUD’s multifamily staff level has dropped significantly while loan volume
has increased three-fold.  Technology
funding has also suffered and multifamily programs are still unable to submit
applications electronically.

Lopez
credited HUD efforts to improve its processes. FHA has initiated a pilot
program streaming applications for properties with low income housing tax credits.
MBA would like to see a nationwide expansion of the pilot as soon as possible.

The
proposed increase of mortgage insurance premiums (MIPs) for multifamily
programs seems to run counter to the strong performance of these programs and
recent tightening of underwriting standards. MBA believes any MIP increase
ought to be supported by a careful actuarial analysis and any insurance
premiums should be used only to manage risk associated with the programs.  Currently any excess income is returned to
Treasury, not used to improve the programs or for a reserve fund.

Bob Nielsen, the immediate past chairman
of NAHB gave similar testimony regarding increases in MIPS. The need to raise
fees to reduce defaults has not been demonstration and HUD has failed to
provide an analysis as to how the new fees would affect borrowers, lenders, or
renters, he said.  The proposed increases
will not provide a buffer against future FHA losses because there is no
segregated fund and excess income is simply returned to the U.S. Treasury each
year. Increases will only add to property owners’ costs, thereby affecting
rents and discouraging the production of rental housing.”

The effect would be felt
disproportionately by market rate properties in the secondary markets where
credit is limited, he added, because private capital is focused on the
strongest markets and the best capitalized large developers.

Turning to other topics, Nielson said NAHB opposes efforts to establish minimum
capital ratios
for the General Insurance and Special Risk Insurance (GI/SRI)
Funds before an in-depth analysis is done but supports efforts to fully fund
renewals of Section 8 Project Based Rental Assistance contracts.  The association also backs HUD’s efforts to
expand financing for small multifamily rental properties and to provide a
secondary market outlet for such loans.

He said that NAHB estimates that the aging “echo boom” generation
will result in demand for between 300,000 and 400,000 multifamily units per
year over the next decade. While economic recovery will determine the timing of
this demand it will not be postponed indefinitely and 2011’s 178,000
multifamily housing starts were only half what was needed to keep pace with
growing demand.

“Production of multifamily housing will undoubtedly increase above the
current low levels,” said Nielsen. “It is important that the
financing mechanisms to support that production are available and that Congress
ensures that the FHA multifamily mortgage insurance programs continue to meet
the needs of low- and moderate-income renters.”

Lopez
and Nielsen were among nine witnesses appearing before the committee.  Among others were Marie Head, Deputy Assistant Secretary for FHA and representatives of
the National Housing Trust, National Low Income Housing Coalition, National
Council of State Housing Agencies and the National Multi Housing Council

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FHFA Sends Congress Strategic Plan for GSEs

The Federal Housing Finance Agency
(FHFA) said Tuesday that, with its conservatorship of Fannie Mae and Freddie
Mac (the Enterprises) now in operation for more than three years “and no
near-term resolution in sight,” it was time to assess its goals and
directions.  In a letter submitted to the
chairs
and ranking members of the House Committee on Financial Services and the
Senate Committee on Banking, Housing, and Urban Affairs, Acting FHFA Director
Edward J. DeMarco set out a Strategic Plan
for Fannie Mae and Freddie Mac Conservatorships
with three goals:

  1. Build a new infrastructure for the secondary mortgage
    market;
  2. Gradually
    contract the Enterprises’ dominant presence in the marketplace while
    simplifying and shrinking their operations;
  3. Maintain
    foreclosure prevention activities and credit availability for new and
    refinanced mortgages.

DeMarco said in moving forward FHFA has
to consider that:

  • The
    Enterprises’ losses are of such magnitude that they will not be able to repay
    taxpayers in any foreseeable scenario;
  • The
    operational infrastructures of each are working but require substantial
    investment to support future business which presents an issue of whether to
    rebuild or start anew;
  • Minimizing
    taxpayer losses, ensuring market liquidity and stability requires preserving
    the Enterprises as working entities but this requires some things such as
    retaining private sector pay comparability that have generated concern because
    of taxpayer involvement;
  • Although
    the housing finance system cannot be called healthy it is stable and
    functioning, albeit with substantial government support;
  • Congress
    and the Administration have not reached consensus on how to resolve the
    conservators and define a path forward.

The absence of any existing meaningful
secondary mortgage market mechanisms beyond the Enterprises and Ginnie Mae is a
dilemma for policymakers who want to replace them and was a key motivation for
conservatorship in the first place.  The
elements for rebuilding the system are already known and work can begin without
knowing whether there will be a government guarantee other than through FHA.  A secondary market structure without the
Enterprises would likely include:

  • A
    framework to connect capital markets to investors to homeowners – i.e. a
    securitization platform that bundles mortgages and provides support to process
    and track payments from borrowers through to investors.
  • A
    standardized pooling and servicing agreement that corrects the many shortcomings
    in the agreements used in the private-label mortgage-backed securities (MBS)
    market pre-housing crisis.
  • Transparent
    servicing requirements that set forth servicers responsibilities to investors
    and borrowers.
  • A
    servicing compensation structure that promotes competition rather than concentration
    of servicing, takes into account servicers’ costs and requirements, and
    considers the appropriate interaction between origination and servicing
    revenue;
  • Detailed,
    timely and reliable loan-level data for investors that is maintained through the
    life of the MBS.
  • A
    sound, efficient system for document custody and electronic registration that
    respects local property laws and enhances the liquidity of mortgages.
  • An
    open architecture for all these elements to facilitate entry to and exit from
    the marketplace and an ability to adapt to emerging technologies and legal
    requirements over time.

Since entering conservatorship the
Enterprises have guaranteed roughly 75 percent of the mortgages originated in
the U.S. with FHA guaranteeing most of the rest.  Shifting mortgage credit risk away from the
Enterprises to private investors could be accomplished in several ways.  The following are either under consideration
or actively being implemented.

  • Increase
    guarantee fee pricing. In September,
    2011 FHFA announced its intention to continue a path of gradual prices
    increases based on risk and the cost of capital. In December Congress directed it to increase
    guarantee fees by at least 10 basis points as part of the revenue raising
    aspects of the Temporary Payroll Tax Cut Continuation Act and Congress also
    encouraged FHFA to require guarantee fee changes that reduce
    cross-subsidization of relatively risky loans and eliminate differences in fees
    across lenders not clearly based on cost or risk.
  • Various
    approaches, including senior-subordinated security structures that could result
    in private investors bearing some or all of the credit risk.
  • Expand
    reliance on mortgage insurance through deeper mortgage insurance coverage on
    individual loans or through pool-level insurance policies that would insure a
    portion of the credit risk currently retained by the Enterprises.

The
Enterprises do not dominate the multi-family credit guarantee business and
approach it very differently from their single-family business.  For a significant portion, Fannie Mae shares
risk with loan originations and for a significant and growing part Freddie Mac
shares credit risk with investors through securities.  Given these conditions, generating potential
value for taxpayers and contracting the multifamily market footprint should be
approached differently and each Enterprise will undertake a market analysis of
its operations.

Capital
market activities have long been considered the Enterprises’ source of greatest
profits, controversy, and risk.  These
have been used to fund the retained portfolios and is a complex business
activity requiring specialized and expert risk managers.  This business line is already on a gradual
wind-down path with the Treasuring requiring a 10 percent reduction in the retained
portfolio each year.  New mortgages are
primarily delinquent ones removed from MBS and other legacy assets have little liquidity.  Over time the retained portfolios are
becoming smaller but also less liquid. 

Maximizing
taxpayer value on these assets is a key consideration and there is argument for
holding some for a longer period.  This
in turn requires management, either by retaining in-house expertise or by contracting
to a third party.  The first is less disruptive
but requires human capital risk which increases with the proposed legislation
on Enterprise compensation.  The second
would hasten the shrinkage in Enterprise personnel but would be more costly and
would pose new control and oversight issues for FHFA.

The
third strategic goal is maintaining foreclosure prevention efforts and credit
availability
.  The Enterprises must
continue and enhance:

  • Successful
    implementation of the Home Affordable Refinance Program (HARP) along with the
    program changes announced last October.
  • Continued
    implementation of the Servicing Alignment Initiative including its approach to
    loss mitigation through loan modifications and early outreach to distressed
    borrowers;
  • Renewed
    focus on short sales, deeds-in-lieu, and deeds-for-lease options;
  • Further
    development and implementation of the REO disposition initiatives announced by
    FHFA last year including efforts to convert properties into rental units.

The Enterprises almost need to resolve other
long-standing concerns in the marketplace that may be suppressing a more robust
recovery and limited credit.  One major
issue is concerns over representations and warrantees.  These policies must be made more transparent
and conditions for their implementation defined.

In accomplishing the three goals, there
must be consideration of human capital as well. 
The boards and executives responsible for the business decisions that
led to conservatorship are long gone and shareholders of the Enterprises have
effectively lost their investments. The public interest is best served by
ensuring that the Enterprises have the best possible leaders to carry out the
work and a search is underway for new CEOs for each company and other
executives willing to take on the necessary challenges in the face of ongoing
criticism of the companies and uncertain legislative environment.  FHFA and the Enterprise boards have taken
seriously the Congressional criticism of compensation structure and are working
to create new ones that will be all salary with the largest portion deferred
and at-risk.

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