From Fannie + Freddie to FHA
By Keat Foong, Executive Editor
Multifamily housing has been the fortunate beneficiary of Fannie Mae, Freddie Mac and FHA financing programs. While the two Government Sponsored Agencies are now targeted for elimination, the Federal Housing Administration (FHA) multifamily loan insurance programs, as it turns out, may not necessarily escape existential threats either. It appears the same questions about the role, size and risks of the government agencies can also be applied to the FHA.
In the latest development, the Protecting American Taxpayers and Homeowners (PATH) Act, which has been introduced in the House, proposes to impose affordability requirements on multifamily properties receiving FHA insurance. “FHA is clearly facing legislative challenges,” agrees Claudia Kedda, senior director, Multifamily and Affordable Housing Finance. “Efforts to reform the single-family program have put pressure on HUD to also take steps to mitigate risk on the multifamily side.”
Besides possible legislative pressure to overhaul the decades-old FHA financing insurance program, developers who use the FHA mortgage insurance programs, whether for construction or acquisition financing, are also meeting other challenges: FHA’s impending exhaustion of loan commitment limit of $25 billion, the reorganization and reduction of the number of HUD field offices, and FHA risk mitigation measures.
All these pressures on FHA are coming at a time of unprecedented demand for the FHA multifamily and healthcare insurance programs. As a sign that the economy is improving, commitment authority is being used at a significantly faster pace than last year, says Kedda. “FHA, Fannie Mae and Freddie Mac continue to provide the bulk of financing for multifamily rental housing at this time,” says Kedda.
On the legislative front, the PATH bill would require FHA multifamily loans to meet occupancy and rent requirements based on area median income, as well as separate FHA from HUD. The bill, sponsored by Jeb Hensarling (R-Texas), aims to “slim down FHA in general,” comments Steve Wendel, executive managing director of Berkeley Point Capital LLC. “There is political pressure from Congress, and political debate on the proper size of FHA and the government’s role.”
Steps to mitigate risks on the multifamily side have already been undertaken, but there is pressure to narrow FHA’s mission, and impose capital reserve requirements on the insurance fund which is not currently required by statute, adds Kedda. “These are concerns for NAHB,” says Kedda because they can affect the availability and cost of financing for a broad range of housing.
Stillman Knight, president and CEO of The Knight Company, and deputy assistant secretary for Multifamily Housing Programs at the FHA office at HUD from 2003-05, would not brush off the seriousness of these legislative initiatives. “I am very concerned that the conversation on the Hill represents a significant threat to the traditional role of FHA,” says Knight.
Knight says that of the three concerns, supplemental funding, multifamily reorganization and FHA reform, “the greatest threat in my mind is the idea on capitol hill that housing no longer fulfills a public purpose and should be financed by the private sector without a government backstop. Our housing finance system is the envy of the world, and we will not make it better by abandoning the basic principles that made it so. Since 1934, FHA has been able to provide a cushion during recessions and for underserved areas of our great nation. It does so by serving a broad range of capital structures providing diversity and strength to its business model and its mission.”
Kedda adds that the vast majority of FHA-insured rental properties already serve households well below the 115 percent of area median income limit that is included in the draft discussion bill. Such income limit requirements may also mean requiring developers and property managers to income certify over the life of unsubsidized loans, which is “burdensome, costly and unnecessary,” she says.
For Wendel, besides the legislative threat, the greatest challenge facing FHA is the plan to consolidate the HUD multifamily field offices over the next three years. The biggest question is “how you can manage a major consolidation and retain staff at the same time. A lot of the staff may choose not to move,” says Wendel. A related question is the impending retirement of the experienced and skilled staff, with more than half the staff eligible for retirement in the next few years, said Wendel.
“Certainly, the [HUD field office reorganization] is going to be difficult on the staff and the customers who build relationships in the local offices—no question about that,” adds Knight.
Loan commitment is another issue that has emerged in recent months, as it has in prior years. In June, HUD announced that because it was approaching its $25 billion loan commitment authority for FY 2013, it would have to prioritize remaining applications. Priority will be applied in the following order: projects affected by Hurricane Sandy, affordable transactions, and market-rate transactions.
As NAHB points out, the commitment authority does not cost the federal government money, as the FHA mortgage insurance premium generates enough revenue to cover the cost. FHA has requested an additional $5 billion for the remainder of FY 2013. However, NAHB said, it is unlikely that Congress will grant HUD the additional commitment authority before the August recess, although in years past industry efforts to convince Congress to pass bills to provide enough commitment authority until the new fiscal year have been successful and the programs continued uninterrupted.
“In this very difficult economic environment, and with continuing issues related to the FHA single-family programs, there is great reluctance by Congress to allow a bill to solve this problem,” says Kedda.
On the plus side, HUD did request $30 billion in commitment authority for the FHA multifamily and healthcare programs for the next fiscal year, FY 2014, which starts in Oct. 1. So far, both the House and Senate appropriations committees have included the higher funding number of $30 billion in the HUD appropriations bill, says Kedda.
Nevertheless, as an indication of the high level of demand for the program, even this increased funding for FY 2014 may not be enough. “There are many commitments that are waiting in the queue right now for Oct. 1 authority to be available, and those will continue to stack up,” reports Tyler Griffin, vice president of originations at Beech Street Capital. “This means a large number of transactions will be committed in the first quarter of HUD’s FY 2014, causing some concern about the authority again running out before the second half of FY 2014.”
Griffin suggests that the resulting delays caused by the dwindling FHA authority can kill deals in an environment of rising interest rates. Other deals that were time-sensitive had to be refinanced via alternate sources, whether the GSEs, or CMBS. However, only about 20 percent of Beech Street’s transactions have been affected by lower proceeds or had to be refinanced. Many “HUD borrowers are generally prepared for timing issues and have started working on their transactions with a good cushion in place. A 45-day wait for new authority hasn’t put them in the red,” says Griffin.
While the amount of FHA commitment may still be a problem, others in the industry seem less concerned that legislative challenges will be serious. There is strong political support for the FHA program in general, including support from the HUD secretary and the Obama Administration, says Wendel. “Hensarling really wants to reduce the footprint of GSE and FHA. But personally, I don’t think there is support for that type of radical restructuring of housing,” says Wendel.
“The House proposal represents the right in its proposal to reform FHA and the housing finance system, but unfortunately, the senate proposal doesn’t vary enough from the House proposal to offer a reasonable compromise in a subsequent negotiation,” says Knight. Stay tuned.