The Mortgage Bankers Association (MBA) is fighting tooth and nail to keep the Federal Housing Administration (FHA) from making one of its biggest mistakes in financing multifamily housing.

Earlier this year, the FHA proposed increasing the mortgage insurance premium (MIP) in fiscal 2007, which begins Oct. 1, 2006, from 45 basis points to up to 80 basis points for most programs. This comes after three years of MIP reductions. The MBA and others in the multifamily industry suspect that the MIP increase is a back-door way for the U.S. government to make up for budget shortfalls.

The Office of Management and Budget (OMB) hopes to generate $150 million in additional revenue from the proposed MIP increase, said Cheryl Malloy, the MBA’s senior vice president of commercial/multifamily. “They are projecting the same FHA volume [as this year] with the MIP doubling, and that’s not a wise assumption.

“I think [the FHA] would actually see a 50% decrease in volume,” Malloy added. She also predicts that this change would increase project costs by 10%.

“For some of the stronger projects, they can go to Fannie Mae and Freddie Mac for financing. A number of projects simply won’t work with the MIP increase.”

One justification the FHA is making for the proposed MIP increase is that the FHA programs have not been serving low- and moderate-income families. The FHA would exempt projects financed with low-income housing tax credits from the MIP increase.

Malloy is forming a coalition with homebuilders, real estate agents and health-care providers to prove that this is a poor excuse.

“We would maintain that the FHA programs were never meant to serve low-income [families] and that they are actually serving low-income [families] without tax credits,” she said.

The MBA has been meeting with the OMB and the Congressional Budget Office (CBO) to try to persuade them to change their minds about the proposed MIP increase. Malloy said that the CBO has responded favorably.

The MBA’s plans include opposing the increase on Capitol Hill at the end of April.

The association is also fighting a proposed up-front Ginnie Mae administrative fee that would apply to nearly all FHA multifamily deals and cost up to six basis points.

Weakening the FHA market

Some lenders predict that the proposed MIP increase would cause FHA volume to drop by 25% to 40% (see Apartment Finance Today, March 2006, page 12).

Gary Alex, FHA program director for KeyBank, calls the proposed MIP increase a “new tax” and believes it would cause fewer properties to be built or rehabilitated and would actually result in significantly lower income for the FHA than projected. For properties that remain in FHA programs, the result will be an unnecessary 5% increase in rents, he said.

“[The] FHA already takes a little longer to apply and get the commitment” compared to agency lenders, said Alex. “Now you’re taking away its advantage of the tightest pricing, and we will become less competitive.

“This will affect our volume [negatively], and it’s creating [a] lack of confidence in the borrowing community,” he added.

“With such dramatic changes in pricing, people who are traditionally FHA borrowers will no longer depend on us,” he said.

Alex plans to commit $400 million to FHA lending in 2006, roughly the same amount as the previous year. About 75% of that volume will be used for new construction or substantial rehabilitation.

He explained that KeyBank is seeing a lot of Sec. 202 substantial rehab, Sec. 236 decoupling and higher-end market-rate developments, as well as more mixed-use, urban projects in the pipeline.

FHA loans dip, more changes ahead

FHA-insured multifamily loan commitments dropped 25% from $7.3 billion in fiscal year 2004 to $5.5 billion in fiscal 2005, which ended Sept. 30, 2005. But the FHA is implementing new, faster underwriting along with favorable terms that it hopes will attract borrowers despite the looming MIP increase.

The FHA is allowing lenders to make firm commitments directly for new construction and substantial rehabilitation loans, instead of having to submit to an additional review with the FHA.

Lenders estimate that the new process can save between 30 and 60 days in underwriting time. “To utilize the new one-step option effectively, a developer would need to have all of the pre-development work completed, including complete plans and specifications and costs bid out,” said Dee McClure, senior vice president and Department of Housing and Urban Development national program director for CWCapital.

Reilly Mortgage Group processed seven loans under the one-step program in 2005, all of them Sec. 221(d)(4) substantial rehabs, said Lemar Seats, Reilly senior vice president and head of production. Two deals took approximately 220 days to process from engagement to closing, he added.