As I write this, the yield on 10-year Treasury securities has risen above 5% for the first time since 2002. Land costs are out of control, and construction costs are still going up.
The cost of buying a home has been rising steadily. Now, America’s renter households face huge rent increases in coming years. That’s good news for owners, but only up to a point.
Savvy developers know that it’s good business to find ways to deliver housing at rents affordable to the largest group of prospective renters: moderate-income households. They also know the danger of a regulatory backlash against fast-rising rents.
Meanwhile in the Gulf Coast, lenders are reluctant to start lending again. (See our Gulf Coast coverage starting on page 44.)
These situations highlight the importance of the Federal Housing Administration’s (FHA) multifamily mortgage insurance programs.
FHA insurance allows lenders to take the added risk of construction and rehab deals in secondary markets and risky areas like inner cities or storm-damaged regions of the nation. FHA-insured loans also offer some relief from rising interest rates, since they usually have the tightest pricing and the longest term (40 years).
You would think the Bush administration would do all it could to make FHA loans easier to use and promote their use, especially in the Gulf Coast.
You would be wrong. The Bush administration’s 2007 budget proposes to do precisely the opposite. It would raise the mortgage insurance premium (MIP) from 45 to 77 basis points. Lenders estimate this will add 10% to the cost of doing FHA deals, resulting in rent increases of as much as 5%.
The administration says the change will “address cases where subsidies are provided for construction of projects that are not limited to low- and moderate-income persons and therefore not achieving the program’s public purpose” in order to “offset taxpayer costs for loans to those projects.” The MIP would remain unchanged for projects eligible for the low-income housing tax credit and a few other special programs.
This policy makes no sense for several reasons:
- FHA has always served a full range of income groups and was never limited to specific income groups.
- The MIP increase for everything but tax credit deals will do absolutely nothing to increase the number of FHA deals that serve low-income people.
- The issue of “offsetting costs” is a complete red herring. The adequacy of the MIPs now in place compared to FHA’s costs was well-established several years ago.
- By financing housing for all income groups, FHA loans help keep rents more affordable. To say that reasonably priced mortgage insurance should only be available to properties housing people earning no more than 60% of area median income (the maximum for a tax credit unit) is just plain stupid.
So, what do the Department of Housing and Urban Development (HUD) executives have to say about all this? HUD Secretary Alphonso Jackson appeared at a March 2 hearing before the Senate HUD appropriations subcommittee. Chairman Christopher Bond (R-Mo.) asked him to explain the rationale for the MIP hike and whether HUD had studied the impact on development of multifamily housing.
Jackson said, “I don’t know the answer to that, Senator.”
I am appalled that Jackson did not fully understand his own budget or its potential impact when he appeared before Sen. Bond. But I applaud him for his follow-up response, in which he agreed that the housing industry has “legitimate concerns” about the impact of the change which should be addressed before the increases are implemented.