Mortgage banking industry leaders are gearing up for a fight over plans announced by the Federal Housing Administration (FHA) to nearly double the mortgage insurance premium (MIP) for most FHA programs to 80 basis points..

The change would reverse a trend of steadily decreasing MIPs, which at press time were at 45 basis points. The change, which is included in the Bush administration’s proposed 2007 budget, would go into effect Oct. 1, 2006, if Congress does not remove or alter it during budget hearings, which are expected to be lengthy.

The exceptions to this rule, FHA proposed, would be affordable housing and risk sharing loans. “Affordable housing” is housing that is financed by low-income housing tax credits, though FHA may broaden that definition, said Charles “Hank” Williams, FHA deputy assistant secretary for multifamily programs, at the Mortgage Bankers Association’s (MBA) Commercial Real Estate Finance/Multifamily Housing Convention in February.

Only 153 of the 818 FHA firm commitments (not including health care loans) were tax credit deals in fiscal year 2005, which ended Sept. 30, 2005.

Lenders say that the MIP increase will kill FHA loan production, which had risen to $7.3 billion in fiscal year 2004 during the refinancing boom but dropped to $5.5 billion in fiscal year 2005.

Lenders complained that there was no need to make the change based on the health of FHA’s mortgage insurance programs, as indicated by the steady MIP decreases over the past few years. “This runs counter to what was going on when they were [changing the MIP] with regard to the actual risk behind the fund,” said Thom Cooley, national vice president for FHA multifamily underwriting at Arcs Commercial Mortgage Co., L.P.

A fight brews

In fact, FHA can change the MIP on its own authority if the change is necessary for the programs’ fiscal soundness. But the appearance of the change in a proposed budget led some lenders to suggest that the change was being made out of a need to raise revenue for a budget badly in the red.

“We’ll see a significant change in the ability of borrowers building new apartments to afford an FHA loan,” said Karl Reinlein, senior vice president and managing director of FHA programs for GMAC Commercial Mortgage Corp. He predicts his firm would lose 25% to 40% of its FHA volume after the MIP increase.

“Finding the market [for FHA] is easy, but now we won’t be able to sell the program,” said Marie Head, president of Prudential Huntoon Paige. She said that she will push for closing all the FHA loans in her pipeline before Oct. 1. Other lenders said it was unclear how FHA would handle grandfathering applications already in the process when the deadline approaches.

The MBA, which was instrumental in helping to lower the MIP, vowed to fight the proposal. “The Office of Management and Budget is not raising the MIP to match risk, but to generate revenue,” said Michael Petrie, former MBA chairman and president of P/R Mortgage & Investment Corp., at the MBA convention. He said the MBA will oppose this fee increase on Capitol Hill in April.

“I encourage [developers] to contact their legislators,” said Andrea McClure, senior vice president at CWCapital, LLC. “This is an issue that has broad ramifications and crosses all types of housing.”

Top FHA multifamily lenders, fiscal year 2005

Fiscal year 2005 initial endorsements year-end counts. NC means “new construction,” and SR means “substantial rehabilitation.”

Originator FHA NC/SR apartments & coop loans Sec. 223(f) refi/purchase apartment loans Sec. 223(a)(7) refi apartment loans Total (excluding Sec.232 health care and other FHA loans)
Reilly Mortgage Group 24 17 48 90
GMAC Commercial Mortgage Bank 17 7 38 59
Greystone Servicing Corp., Inc. 2 3 51 56
Prudential Huntoon Paige 13 11 16 40
Love Funding Corp. 8 2 29 39
Highland Mortgage Co. 5 6 25 36
PNC MultiFamily Finance, Inc. 8 8 12 28
Capstone Realty Advisors, LLC 10 6 11 27
GMAC Commercial Mortgage Corp. 3 11 13 27
Red Mortgage Capital, Inc. 3 3 17 24

These top lenders made 426 FHA multifamily loans in fiscal year 2005, which is 60.5% of all the multifamily loans FHA insured that year.

Source: Department of Housing and Urban Development