MIP fight moves to Capitol
With refinancing activity getting stronger, lenders are alarmed by the dampening effect proposed changes to the FHA program will have on multifamily housing.
The Mortgage Bankers Association (MBA) marched on Capitol Hill in April in an effort to save the Federal Housing Administration’s (FHA) multifamily programs from a proposed mortgage insurance premium (MIP) rate hike marked for the 2007 federal budget proposal. The Bush administration wants to raise the MIP from 45 to 77 basis points, and lawmakers need to be convinced that it’s a bad idea, say member lenders.
The plan to increase the MIP would add 10 percent to the cost of doing most FHA deals, resulting in rent increases of as much as 5 percent, according to lenders. This would come at a time when construction costs are skyrocketing and interest rates and local property taxes are rising as well. Some FHA projects, such as those financed by low-income housing tax credits (LIHTCs), would not be affected.
The Office of Management and Budget had justified the proposal to increase the MIP by saying that it would generate $150 million annually in additional revenue. But the Congressional Budget Office (CBO) argued that FHA volume would actually decline, resulting in only a $20 million annual boost in revenue.
Members of Congress were not familiar with these aspects of the proposed budget, said Dee McClure, CW Capital’s senior vice president and Department of Housing and Urban Development (HUD) national program director.
“After speaking with them, they realized that the proposed revenue generated by the MIP increase would not solve the nation’s deficit problems,” she said. “The $20 million per year is meaningless compared to the harm it would do to … moderate income housing, and [it] has ramifications on construction jobs and the tax base.”
“With the CBO analysis and a huge outcry from the [housing and building] industries, there’s a good probability that this won’t go into effect,” said Karl Reinlein, executive vice president of Capmark Finance, Inc.
With long-term interest rates climbing above 5 percent, it makes even less sense for the FHA to propose a 32 basis point MIP increase in the 2007 federal budget, say lenders.
“While we’re still good on the FHA products, an increase in MIP as interest rates rise will have a profound edfect,” said Mark Dellonte, senior vice president and director of agency lending for Love Funding Corp.
“Congress is looking at this as a way to make money, but it’ll actually decrease what’s being made in financing,” he said.
Lenders make recommendations
HUD has said that the MIP change would “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.”
But nationally at least 85 percent to 90 percent of FHA projects are serving families at the area median income or below without using subsidies, according to Tom Booher, president and CEO of PNC MultiFamily Capital.
Some FHA programs, such as projects financed by LIHTCs, would be exempt from the proposed MIP increase. However, tax credit projects make up no more than 25 percent of overall FHA volume.
“HUD should change its definition of affordable housing to be more inclusive,” recommended Booher.
Lenders say the MIP should continue to reflect the decreasing risks in the multifamily lending marketplace instead of being abused as a back-door way to make up for government budget shortfalls. For the past three years, the MIP has actually dropped from 80 to 45 basis points.
The MIP’s intended function is to offset the risk exposure that the government has under the mortgage insurance program, said Bud Malone, a consultant and former lender for the FHA industry.
“FHA should continue doing what it’s been doing by tying the cost of the program to an actual analysis of what it costs to provide mortgage insurance,” said Booher. This results in the MIP coming down, which makes underwriting costs lower and helps deals get done.