Saving FHA's multifamily insurance programs

Early this year, Congress vowed to terminate the Federal Housing Administration's FHA's) programs through which it insured mortgages for multifamily housing properties, nursing homes, hospitals and other health care facilities. Through a tremendous effort led by MBA and the members of its Multifamily Committee, chaired by Shekar Narasimhan (Washington Mortgage Financial Group Ltd.), its Insured Projects Subcommittee, chaired by Mike Petrie (P/R Mortgage & Investment Corp.), and its CREF/ Multifamily Legislative Subcommittee, chaired by Rodrigo Lopez (Woodman of the World Life Insurance Society), this threat has been eliminated.

Since 1992, federal law has required that Congress establish a loan loss reserve to cover potential losses to the FHA insurance funds that undertake these insurance activities. Although premiums and fees yield a positive cash flow for some of the programs insured by the funds, others experience a net loss. As such, an appropriation is required each year to cover new insurance obligations. This loan loss reserve is called "credit subsidy"

Early in the current legislative session, most housing programs appeared to be headed for the budgetary chopping block. This was due to efforts by the new Republican-controlled Congress to eliminate and/or privatize many federally-sponsored programs, or at least significantly reduce their funding and give control to the states. Thus, the FHA's multifamily programs were included among the initial hit list of expendable programs.

Through meetings held by MBA with a large number of Representatives and Senators during the weeks following the start of the legislative session, and during MBA's March Legislative Conference, it became clear that the Hill did not distinguish among the wide variety of multifamily activities in which the Federal Government was engaged. As such, MBA set out to educate members of Congress about the differences between FHA's insurance activities and the other high-cost and controversial multifamily activities operated by the Department.

Through the efforts of individuals such as Robert W. Fidler (Fleet Mortgage Group Inc.), Clifford B. Hardy Jr. (First Housing Development Corporation of Florida), T. Michael Forney (Larson Financial Resources), John and Chip Moore (Highland Mortgage Company), Edward G. Klopfer, George L. Gugle (Sussex Mortgage), and many others, MBA began to show that the programs some sought to eliminate were in fact highly successful and operated at little cost to the taxpayer. In fact, it became clear that the FHA programs were some of the most successfull federal programs at leveraging private sector investment.

To assist in solving what was in large measure a problem of public perception, MBA commissioned a study by the Boston-based consulting firm, Abt Associates. The results showed that three of the four multifamily mortgage insurance programs operated by FHA since 1986 have made money or broken even. The fourth, although operating in the red, proved to be much more successful than previously believed.

Armed with this information, MBA's members educated Congress about these facts, and established that these programs can and do operate at a profit. Still, when the House and Senate budget committees released their Budget Resolutions in May, each providing a "road map" for directing the federal budget to a zero deficit within seven years, the FHA multifamily mortgage insurance programs were slated for immediate elimination.

MBA was not deterred, however, when the budget committees made this decision. Instead, MBA stepped up its efforts to educate U.S. Representatives and their staffs about the distinctions between FHA's successful multifamily mortgage insurance activities and other less successful and more costly programs operated by the federal government. It also began to focus attention on obtaining an appropriation that would be necessary to operate the multifamily programs in FY '96.

Recognizing that Congress would not grant FHA the full $188 million requested by HUD, and facing the fact that Congress wanted to eliminate the programs altogether, MBA told the Hill that the programs could be made self-sustaining by implementing several underwriting and program changes. As such, FHA should be funded for one year, to give Congress time to modify the existing programs to make them self-funding. After this time, the programs would operate without the need for an annual Congressional appropriation (exclusive of expenses for personnel and administrative overhead).

This dual approach proved to be successful. Tireless and persistent efforts by the individuals previously mentioned, together with others (see below), yielded favorable results. In late july, the House considered and debated a controversial appropriations bill covering FY '96 funding for HUD, the VA and all of the independent agencies (including the Environmental Protection Agency, NASA, the National Science Foundation and others).

Although versions of the bill approved by the VA/HUD Appropriations Subcommittee and its parent Appropriations Committee failed to fund the programs for the year, a "Manager's Amendment" introduced by subcommittee chairman Jerry Lewis (R-Calif.) included $70 million for credit subsidy for FY '96. MBA had sought $100 million together with several technical changes intended to assure that the appropriated funds would be sufficient to cover all lending activity during the coming fiscal year. Mr. Lewis' amendment, and the bill itself, were approved with the $70 million and most of the changes requested by MBA.

A similar effort, focusing on Senate offices, mounted by MBA and its members during August and September, also appears to have been successful. Both the Senate's VA/HUD Subcommittee and its parent Appropriations Committee approved a FY '96 spending bill in mid-September that included the full $100 million requested by MBA. Most of the technical language requested by MBA also was included in the legislation.

As part of MBA's initiatives, a two-day legislative fly-in was held in Washington on September 11-12. With the knowledge that the Subcommittee had approved a bill including the requested $100 million, attention shifted to the next phase of the FHA multifamily insurance debate - that of modifying the programs to make them self-sustaining without reducing their attractiveness to borrowers and investors. Participants therefore focused on MBA's proposal to permanently modify the multifamily programs and to shore up support from House appropriators to accept the $100 million in conference with the Senate.

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