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May 17, 2013

Testimony of Marie Head on the role of the FHA in Multifamily Mortgage Insurance

On Thursday, May 16, the House Financial Services Committee conducted a hearing that focused on the Government’s role in multifamily and health care facilities mortgage insurance and reverse mortgages. Marie Head, the Deputy Assistant Secretary for Multi-Family Housing, served as a witness. Ms. Head testified that the Federal Housing Administration’s (FHA) countercyclical role during the financial downturn of 2008 was crucial to mitigating the worst of the financial recession, and that more commitment authority is necessary for the FHA to endorse future multifamily construction/revitalization loans. However, she stated that the FHA’s expanded footprint in multifamily finance is intended to be temporary. The FHA’s role today is to encourage the return of private capital back into the mortgage market while balancing the need to remain a supportive mechanism for all types of housing moving forward. To serve this role while private capital returns to the housing finance market, Ms. Head acknowledged the Federal Housing Administration’s request for an additional $5 billion in commitment authority for the General and Special Risk Insurance Fund (GI/SRI). This proposal would increase the total commitment authority available to the FHA to $30 billion in FY 2013. HUD estimates that this fiscal year, 40 percent of the insured multifamily housing portfolio will seek refinancing opportunities through FHA. This requested increase is also consistent with President Obama’s FY 2014 budget request. The FHA has taken a number of comprehensive steps to improve its risk management capabilities and processes to ensure the ongoing solvency of the FHA insurance funds. Marie Head stated that the multifamily office has also been engaged in a series of program specific steps to ensure that it mitigates risk. The implemented changes in the FHA and Multifamily Office she specified include:
  • LIHTC Pilot Program: The Low-Income Housing Tax Credit (LIHTC) Pilot Program that establishes a Single Underwriter Role and separate lender approval for underwriting for more complex loans that combine FHA programs with LIHTCs. This pilot and the underwriter model are the basis for the proposed risk based processing and underwriter role in the proposed operating model changes. This shift is a result of analyzing outcomes associated with the Multifamily Accelerated Processing (MAP) program, which show that certain FHA programs demand skilled lenders and underwriters with specialized knowledge.Currently, HUD offers the full range of FHA programs without regard to specialized expertise. As part of risk mitigation, FHA has already implemented revised underwriting standards to raise debt service coverage ratios, lower loan to value and loan to cost ratios, increase project reserves and sponsor equity investment, and limit sponsor cash out. Underwriting ratios are now targeted to different property types based on their risk profiles, with lower ratios for subsidized affordable housing properties and higher ratios for market rate properties.
  • Breaking Ground: Completed in mid-FY 2012, Breaking Ground was an initiative in Multifamily Housing Development to reduce backlogs, improve time frames, and create an early warning system that allows for more effective risk management by creating extensive tools to monitor and access credit for multifamily insured loans. These tools include a more extensive credit review of borrowers; an early warning system that targets loans early in the process that do not meet FHA underwriting criteria; and a dashboard monitoring tool to track accountability of field offices; and establishment of a queue in order to more efficiently manage workload and provide greater transparency to lenders.HUD says that adopting this approach has produced positive results. Offices that had large application backlogs prior to Breaking Ground have reported processing efficiency improvements, methodically clearing out older applications – the number of applications in process for over 90 days dropped from 191 to 50 in just seven months. In addition, offices that began Breaking Ground without a large backlog have begun to meet aggressive application processing time cycles. The Department will continue to track these metrics.
  • Sustaining Our Investments: The Sustaining Our Investments initiative, which was fully implemented last month, has resulted in an overhaul of the processes used to manage the portfolio of the Office of Multifamily Asset Management. The initiative focuses on Risk Based Management – allowing project managers at both the Headquarters and field level to focus day-to-day operations on managing at-risk loans in the portfolio. Risk-based reports keyed on financial and physical risk triggers direct project managers to act early on potential problems with particular assets. The first step in this initiative was to complete a full ranking of FHA’s entire multifamily market rate portfolio to better assess and address potential risk factors. The ranking of the non-insured portfolio is now underway and scheduled for completion this summer.
Ms. Head also discussed a topic which has generated serious concern among NAHMA members, the restructuring of the multifamily business model in regard to the reorganization of HUD Field Offices. In the field, 17 hubs will be consolidated into five – with each Hub/Region having a satellite office. At full implementation, the total number of field offices with Multifamily presence will decline from 50 to 10. Impacted employees will have the ability to relocate, accept a buy-out, or take early retirement. All employees will have the opportunity to remain with the Department albeit possible in another location or role with the department. Ms. Head state that the consolidation of field offices will be phased in over two and a half years with a scheduled completion by FY 2016. The plan seeks to increase efficiency and consistency, and modernize services; HUD estimates that this consolidation will save $40 to $45 million in annual costs. The Department has stated that these are proactive steps in an attempt to better serve customers and stakeholders. Much of the restructuring process will build upon Breaking Ground and Sustaining Our Investments through four initiatives, including:
  • Launching more routine and effective workload sharing across the country. By more equitably distributing workloads in the areas of Production and Asset Management, Multifamily Housing will be able to reduce unevenly distributed pressure on staff and reduce customer wait times and the application backlog. A workload sharing pilot is already in process throughout the country.
  • Introducing risk-based processing and underwriters in the Office of Multifamily Production. In order to increase processing efficiencies, improving customer service and more effectively manage risk, FHA Multifamily will segment and process applications according to their risk profile and complexity, assigning an underwriter to oversee the review of the application from start to finish, drawing in technical experts as needed.
  • Creating Specialist Support in the Office of Multifamily Asset Management. The newly created positions of Troubled Asset Specialist and Account Executives will allow Multifamily to assign the most experienced staff to focus on risky, complex or troubled assets, ensuring that the most skilled staff is engaged to manage risk to the portfolio. Other Account Executives with less expertise will focus on non-troubled portfolio while building the expertise and skill sets to manage more complex transactions.
  • Streamlining organizational structures. In headquarters, FHA Multifamily will reduce the number of offices by merging the Office of Housing Assistance and Grants Administration and the Office of Housing Assistance Contract Administration Oversight into other existing Headquarters offices. A dedicated Associate Deputy Assistant Secretary role will be created to support the field while leadership also examines other offices for ways to streamline and reduce duplication of efforts.
As a key stakeholder and partner in administering HUD’s affordable multifamily housing programs for decades, NAHMA has great concerns over the abrupt and drastic restructuring of the Department’s field office system. While HUD has noted that some 66 percent of its staff is eligible for retirement, NAHMA believes it would have been a more orderly and manageable process for industry stakeholders to adjust to a gradual “natural” reorganization over time rather than the current approach of encouraging so many talented and knowledgeable staff to retire at once. Fundamentally, we are concerned about the potential negative impact on owner’s and manager’s ability to efficiently and effectively access HUD program staff, tools and resources required for the preservation of the HUD assisted portfolio as safe, quality affordable housing. Finally, as part of the FY 2014 Budget, HUD is seeking legislation to facilitate lending to small multifamily properties which are an important provider of affordable, but unsubsidized, housing for low and moderate-income families. According to the 2010 American Community Survey, nearly one-third of renters live in 5 to 49 unit buildings. These buildings also tend to have lower median rents than do larger properties: $400 per month for 5-49 unit properties as compared to $549 per month for properties with 50 or more units. Because they are expensive to finance, particularly in this environment, these properties are at risk of divestment. To view Marie Head’s testimony, please click here.

Tax Reform Discussions

On May 15, the Senate Finance Committee held a private to review a series of options for reforming tax code provisions related to community and economic development. Options for changing the Low Income Housing Tax Credit (LIHTC) and tax-exempt bonds were among the tax code provisions listed in the paper. The options were based on suggestions made by witnesses at the Committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress. The Committee staff paper does not provide commentary on or analysis of the various tax code provisions it addresses. The paper also makes no recommendations to the Committee. On the Housing Credit, the paper provides the following options: repealing or replacing the Housing Credit with an equivalent reduction in tax on rental income; reforming or expanding the Housing Credit (including by making permanent the fixed 9 percent Credit floor); or, creating a non-refundable tax credit for low-income renters that could supplement or replace the Housing Credit. The paper is one of 10 papers the Committee leadership—Chairman Baucus (D-MT) and Ranking Member Hatch (R-UT)—asked Committee staff to prepare to assist it in its development of tax reform legislation. Committee meetings to consider the papers are expected to extend into June. This paper is the sixth in a series of papers compiling tax reform options that Finance Committee members may consider as they work towards tax reform. The options represent a list of tax reform options suggested by witnesses at the Committee’s 30 hearings on tax reform to date, plus bipartisan commissions, tax policy experts, and members of Congress. NAHMA will update members with any legislation proposals that affect housing tax credits. To read more about the tax reform options, please click here.

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