[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
H.R. 1985--THE FHA MULTIFAMILY
LOAN LIMIT ADJUSTMENT ACT OF 2003
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 22, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-49
92-333 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
MARK GREEN, Wisconsin, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska JULIA CARSON, Indiana
RICHARD H. BAKER, Louisiana BARBARA LEE, California
PETER T. KING, New York MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina MELVIN L. WATT, North Carolina
DOUG OSE, California WILLIAM LACY CLAY, Missouri
PATRICK J. TOOMEY, Pennsylvania STEPHEN F. LYNCH, Massachusetts
CHRISTOPHER SHAYS, Connecticut BRAD MILLER, North Carolina
GARY G. MILLER, California DAVID SCOTT, Georgia
MELISSA A. HART, Pennsylvania ARTUR DAVIS, Alabama
PATRICK J. TIBERI, Ohio
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
July 22, 2003................................................ 1
Appendix:
July 22, 2003................................................ 29
WITNESSES
Tuesday, July 22, 2003
Cheatham, Linda D., Senior Vice President, Berkshire Mortgage
Finance on behalf of the Mortgage Bankers Association of
America........................................................ 24
Cohen, Howard Earl, President, The Beacon Companies.............. 26
Kolaski, Casimir, President, Kolaski Housing Advisors............ 22
Ruping, Gary H., President, Ruping Builders on behalf of the
National Association of Home Builders.......................... 20
Weicher, Hon. John, Assistant Secretary, Federal Housing
Commissioner, Department of Housing and Urban Development...... 7
APPENDIX
Prepared statements:
Ney, Hon. Robert W........................................... 30
Oxley, Hon. Michael G........................................ 32
Crowley, Hon. Joseph......................................... 33
Cheatham, Linda D............................................ 36
Cohen, Howard Earl........................................... 41
Kolaski, Casimir............................................. 44
Ruping, Gary H............................................... 48
Weicher, Hon. John........................................... 54
Additional Material Submitted for the Record
Ney, Hon. Robert W.:
Fifield Company letter, July 21, 2003........................ 58
Members letter regarding the National Affordable Housing Trust
Fund, July 22, 2003............................................ 59
H.R. 1985--THE FHA MULTIFAMILY
LOAN LIMIT ADJUSTMENT ACT OF 2003
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Tuesday, July 22, 2003
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Bob Ney
[chairman of the subcommittee] presiding.
Present: Representatives Ney, Green, Ose, Miller of
California, Tiberi, Renzi, Waters, Carson, Lee, Sanders, Watt,
Clay, and Scott.
Chairman Ney. [Presiding.] The Subcommittee on Housing and
Community Opportunity will meet this morning to hold a hearing
on H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act of
2003. And we will have a markup after today's hearing.
I will also note that we will have opening statements. And
also, without objection, all members' opening statements will
be made a part of the record.
And of course, any statement that the witness has and the
time has lapsed will be also made part of the record, without
objection.
The Federal Housing Administration is one of the most
effective programs, I believe, in helping low-to middle-income
buyers purchase their first home. It was originally designed to
encourage lenders to make credit more readily available and at
lower rates.
Through FHA programs, HUD insures mortgages and loans, made
by HUD-approved lenders, for a wide variety of purposes,
including new construction, rehabilitation, property
improvement and refinancing in connection with a wide variety
of types of property.
FHA programs include all types of residential property:
multifamily, single family, manufactured homes, non-residential
commercial property, hospitals and certain other health care
facilities. The FHA multifamily mortgage insurance program is a
critical source of financing for affordable multifamily rental
housing.
During the previous two years, Congress supported and
implemented improvements to the program, including increasing
the base loan limits by 25 percent and indexing the loan limits
to inflation, which begins in 2004. As a result, loan volumes
have increased significantly in many areas of the country,
where the program previously was not working.
However, there are a number of high-cost urban markets,
such as New York, Boston, San Francisco, Chicago and Los
Angeles, where construction costs are obviously significantly
higher than in other areas of the country. And the high-cost
factors have not been sufficient to allow the use of the FHA
multifamily mortgage insurance programs.
Under current statutes, the HUD Secretary may increase the
loan limits in high-cost geographic areas, up to a maximum that
is expressed as a specific percentage. Currently, it is 110
percent above the statute's base limit.
The secretary may also increase the loan limits on a
project-by-project basis, up to a level that is a specific
percentage. Currently, that is 140 percent above the base
limit, if it is deemed necessary because of high costs.
H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act of
2003, was introduced by Congressman Gary Miller, May the 6th,
2003. It would amend the National Housing Act to give the HUD
Secretary the discretion to increase the maximum mortgage
amount limit for FHA-insured mortgages for multifamily housing
located in high-cost areas.
In addition, it would change the statutory maximum
adjustment percentage for geographic areas from 110 to 170
percent, which would change HUD's maximum high-cost percentage
to 270 percent. Providing the HUD Secretary additional
flexibility to increase the maximum loan limits in high-cost
areas would greatly improve the FHA multifamily mortgage
insurance programs.
With severe shortages of affordable rental housing in most
of the high-cost markets, this change would enable developers
to provide much needed and affordable housing to low-and
moderate-income families.
I would also note that the ranking member is a sponsor of
this bill--of the Housing Subcommittee. And also Ranking Member
Mr. Frank supported the bill, who is the ranking member of the
full committee.
And with that, I would turn to Mr. Scott. Do you have an
opening statement? Thank you.
Mr. Scott. Yes, thank you very much, Chairman Ney. I want
to thank you for holding this important hearing today regarding
Multifamily Loan Limit Adjustment Act, H.R. 1985. I also want
to thank the distinguished panel of witnesses today for their
testimony.
From July, 2001 to July 2002, my State of Georgia ranked
fourth in the nation in housing growth, both in the number of
homes built and the percentage increase in housing. I represent
parts of 11 counties in the metro Atlanta and suburban Atlanta
communities.
And five of these counties represent five of the top
housing growth counties in Georgia. So five of the top housing
growth counties in Georgia are located in my district.
Part of this explosive growth is due to low interest rates.
And part is due to the rapid expansion of the south and east
suburbs of Atlanta.
While Atlanta would not be considered a high-cost city for
the purposes of this legislation, I am concerned with home
ownership rates, particularly home ownership rates of minority
groups. From 1998 to 2002, for example, African-American home
ownership rates rose from 45.6 percent to 47.3 percent.
However, compared with the national average increase from
66.3 percent to 67.9 percent, we can see that African-American
home ownership still lags far behind. With interest rates at
historical lows, I believe that we must push even harder to
help increase minority home ownership rates.
And addressing FHA home loan limits is part of that
equation. I strongly support H.R. 1985. And I look forward to
its quick passage today.
Thank you very much, Mr. Chairman. Yield back the balance
of my time.
Chairman Ney. The gentleman yields back the balance of his
time.
Additional opening statements? Opening statement, Mr.
Sanders?
Mr. Sanders. Sorry, Ms. Lee was next.
Ms. Lee. Thank you, Mr. Chairman. And thank you very much
for not only for yielding, but for being polite.
Thank you, Chairman Ney and also, to our ranking member in
her absence this morning.
For a minute, I would like to just say that under the
leadership, of course, of Chairman Frank and many others, we
have enacted into law legislation to increase the multifamily
loan limits and increase the dollar amounts by approximately 25
percent.
During last year, I mean, I think it was during a committee
hearing last year, the markup of H.R. 3995, we agreed and
passed out of committee a bill which would have done all of the
things in H.R. 1985. Now from what I remember, H.R. 3995 was
never placed on the calendar.
The Financial Services, though, did include two provisions
affecting FHA multifamily loan limits: one, which would have
provided for annual inflation indexing of the basic statutory
per unit loan limit and provide for annual indexing; and a
second provision, which would have raised percentage
adjustments that the HUD Secretary could use in high-cost
areas.
This authority to raise the percentage adjustment, in my
opinion, is very critical. In many areas in our country very
similar to my own district--the 9th Congressional District of
California that includes Oakland--our housing costs are
outrageous.
And there is a dire need to provide affordable, quality
multifamily housing. But yet, of course, just like many
districts, we are faced with an extremely scarce housing stock.
So I look forward to this hearing and support H.R. 1985,
because it will raise the fact that HUD can increase the basic
multifamily limits in high-cost areas from 210 percent to 270
percent and increase the basic statutory, per unit multifamily
loan limit, on a project-by-project basis, from 240 percent to
270 percent.
However, changing the limits of course is not the final
answer to the affordable housing crisis. In addition, we must
authorize and execute a national affordable housing trust fund.
By creating a national housing production program, we will
ensure that at least 1.5 million new affordable houses--
multifamily units included--will be built across this country.
By creating a national housing trust fund, we can truly help
those in need by calculating the area need and the median
income.
Money will go to states and localities based on a formula
which weighs their true need. We must take the issue of
affordable housing really to the next level, Mr. Chairman.
And I feel that a national affordable housing trust fund
will guarantee that next step. A national affordable housing
trust fund will guarantee, for at least 50 years, that the
housing built with trust fund money will stay affordable.
So this bill, H.R. 1985, hopefully will pass out of this
committee because I think this is the first step in changing an
antiquated formula that restricts HUD and our local housing
agencies from providing the best comprehensive service
possible. But I also support the trust fund.
And I want to thank my colleague from Vermont, Mr. Sanders,
who I know will talk more about it. But I think that as we
debate and look at this bill, we should also look at what
producing new affordable housing means in terms of housing
stock.
Thank you, Mr. Chairman. And I yield.
Chairman Ney. I want to thank the gentlelady for her
statement.
The gentleman, sponsor of the bill, Mr. Miller?
Mr. Miller of California. Thank you, Chairman Ney. And I
want to thank you for convening this hearing today to examine
FHA's multifamily mortgage insurance program.
I would also like to thank the ranking member of this full
committee, Mr. Frank, for working with me in introducing H.R.
1985, the FHA Multifamily Loan Adjustment Limit Act of 2003.
Mr. Chairman, it is not really often that Democrats and
Republicans from across the spectrum see eye to eye. And it is
a rare pleasure to have Ms. Waters and I looking at an issue
and agreeing on it because generally, on housing issues, we
have different opinions.
But on this issue, we are in agreement that this has to be
done. And because of the high-cost markets, where land and
construction costs are significantly higher than in other areas
of the country, there is no question that FHA multifamily
mortgage insurance limits are not keeping pace.
And that is a problem we conservatives and liberals alike
have come together today to solve.
Having been a developer for over 30 years and many of my
friends are, the rapidly escalating costs of land and
construction, especially in California, are making it very,
very difficult to provide affordable rental units. The slowdown
in affordable rental housing production has resulted in a
significant gap between the demand and the supply of affordable
rental housing.
Increasingly, America's working families are unable to find
decent, affordable homes in the communities where they work. In
fact, according to a report released by the National Housing
Conference last November, more than 4.8 million working
families spent more than half of their income on housing in
2001.
This was an increase of 60 percent of families in 4 years.
This is unacceptable.
Today, many public servants in my district--police
officers, firefighters and teachers--are not able to live in
the communities in which they serve or grew up. I call these
people the new homeless.
Exactly who are these new homeless? In my district, it
might be a couple; the husband is a firefighter and the wife a
teacher.
They have good jobs and make a good living. But their
combined income does not enable them to rent a modest, one-
bedroom apartment, which rents for over $1,000.
And if Congress does not do something to promote affordable
rental housing, this will not get easier for these couples over
the years in my district. Orange County, California, has the
third biggest rent increase out of the 25 largest metropolitan
areas and 11 western states.
Thirty-three percent of renters in Orange County sent 35
percent or more of their household income to their landlord.
This is a problem all over southern California.
The Inland Empire in Los Angeles ranked first and second in
terms of rent increases. As you will hear from the panel today,
it is a national problem. And Congress must work expeditiously
to address it.
The FHA multifamily mortgage insurance program has operated
successfully for over 65 years, working with private sector
parties to expand the supply of rental houses. Over the past
six decades, this public-private partnership has leveraged more
than $100 billion of private sector investment to provide
rental housing for more than four million families and the
elderly throughout the country.
FHA's multifamily mortgage insurance program enables
qualified buyers to obtain long-term, fixed-rate, non-recourse
financing for a variety of multifamily properties that are
affordable to low-and moderate-income families. In fiscal year
2002, Congress provided for a 25 percent increase in the
multifamily loan limit, which addressed problems resulting from
increased construction and land costs over the past decade.
This increase in the FHA loan limit was essential. As
multifamily loan limits had been unchanged for 10 years and had
virtually shut down the FHA new construction program in most
major cities and second-tier cities throughout the country.
In addition, in 2002, the President signed the FHA Down
Payment Simplification Act, which will index the FHA
multifamily loan limits to the consumer price index, beginning
in January 2004.
There is one final step to increase the FHA multifamily
loan limits in high-cost areas. This is the last hurdle in
making these programs as effective as they can be in providing
affordable rental units.
While FHA multifamily loan limits were increased in 2002,
according to the Department of Housing and Urban Development
data, there was only one FHA-insured multifamily loan in new
construction or substantial rehabilitation approved in
California in each of the fiscal years 2002 and 2003. And when
you look at the demand, especially in our area in California,
to think that there was only one loan made, there is a real
problem. And that problem is indexing.
My bill, H.R. 1985, establishes a mechanism for addressing
the need of new construction and substantial rehabilitation in
extremely high-cost areas in the country. It gives the
Secretary of HUD the authority to increase the maximum high-
cost percentage in extremely high-cost areas from 210 to 270
percent.
I look forward to this hearing today, Mr. Chairman. Thank
you very much.
Chairman Ney. Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman. And thank you for
holding this important hearing and markup of H.R. 1985, the FHA
Multifamily Loan Limit Adjustment Act of 2003.
This legislation would amend the National Housing Act to
increase the maximum mortgage amount limit for FHA-insured
mortgages for multifamily housing located in high-cost areas.
With severe shortages of affordable rental housing, this change
would enable developers to provide much-needed, new affordable
housing to low-and moderate-income families.
Mr. Chairman, I am very pleased to see affordable and fair
housing as a priority of this subcommittee, as it must be.
Today, I would like to present you with a letter, signed by
half of the members of the Housing Subcommittee and, in total,
six Republicans as well, asking for a hearing on the National
Affordable Housing Trust Fund, which Ms. Lee just mentioned a
moment ago.
And I ask for unanimous consent that a copy of this letter
be inserted into the record.
Chairman Ney. Without objection.
[The following information can be found on page 59 in the
appendix.]
Mr. Sanders. As Mr. Miller just indicated and Ms. Lee
before, I think there is an understanding, regardless of one's
political persuasion, that we are in the midst of a major,
major housing crisis in this country. I think that, in terms of
seriously addressing the issue and building the quantity of
affordable housing that we as a nation need--and by, the way,
putting substantial numbers of people to work building that
housing--I think that there is little doubt that the National
Affordable Housing Trust Fund is that piece of legislation,
that has been presented in Congress, that would do that.
Mr. Chairman, we have 203 co-sponsors, Mr. Chairman, 203
co-sponsors--Republicans, Democrats, Independents--on this
legislation. Amazingly enough--and this is something I have
never experienced in my life--we have over 4,000 organizations.
And not just housing organizations or low-income
organizations or trade unions, we have banks and business
organizations in support of this legislation. Four thousand
separate organizations.
Because business organizations know that if there is not
affordable housing in the area, they cannot maintain a steady
source of labor to produce the products that they need.
So Mr. Chairman, I would respectfully request that given
that we have 203 co-sponsors on this legislation, 4,000
organizations in support of it, that we hold a hearing in order
to discuss it. And I would yield to my friend, the chairman.
Chairman Ney. Yield for a response?
Mr. Sanders. Yes, or not.
Chairman Ney. No, appreciate the letter. And I will
definitely take it under advisement.
Mr. Sanders. I thank the chairman.
Chairman Ney. Thank you.
Other members wishing to make opening statements? Any other
members wishing, have a desire to make an opening statement.
If not, we will start with our panel. I want to welcome Mr.
Weicher, who is Assistant Secretary for Housing and Federal
Housing Commissioner at the U.S. Department of Housing and
Urban Development, a position he assumed nearly 2 years ago on
June 1, 2001.
Mr. Weicher has held policy positions at HUD in two
previous administrations, as Assistant Secretary for Policy
Development and Research and as HUD's Chief Economist. He holds
a Ph.D. in economics from the University of Chicago and is the
author of 12 books on housing and urban issues.
Mr. Weicher has been a Professor of Economics at the Ohio
State University, the greatest university in the United States.
And the call at Tempe was absolutely correct.
With that, we will let you begin. I think you need to get
your microphone.
STATEMENT OF HON. JOHN WEICHER, ASSISTANT SECRETARY, HOUSING/
FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
Mr. Weicher. There we are. Sorry.
Thank you, Mr. Chairman. And thank you for inviting the
department to testify this morning.
I want to start by stressing that the administration and
the department are firmly committed to having FHA participate
as a strong and effective player in the financing of rental
housing nationwide. We have taken several major actions in that
effort.
First, we have put the multifamily insurance programs on a
sound actuarial basis, enabling most of them to operate without
the need for appropriated credit subsidy. Second, we have
instituted an annual process of updating the mortgage insurance
premiums, so that the programs continue to operate on a break
even basis.
Third, we have established a much faster underwriting
process, saving the industry time and money. Fourth, Secretary
Martinez asked Congress for a 25 percent increase in the
multifamily mortgage limits, the first increase in 10 years,
which you approved.
This administration inherited serious problems in FHA's
basic multifamily housing insurance program, the Section
221(d)(4) program. Three times in 8 years, the program was
closed down because it required credit subsidy and the
available credit subsidy allocation was exhausted.
The last time was in May 2001, when the department was
forced to suspend multifamily insurance processing. To prevent
further closures, the department determined to place the
program on a break-even basis.
This necessitated raising the premium from 50 basis points
to 80 basis points for fiscal year 2002. Many in the industry
were very concerned by this necessary increase.
They worried that it would weaken the viability of the
program and its ability to serve moderate-income families. That
did not happen.
In fiscal year 2002, FHA insured $2.8 billion worth of
Section 221(d)(4) projects, nearly double the 2001 total, and
the largest volume in 20 years.
At the same time, the department made a commitment to
conduct a systematic analysis of how the credit subsidy rate
was calculated for the first time since credit reform was
enacted in 1990. We found that the Section 221(d)(4) program
could be operated on a break-even basis at a much lower premium
of 57 basis points.
This premium went into effect at the beginning of fiscal
year 2003. In addition, we are now repeating the analysis every
year to determine what the appropriate premium should be. And
as a result, the premium will be cut again to 50 basis points
in October for the new fiscal year.
These efforts by this administration have ensured that the
Section 221(d)(4) program will not repeat the experience of
past shutdowns. Mortgage bankers and developers are assured
that they can continue to bring loans to the department.
Moreover, once applications come to the department, we now
process them faster, using our multifamily accelerated
processing procedure. MAP was instituted on a national basis in
fiscal year 2001 and provides guaranteed processing time
frames. And it has resulted in a significant increase in
mortgage applications and endorsements.
Our other major initiative has been to increase the
mortgage limits, as I mentioned. Shortly after assuming office,
Secretary Martinez called for a much-needed 25 percent increase
in the statutory loan limits, which Congress enacted in 2002.
Also at that time, Congress approved indexing the FHA
mortgage limits, beginning next January. Indexing will further
increase the loan limits, year by year. It will enable FHA to
keep pace with inflation and meet the needs of families seeking
moderately priced rental housing.
Clearly, annual adjustments provide a better way to
compensate for increased costs than legislating specific dollar
increases at irregular intervals. The 2002 increase represented
a catch-up for the inflation that occurred during the preceding
decade.
Thanks to all of these changes, in fiscal year 2002, FHA
insured over $7 billion worth of projects for all of our
multifamily insured housing programs combined. This is our
highest overall production on record. And the projections for
2003 indicate that we will be exceeding the 2002 numbers.
Through the first three quarters of fiscal year 2003, we
have issued commitments for a total of $5.3 billion, a nine
percent increase in mortgage activity compared to last year at
this time. Having set a record last year, we appear to be on
course to break it this year.
Based on the increasing number of loan commitments over the
last 2 years, the department believes that the FHA multifamily
mortgage insurance products, under current limits, meet the
market tests and the market needs in the great majority of this
country. In fact, we are seeing applications from high-cost
metropolitan areas that have not participated in the program in
years: Philadelphia, Baltimore, here in Washington and in
Seattle.
However, there are areas where FHA insurance products are
underutilized, such as San Francisco, Los Angeles, Boston and
New York. Based on discussions with our field office personnel
and industry groups, there appear to be a variety of reasons
for the lack of multifamily production in these areas.
These reasons include: suitable sites not being readily
available; available sites often having substantial
environmental issues; available sites being located in areas
that are not marketable, where there is no public
transportation; and regulatory barriers adding years to
processing times. These local market issues will remain
regardless of the proposed legislation.
Traditionally, FHA mortgage insurance has served an
important public purpose by insuring projects that are
affordable to low-to moderate-income families. It is important
to make sure that FHA continues to serve that purpose: that
increases in the mortgage limits do not put FHA into higher-
income housing at the expense of moderately priced rental
properties.
That could be the case if the regulatory, environmental and
other problems I mentioned are the main reasons why multifamily
housing is not being built in some areas. It is worth noting
that the national rental vacancy rate is 9.4 percent, the
highest level in 40 years.
Given this, it is important that FHA exercise prudent
underwriting and control of credit risk in an environment where
there is a risk of oversupply of housing. At the same time, we
certainly recognize that rental housing is more expensive in
some markets than in others.
When we raised the mortgage limits, the department made a
commitment to study the impact of the increase, with particular
reference to high-cost areas. We are now conducting that study,
looking at 18 months' experience with the new limits.
The study will be completed this fall and will provide the
data to determine if further increases to the mortgage limits
are warranted to serve high-cost markets. Until then, the
department is not in the position to support this proposed
legislation at this time.
Thank you, Mr. Chairman. Be happy to answer any questions
you may have.
[The prepared statement of Hon John Weicher can be found on
page 54 in the appendix.]
Chairman Ney. I want to thank the gentleman for his
testimony. And if we will suspend for a minute and we will have
our ranking member to make her opening statement.
Ms. Waters. Thank you very much, Mr. Chairman, for holding
this hearing. I just left Mr. Frank. But I would like to thank
him and Congressman Gary Miller for offering H.R. 1985 and
bringing this issue to the forefront.
We are all aware of the need to build affordable housing in
our states, cities and respective districts.
Mr. Chairman, we have an affordable housing crisis in Los
Angeles and in many other high-cost areas around the country.
All of us know that the current FHA multifamily loan limits are
inadequate for high-cost areas like Los Angeles and Boston.
The 25 percent increase enacted last year by Congress is
just not enough. And we need to do more.
HUD data shows that Los Angeles is one of six cities in
funding year 2002 that did not have any Section 221(d)(4) new
construction projects. There was only one loan approved in
California for multifamily housing under Section 221(d)(4) in
funding year 2002 and one such loan in funding year 2003.
H.R. 1985 raises the minimum that HUD can increase the
basic multifamily limits in high-cost areas from 210 percent to
270 percent. By increasing the loan limits for high-cost areas
like Los Angeles, H.R. 1985 will make it far more likely that
it is economically viable for developers to build affordable
housing.
In Los Angeles, this will help our non-profit developers to
add an additional tool in their neighborhood development kit.
Mr. Chairman, although the 25 percent increase in the basic
loan limits was an important step towards making the FHA
multifamily insurance programs work more effectively, Los
Angeles as well as other high-cost areas like Boston, New York
and Chicago continue to be unable to access FHA multifamily
loans as a resource to help build affordable housing.
The Federal Housing Administration multifamily mortgage
insurance program has been a critical source of financing for
the affordable multifamily rental housing. The FHA Section
221(d)(4) and 221(d)(3) mortgage insurance is intended to
provide financing for market rate housing that is affordable to
low-and moderate-income households.
According to HUD data in funding year 2002, FHA insured 211
multifamily housing projects, totaling 39,413 rental units,
with a dollar volume of $2.7 billion. Over 90 percent of these
loans were insured through FHA's 221 program, which was used to
finance loans by for-profit developers.
With an increase in loan limits, we will see more non-
profit developers participating in the program. Clearly,
passage of H.R. 1985 will provide a much-needed policy change
to help stimulate the development of affordable housing.
And I commend you, sir, for scheduling this hearing and the
office again. And I look forward to a markup later on today.
I yield back the balance of my time.
Chairman Ney. I thank the gentlelady, ranking member, for
her statement.
A question I would have is: how do you currently determine,
does the department determine, what is a high-cost metropolitan
area?
Mr. Weicher. We look at construction cost measures, which
are available for individual areas on a national basis. There
is an index put together, known by the name of the Boeckh
Index. There is the RS Means index.
And we use our own program data. And we use the expertise
of our economists and our staff in the field and get their
professional judgments as well.
Chairman Ney. Do you think that the current statute is
explicit enough, gives you enough guideline? Or does it need to
be more explicit?
Mr. Weicher. I do not believe it needs to be more explicit,
Mr. Chairman. And I think the evidence for that is the dramatic
increase in production, which we saw when we raised the
mortgage limits and were able to put the program on a break-
even basis.
I think that we have eliminated major constraints to the
effective operation of the program. And I do not believe there
is need for additional legislation on this point.
Chairman Ney. You also indicated the Department undertook a
systematic review of the process to establish the level of
mortgage insurance premium needed to require no appropriated
credit subsidy. And do you want to describe what you considered
in that review?
Mr. Weicher. Yes, certainly, Mr. Chairman.
We were replacing a process which had been put into place
back in 1990, when there was relatively little information to
draw on, on the operation of the program. And that process
simply looked at average default rates for all of the loans
that we had made over past years, without much regard for what
had been happening in the market and in the economy.
We replaced that with a model where we look at the economic
performance--we relate defaults on projects to economic
performance locally and nationally and where we also look at
the tax laws under which the projects have been underwritten
and developed. And of course, as you know, there were dramatic
changes in the tax laws affecting multifamily housing a number
of times in certainly our professional memory.
In 1981, there was a great liberalization, followed in 1986
by a contraction. And as a result, there were a lot of projects
that were underwritten and built between 1981 and 1986 under
the favorable tax treatment that had trouble supporting
themselves when the tax treatment changed.
So we have built an analysis which took that into account,
took into account the present tax regime. And on that basis, we
concluded that we could indeed lower the premium from the 80
basis points that had been established under the previous
system to 57 basis points and further this year updating it to
50 basis points coming in October.
We have a fairly sophisticated technique. And we are
refining it from year to year.
Chairman Ney. Appreciate the answer.
The last question I have is: in the past, HUD had to manage
a large inventory of multifamily. And it was at considerable
expense of the taxpayers' dollars, obviously.
Do you want to comment or give us some type of insight of
what is the status of that inventory now? And how have you
tried to handle coming to terms with some of the ways to affect
costs?
Mr. Weicher. I am happy to do that, Mr. Chairman.
When we came into office, we had--the department had--an
inventory of about 100 multifamily projects where we either
owned the property or we were the mortgagee in possession. We
have had an active program of selling those projects or giving
those projects to local governments under the terms of the
statute.
And we have been able to reduce our inventory from 100
projects down to 37. Seventeen of them are a special situation
in the Boston area where there was a long-term commitment to
rehabilitate and, indeed, rebuild projects to make them
applicable as cooperative housing for the residents. And those
are proceeding on a different track.
Apart from them, we have only 20 projects nationwide where
we are still the owner or the mortgagee in possession. And we
are bringing those to market as expeditiously as we can.
Chairman Ney. I want to thank you.
The gentlelady, for questions?
Ms. Waters. Mr. Chairman, as I understand it, before I came
in, you indicated that you felt that the 25 percent increase
was adequate. And I am sorry to put you back through it again,
but I do not understand why there is not some recognition of
the fact that the housing market in places like Los Angeles has
just gone off the scale.
I think when we had the hearing out in Los Angeles just a
few weeks ago, it was indicated that by both consumers and the
apartment managers, that the average two-bedroom apartment is
renting for somewhere between $1,100 and $1,300. These
apartment buildings used to be $500 and $600 a month. And now
they are just out of the reach of the average working family.
So we need to produce more housing because we truly have a
housing crisis. And it is truly an onerous market for rental
housing.
Why does this not drive you to want to join with us in the
production of more rental units so that we can drive down the
price?
Mr. Weicher. What I said in my statement, Congresswoman
Waters, was that raising the mortgage limits and the other
changes which we put into place, eliminating the need for
credit subsidy and creating a more accelerated processing
system, all of them combined enable us to double the volume of
business that we were doing in our basic Section 221(d)(4)
program and to set a record for the volume of business we were
doing in all of our programs combined, a record that we
anticipate we will break this year.
Those are national figures. I also said that we are doing
business in some market areas where we have not done business
in a number of years, but that we also recognize that there are
areas where our programs are not being utilized, where our
programs are being underutilized.
And I listed specifically Los Angeles, San Francisco,
Boston and New York. And I repeated the commitment which we
made at the time that we put the new premium calculation
process in place, that we would look at how the changes are
working out and do a study of our outcomes and be prepared to
make recommendations to you when the study is completed. And
the study is going to be completed this fall.
Ms. Waters. Thank you very much, Mr. Chairman.
Chairman Ney. Thank you.
Mr. Green?
Mr. Green. Thank you, Mr. Chairman.
You just indicated again, as you did in your opening
statement, that there are record levels of FHA multifamily
mortgage activity over the last few years. And as you just
said, you hope to break the record again this year.
To what do you attribute that high level of activity and
the growth in the level of activity?
Mr. Weicher. Well, I think there are several factors,
Congressman Green. One is--and this, I think, is very
important--we have gotten our programs to the point where we do
not need to ask you for an appropriation every year to cover
the losses on the programs.
There are only four remaining programs out of the 19 that
we have, which require credit subsidy. And as a result, the
credit subsidy appropriation that we have requested and that
you all have approved is only $10 million. And it is enough for
those four programs.
What this means is that the industry can come to us, knows
that it can come to us at any time, with an application. And
the application can be considered on its merits for insurance,
without regard to whether we have run into a credit subsidy
appropriation limit.
Secondly, we have the multifamily accelerated processing
program. We are moving projects through the pipeline much more
quickly and enabling developers to get in the ground much more
quickly than they have been able to under our traditional
processing system.
And certainly, raising the mortgage limits, as the
Secretary requested and as you all approved, is an important
factor. There had not been an increase since 1992. And that was
10 years during which costs went up--not a large amount from
year to year, but they did go up from year to year. And it
became harder and harder to build under the FHA mortgage
limits.
And we have caught up with the inflation over that period.
And moving forward with the inflation adjustments that are now
statutory, we will be able to keep pace with inflation, year by
year.
All of those factors put together, I think, contributed to
a strong performance by our programs and a performance that we
believe we can continue to repeat.
Mr. Green. Interesting.
I think FHA is poorly understood by many people in the
public. How would you describe the market that FHA serves for
these programs?
Mr. Weicher. Basically, we are serving low-to moderate-
income families in our programs. Most of our projects are
designed to serve people who are in the lower half of the local
income distribution. And they do serve those people.
We are not in the luxury business. We are not trying to
provide housing for people at the high end of the economic
spectrum.
We leave that to the private market. And the private market
seems to be filling that demand adequately.
We are trying to serve people who are able to make modest
rental payments out of their incomes, who do not require
subsidy to afford decent housing, but do benefit from the lower
cost of loans that results from FHA's insurance.
Mr. Green. In your portion of the market, do you see
private sector initiatives that are serving that same market?
Mr. Weicher. There is some overlap. We do not draw precise
boundaries between the loans that we make and the loans that
the private sector makes.
And indeed, there is nothing in the statute to stop a
private developer from building to serve the FHA market. And
occasionally, some projects are built that way.
But because we have the full faith and credit of the
government of the United States behind us, lenders are willing
to make loans at lower interest rates for our projects. And as
a result, our projects are atypically a little bit cheaper.
Mr. Green. Well, maybe just outside obviously what you work
on, your authority, but are there things that we can do to
increase private sector initiatives to this market, to get the
private sector more involved?
Mr. Weicher. I think the private developers face--and so do
our FHA projects--they do have to confront the costs of land
and the cost of labor. And those are the basic costs that they
are confronted with.
We have, in many markets, serious processing problems,
serious delays in being able to get the local approvals for a
project, particularly on the multifamily side. The secretary
has established a program to look at the regulatory barriers to
affordable housing, headed by a gentleman by the name of Bryant
Applegate, who has come from Florida with the Secretary. And
that activity is to see if we can identify barriers--federal
barriers, as well as state and local barriers--which can be
dealt with to bring down the cost of providing affordable
rental housing.
Mr. Green. Okay. Thank you. Thank you, Mr. Chairman.
Chairman Ney. Mr. Watt?
Mr. Watt. Thank you, Mr. Chairman.
Mr. Weicher, I welcome you and confess a little confusion
about your testimony. But it is not the first time I have had
confusion about HUD's testimony on a number of issues. So I
guess I should not be surprised.
Your statement seems to, in one respect, revise history a
little bit, making it sound like Secretary Martinez was and HUD
was the major advocate for the 25 percent increase in the
statutory limit back in 2002, when in fact my recollection is
that Congress had been calling for that increase and Members of
Congress had been calling for that increase throughout the
period from 1992 to 2002. And finally, HUD got to the point
where it could not resist the change anymore and got on the
same page and made the recommendation.
Your testimony says that by doing that, you were able to
see some activity in the FHA program in some high-cost areas.
Philadelphia, Baltimore, Washington and Seattle specifically,
you mention on page three of your testimony.
But you acknowledge that still has not reached the high-
cost areas that this bill is designed to get to. And so we are
at this again.
And if we wait until HUD finishes its study in the fall of
this year, that means, as I calculate it, it would be next year
before HUD could have a recommendation about that. I guess 10
years from now, HUD would be back here saying, ``We took the
lead in recommending another change and increase,'' if you did,
in fact, recommend it at that time.
The problem is that that means from 1992 up to whenever we
do this increase, cities like Los Angeles and Chicago and
Boston and Oakland the really high-cost areas are simply not
using the program. And it is not as if you are cutting off
high-income people or people who are even above the median
income level from the use of the FHA program. In those
communities, nobody is using the program, either for lower-
income people, people who fall below the income limit, or
people who might be able to access the market.
So the question I have is: if you are not supportive of
this increase, if you are not supportive of this bill at this
present, what would you have cities like San Francisco, Los
Angeles, Boston, New York, Oakland do in the interim to help
produce housing in those high-cost areas? I mean, because they
have not had the benefit of this program since actually before
1992, if you go back and look at it historically.
So how long would you have them wait? And if you would not
have them wait, what would you do in the interim to spur
housing development in those high-cost areas where even your
testimony concedes the adjustment that we made in 2002 has not
had any impact at all?
What would you do in the interim?
Mr. Weicher. Let me start by going back to your first point
about the Secretary's call for an increase in the multifamily
mortgage loan limits. The secretary made that call, urged that
on Congress, within a month after assuming office back in 2001.
There were people undoubtedly favoring an increase in the
loan limits before that. I do not really know whether HUD was
favoring it between 1993 and 2001.
But the Secretary's statement in February of 2001 created,
I think, a basis for a bipartisan agreement on an increase in
the loan limits, which Congress enacted in fiscal year 2002. So
I was not in the slightest trying to rewrite history. The
history includes an explicit call by the new HUD Secretary,
Secretary Martinez, for that increase, for what was the first
increase in 10 years.
With respect to what we are doing now, we are studying the
impact of the increases that we have had and the other changes
that we have made in the program on our ability to serve high-
cost areas.
Chairman Ney. Time has expired.
Mr. Weicher. Excuse me, if I may just finish for a moment.
When we will complete that study, I certainly do not anticipate
that we will take 10 years before a policy recommendation will
be made. We would expect to make a recommendation very quickly
thereafter.
Mr. Watt. Thank you.
Can he answer the question, Mr. Chairman? What are we going
to do in the interim? What are those cities going to do in the
interim?
Mr. Weicher. I think that the cities which are high-cost
cities at this point, if they cannot make the program work
under their current policies and under current FHA limits, they
may be able to modify their policies while we complete the
process. But I think it is not going to be very long before we
are going to know the outcome and have a recommendation.
Chairman Ney. Any additional detail for the answer also can
be placed in the record. Thank you.
Mr. Renzi?
Mr. Renzi. Thank you, Mr. Chairman.
Sir, appreciate your testimony today. And in looking over
your statement, when you talk about the vacancy rate being 9.4
percent on a national basis, when you move into those high-cost
areas and we look at the low-cost rental in those high-cost
areas, I imagine the vacancy rate has to be almost full.
Mr. Weicher. Well, vacancy--oh, I am sorry.
Mr. Renzi. Go ahead, please.
Mr. Weicher. The vacancy rates, that is a national vacancy
rate. And the vacancy rates certainly vary from one part of the
country to another.
And in the high-cost areas that members are concerned with,
it is certainly true that vacancy rates are relatively low. The
lowest vacancy rates come in the Northeast, in New England and
in New York, and come on the West Coast, in the California
cities.
Those are markets which have low vacancy rates. And at the
same time, nobody is building much in those areas, as we hear.
And that suggests that there is a problem in those markets
beyond simply the availability of mortgage money.
Mr. Renzi. When you look at lending to affordable
multifamily units and you worry in your statement in moving FHA
monies into higher-income housing, you have limits in place and
restrictions in place, requirements in place already that, if I
was a developer, build a multifamily housing unit, I would have
to rent those out at a certain rental rate. And a certain block
of my units must go to low-income or moderate-income
recipients?
Mr. Weicher. Not on our basic Section 221(d)(4) programs,
our basic unsubsidized rental insurance programs. The limits
are dollar limits on the mortgage, which implies a limit on the
rents or the rent that is needed to make the project work. We
do not impose income limits on the residents of those projects.
If someone who is very well-to-do wants, for some reason,
to live in an FHA project, that is between that individual,
that family and the owner of the project. It is not a
limitation that we impose in our programs.
Mr. Renzi. I do not know that that really happens in the
real world. But, okay.
Well, listen, thank you for your testimony.
Chairman Ney. Mr. Clay?
Mr. Clay. Thank you, Mr. Chairman.
Mr. Weicher, we have not had adequate increases to the FHA
multifamily mortgage limits sufficient to offset the impact of
the economic growth of the past decade. This growth has
affected not only low-income housing, but middle-income housing
as well, to the tune of almost five million working families
had critical housing needs in 2001.
My district lowers that description. And with the shipping
of jobs overseas, the cutback on hourly wages, if current moves
are successful and with the push for the elimination of
overtime and smaller paychecks, what do you see as the impact
of these issues on housing affordability?
Mr. Weicher. Well, Mr. Clay, what we have in the housing
market, as I was saying in response to Mr. Renzi a moment ago,
we do have a high national vacancy rate and a high vacancy rate
in much of the country, apart from the Northeast and California
on the West Coast. We also have the highest home ownership rate
in our history nationally.
Despite whatever economic problems individual families are
having and whatever problems their employers are having, people
are able to buy homes. They are buying homes in record numbers.
And at the same time, we are providing assistance through
the FHA program. We are providing mortgage money that enables
builders in much of the country, nearly all of the country, to
build affordable rental housing in unprecedented quantity.
Mr. Clay. Now are these vacancy rates, do these rates apply
to low-income housing or middle-income housing? Which is it?
Mr. Weicher. They are about the same across the rent
spectrum.
Mr. Clay. And you cite the boom in home ownership. Now you
know that Hispanics and African-Americans lag behind in that
home ownership rate. Tell me, what are some of your solutions
to helping those two segments of the population?
Mr. Weicher. Well, certainly we are very concerned about
differences in home ownership rates between the white majority
of the population, where it runs about 75 percent, and the
African-American and Hispanic communities, where it runs about
50 percent.
The President established a year ago a commitment to create
5.5 million more minority homeowners. And we at HUD have been
certainly working vigorously to contribute to that goal, as
have many of the professional organizations in the industry and
other entities.
Last year, FHA insured 260,000 mortgages for first-time
minority home buyers. This fiscal year, we are running at about
the same rate so far.
That is almost half of the 5.5 million, on an annual basis,
that the President called for. Other programs, the U.S.
Department of Agriculture's Rural Housing Service and the
Veterans Administration's Home Loan Guarantee Program, are also
participating in this effort. We are the agencies which do
serve lower-and moderate-income families as they become
homebuyers, as well as serving them when they are renters.
Mr. Clay. Final question, let me ask you, we have a supply
of low-cost housing that I feel is getting smaller and smaller,
and an increase in the number of low-income households. If
having a job does not guarantee affordable housing, what needs
to be done to stem the tide of this critical affordable housing
shortage? How can we stem that tide?
Mr. Weicher. Well, I think it is important to look at
supply constraints on the availability of rental housing. We
operate in an environment where the many localities have
erected barriers to the production of rental housing,
particularly the production of low-and moderate-income rental
housing.
We have the ``not in my backyard'' syndrome, the NIMBY
syndrome, which is a problem in much of the country. And it is
important, I think, that the federal government, state
governments and local governments work together to try to
address barriers which limit the availability of rental housing
for lower-income families.
Mr. Clay. Thank you very much for your response. Thank you.
Chairman Ney. Mr. Miller?
Mr. Miller of California. Thank you, Mr. Chairman.
Mr. Weicher, it is good to have you here today. And very
rarely do I ever take opposition to testimony from HUD, because
I usually get around.
The problem is I have been a developer for 30 years. And
most of my friends, close friends, are in that industry.
And you said you have a problem with legislative increases.
Then you come back and say you want governments to work
together.
There is no private sector alternative. And the thing I
like about this is the FHA program pays for itself. It even
makes money.
So we are not giving grants. We are not doing something
that is going to lose money for anybody. And it does not take
away from low-cost areas, what we are proposing here. And it
does not hurt one person's district, period.
So there is no harm, no foul on what we are doing out here.
But I am going to ask you some questions. And I am going to
speak for Ms. Velasquez, Mr. Frank, Mrs. Waters, Mrs. Lee and
myself because this concerns all of us.
You said that you are doubling the volume of loans. That
sounds good.
But according to HUD data, FHA multifamily loans for new
construction or substantial rehabilitation in Massachusetts in
fiscal year 2002 and 2003, only one loan was approved. So we
are going to give them two.
In California, in 2002 and 2003, only one loan was
approved. We are going to give them two.
In New York, no loans. So two times zero is still zero.
And in Boston, the same situation. So I am not trying to
argue with you. But you list the reasons here why they are
underutilized. And they have nothing to do with what we are
doing here today.
One is suitable sites are not readily available. They are
difficult. But there are suitable sites out there.
The problem is by the time you acquire the sites, based on
the limits today they are able to borrow, they cannot get a
loan because it cannot be done. I will give you an example of a
developer in Boston who I received a letter from.
Two available sites in Boston have substantial
environmental issues that render them cost-prohibitive. We just
passed a bill this year--and I correct Mrs. Waters--that
included petroleum so we can go out and clean these sites up in
communities that are needed so we can go build affordable
housing. We are taking care of that one ourselves.
That might be true. But we are going to deal with that.
And many of those sites are located in areas that are not
suitable marketplaces, no public transportation. Again, we are
dealing with that in some areas. In others, that does not
apply.
And regulatory barriers, if you want to drive a nail into
anything today, to build anything, there are regulatory
barriers. It does not matter what you want to build, NIMBY
applies to single family detached, multifamily, apartments.
It does not matter. Nobody wants it anywhere if it is near
where they live.
The problem is that in areas that do need rental housing,
we are not building it. California is an example. The
multifamily, as far as for sale, is almost non-existent because
of litigation, as you know.
Most developers will not build condos or townhomes because
they know they are going to get sued, without a doubt. A friend
of mine, Lewis Holmes, owns Lewis Operating Company, now will
only build rental units and commercial shopping centers because
of litigation.
They are a fine builder. They probably own 15 to 20 percent
of KB homes out there. But they are stockholders and not
principals.
But all they are building in rental houses, they cannot, at
all, get an FHA loan. And there is a gentleman from Mr. Frank's
district in Boston that he says he wants to build a 180-unit
garden style walkup apartment in Burlington. Twenty percent of
the units will be affordable to seniors and low incomes up to
80 percent of the area median income.
The units range from 700 square foot one-bedroom units to a
1,200 square foot two-bedroom unit. They have a clubhouse and a
pool. So it is a nice unit.
They are quality affordable housing. The problem is the
total development costs are $176,000 per unit.
Now the reason they are that low is because he has had the
land for quite a few years. So the cost of land is only $15,000
per unit. But the current market value is $50,000 per unit.
His hard costs are $113,000 per unit, sticks and bricks,
plus $3,000 a unit in impact fees. And permits run $10,000.
Based on a case-by-case exception to get him up to 240
percent, which we all understand that going by a case-by-case
protracts the process, increases the cost because it is going
to take longer to get a HUD case-by-case approved. This puts
him at $124,608 per unit.
He cannot do it. What we are proposing puts him a little
over $140,000 per unit, which he can do.
This is discretionary on the part of HUD. What I do not
understand is there is no alternative. So for us, giving HUD
this authority to increase it to this amount does nothing but
benefit all of our areas, does not in any way hurt HUD, impact
HUD, cost HUD any money.
In fact, if you do have a foreclosure in California or
Boston or New York, you are going to have more buyers standing
in line to buy that from you, as you know, than you can deal
with. So the high-cost areas are what we are trying to deal
with.
We are not talking about areas that do not need high-cost
loans. We are talking about the areas that cannot build because
they do need a high-cost loan.
That is what we are trying to deal with, giving HUD the
discretionary authority to do that, without having to go
through a protracted process just to get you up to 240. We need
to go to 270.
The costs are there. The demand is there.
Boston, San Francisco, Oakland, Orange County, Los Angeles,
the Inland Empire, the vacancy rates are three percent, which
they are 100 percent occupied, sir, because you know three
percent means three percent or under restoration while we are
trying to put them back on the market.
So you have zero available product. You have States where
they are building very little attached product: townhomes,
condos.
You made a statement that we have the highest home
ownership in history. And I applaud that. And being a
developer, I think that is great.
But that is not the people we are trying to help here. We
are trying to help people, not giving them a grant, but raising
the loan amount so these units can be built to help people who
need those units. Not subsidies, we are not talking about any
of that.
The people who can afford a home are buying homes. Those
are not the people who will want to rent these units we are
trying to make sure they build out there.
And I really think I am trying to help HUD. I am a
developer. I am a Republican. Martinez is a friend of mine. I
think this is good.
And I am not impugning you. With all respect, your four
reasons here just do not, in reality, hold water.
And Mr. Chairman, you have been really nice in giving me
some extra time. I was going to ask Ms. Waters, but she used
hers up.
But there are such issues here that we need to deal with.
And we are trying to deal with them. And we would like your
help.
I yield back the time I do not have.
Chairman Ney. Well, I thank the gentleman. And I want to
thank Mr. Weicher and the members. And that concludes panel
one. Thank you.
We will move on to panel two.
I want to welcome panel two. I want to introduce first
Howard Cohen is the President of the Beacon Companies Limited
Partnership, a Boston-based residential development company.
Beacon has been in business for 60 years and owns and manages
8,500 residential units, primarily in the New England,
Pennsylvania and Virginia areas.
Linda Cheatham is the Senior Vice President of Berkshire
Mortgage Finance. She has over 30 years of experience with FHA
multifamily insurance programs. She is testifying today on
behalf of the Mortgage Bankers Association of America, a
national association representing the real estate finance
industry.
Casimir Kolaski is the President of Kolaski Housing
Advisors, Incorporated, a company that provides consulting
services focused on the development of affordable rental
housing. Before entering the private sector, Mr. Kolaski had a
long career at HUD, having served as the Director of Housing in
HUD's Boston office and later in its Rhode Island office.
And our last witness is Gary Ruping, is the founder and
owner of Ruping Builders in Billerica, Massachusetts. Ruping
Builders has been involved in the development of a range of
housing, including affordable housing, since 1985. Mr. Ruping
served on the Massachusetts Special Commission on the Barriers
to Housing Development.
I want to thank all the witnesses. And we will begin with
Mr. Ruping.
STATEMENT OF GARY H. RUPING, PRESIDENT, RUPING BUILDERS, INC.,
BILLERICA, MA, ON BEHALF OF THE NATIONAL ASSOCIATION OF
HOMEBUILDERS
Mr. Ruping. Good morning, Mr. Chairman.
Good morning, Chairman Ney, Ranking Member Waters and
subcommittee members. I appreciate the invitation to represent
the 211,000 members of the National Association of Home
Builders and myself to testify on H.R. 1985, the FHA
Multifamily Loan Limit Adjustment Act.
My name is Gary Ruping. I am the founder and owner of
Ruping Builders, in Billerica, Massachusetts, part of the
greater Boston area.
Formed in 1985, my company has been involved in the
development of a wide range of housing, including quality
apartment homes, condominium communities and affordable
housing. During former Governor Cellucci's term, I served as
Co-chairman of the Special Commission on the Barriers to
Housing Development.
As the subcommittee is aware, important reforms were made
to the FHA multifamily insurance program in the 107th Congress,
such as increasing the limits by 25 percent and indexing
programs to inflation beginning in 2004. However, despite these
significant improvements, there are pockets in this country--
high-cost, urban areas--where the FHA multifamily programs,
particularly the 221(d)(4), are not really working.
NAHB wholeheartedly endorses H.R. 1985, which would permit,
but not require, the HUD Secretary to increase the multifamily
mortgage insurance loan limits in high-cost areas from 210 to
270 percent. According to data published by HUD, there are 16
cities that are currently at the statutory maximum of 210
percent.
Another five cities are just below 210 percent or between
205 and 209 percent. In 2002, there were 13 cities at the
maximum limit. In other words, the problem is growing.
Available HUD data for 2002 and part of this year indicates
that in most of the high-cost areas, the 221(d)(4) program
cannot work. For example, in fiscal year 2002, there were no
initial endorsements in the city of Boston, none in Providence,
New York, Philadelphia, Chicago, Los Angeles, San Francisco and
Seattle.
This year, there have been no initial endorsements for
Boston, Providence, New York, Greensboro, Los Angeles, San
Francisco and Seattle. While H.R. 1985 permits the Secretary to
go up to 270 percent, it eliminates the current provision to
approve mortgage loan limits by up to 240 percent on a case-by-
case basis.
We believe that this is sound policy because of the
additional administrative and paperwork burdens attendant to
the case-by-case approval process. From a developer's
perspective, I will have already expended a considerable amount
of money to apply for the loan before I know if the loan is
then possible.
The effectiveness of the 221(d)(4) program would be greatly
enhanced if builders in high-cost areas were confident they
could proceed with an FHA-insured loan without the additional
cost, time and difficulty of applying for a case-by-case
exemption, exception. When the statutory limits are close or at
the maximum, builders will have little incentive to use an FHA
insurance program.
Congressman Miller clearly outlined the project that I have
in Burlington, Massachusetts. He is correct. It is a 180-unit,
garden style walkup apartment project.
Twenty percent of the units will be affordable to seniors
with incomes up to 80 percent of the area median. The rest will
be at market rates.
The units range in size from 700 square feet for a one
bedroom to 1,200 square feet for a two-bedroom unit. The
development will include a clubhouse and modest outdoor pool,
which are typical amenities offered in this marketplace.
This development will offer quality, affordable housing. It
is not intended to serve the luxury, high-end market.
I decided to pursue a 221(d)(4) insured loan in part
because the program offers terms related to the debt service
coverage ratio, interest rate and loan period that are needed
to make the project financially feasible. In addition, the
construction loan is automatically converted to a permanent
loan.
Conventional loan terms are not as favorable. And I would
have to obtain both a construction loan with recourse and a
permanent loan.
With interest rates being comparable right now, the Section
221(d)(4) program seemed the way to go. However, I may not
actually be able to obtain the FHA-insured loan.
My development costs are $176,000 per unit, which exceeds
the high-cost limits. This figure is actually somewhat low
because I bought the land many years ago at a cost of $15,000
per unit. The land is currently worth $50,000 a unit.
My hard construction costs are $113,000 per unit. Impact
fees are $3,000 per unit. And permit costs run $10,000 per
unit.
The balance of the total development costs include
architecture, engineering and legal fees, environmental testing
and builders overhead. In addition, labor costs in the Boston
area are very high, which contributes to the high construction
cost.
The current statutory mortgage loan limit for a two-bedroom
unit in a non-elevator structure is $51,920. The maximum
permitted limit, using a case-by-case exception at 240 percent
HCP----
Chairman Ney. Time has expired.
Mr. Ruping. Would you like me----
Chairman Ney. But I would note, without objection, the rest
of your testimony can be placed in the record.
Mr. Ruping. Thank you, Mr. Chairman.
[The prepared statement of Gary H. Ruping can be found on
page 48 in the appendix.]
Chairman Ney. The reason I want to continue to hold to the
time today, we are going to have some votes and I want to make
sure we hear all of your testimony.
Mr. Kolaski?
STATEMENT OF CASIMIR KOLASKI, PRESIDENT, KOLASKI HOUSING
ADVISORS, INC., PROVIDENCE, RI
Mr. Kolaski. Thank you.
Good morning, Chairman Ney, Ranking Member Waters and
members of the subcommittee. My name is Casimir Kolaski. And I
am the President of Kolaski Housing Advisors. My company
provides consulting services on the acquisition, development,
financing and management of affordable rental housing.
Prior to starting my own company, I spent over 25 years
working for the U.S. Department of Housing and Urban
Development, where I served as Director of Housing in HUD's
Boston office, as well as manager of HUD's Rhode Island office.
Additionally, I served as special assistant to the
Assistant Secretary for Housing/FHA commissioner. I appreciate
the opportunity to be here today to comment on H.R. 1985, the
FHA multifamily programs and how they are working in high-cost
urban areas.
My company works with clients who are developers of
affordable rental housing for families and seniors, as well as
for clients developing nursing care and assisted living
facilities. We make every effort to use HUD's programs,
although frequently we must tap additional sources of
financing, such as the low-income housing tax credit, state and
city housing trust funds and the Federal Home Loan Bank's
Affordable Housing Program.
Complicating our efforts are the extraordinarily high land
and labor costs found in cities such as Providence and Boston,
which make use of some programs, particularly FHA insurance,
difficult or impossible.
The 221(d)(4) mortgage insurance program is intended to
provide financing for market-rate housing that is affordable to
moderate-and middle-income households. The program is unique in
that it offers a variety of terms to developers that are not
available through conventional financing and are critical to
the feasibility of many affordable housing projects.
Despite enactment of a 25 percent increase in the mortgage
limits for FHA multifamily insurance programs, the limits are
still not sufficient to meet the needs in high-cost urban
markets, such as Providence and Boston.
High land and labor costs are typical problems in large
cities and in metropolitan areas experiencing growth. Other
costs, such as impact fees, permitting fees and real estate
taxes, also tend to be significantly higher.
The zoning process is complex and time-consuming, and the
NIMBY attitude continues to impact the ability of developers to
build rental housing.
In Providence and Boston, our high-cost percentage is at
the maximum of 210 percent, about $109,000 for a two-bedroom
unit in a non-elevator building. On a project-by-project basis,
HUD may approve an increase up to 140 percent, or about
$124,600 for the same unit.
I am working with a client who is building a new addition
to an existing Section 202 elderly housing apartment in Boston.
There are no land costs and no construction costs for community
space or other amenities because they are already provided in
the existing building.
The development costs for this addition are $133,000 per
unit. As a result, this project could not be financed with an
FHA-insured loan.
The financing for this project will come from a capital
grant through the Section 202 program, as well money from
Massachusetts Affordable Housing Trust and the city of Boston's
neighborhood housing trust funds, which are substantial
subsides not easily available to projects financed with FHA-
insured loans.
During my service with HUD in Boston, I worked with
MassHousing on the disposition of 2,000 HUD-foreclosed units in
the Multifamily Demonstration Disposition Program. Of the 11
projects in the program, three involved the total demolition
and new construction of the projects.
The per unit total development cost of Academy Homes II,
the last of the three new construction projects, which is
currently nearing completion, is $233,000 per unit. Of that
amount, about $21,000 is attributed to demolition, asbestos
removal and other environment issues, leaving a development
cost of $212,000 per unit.
That figure does not include land costs. And there were no
impact fees to pay. All of these projects were competitively
bid.
Clearly, these projects could not be financed with a
Section 221(d)(4) insured loan. In fact, MassHousing calculates
that the average development cost for new family rental housing
in greater Boston for last year was $195,045.
In summary, I urge the Housing Subcommittee to support H.R.
1985, introduced by Representatives Miller and Frank. We must
remember the 25 percent increase in the base loan limits was
long overdue, as the limits had not been raised for a decade.
This bill is an important step towards making the FHA
multifamily insurance programs work more effectively in high-
cost areas, which continue to suffer from lack of access to the
program. With unemployment rising and wages not keeping pace
with rising rents, it is especially important that the program
be available to provide much-needed affordable housing to our
cities' working families and individuals.
There are few, and often no, alternatives in the market
available to them. These are the people who teach our children,
protect the citizens, serve you in restaurants and retail
establishments, take care of our office buildings, provide
public transportation to residents and visitors and keep our
streets and parks clean. We must find a way to provide them
with decent qualify affordable housing.
Chairman Ney. Time has expired.
Mr. Kolaski. Thank you.
[The prepared statement of Casimir Kolaski can be found on
page 44 in the appendix.]
Chairman Ney. I want to thank you.
Ms. Cheatham?
STATEMENT OF LINDA D. CHEATHAM, SENIOR VICE PRESIDENT,
BERKSHIRE MORTGAGE FINANCE ON BEHALF OF THE MORTGAGE BANKERS'
ASSOCIATION OF AMERICA, WASHINGTON, DC
Ms. Cheatham. Thank you.
Good morning, Mr. Chairman and members of the subcommittee.
My name is Linda Cheatham. And I am the Senior Vice President
for FHA lending at Berkshire Mortgage Finance. I am appearing
on behalf of the Mortgage Bankers Association of America, the
MBA.
MBA is grateful for the opportunity to present its views to
the Housing and Community Opportunity Subcommittee today on the
FHA Multifamily Loan Limit Adjustment Act of 2003. And we
applaud Representative Gary Miller and Representative Barney
Frank for introducing a bill to increase the nation's
affordable multifamily housing stock.
I have over 30 years of experience with FHA mortgage
insurance programs. Currently, I head FHA production at
Berkshire Mortgage Finance, a multifamily mortgage banking
company headquartered in Boston with offices around the
country, including Irvine, Santa Monica and Walnut Creek,
California.
Our company has originated over $190 million in FHA-insured
multifamily loans so far this year and over $1 billion in our
servicing portfolio.
Before joining Berkshire, I was director of the Office of
Multifamily Development at HUD headquarters and with HUD for
over 25 years, working in FHA multifamily programs.
MBA strongly supports the Federal Housing Administration's
multifamily mortgage insurance programs. FHA multifamily
mortgage insurance has operated successfully for over 65 years,
working with private sector partners to expand the supply of
rental housing.
Over the past six decades, this private/public partnership
has leveraged more than $100 billion of private sector
investments to provide rental housing for more than four
million families and the elderly throughout the country. The
Center for Housing Policy reported in a recent study that more
than 4.8 million working families had a critical housing need
in 2001. And many of these are moderate-income households,
where a full-time job simply does not provide sufficient income
to afford the fair market rent in that community.
In many communities in this country, the economics simply
will not allow developers and builders to construct units where
the rents will be affordable to many working families. FHA's
multifamily mortgage insurance programs are one of the most
effective tools to provide affordable multifamily apartments to
low-and middle-income families.
H.R. 1985 is a major step in allowing the FHA programs to
help finance the development of affordable rental housing. MBA
applauds Congress and the administration for taking steps over
the past 2 years to update the FHA multifamily loan limits.
Unfortunately, the current maximum FHA multifamily mortgage
limits are inadequate in some areas and continue to constrain
new construction and rehabilitation in many selected, high-cost
areas, where construction costs are significantly higher than
in the rest of the country.
H.R. 1985 establishes an additional mechanism for
addressing the need for new construction or substantial
rehabilitation in extremely high-cost areas of the country by
giving the Secretary of HUD the authority to increase the
maximum high-cost percentage in extremely high-cost areas to
170 percent.
High costs in these areas can be attributed to a number of
factors, including location--for example, inner-city sites can
be expensive to develop--or scattered sites or environmental
concerns, to name a few. This proposed increase for high-cost
areas is crucial, as I can attest from my own personal
experiences with worthy projects that could not be financed,
due to the confines imposed by the mortgage limits.
Berkshire has examined several new construction projects
with affordable components in the Boston area, for example,
that have been infeasible because the mortgage that resulted
from the statutory limits required substantial cash investment
far above the borrower's ability to generate. Currently, we are
looking at a mixed income project to be located in a sub-market
in the northern greater Boston area.
The vacancy rate for affordable housing in that area stands
at 1.8 percent and for higher income housing at 5.4 percent.
The project has all of its local approvals and is proposed for
two phases.
However, our preliminary analysis shows that for the two
phases, the borrower would have to come up with more than $10
million in equity because the stat limits control the mortgage
amount. The vacancy rates clearly indicate a need for the
proposed housing. But it cannot be built using FHA mortgage
insurance and will not likely go forward absent the increase
that MBA is supporting.
Mr. Chairman and members of the committee, it is critical
to institute this final step to update the FHA multifamily loan
programs in order for the programs to reach their full
potential and serve the many needy families in America. MBA
stands ready to work with you to advance this important
legislation.
Thank you.
[The prepared statement of Linda D. Cheatham can be found
on page 36 in the appendix.]
Chairman Ney. I thank the witness for her testimony.
And the last witness, thank you.
STATEMENT OF HOWARD EARL COHEN, PRESIDENT, THE BEACON
COMPANIES, LLP, BOSTON, MA
Mr. Cohen. My name is Howard Cohen. I am President of the
Beacon Companies, Limited Partnership, a Boston-based
development company.
Beacon has been in the development business for over 60
years. We develop, own and manage both market rate and
affordable developments. We currently own and manage 8,500
residential units, primarily in New England, Pennsylvania and
Virginia.
Our portfolio consists of developments financed through
FHA, as well as Fannie Mae, Freddie Mac and various HFAs and
conventional financing sources. I am here today speaking on
behalf of Citizens Housing and Planning Association of Greater
Boston, a broad-based housing advocacy group.
I am a resident of Newton, Massachusetts. And I also have
the honor of being represented in Congress by Congressman
Frank.
Over the last 8 years, we have been unable to access FHA
for any of our developments in the Boston and Providence area,
due to the constraints imposed by the statutory mortgage
limits. I first became intensely aware of this issue in 2000
when we tried to develop a residential high-rise in Providence
Capital Center.
Capital Center is a major effort by Providence to redevelop
the downtown area. The city believed that a residential
component was highly desirable.
In my experiences, that would have been a perfect fit for
FHA insurance. However, the statutory mortgage limits
prohibited the use of FHA.
Shortly thereafter, I was asked to serve on a commission
established by Boston's Mayor Menino on housing finance. In
reviewing the history of housing finance in the city, it
quickly became apparent to the commission that a substantial
proportion of the city's most successful and innovative
residential developments had been FHA assisted, but that all
these developments were at least 10 years old.
Again, as we probed the issue, it became apparent that due
to the statutory mortgage limits, FHA was no longer a viable
housing finance tool in the Boston area, although it had played
a very important historic role. One of the commission's primary
recommendations for federal action was to encourage the
adoption of legislation such as H.R. 1985.
As the commission was meeting, we learned about the
admirable efforts of the Bush Administration and this committee
to support the first increase in the FHA mortgage limits in a
decade. However, the 25 percent increase in statutory limits
did not solve the problem in our high-cost area.
It was at this time, through the auspices of the city of
Boston and the Massachusetts Housing Advocacy Organization that
we began to discuss with our congressman the need for
additional legislation.
Let me provide an example from our own portfolio. We are
currently completing construction of a 200-unit development on
Boston's South Shore and anticipate commencing construction of
another 150-unit development in the same area.
In both cases, we have mixed income developments. Pursuant
to the state's zoning law, 20 percent of the units must be set
aside for occupants with incomes below 50 percent of median
income.
These are exactly the type of developments where FHA's
experience and mission would make it a perfect lender. However,
the per-unit cost of these developments, including land, is in
the range of $150,000 per unit. Direct construction costs are
in the range of $90 per square foot.
This is the general range of the cost of new suburban low-
rise, multifamily developments in the Boston and Rhode Island
area. For urban high-rise development, these numbers would have
to be essentially doubled.
At the current statutory limits, the maximum FHA loan would
be much less than could be obtained with conventional
financing. Were H.R. 1985 in effect, with loan limits at 270
percent of the statutory base, FHA insurance would be a prime
candidate for financing.
It is beyond our level of expertise to justify or even
explain why there is such a vast divergence in the cost of
creating a housing unit between various parts of the country.
As previous speakers have noted, older, highly developed
regions such as ours, we face steep land costs and high site
development costs, with many of our sites requiring
environmental remediation.
Because of our land constraints and slower rate of growth,
we cannot accomplish some of the economies of scales that I see
in other parts of the country. The in-fill nature of much of
our development requires particular attention to design and
neighborhood compatibility.
There are some obvious artificial cost burdens imposed by
unnecessary code and permitting requirements that our current
governor, Governor Romney's administration is working hard to
correct. The cost of housing in Massachusetts has become a
severe impediment to our economic development.
Efforts to redress these costs and to encourage more
residential development are a priority for both our governor
and the Massachusetts legislature. The passage of H.R. 1985
would revive FHA as a viable tool in our region, which
contribute to reduction in our costs of financing and thus, the
overall cost of producing housing.
Enactment of H.R. 1985 would be a significant federal
contribution to this effort at no additional cost to the
federal government. Thank you.
[The prepared statement of Howard Earl Cohen can be found
on page 41 in the appendix.]
Chairman Ney. I want to thank the panel for their
testimony. I do have a letter from Steven Fifield from the
Fifield Company of Chicago, Illinois for the record, without
objection.
[The following information can be found on page 58 in the
appendix.]
And I would also note that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
Do appreciate your testimony. It does count, I believe,
here with us on this important issue.
If members do not have questions, we will move into the
markup. With that, this concludes the hearing portion of our
meeting. Without objection, the subcommittee will take a short
recess to allow the staff to set up the room for the markup.
Thank you.
[Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
A P P E N D I X
July 22, 2003
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