Twelve groups, principally trade associations, sent a letter on Friday to the Department of Housing and Urban Development (HUD) commenting on a Notice of Proposed Changes to Federal Housing Administration (FHA) Mortgage Insurance Premiums (MIPS).  The changes affect financing for certain multifamily housing and hospital and health care facilities.   According to the Notice, "These MIP increases will not only provide additional protection for the GI/SRI fund and increase receipts to the Treasury, but will also encourage private lending to return to the market by ensuring FHA is not under-pricing its risk."

The following are the proposed changes to MIP by program type.

No increases are proposed for projects financed with Low Income Housing Tax Credits, have project-based rental assistance, or are financed by FHA risk-sharing loans.

The letter, sent to HUD's Regulation Division is signed by the following:

• American Seniors Housing Association
• Committee on Healthcare Financing
• Council for Affordable Rural Housing
• Institute of Real Estate Management
• Leading Age
• Mortgage Bankers Association
• National Affordable Housing Management Association
• National Apartment Association
• National Association of Home Builders
• National Association of Housing Cooperatives
• National Leased Housing Association
• National Multi Housing Council

The group voices its objection to the premium increases on the basis that HUD has not provided compelling justification for them.  The letter notes that the purpose does not seem to be pricing against risk or covering FHA's costs but rather to increase receipts to the Treasury.  The MIP was not intended, the letter states, to raise funds for Treasury and any increase should be supported and preceded by a careful analysis of the need for and impact of the change.

Historically, the letter says, HUD has not used the MIP to generate revenue beyond that needed to cover expected credit losses and associated programs costs.  The current MIP is at a level where the programs will break even providing only a minimal amount of excess income and is based on an economic model that takes into account the risks and costs of the program.  The Notice makes no mention of any technical or actuarial defects in the model.

The Notice says the new MIP would provide funds in excess of that needed to operate the program and these funds would not build a buffer against future loss because there is no segregated fund but would go into the overall federal budget.  The increased MIPs will only add to property owners' costs thereby affecting rents.  The letter's writers say that "such an action sets a precedent for poor public policy making and has a significant negative impact on national housing policy."

Congress did not intend the MIP to be based on what the market would bear.  The original framework resulted in a need for subsidies from Congress for the FHA multifamily programs but better economic modeling has improved the credit subsidy calculations used for the MIP and it has run at a break-even point for most of the last 10 years. 

The default rate used in the calculation has, in fact, gone down.  For example in the new construction program the rate in FY2012 was 19.11 percent and in FY 2013 it was 13.18 and the multi-family rate dropped from 12.64 percent to 4.22 percent.  "The need for an MIP increase in the face of reduced defaults has not been demonstrated and would be a de facto tax on rental housing" the letter says.

Also, FHA is not crowding out the private market.  It significantly increased its role in the multifamily market during the recession as other participants pulled back but many capital providers began reentering the market in 2009 and have steadily increased their presence in 2010 and 2011.  On the other hand, Fannie Mae, Freddie Mac and FHA stayed in the markets and even increased their volumes in 2008 through 2011.

FHA's share of the new construction market increased in 2008 through 2010 the absolute volume as well as the market share decreased in 2011 as other investors returned to the market and there are indications the FHA share has dropped even further in this fiscal year.  This means that FHA is operating as it should, providing liquidity when other market participants are pulling back and increasing market share as they return.

"As conventional lenders have returned to the market, FHA's market share has declined because these financing sources are more flexible and less costly to pursue.  This is occurring naturally, without the need to unnecessarily increase costs through an increase in the MIP."

Rental housing in general is inherently affordable in character and many of the programs routinely financed by FHA-insured loans that target families at 60 to 80 percent of area median income without any subsidies will be disadvantaged by the new fees.  The proposed increases will also disproportionately affect market rent properties in secondary and tertiary markets where access to capital is more limited.  Private capital is focusing lending in the strongest markets and to the most well-capitalized large developers.  As HUD does not differentiate among markets the increase penalizes the borrowers who need HUD financing the most. Market rate properties would be disproportionately damaged by the changes and Congress intends the multifamily insurance programs to have a broad scope rather than a focus on lower-income families. 

The letter concludes with a plea to avoid implementing the changes at a time when demand for rental housing is increasing and preserving and investing in rental housing stock is critical.  "Maintaining mortgage liquidity is important to the housing stock and to support job creation through development and investment in rental housing."