WASHINGTON -- The Department of Housing and Urban Development will attempt to revive its moribund multifamily loan insurance program over the next two years by testing the idea of letting state and local governments share the risk of insuring the loans.

HUD officials are calling the new risk-sharing pilot program the centerpiece of their attempts to spur construction of multifamily housing units. If successful, the plan could ultimately trigger a resurgence in the issuance of tax-exempt multifamily housing bonds, municipal lobbyists said.

"Risk sharing is the cornerstone of our multifamily housing production effort," said Jeanne Engel, general deputy assistant secretary in HUD's office of housing. "We think this is the wave of the future for the Federal Housing Administration," the agency within HUD that insures multifamily loans.

HUD expects to begin the pilot program shortly, Engel said. The agency's regulations for the program are being. reviewed by the Office of Management and Budget. As soon as the rules are cleared by OMB and reviewed by Congress, HUD will publish them and begin accepting applications from housing agencies that want to participate, Engel said.

HUD will permit up to 30,000 rental housing units to be financed over the next two years under risk-sharing arrangements. The program calls for two risk-sharing levels. Under the first, a state or local housing agency would assume between 50% and 90% of the insurance risk on a loan. In this situation, the agency would be permitted to use its own underwriting standards and loan terms without FHA approval.

A housing agency could also choose to assume between 10% and 25% of the risk on a loan. In that case, the agency's underwriting standards and loan terms would have to be approved by the FHA.

Loans insured under the demonstration program could be used to finance new construction, substantial rehabilitation of existing units, or acquisition of units without substantial rehabilitation. Each project would have to contain a minimum of five units. Certain types of facilities would not be eligible for the program, including transient housing and nursing homes.

The risk-sharing pilot is needed because FHA's current insurance program is nearly unworkable, state and local housing officials said. It often takes one or two years for an insurance application to be processed by the administration, they said.

"Opportunities come and go during that period," said Charles Brass, the vice president of development for the New York City Housing Development Corp.

Ironically, the long slow process for approving insurance applications is a reaction to a scandal that erupted in the early 1980s involving another risk-sharing program attempted by HUD, known as coinsurance.

Organizations that became coinsurers tended to be savings and loans or other private companies that did not know the housing industry well and were not capable of properly monitoring housing projects, lobbyists said.

The program used lax underwriting standards and did not force the entities sharing the risk with HUD to stay with a project if it became troubled. The result was a tremendous number of defaults, and billions of dollars worth of troubled mortgages assigned to HUD, lobbyists said.

The new risk-sharing pilot will not have the same problems that plagued the coinsurance program because the federal government's partners this time are by their nature more responsible, said Engel.

"State and local housing agencies are here to stay. They cannot up and run away from a project," Engel said. "Their goals are to build the housing, maintain it as affordable, and care about the tenants."

John C. Murphy, the executive director of the Association of Local Housing Finance Agencies, said that HUD, in developing the risk-sharing program, "recognizes that state and local housing finance agencies ... are quite capable, well staffed, and keenly understand multifamily housing finance. They are able to assume this role."

In monitoring the program, HUD will be walking a fine line between maintaining high standards for loans that are insured and giving housing agencies flexibility in the decisions they make about insurance.

"This is the centerpiece program for the future, but it can't repeat coinsurance's mistakes. How does HUD manage that balancing act?" said Robin Salomon, a lobbyist with 1300 Group, a legislative affiliate of the law firm of Pepper, Hamilton & Scheetz.

HUD officials "need to provide capable oversight, but they can't beat the program participants to death," Salomon said.

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