Leo E. Zickler. chairman and president of Oxford Realty Services Co.. Bethesda. Md. told the Housing and Community Development Subcommittee of the House Banking. Finance and Urban Affairs Committee that the multifamily finance system must be rebuilt in order to meet the affordable housing needs of the nation. He testified in support of the National Mulitfamily Housing Finance Act. which has been included as a provision of the Housing and Community Development Act (H.R. 5334). He spoke on behalf of the National Multi Housing Council and the National Apartment Association.
This country cannot have a serious national effort to provide more affordable housing unless it starts now to rebuild a strong multifamily finance system.
The fact is that multifamfly rental housing is the most realistic form of quality affordable housing for tens of millions of American families-including young families struggling to buy a first home. working families who find home ownership out of reach. and millions of retired persons.
It is especially true for low-income and moderateincome families. And, with current trends, it will increasingly be the case for growing numbers of middle-income Americans.
At its core, the country's affordable housing problem is a problem of rental housing. For the past two decades. the number of low-income renter households has grown steadily. from 5.3 million to 8 million households, while the number of homes they could afford shrank from nearly 6 million to fewer than 3 million.
This committee works hard to foster decent affordable housing. However. all of your efforts will be overwhelmed by the damage created when we have a hostile climate for private investment in multifamily rental property. Unfortunately. that has been the destructive consequence of many federal actions in recent years.
Three major developments have combined to create a devastating shortage of multifamily financing.
First, the traditional sources of multifamily mortgage financing are largely drying up. That problem is not short-term or cyclical.
The thrift industry has been reducing its multifamily loan portfolios by more than $13 billion per year since enactment of the Financial Institutions Reform. Recovery and Enforcement Act. FIRREA's single-borrower loan limitations effectively preclude all but a handful of the nation's largest thrifts from making an acquisition. development or construction loan for a multifamily project FIRREA's risk-based capital standards create a heavy bias against multifamily lending by thrifts and banks. Lenders can maintain profitability only by increasing interest charges or reducing lending volume on multifamily loans.
Banks also have been under intense pressure to reduce multifamfiy lending as a share of their total assets. After a period of unusually heavy real estate lending in the mid- to late-1980s, banks are struggling to return to earlier patterns by reducing their real estate loan holdings by hundreds of billions of dollars.
The insurance industry is also under intense financial pressure, which is forcing retrenchment by this traditional source of longterm multifamily housing lending.
Second, is that an efficient secondary market in multifamily mortgage loans has been slow to develop.
To see the importance of that handicap, look at what happened in the single-family mortgage market and compare it with developments in the multifamily market. The collapse in mortgage lending by traditional lending institutions had relatively little impact on single-family borrowers because Fannie Mae. Freddie Mac and other secondary mortgage market entities rapidly expanded their volumes to fill the demand for single-family mortgage credit. But no such replacement system has emerged to fill the vacuum for multifamily lending. Fannie Mae has developed its Delegated Underwriting and Servicing Program and is increasing the resources it devotes to multifamily lending. But the volume of multifamily activity has not increased anywhere near the levels needed to fill the vacuum left by the retrenchment by primary lenders.
Freddie Mac, after withdrawing completely from the multifamily market in 1990, is only now taking tentative steps to return. (Freddie Mac --the Federal Home Loan Mortgage Corporation--formally re-entered the multifamily market last month. (See The Mortgage Market- place. July 20. page 1 .)
The reasons are many. Multifamily lending accounts for less than 10% of the total volume of mortgage originations. Because each mortgage is large and somewhat more difficult to standardize, a secondary market in multifamily loans requires both more comprehensive data about each local housing market and much more sophisticated technology.
Therefore, powerful profit incentives draw the attention and resources of Fannie Mac and Freddie Mac toward single-family mortgages rather than multifamily lending.
Some particularly innovative multifamily deals may never achieve the degree of conformity to standard practice required for the secondary market, but most multifamily loans could and should be much more standardized.
Indeed, much of the non-standard "creative financing" often found in multifamily financing is not required by the nature of the property itself. It is a symptom rather than a cause of the failure to have an adequate secondary mortgage market.
Third, the Federal Housing Administration has, in effect, been withdrawing from its historic role as a major supporter of credit for multifamily housing.
Inattention and mismanagement under the previous administration had left FHA at the end of 1980s with severely weakened staff capabilities. The negligence of that era culminated in the huge losses under the coinsurance program, a poorly conceived scheme for "privatizing" the activities of FHA staff.
The current administration's first reaction was suddenly to shut down the coinsurance program. In effect. the administration eliminated FHA support for multifamily credit for an unprecedented period of almost two years. except for a very few projects insured under direct processing.
More recently, FHA claims it is responding to the demand for multifamily mortgage insurance through its new Multifamily Delegated Processing Program. under which mortgage processors are selected by competitive bidding to make underwriting recommendations for mortgage insurance applications to FHA.
Although mortgages are indeed beginning to be insured under the MDPP, multifamily lenders. developers and owners find the program very difficult to work with. The program's design is unnecessarily cumbersome.
It now takes the FHA field offices six to 12 months to process a loan for FHA insurance. These loans could be processed by the private sector in 60 to 90 days with appropriate program design and oversight by FHA staff. [The Department of Housing and Urban Development] could shorten its processing time for a loan to as little as 90 days total by using a combination of HUD staff and private sector appraisers. architects and mortgage credit analysts.
HUD has proposed helpful, but inadequate, in our opinion, improvements to the MDPP. Delegated processors are not assigned to projects in a timely manner. Schedules established under MDPP procedures are not met. partly because HUD offices are not adhering to established processing timetables and are not resolving problems in a reasonable period of time. But HUD admits that it will be a number of months before processing times will be shortened due to the shortage of trained HUD staff.
The primary breakdown in the multifamily insurance programs is HUD's continuing lack of administrative support for those programs. Staff positions dealing with the insurance programs are not filled. and FHA multifamily insurance is a particularly low priority with the present administration.
Shortages of skilled staff are crippling whether HUD chooses to process loans on a direct basis using HUD's staff or on an indirect basis using the MDPP. Skilled HUD personnel are required to analyze the loan underwriting performed by the delegated processors or actually to perform such underwriting themselves.
HUD is trying to patch modified MDPP procedures onto a direct processing system that has not been adapted adequately to modern mortgage finance. HUD did not have the staff capacity to administer direct processing several years ago, and HUD's staff capacity is even weaker now.
We are concerned that, at heart, HUD's current practice adopts some very dangerous characteristics of the ill-fated coinsurance program. For example. MDPP is designed to provide FHA insurance only through a special `stable' of MDPP mortgage processors. HUD then subjects these firms to enormous administrative complexity and aggravation.
Under these conditions, it is highly unlikely that, over time, this `stable' of MDPP processors will continue to include the country's strongest lenders or most sophisticated mortgage underwriters.
If the frustrations of working with FHA persist, just the contrary Is likely to occur--the MDPP 'stable' Is increasingly likely to be comprised of relatively marginal and poorly capitalized firms for whom FHA processing Is their primary business.
HUD will then find itself either tightly limiting volume or drifting again toward unacceptable risks unless FHA develops a capacity for highly sophisticated oversight. FHA would have to become able to scrutinize the work of MDPP processors very closely without making the underwriting procedures impossibly unwieldy. Experience does not build confidence that FHA by itself can maintain that capability.
We are concerned that. unless Congress and the administration take major action in the next few months, FHA could permanently lose Its ability to foster a national multifamlly mortgage market that has the stability and depth that the country needs. And if that is allowed to happen, rental housing will be severely harmed for a long time to come.
The bill would prepare FHA to move beyond the increasingly unworkable and fiscally dangerous procedures of the recent past.