State housing finance agencies around the country are throwing their weight behind two pieces of legislation now in Congress that they say could bolster the nation's stock of multifamily and low-income housing.
One bill includes provisions designed to increase the availability of credit enhancement from the Federal Housing Administration for multifamily housing bonds. The second bill aims to expand the role of federal mortgage agencies in encouraging new financing for low-income housing.
Executives from state housing agencies have - already testified in support of the bills on behalf of the National Council of State Housing Agencies, and lobbyists are hopeful the measures will pass before the end of the current legislative session.
The credit enhancement proposal was approved by the House in July as part of the general housing reauthorization bill. Lawmakers tried to bring the bill to the Senate floor for a vote early last month, but did not succeed.
In a program called for under the bill, the FHA, an agency within the Department of Housing and Urban Development, would provide credit enhancement on bond deals initiated by state housing agencies, thereby lifting the credit rating for the issues and lowering the financing cost.
The Program would be initiated as a pilot project between HUD. and state and local housing agencies, or between the department and other entities involved in financing multifamily projects.
HUD would provide full insurance through the Federal Housing Administration for affordable multifamily loans originated by qualified state housing finance agencies. The agencies would be required to reimburse HUD for all or a portion of the losses incurred on the insured loans. The department would also have to allow the state housing agencies to use their own under-writing criteria without further review, unless HUD retains over 50% of the risk.
To qualify for the program, a state housing agency must have at least a single-A rating or demonstrate its credit worthiness to HUD's satisfaction.
The first state housing agency officials that have expressed interest in participating are from Massachusetts and Michigan, according to Barbara Thompson, director of government affairs for the National Council of State Housing Agencies.
The General Accounting Office, which recently completed a draft report on the pilot program, suggested that it be restricted initially to state housing finance agencies experienced in financing affordable multifamily housing.
The GAO said these agencies are "organizations of state government, known entities in the financial marketplace, and publicly accountable to their legislatures."
James L. Logue, executive director of the Michigan State Housing Development Authority, said in testimony in July before the House subcommittee on housing and community development that the pilot program strategy would make financing available for affordable housing more quickly.
He said FHA multifamily insurance should eventually be made available through federal mortgage agencies as well as state housing agencies.
Mr. Logue said the program is needed because insurance from the private sector for such purposes is "virtually nonexistent," and the housing administration has drastically cut its enhancement program.
FHA multifamily insurance fell to $1.3 billion in 1990 from $5.6 billion in 1987.
"Without the credit enhancement provided by FHA insurance, it will remain virtually impossible to finance affordable multifamily housing," Mr. Logue said.
The Michigan housing official also said additional private sector involvement would be helpful, but only if participants are held to very stringent performance and capital standards.
New Program, Few Risks
He stressed that the program would not repeat problems that arose with a former federal coinsurance program because that involved "undercapitalized, fly-by-night" mortgage companies.
State housing finance agencies, by contrast, are "substantial financial institutions with long records of responsible underwriting and significant incentive to continue their public mission of providing affordable housing," so they would expose HUD to very little risk, Mr. Logue said.
Under the federal government's now-extinct coinsurance program, the FHA provided 80% of the insurance and the lender provided the rest. But the bond market's penalty for less than 100% coverage was too high, so the housing administration brought the Government National Mortgage Association on board to fully guarantee the bonds.
Private lenders and the FHA were supposed to reimburse Ginnie Mae for any losses, but many private lenders never did, leaving FHA and the federal government on the hook.
"This problem is obviated in the proposed pilot program because [housing finance agencies'] high underwriting standards and multifamily expertise make any default extremely unlikely, and should a default occur, HFAs have the assets and commitment to fulfill their obligation to pay." Mr. Logue told lawmakers in July.
In fact, the two state agencies that were certified as coinsurers under the old program - the Massachusetts Housing Finance Agency and the Pennsylvania Housing Finance Agency - never caused a loss to the federal government during their time with the program.
Mr. Logue said he has also never heard of a state housing finance agency defaulting on an issue, "and agencies generally have the implicit backing of their state governments."
Ms. Thompson of the national council said that in addition to the credit enhancement program, a stronger secondary market for multifamily mortgages would also increase the funds available to finance multifamily projects.
She said the transactions do not currently attract a secondary market because of their lack of uniformity. That means lenders who might be willing to make multifamily loans have no market outlet to sell the loan later, which discourages them from becoming involved, she said.
Ms. Thompson said that because the program in its initial phase would be small in scope in order to prove to HUD that it can work, it is unlikely to greatly affect tax-exempt bond issuance at first. She said the latest version of the bill calls only for financing 30,000 new housing units over 3 years.
Under a second bill that passed the House last year,and the Senate in July, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. would be required to increase their mortgage purchases for low-income single and multifamily housing.
The bill, S 2733 in the Senate and HR 2900 in the House, would require $3.5 billion over a two-year period for housing for families with incomes of 80% of the national median or less, according to Ms. Thompson.
Officials of the Council of State Housing Agencies also told Congress that Fannie Mae and Freddie Mac are not meeting the requirements to make at least 30% of their mortgage purchases benefit low-and moderate-income families and 30% serve central cities.
The legislation comes at a time when housing officials say the need has never been greater.
Between 1985 and 1989, there was a net loss of 75,000 low-cost rental units and 15,000 government-subsidized rental units, according to a study conducted last year by the Joint Center for Housing Studies of Harvard University. In 1989, 77.2% of all poor renters, or 3.4 million households, devoted more than half of their incomes to housing, the study finds.
Different Standards Urged
Terrence R. Duvernay, executive director of the Georgia Housing and Finance Authority, told lawmakers considering the proposal last year that change is needed because current underwriting standards are geared toward conventional rather than low-income housing.
"Unfortunately, many worthy affordable housing projects find it impossible to meet these standards for reasons which do not necessarily include risk," Mr. Duvernay told the House Banking, Finance, and Urban Affairs subcommittee on housing and community development.
Mr. Duvernay said the current programs at Fannie Mae and Freddie Mae are structured to make sure the two agencies encounter virtually no risk, even in affordable housing ventures. But he said financing truly low-income housing involves some risk, and he urged the agencies to expand their scope.
For multifamily housing, the program should involve higher loan-to-value ratios, lower debt service coverage ratios, and less rigid assumptions on rent, reserve, income, and expense trends, Mr. Duvernay said. For single-family loans, higher loan-to-value ratios and lower debt-to-income ratios should be allowed, he added.
"If, as we believe, low-income housing that does not meet conventional underwriting standards does not necessarily imply greater losses, there is real potential that no losses will materialize through the loans which [the program] funds are used to reserve against," Mr. Duvernay said. In that case, the reserves can be used to leverage even more financing, he said.
Another problem is the differences among low-income housing projects. Traditional single-family mortgages can be packaged into large numbers and sold easily in the secondary market because most are virtually identical.
For that reason, Mr. Duvernay echoed Ms. Thompson's call for assistance for Fannie Mae and Freddie Mac in developing a system of repackaging low-income housing mortgages into securities appropriate for a large retail market.
He said the agencies could either establish their own secondary market pool or capitalize other institutions, such as state housing finance agencies, to do so.
Mr. Duvernay also suggested that the new affordable housing program should give preference to regions, particularly rural areas, where rental housing is frequently not viable. He said a minimum of $1 billion in leveraged financing for low-income housing should be made available under the program.
