Introduction Mr. Chairman and Members of the Subcommitte, my name is Larry Dale, and I am Executive Director of the National Housing Impact Division at Fannie Mae. I am pleased to participate in this roundtable discussion, which is addressing important housing issues relating to FHA, both single family and multifamily, and other related issues. This statement will address a number of issues: Part I will discuss issues relating to FHA single family reform; Part II will discuss multifamily financing and the adequacy of the current system for financing multifamily housing; and Part III will discuss a number of miscellaneous housing issues related to the FHA and to this year's housing authorization bill. Fannie Mae is a privately-owned corporation, chartered by the federal government to fulfill a public mission increasing the supply of capital to finance residential mortgages. We do this by purchasing loans from lenders in the secondary mortgage market, and by issuing securities that are backed by single family and multifamily mortgages. As a trade-off for being limited to the business of single family and multifamily residential finance, Fannie Mae maintains certain ties to the federal government which allow us to borrow at reduced cost. The cost savings are passed on to lenders and consumers in the form of lower interest rates on mortgages. Fannie Mae is the nation's largest investor in mortgages. At the end of February 1992, we held over $133 billion in mortgages in our portfolio and had outstanding over $380 billion in mortgage-backed securities (MBS). Multifamily loan inventory as of February 1992 totaled $21.6 billion and consisted of $4.8 billion FHA-insured loans, $8.6 billion in conventional multifamily MBS, and $8.2 billion in conventional portfolio loans. Part I FHA Reform In an effort to reverse the continued losses to the FHA insurance program caused considerable 3 It has been almost sixty years since the National Housing Act put in place a program of federal government mortgage insurance for long-term fixed-rate mortgage loans. Enacted as a Depression era reform effort, Congress sought to create a mortgage product that insured the lender against the risk of default and protected the borrower by creating a safe mortgage product with a fixed-rate and long amortization period. Credit protection and a standard long-term fixed-rate mortgage product was guaranteed. Rapid market condition changes, unexpected losses in the FHA insuance fund, and failure to agree on a policy direction for FHA have resulted in an unfortunate lack of program direction. Fannie Mae believes that it is an appropriate time to revisit the operation of the single-family FHA insured mortgage program. We acknowledge the difficulties and differences of opinions that many have on the proper role of the federal government in insuring against credit risk on residential mortgages. In its overall book of single-family business, Fannie Mae seeks at least a 99% success rate on this business (99 out of 100 borrowers are successful homeowners in that they pay off their mortgage obligation). Properly, HUD-FHA assumes a lower success rate on its overall single-family mortgage insurance program. Public policy imperatives, such as addressing affordability, lower downpayments, a sharper focus on low and moderate income households and providing access capital for areas which have historically lacked such access, result in FHA standards which are, appropriately, different from those of the conventional mortgage market place. Simply put, a 94% success ratio may be perfectly appropriate for FHA even though it is inappropriate and infeasible as a private business assumption. to Fannie Mae believes it is important for the federal government to continue to provide credit support for residential single-family and multifamily lending. It is the role that the Federal Government plays best. Fannie Mae and the secondary market play a different role. Working together with our network of lenders in the primary market who originate and service loans, we have established national standards that make single-family mortgage products a commodity that is accepted and dealt with in all areas of the country. Fannie Mae can track information on loan portfolios and mortgages backing our securities. We set forth underwriting guides that reflect credit experience and the impact of various economic developments on the credit quality of our mortgages. We monitor the quality and practice of our lender network and make appropriate decisions on continuing business relationships based on their performance. We have the lender network and the necessary controls, through which the federal government (FHA) could provide the credit support for residential mortgages. Part II Fannie Mae would suggest consideration of a new role for FHA, one of a reinsurer, credit enhancer, or risk sharer in support of residential mortgage credit. In return for allowing more liberal underwriting standards, conventional lenders and/or the secondary market would enter into a contractual relationship with HUD/FHA which would result in a sharing of risk. The conventional market would assume risks that it is accustomed to taking while the FHA would assume the incremental risks associated with the more liberal underwriting standards. In Fannie Mae's case, our Charter Act requires that we achieve a reasonable rate of return. The mortgages would be originated and serviced by Fannie Mae's network of lenders with underwriting standards established by Fannie Mae and FHA. The management of a large mortgage business would be removed from FHA's responsibility, delegated to the secondary market agencies' lender network with underwriting standards and guidelines established jointly by FHA and the secondary market agencies. FHA's role would be as a risk-sharer, credit enhancer, or pool insurer or reinsurer. Multifamily Financing: Summary of Key Points O The secondary market has a significant role to play in financing multifamily housing, especially affordable rental housing. Fannie Mae's multifamily activities are almost entirely concentrated in units affordable to families of lowand moderate-income. In 1991, our multifamily activities provided housing for 127,000 families. Our total outstanding multifamily business supports rental units that house nearly 1 million families. Again in 1991, Fannie Mae's $3.2 Billion in investments in and/or guarantees of Multifamily mortgages made us far and away the largest single financer in Multifamily housing. Business volumes of thrifts and banks have tapered off dramatically since 1989 due to the effect that FIRREA and related risk-based capital requirements have had on regulated institutions. Financial institutions, mortgage bankers, Fannie Mae, Freddie Mac and FHA can attempt to provide a more efficient multifamily financing system, but these financing vehicles cannot meet the needs of low income renter families without federal subsidy assistance. Credit enhancement from the Federal Government together with government subsidy programs, such as Section 8 certificates, vouchers, and HOME funds can provide an effective mechanism 5 to deliver affordable rental housing to low income households. The risk inherent in any housing program needs to be considered. This is not analogous to saying no, but rather to knowing programs are sound. Residents suffer first and foremost if programs fail. The risk consideration must focus on the physical performance of the housing over time as well as on affordability. Conventional multifamily housing (unassisted and not federally insured) is a major housing resource and generally provides housing at affordable rents. It is vital to maintain capital flow to ensure its preservation through an effective multifamily finance system. Securitizing multifamily loans (which are commercial loans) is a different task than securitizing single family loans. Multifamily loans are business loans. Historically, the factors necessary to create a larger secondary market have not existed. Standard lending documents, commonly accepted underwriting definitions and procedures, and agreement as to the risk characteristics for such loans have not been present. Fannie Mae's Multifamily Business Since 1987, a year in which we restructured our multifamily financing products, our loan inventory has grown from approximately $8 billion to over $21.6 billion, more than a 150% increase. Our conventional loan inventory has more than quadrupled from under $4 billion to over $16.4 billion. One element of this growth was a surge in MBS swaps for pools of mortgages held by regulated financial institutions. Let me describe the typical loan guaranteed in an MBS swap transaction. It is a loan of less than $1 million on a property in an urban center, often on the west coast; and in many cases, the property provides very affordable rental housing. Currently this is a much lower volume product due to the effect on these institutions of strict FIRREA capital standards for multifamily housing as promulgated and administered by the OTS under FIRREA and the occ under banking regulatory law. The other main element of growth was the DUS product line, which is still very active and productive. The typical DUS loan is a recently originated loan for a $4-5 million property which is over 10 years old and has rents affordable to many low- and moderate-income families. The affordable housing dimension of even conventional market multifamily financing programs should not be surprising. Renter households on the whole are less affluent than homeowner households. The median household income of renter families is $19,000 according to the 1989 American Housing Survey, compared to $34,000 for homeowner families. |