Mr. Chairman and Members of the Subcommittee: We appreciate the opportunity to participate in the Subcommittee's hearing this morning on the Federal Housing Administration (FHA). My testimony today is based on a study that we are currently conducting in response to a mandate contained in the National Affordable Housing Act of 1990. This mandate directed GAO to, among other things, identify legislative or administrative actions that could improve the availability of mortgage financing for affordable multifamily housing through credit enhancements. Credit enhancements are additional collateral, reserves, or third party guarantees to insure the payment of debt obligations. As you are aware, Mr. Chairman, there are various subsidies that the federal government can use to assist lower-income families so they can afford rental housing. Among the primary ones are Section 8 vouchers and certificates, public housing, low-income housing tax credits, and credit enhancements. As requested, today I will discuss several credit enhancement options which focus primarily on modifications to FHA's insurance programs. The results I am reporting today are preliminary and thus subject to revision as we complete our work. We anticipate issuing our final report on this subject later this year. To develop these options, we drew upon the expertise of a wide range of senior and midlevel officials representing private financial institutions, including commercial bankers, mortgage bankers, and savings and loan officials; bond insurers; credit rating agencies; government-sponsored mortgage finance corporations; for-profit and nonprofit housing developers; government regulatory organizations; state and local housing finance agencies (HFAs); and community development organizations. We also interviewed selected representatives of academia. We reviewed financial and, housing literature, congressional testimonies, and studies pertinent to the subject of mortgage finance. In summary, there is a broad consensus among those we interviewed that a need exists to improve the availability of longterm fixed-rate financing for affordable housing. The options I discuss this morning are geared toward this objective. These options are (1) delegated processing, (2) delegated underwriting, (3) primary bond insurance, and (4) bond reinsurance. The first two options are intended to improve the availability of government insurance on individual loans, while the last two options would be primarily for groups or pools of loans. Appendix I provides a detailed discussion of each option. The options, while they would modify FHA's current practice in providing credit enhancements, could be focused initially on HFAs, that have demonstrated their capacity and commitment to affordable multifamily housing. If implemented, this approach would provide the federal government with the opportunity to evaluate the benefits and risks of these options before expanding their use to other qualified market participants (specifically, the Federal National Mortgage Association, or Fannie Mae; the Federal Home Loan Mortgage Corporation, or Freddie Mac; and additional HFAs). It is important to note that while these options could increase the financing available for providing affordable housing, additional credit enhancements will expose the federal government to possible costs. This exposure could be lessened by having a comprehensive data base on affordable multifamily loan performance from which reliable underwriting criteria and premium structures could be developed. Such a data base currently does not exist. Before discussing in more detail the options for providing credit enhancements it is important to provide some context for our work. To do this, I will highlight (1) the need for affordable rental housing and factors having a negative impact on its financing and (2) the benefits of an expanded secondary market for affordable multifamily mortgages. NEED FOR AFFORDABLE HOUSING AND FACTORS IMPEDING PERMANENT FINANCING A recent study by the Department of Housing and Urban Development shows that millions of lower-income families pay too much for housing and that too much of the housing they occupy is substandard. This study, along with other studies' has also shown that the number of families with these housing problems has been growing and that federal housing subsidies that make housing more affordable only reach about one-third of the affected population. The basic explanation for this situation is that there is a gap between what it costs to build and operate affordable housing and the rents that lower-income households can afford to pay. For example, a family with a $10,000 annual income can afford to pay about $250 per month according to government guidelines (30 percent of income). However, this amount typically is not sufficient to allow an owner to make mortgage payments, pay operating expenses, 'Center on Budget and Policy Priorities and the Low Income set aside reserves for major repairs or rehabilitation, and earn a profit. Aside from the income limitations of tenants, financing for affordable multifamily housing has undergone major transformations during the 1980s caused by policy, legal, regulatory, and social changes. These changes, while having positive implications, including curtailing overbuilding in some areas and promoting safety and soundness within depository institutions, have nevertheless generally worked to discourage investment in affordable multifamily housing. For example: Changes contained in the Tax Reform Act of 1986 (lowering the marginal tax rate, lengthening depreciation times, and changing rules concerning passive losses2) decreased the profitability of owning affordable multifamily properties, which in turn increased the difficulty of obtaining permanent financing. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 required that depository institutions maintain twice the capital reserves on multifamily housing loans than on single-family housing loans. There is general consensus among those we interviewed that this has had a negative impact on the willingness of these institutions to finance affordable multifamily housing. The shift from project-based subsidies to tenant-based subsidies has also increased the difficulty of obtaining permanent financing because of the lack of assured rental income. Losses on rental property resulting from depreciation or cash contributions to cover operating deficits. |