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Tuesday, July 22, 2003
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:05 a.m., in Room 2128, Rayburn House Office Building, Hon. Bob Ney [chairman of the subcommittee] presiding.
    Present: Representatives Ney, Green, Ose, Miller of California, Tiberi, Renzi, Waters, Carson, Lee, Sanders, Watt, Clay, and Scott.
    Chairman NEY. [Presiding.] The Subcommittee on Housing and Community Opportunity will meet this morning to hold a hearing on H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act of 2003. And we will have a markup after today's hearing.
    I will also note that we will have opening statements. And also, without objection, all members' opening statements will be made a part of the record.
    And of course, any statement that the witness has and the time has lapsed will be also made part of the record, without objection.
    The Federal Housing Administration is one of the most effective programs, I believe, in helping low-to middle-income buyers purchase their first home. It was originally designed to encourage lenders to make credit more readily available and at lower rates.
    Through FHA programs, HUD insures mortgages and loans, made by HUD-approved lenders, for a wide variety of purposes, including new construction, rehabilitation, property improvement and refinancing in connection with a wide variety of types of property.
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    FHA programs include all types of residential property: multifamily, single family, manufactured homes, non-residential commercial property, hospitals and certain other health care facilities. The FHA multifamily mortgage insurance program is a critical source of financing for affordable multifamily rental housing.
    During the previous two years, Congress supported and implemented improvements to the program, including increasing the base loan limits by 25 percent and indexing the loan limits to inflation, which begins in 2004. As a result, loan volumes have increased significantly in many areas of the country, where the program previously was not working.
    However, there are a number of high-cost urban markets, such as New York, Boston, San Francisco, Chicago and Los Angeles, where construction costs are obviously significantly higher than in other areas of the country. And the high-cost factors have not been sufficient to allow the use of the FHA multifamily mortgage insurance programs.
    Under current statutes, the HUD Secretary may increase the loan limits in high-cost geographic areas, up to a maximum that is expressed as a specific percentage. Currently, it is 110 percent above the statute's base limit.
    The secretary may also increase the loan limits on a project-by-project basis, up to a level that is a specific percentage. Currently, that is 140 percent above the base limit, if it is deemed necessary because of high costs.
    H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act of 2003, was introduced by Congressman Gary Miller, May the 6th, 2003. It would amend the National Housing Act to give the HUD Secretary the discretion to increase the maximum mortgage amount limit for FHA-insured mortgages for multifamily housing located in high-cost areas.
    In addition, it would change the statutory maximum adjustment percentage for geographic areas from 110 to 170 percent, which would change HUD's maximum high-cost percentage to 270 percent. Providing the HUD Secretary additional flexibility to increase the maximum loan limits in high-cost areas would greatly improve the FHA multifamily mortgage insurance programs.
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    With severe shortages of affordable rental housing in most of the high-cost markets, this change would enable developers to provide much needed and affordable housing to low-and moderate-income families.
    I would also note that the ranking member is a sponsor of this bill—of the Housing Subcommittee. And also Ranking Member Mr. Frank supported the bill, who is the ranking member of the full committee.
    And with that, I would turn to Mr. Scott. Do you have an opening statement? Thank you.
    Mr. SCOTT. Yes, thank you very much, Chairman Ney. I want to thank you for holding this important hearing today regarding Multifamily Loan Limit Adjustment Act, H.R. 1985. I also want to thank the distinguished panel of witnesses today for their testimony.
    From July, 2001 to July 2002, my State of Georgia ranked fourth in the nation in housing growth, both in the number of homes built and the percentage increase in housing. I represent parts of 11 counties in the metro Atlanta and suburban Atlanta communities.
    And five of these counties represent five of the top housing growth counties in Georgia. So five of the top housing growth counties in Georgia are located in my district.
    Part of this explosive growth is due to low interest rates. And part is due to the rapid expansion of the south and east suburbs of Atlanta.
    While Atlanta would not be considered a high-cost city for the purposes of this legislation, I am concerned with home ownership rates, particularly home ownership rates of minority groups. From 1998 to 2002, for example, African-American home ownership rates rose from 45.6 percent to 47.3 percent.
    However, compared with the national average increase from 66.3 percent to 67.9 percent, we can see that African-American home ownership still lags far behind. With interest rates at historical lows, I believe that we must push even harder to help increase minority home ownership rates.
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    And addressing FHA home loan limits is part of that equation. I strongly support H.R. 1985. And I look forward to its quick passage today.
    Thank you very much, Mr. Chairman. Yield back the balance of my time.
    Chairman NEY. The gentleman yields back the balance of his time.
    Additional opening statements? Opening statement, Mr. Sanders?
    Mr. SANDERS. Sorry, Ms. Lee was next.
    Ms. LEE. Thank you, Mr. Chairman. And thank you very much for not only for yielding, but for being polite.
    Thank you, Chairman Ney and also, to our ranking member in her absence this morning.
    For a minute, I would like to just say that under the leadership, of course, of Chairman Frank and many others, we have enacted into law legislation to increase the multifamily loan limits and increase the dollar amounts by approximately 25 percent.
    During last year, I mean, I think it was during a committee hearing last year, the markup of H.R. 3995, we agreed and passed out of committee a bill which would have done all of the things in H.R. 1985. Now from what I remember, H.R. 3995 was never placed on the calendar.
    The Financial Services, though, did include two provisions affecting FHA multifamily loan limits: one, which would have provided for annual inflation indexing of the basic statutory per unit loan limit and provide for annual indexing; and a second provision, which would have raised percentage adjustments that the HUD Secretary could use in high-cost areas.
    This authority to raise the percentage adjustment, in my opinion, is very critical. In many areas in our country very similar to my own district—the 9th Congressional District of California that includes Oakland—our housing costs are outrageous.
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    And there is a dire need to provide affordable, quality multifamily housing. But yet, of course, just like many districts, we are faced with an extremely scarce housing stock.
    So I look forward to this hearing and support H.R. 1985, because it will raise the fact that HUD can increase the basic multifamily limits in high-cost areas from 210 percent to 270 percent and increase the basic statutory, per unit multifamily loan limit, on a project-by-project basis, from 240 percent to 270 percent.
    However, changing the limits of course is not the final answer to the affordable housing crisis. In addition, we must authorize and execute a national affordable housing trust fund.
    By creating a national housing production program, we will ensure that at least 1.5 million new affordable houses—multifamily units included—will be built across this country. By creating a national housing trust fund, we can truly help those in need by calculating the area need and the median income.
    Money will go to states and localities based on a formula which weighs their true need. We must take the issue of affordable housing really to the next level, Mr. Chairman.
    And I feel that a national affordable housing trust fund will guarantee that next step. A national affordable housing trust fund will guarantee, for at least 50 years, that the housing built with trust fund money will stay affordable.
    So this bill, H.R. 1985, hopefully will pass out of this committee because I think this is the first step in changing an antiquated formula that restricts HUD and our local housing agencies from providing the best comprehensive service possible. But I also support the trust fund.
    And I want to thank my colleague from Vermont, Mr. Sanders, who I know will talk more about it. But I think that as we debate and look at this bill, we should also look at what producing new affordable housing means in terms of housing stock.
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    Thank you, Mr. Chairman. And I yield.
    Chairman NEY. I want to thank the gentlelady for her statement.
    The gentleman, sponsor of the bill, Mr. Miller?
    Mr. MILLER OF CALIFORNIA. Thank you, Chairman Ney. And I want to thank you for convening this hearing today to examine FHA's multifamily mortgage insurance program.
    I would also like to thank the ranking member of this full committee, Mr. Frank, for working with me in introducing H.R. 1985, the FHA Multifamily Loan Adjustment Limit Act of 2003.
    Mr. Chairman, it is not really often that Democrats and Republicans from across the spectrum see eye to eye. And it is a rare pleasure to have Ms. Waters and I looking at an issue and agreeing on it because generally, on housing issues, we have different opinions.
    But on this issue, we are in agreement that this has to be done. And because of the high-cost markets, where land and construction costs are significantly higher than in other areas of the country, there is no question that FHA multifamily mortgage insurance limits are not keeping pace.
    And that is a problem we conservatives and liberals alike have come together today to solve.
    Having been a developer for over 30 years and many of my friends are, the rapidly escalating costs of land and construction, especially in California, are making it very, very difficult to provide affordable rental units. The slowdown in affordable rental housing production has resulted in a significant gap between the demand and the supply of affordable rental housing.
    Increasingly, America's working families are unable to find decent, affordable homes in the communities where they work. In fact, according to a report released by the National Housing Conference last November, more than 4.8 million working families spent more than half of their income on housing in 2001.
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    This was an increase of 60 percent of families in 4 years. This is unacceptable.
    Today, many public servants in my district—police officers, firefighters and teachers—are not able to live in the communities in which they serve or grew up. I call these people the new homeless.
    Exactly who are these new homeless? In my district, it might be a couple; the husband is a firefighter and the wife a teacher.
    They have good jobs and make a good living. But their combined income does not enable them to rent a modest, one-bedroom apartment, which rents for over $1,000.
    And if Congress does not do something to promote affordable rental housing, this will not get easier for these couples over the years in my district. Orange County, California, has the third biggest rent increase out of the 25 largest metropolitan areas and 11 western states.
    Thirty-three percent of renters in Orange County sent 35 percent or more of their household income to their landlord. This is a problem all over southern California.
    The Inland Empire in Los Angeles ranked first and second in terms of rent increases. As you will hear from the panel today, it is a national problem. And Congress must work expeditiously to address it.
    The FHA multifamily mortgage insurance program has operated successfully for over 65 years, working with private sector parties to expand the supply of rental houses. Over the past six decades, this public-private partnership has leveraged more than $100 billion of private sector investment to provide rental housing for more than four million families and the elderly throughout the country.
    FHA's multifamily mortgage insurance program enables qualified buyers to obtain long-term, fixed-rate, non-recourse financing for a variety of multifamily properties that are affordable to low-and moderate-income families. In fiscal year 2002, Congress provided for a 25 percent increase in the multifamily loan limit, which addressed problems resulting from increased construction and land costs over the past decade.
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    This increase in the FHA loan limit was essential. As multifamily loan limits had been unchanged for 10 years and had virtually shut down the FHA new construction program in most major cities and second-tier cities throughout the country.
    In addition, in 2002, the President signed the FHA Down Payment Simplification Act, which will index the FHA multifamily loan limits to the consumer price index, beginning in January 2004.
    There is one final step to increase the FHA multifamily loan limits in high-cost areas. This is the last hurdle in making these programs as effective as they can be in providing affordable rental units.
    While FHA multifamily loan limits were increased in 2002, according to the Department of Housing and Urban Development data, there was only one FHA-insured multifamily loan in new construction or substantial rehabilitation approved in California in each of the fiscal years 2002 and 2003. And when you look at the demand, especially in our area in California, to think that there was only one loan made, there is a real problem. And that problem is indexing.
    My bill, H.R. 1985, establishes a mechanism for addressing the need of new construction and substantial rehabilitation in extremely high-cost areas in the country. It gives the Secretary of HUD the authority to increase the maximum high-cost percentage in extremely high-cost areas from 210 to 270 percent.
    I look forward to this hearing today, Mr. Chairman. Thank you very much.
    Chairman NEY. Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman. And thank you for holding this important hearing and markup of H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act of 2003.
    This legislation would amend the National Housing Act to increase the maximum mortgage amount limit for FHA-insured mortgages for multifamily housing located in high-cost areas. With severe shortages of affordable rental housing, this change would enable developers to provide much-needed, new affordable housing to low-and moderate-income families.
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    Mr. Chairman, I am very pleased to see affordable and fair housing as a priority of this subcommittee, as it must be. Today, I would like to present you with a letter, signed by half of the members of the Housing Subcommittee and, in total, six Republicans as well, asking for a hearing on the National Affordable Housing Trust Fund, which Ms. Lee just mentioned a moment ago.
    And I ask for unanimous consent that a copy of this letter be inserted into the record.
    Chairman NEY. Without objection.
    [The following information can be found on page 59 in the appendix.]
    Mr. SANDERS. As Mr. Miller just indicated and Ms. Lee before, I think there is an understanding, regardless of one's political persuasion, that we are in the midst of a major, major housing crisis in this country. I think that, in terms of seriously addressing the issue and building the quantity of affordable housing that we as a nation need—and by, the way, putting substantial numbers of people to work building that housing—I think that there is little doubt that the National Affordable Housing Trust Fund is that piece of legislation, that has been presented in Congress, that would do that.
    Mr. Chairman, we have 203 co-sponsors, Mr. Chairman, 203 co-sponsors—Republicans, Democrats, Independents—on this legislation. Amazingly enough—and this is something I have never experienced in my life—we have over 4,000 organizations.
    And not just housing organizations or low-income organizations or trade unions, we have banks and business organizations in support of this legislation. Four thousand separate organizations.
    Because business organizations know that if there is not affordable housing in the area, they cannot maintain a steady source of labor to produce the products that they need.
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    So Mr. Chairman, I would respectfully request that given that we have 203 co-sponsors on this legislation, 4,000 organizations in support of it, that we hold a hearing in order to discuss it. And I would yield to my friend, the chairman.
    Chairman NEY. Yield for a response?
    Mr. SANDERS. Yes, or not.
    Chairman NEY. No, appreciate the letter. And I will definitely take it under advisement.
    Mr. SANDERS. I thank the chairman.
    Chairman NEY. Thank you.
    Other members wishing to make opening statements? Any other members wishing, have a desire to make an opening statement.
    If not, we will start with our panel. I want to welcome Mr. Weicher, who is Assistant Secretary for Housing and Federal Housing Commissioner at the U.S. Department of Housing and Urban Development, a position he assumed nearly 2 years ago on June 1, 2001.
    Mr. Weicher has held policy positions at HUD in two previous administrations, as Assistant Secretary for Policy Development and Research and as HUD's Chief Economist. He holds a Ph.D. in economics from the University of Chicago and is the author of 12 books on housing and urban issues.
    Mr. Weicher has been a Professor of Economics at the Ohio State University, the greatest university in the United States. And the call at Tempe was absolutely correct.
    With that, we will let you begin. I think you need to get your microphone.
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    Mr. WEICHER. There we are. Sorry.
    Thank you, Mr. Chairman. And thank you for inviting the department to testify this morning.
    I want to start by stressing that the administration and the department are firmly committed to having FHA participate as a strong and effective player in the financing of rental housing nationwide. We have taken several major actions in that effort.
    First, we have put the multifamily insurance programs on a sound actuarial basis, enabling most of them to operate without the need for appropriated credit subsidy. Second, we have instituted an annual process of updating the mortgage insurance premiums, so that the programs continue to operate on a break even basis.
    Third, we have established a much faster underwriting process, saving the industry time and money. Fourth, Secretary Martinez asked Congress for a 25 percent increase in the multifamily mortgage limits, the first increase in 10 years, which you approved.
    This administration inherited serious problems in FHA's basic multifamily housing insurance program, the Section 221(d)(4) program. Three times in 8 years, the program was closed down because it required credit subsidy and the available credit subsidy allocation was exhausted.
    The last time was in May 2001, when the department was forced to suspend multifamily insurance processing. To prevent further closures, the department determined to place the program on a break-even basis.
    This necessitated raising the premium from 50 basis points to 80 basis points for fiscal year 2002. Many in the industry were very concerned by this necessary increase.
    They worried that it would weaken the viability of the program and its ability to serve moderate-income families. That did not happen.
    In fiscal year 2002, FHA insured $2.8 billion worth of Section 221(d)(4) projects, nearly double the 2001 total, and the largest volume in 20 years.
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    At the same time, the department made a commitment to conduct a systematic analysis of how the credit subsidy rate was calculated for the first time since credit reform was enacted in 1990. We found that the Section 221(d)(4) program could be operated on a break-even basis at a much lower premium of 57 basis points.
    This premium went into effect at the beginning of fiscal year 2003. In addition, we are now repeating the analysis every year to determine what the appropriate premium should be. And as a result, the premium will be cut again to 50 basis points in October for the new fiscal year.
    These efforts by this administration have ensured that the Section 221(d)(4) program will not repeat the experience of past shutdowns. Mortgage bankers and developers are assured that they can continue to bring loans to the department.
    Moreover, once applications come to the department, we now process them faster, using our multifamily accelerated processing procedure. MAP was instituted on a national basis in fiscal year 2001 and provides guaranteed processing time frames. And it has resulted in a significant increase in mortgage applications and endorsements.
    Our other major initiative has been to increase the mortgage limits, as I mentioned. Shortly after assuming office, Secretary Martinez called for a much-needed 25 percent increase in the statutory loan limits, which Congress enacted in 2002.
    Also at that time, Congress approved indexing the FHA mortgage limits, beginning next January. Indexing will further increase the loan limits, year by year. It will enable FHA to keep pace with inflation and meet the needs of families seeking moderately priced rental housing.
    Clearly, annual adjustments provide a better way to compensate for increased costs than legislating specific dollar increases at irregular intervals. The 2002 increase represented a catch-up for the inflation that occurred during the preceding decade.
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    Thanks to all of these changes, in fiscal year 2002, FHA insured over $7 billion worth of projects for all of our multifamily insured housing programs combined. This is our highest overall production on record. And the projections for 2003 indicate that we will be exceeding the 2002 numbers.
    Through the first three quarters of fiscal year 2003, we have issued commitments for a total of $5.3 billion, a nine percent increase in mortgage activity compared to last year at this time. Having set a record last year, we appear to be on course to break it this year.
    Based on the increasing number of loan commitments over the last 2 years, the department believes that the FHA multifamily mortgage insurance products, under current limits, meet the market tests and the market needs in the great majority of this country. In fact, we are seeing applications from high-cost metropolitan areas that have not participated in the program in years: Philadelphia, Baltimore, here in Washington and in Seattle.
    However, there are areas where FHA insurance products are underutilized, such as San Francisco, Los Angeles, Boston and New York. Based on discussions with our field office personnel and industry groups, there appear to be a variety of reasons for the lack of multifamily production in these areas.
    These reasons include: suitable sites not being readily available; available sites often having substantial environmental issues; available sites being located in areas that are not marketable, where there is no public transportation; and regulatory barriers adding years to processing times. These local market issues will remain regardless of the proposed legislation.
    Traditionally, FHA mortgage insurance has served an important public purpose by insuring projects that are affordable to low-to moderate-income families. It is important to make sure that FHA continues to serve that purpose: that increases in the mortgage limits do not put FHA into higher-income housing at the expense of moderately priced rental properties.
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    That could be the case if the regulatory, environmental and other problems I mentioned are the main reasons why multifamily housing is not being built in some areas. It is worth noting that the national rental vacancy rate is 9.4 percent, the highest level in 40 years.
    Given this, it is important that FHA exercise prudent underwriting and control of credit risk in an environment where there is a risk of oversupply of housing. At the same time, we certainly recognize that rental housing is more expensive in some markets than in others.
    When we raised the mortgage limits, the department made a commitment to study the impact of the increase, with particular reference to high-cost areas. We are now conducting that study, looking at 18 months' experience with the new limits.
    The study will be completed this fall and will provide the data to determine if further increases to the mortgage limits are warranted to serve high-cost markets. Until then, the department is not in the position to support this proposed legislation at this time.
    Thank you, Mr. Chairman. Be happy to answer any questions you may have.
    [The prepared statement of Hon John Weicher can be found on page 54 in the appendix.]
    Chairman NEY. I want to thank the gentleman for his testimony. And if we will suspend for a minute and we will have our ranking member to make her opening statement.
    Ms. WATERS. Thank you very much, Mr. Chairman, for holding this hearing. I just left Mr. Frank. But I would like to thank him and Congressman Gary Miller for offering H.R. 1985 and bringing this issue to the forefront.
    We are all aware of the need to build affordable housing in our states, cities and respective districts.
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    Mr. Chairman, we have an affordable housing crisis in Los Angeles and in many other high-cost areas around the country. All of us know that the current FHA multifamily loan limits are inadequate for high-cost areas like Los Angeles and Boston.
    The 25 percent increase enacted last year by Congress is just not enough. And we need to do more.
    HUD data shows that Los Angeles is one of six cities in funding year 2002 that did not have any Section 221(d)(4) new construction projects. There was only one loan approved in California for multifamily housing under Section 221(d)(4) in funding year 2002 and one such loan in funding year 2003.
    H.R. 1985 raises the minimum that HUD can increase the basic multifamily limits in high-cost areas from 210 percent to 270 percent. By increasing the loan limits for high-cost areas like Los Angeles, H.R. 1985 will make it far more likely that it is economically viable for developers to build affordable housing.
    In Los Angeles, this will help our non-profit developers to add an additional tool in their neighborhood development kit.
    Mr. Chairman, although the 25 percent increase in the basic loan limits was an important step towards making the FHA multifamily insurance programs work more effectively, Los Angeles as well as other high-cost areas like Boston, New York and Chicago continue to be unable to access FHA multifamily loans as a resource to help build affordable housing.
    The Federal Housing Administration multifamily mortgage insurance program has been a critical source of financing for the affordable multifamily rental housing. The FHA Section 221(d)(4) and 221(d)(3) mortgage insurance is intended to provide financing for market rate housing that is affordable to low-and moderate-income households.
    According to HUD data in funding year 2002, FHA insured 211 multifamily housing projects, totaling 39,413 rental units, with a dollar volume of $2.7 billion. Over 90 percent of these loans were insured through FHA's 221 program, which was used to finance loans by for-profit developers.
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    With an increase in loan limits, we will see more non-profit developers participating in the program. Clearly, passage of H.R. 1985 will provide a much-needed policy change to help stimulate the development of affordable housing.
    And I commend you, sir, for scheduling this hearing and the office again. And I look forward to a markup later on today.
    I yield back the balance of my time.
    Chairman NEY. I thank the gentlelady, ranking member, for her statement.
    A question I would have is: how do you currently determine, does the department determine, what is a high-cost metropolitan area?
    Mr. WEICHER. We look at construction cost measures, which are available for individual areas on a national basis. There is an index put together, known by the name of the Boeckh Index. There is the RS Means index.
    And we use our own program data. And we use the expertise of our economists and our staff in the field and get their professional judgments as well.
    Chairman NEY. Do you think that the current statute is explicit enough, gives you enough guideline? Or does it need to be more explicit?
    Mr. WEICHER. I do not believe it needs to be more explicit, Mr. Chairman. And I think the evidence for that is the dramatic increase in production, which we saw when we raised the mortgage limits and were able to put the program on a break-even basis.
    I think that we have eliminated major constraints to the effective operation of the program. And I do not believe there is need for additional legislation on this point.
    Chairman NEY. You also indicated the Department undertook a systematic review of the process to establish the level of mortgage insurance premium needed to require no appropriated credit subsidy. And do you want to describe what you considered in that review?
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    Mr. WEICHER. Yes, certainly, Mr. Chairman.
    We were replacing a process which had been put into place back in 1990, when there was relatively little information to draw on, on the operation of the program. And that process simply looked at average default rates for all of the loans that we had made over past years, without much regard for what had been happening in the market and in the economy.
    We replaced that with a model where we look at the economic performance—we relate defaults on projects to economic performance locally and nationally and where we also look at the tax laws under which the projects have been underwritten and developed. And of course, as you know, there were dramatic changes in the tax laws affecting multifamily housing a number of times in certainly our professional memory.
    In 1981, there was a great liberalization, followed in 1986 by a contraction. And as a result, there were a lot of projects that were underwritten and built between 1981 and 1986 under the favorable tax treatment that had trouble supporting themselves when the tax treatment changed.
    So we have built an analysis which took that into account, took into account the present tax regime. And on that basis, we concluded that we could indeed lower the premium from the 80 basis points that had been established under the previous system to 57 basis points and further this year updating it to 50 basis points coming in October.
    We have a fairly sophisticated technique. And we are refining it from year to year.
    Chairman NEY. Appreciate the answer.
    The last question I have is: in the past, HUD had to manage a large inventory of multifamily. And it was at considerable expense of the taxpayers' dollars, obviously.
    Do you want to comment or give us some type of insight of what is the status of that inventory now? And how have you tried to handle coming to terms with some of the ways to affect costs?
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    Mr. WEICHER. I am happy to do that, Mr. Chairman.
    When we came into office, we had—the department had—an inventory of about 100 multifamily projects where we either owned the property or we were the mortgagee in possession. We have had an active program of selling those projects or giving those projects to local governments under the terms of the statute.
    And we have been able to reduce our inventory from 100 projects down to 37. Seventeen of them are a special situation in the Boston area where there was a long-term commitment to rehabilitate and, indeed, rebuild projects to make them applicable as cooperative housing for the residents. And those are proceeding on a different track.
    Apart from them, we have only 20 projects nationwide where we are still the owner or the mortgagee in possession. And we are bringing those to market as expeditiously as we can.
    Chairman NEY. I want to thank you.
    The gentlelady, for questions?
    Ms. WATERS. Mr. Chairman, as I understand it, before I came in, you indicated that you felt that the 25 percent increase was adequate. And I am sorry to put you back through it again, but I do not understand why there is not some recognition of the fact that the housing market in places like Los Angeles has just gone off the scale.
    I think when we had the hearing out in Los Angeles just a few weeks ago, it was indicated that by both consumers and the apartment managers, that the average two-bedroom apartment is renting for somewhere between $1,100 and $1,300. These apartment buildings used to be $500 and $600 a month. And now they are just out of the reach of the average working family.
    So we need to produce more housing because we truly have a housing crisis. And it is truly an onerous market for rental housing.
    Why does this not drive you to want to join with us in the production of more rental units so that we can drive down the price?
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    Mr. WEICHER. What I said in my statement, Congresswoman Waters, was that raising the mortgage limits and the other changes which we put into place, eliminating the need for credit subsidy and creating a more accelerated processing system, all of them combined enable us to double the volume of business that we were doing in our basic Section 221(d)(4) program and to set a record for the volume of business we were doing in all of our programs combined, a record that we anticipate we will break this year.
    Those are national figures. I also said that we are doing business in some market areas where we have not done business in a number of years, but that we also recognize that there are areas where our programs are not being utilized, where our programs are being underutilized.
    And I listed specifically Los Angeles, San Francisco, Boston and New York. And I repeated the commitment which we made at the time that we put the new premium calculation process in place, that we would look at how the changes are working out and do a study of our outcomes and be prepared to make recommendations to you when the study is completed. And the study is going to be completed this fall.
    Ms. WATERS. Thank you very much, Mr. Chairman.
    Chairman NEY. Thank you.
    Mr. Green?
    Mr. GREEN. Thank you, Mr. Chairman.
    You just indicated again, as you did in your opening statement, that there are record levels of FHA multifamily mortgage activity over the last few years. And as you just said, you hope to break the record again this year.
    To what do you attribute that high level of activity and the growth in the level of activity?
    Mr. WEICHER. Well, I think there are several factors, Congressman Green. One is—and this, I think, is very important—we have gotten our programs to the point where we do not need to ask you for an appropriation every year to cover the losses on the programs.
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    There are only four remaining programs out of the 19 that we have, which require credit subsidy. And as a result, the credit subsidy appropriation that we have requested and that you all have approved is only $10 million. And it is enough for those four programs.
    What this means is that the industry can come to us, knows that it can come to us at any time, with an application. And the application can be considered on its merits for insurance, without regard to whether we have run into a credit subsidy appropriation limit.
    Secondly, we have the multifamily accelerated processing program. We are moving projects through the pipeline much more quickly and enabling developers to get in the ground much more quickly than they have been able to under our traditional processing system.
    And certainly, raising the mortgage limits, as the Secretary requested and as you all approved, is an important factor. There had not been an increase since 1992. And that was 10 years during which costs went up—not a large amount from year to year, but they did go up from year to year. And it became harder and harder to build under the FHA mortgage limits.
    And we have caught up with the inflation over that period. And moving forward with the inflation adjustments that are now statutory, we will be able to keep pace with inflation, year by year.
    All of those factors put together, I think, contributed to a strong performance by our programs and a performance that we believe we can continue to repeat.
    Mr. GREEN. Interesting.
    I think FHA is poorly understood by many people in the public. How would you describe the market that FHA serves for these programs?
    Mr. WEICHER. Basically, we are serving low-to moderate-income families in our programs. Most of our projects are designed to serve people who are in the lower half of the local income distribution. And they do serve those people.
    We are not in the luxury business. We are not trying to provide housing for people at the high end of the economic spectrum.
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    We leave that to the private market. And the private market seems to be filling that demand adequately.
    We are trying to serve people who are able to make modest rental payments out of their incomes, who do not require subsidy to afford decent housing, but do benefit from the lower cost of loans that results from FHA's insurance.
    Mr. GREEN. In your portion of the market, do you see private sector initiatives that are serving that same market?
    Mr. WEICHER. There is some overlap. We do not draw precise boundaries between the loans that we make and the loans that the private sector makes.
    And indeed, there is nothing in the statute to stop a private developer from building to serve the FHA market. And occasionally, some projects are built that way.
    But because we have the full faith and credit of the government of the United States behind us, lenders are willing to make loans at lower interest rates for our projects. And as a result, our projects are atypically a little bit cheaper.
    Mr. GREEN. Well, maybe just outside obviously what you work on, your authority, but are there things that we can do to increase private sector initiatives to this market, to get the private sector more involved?
    Mr. WEICHER. I think the private developers face—and so do our FHA projects—they do have to confront the costs of land and the cost of labor. And those are the basic costs that they are confronted with.
    We have, in many markets, serious processing problems, serious delays in being able to get the local approvals for a project, particularly on the multifamily side. The secretary has established a program to look at the regulatory barriers to affordable housing, headed by a gentleman by the name of Bryant Applegate, who has come from Florida with the Secretary. And that activity is to see if we can identify barriers—federal barriers, as well as state and local barriers—which can be dealt with to bring down the cost of providing affordable rental housing.
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    Mr. GREEN. Okay. Thank you. Thank you, Mr. Chairman.
    Chairman NEY. Mr. Watt?
    Mr. WATT. Thank you, Mr. Chairman.
    Mr. Weicher, I welcome you and confess a little confusion about your testimony. But it is not the first time I have had confusion about HUD's testimony on a number of issues. So I guess I should not be surprised.
    Your statement seems to, in one respect, revise history a little bit, making it sound like Secretary Martinez was and HUD was the major advocate for the 25 percent increase in the statutory limit back in 2002, when in fact my recollection is that Congress had been calling for that increase and Members of Congress had been calling for that increase throughout the period from 1992 to 2002. And finally, HUD got to the point where it could not resist the change anymore and got on the same page and made the recommendation.
    Your testimony says that by doing that, you were able to see some activity in the FHA program in some high-cost areas. Philadelphia, Baltimore, Washington and Seattle specifically, you mention on page three of your testimony.
    But you acknowledge that still has not reached the high-cost areas that this bill is designed to get to. And so we are at this again.
    And if we wait until HUD finishes its study in the fall of this year, that means, as I calculate it, it would be next year before HUD could have a recommendation about that. I guess 10 years from now, HUD would be back here saying, ''We took the lead in recommending another change and increase,'' if you did, in fact, recommend it at that time.
    The problem is that that means from 1992 up to whenever we do this increase, cities like Los Angeles and Chicago and Boston and Oakland the really high-cost areas are simply not using the program. And it is not as if you are cutting off high-income people or people who are even above the median income level from the use of the FHA program. In those communities, nobody is using the program, either for lower-income people, people who fall below the income limit, or people who might be able to access the market.
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    So the question I have is: if you are not supportive of this increase, if you are not supportive of this bill at this present, what would you have cities like San Francisco, Los Angeles, Boston, New York, Oakland do in the interim to help produce housing in those high-cost areas? I mean, because they have not had the benefit of this program since actually before 1992, if you go back and look at it historically.
    So how long would you have them wait? And if you would not have them wait, what would you do in the interim to spur housing development in those high-cost areas where even your testimony concedes the adjustment that we made in 2002 has not had any impact at all?
    What would you do in the interim?
    Mr. WEICHER. Let me start by going back to your first point about the Secretary's call for an increase in the multifamily mortgage loan limits. The secretary made that call, urged that on Congress, within a month after assuming office back in 2001.
    There were people undoubtedly favoring an increase in the loan limits before that. I do not really know whether HUD was favoring it between 1993 and 2001.
    But the Secretary's statement in February of 2001 created, I think, a basis for a bipartisan agreement on an increase in the loan limits, which Congress enacted in fiscal year 2002. So I was not in the slightest trying to rewrite history. The history includes an explicit call by the new HUD Secretary, Secretary Martinez, for that increase, for what was the first increase in 10 years.
    With respect to what we are doing now, we are studying the impact of the increases that we have had and the other changes that we have made in the program on our ability to serve high-cost areas.
    Chairman NEY. Time has expired.
    Mr. WEICHER. Excuse me, if I may just finish for a moment. When we will complete that study, I certainly do not anticipate that we will take 10 years before a policy recommendation will be made. We would expect to make a recommendation very quickly thereafter.
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    Mr. WATT. Thank you.
    Can he answer the question, Mr. Chairman? What are we going to do in the interim? What are those cities going to do in the interim?
    Mr. WEICHER. I think that the cities which are high-cost cities at this point, if they cannot make the program work under their current policies and under current FHA limits, they may be able to modify their policies while we complete the process. But I think it is not going to be very long before we are going to know the outcome and have a recommendation.
    Chairman NEY. Any additional detail for the answer also can be placed in the record. Thank you.
    Mr. Renzi?
    Mr. RENZI. Thank you, Mr. Chairman.
    Sir, appreciate your testimony today. And in looking over your statement, when you talk about the vacancy rate being 9.4 percent on a national basis, when you move into those high-cost areas and we look at the low-cost rental in those high-cost areas, I imagine the vacancy rate has to be almost full.
    Mr. WEICHER. Well, vacancy—oh, I am sorry.
    Mr. RENZI. Go ahead, please.
    Mr. WEICHER. The vacancy rates, that is a national vacancy rate. And the vacancy rates certainly vary from one part of the country to another.
    And in the high-cost areas that members are concerned with, it is certainly true that vacancy rates are relatively low. The lowest vacancy rates come in the Northeast, in New England and in New York, and come on the West Coast, in the California cities.
    Those are markets which have low vacancy rates. And at the same time, nobody is building much in those areas, as we hear. And that suggests that there is a problem in those markets beyond simply the availability of mortgage money.
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    Mr. RENZI. When you look at lending to affordable multifamily units and you worry in your statement in moving FHA monies into higher-income housing, you have limits in place and restrictions in place, requirements in place already that, if I was a developer, build a multifamily housing unit, I would have to rent those out at a certain rental rate. And a certain block of my units must go to low-income or moderate-income recipients?
    Mr. WEICHER. Not on our basic Section 221(d)(4) programs, our basic unsubsidized rental insurance programs. The limits are dollar limits on the mortgage, which implies a limit on the rents or the rent that is needed to make the project work. We do not impose income limits on the residents of those projects.
    If someone who is very well-to-do wants, for some reason, to live in an FHA project, that is between that individual, that family and the owner of the project. It is not a limitation that we impose in our programs.
    Mr. RENZI. I do not know that that really happens in the real world. But, okay.
    Well, listen, thank you for your testimony.
    Chairman NEY. Mr. Clay?
    Mr. CLAY. Thank you, Mr. Chairman.
    Mr. Weicher, we have not had adequate increases to the FHA multifamily mortgage limits sufficient to offset the impact of the economic growth of the past decade. This growth has affected not only low-income housing, but middle-income housing as well, to the tune of almost five million working families had critical housing needs in 2001.
    My district lowers that description. And with the shipping of jobs overseas, the cutback on hourly wages, if current moves are successful and with the push for the elimination of overtime and smaller paychecks, what do you see as the impact of these issues on housing affordability?
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    Mr. WEICHER. Well, Mr. Clay, what we have in the housing market, as I was saying in response to Mr. Renzi a moment ago, we do have a high national vacancy rate and a high vacancy rate in much of the country, apart from the Northeast and California on the West Coast. We also have the highest home ownership rate in our history nationally.
    Despite whatever economic problems individual families are having and whatever problems their employers are having, people are able to buy homes. They are buying homes in record numbers.
    And at the same time, we are providing assistance through the FHA program. We are providing mortgage money that enables builders in much of the country, nearly all of the country, to build affordable rental housing in unprecedented quantity.
    Mr. CLAY. Now are these vacancy rates, do these rates apply to low-income housing or middle-income housing? Which is it?
    Mr. WEICHER. They are about the same across the rent spectrum.
    Mr. CLAY. And you cite the boom in home ownership. Now you know that Hispanics and African-Americans lag behind in that home ownership rate. Tell me, what are some of your solutions to helping those two segments of the population?
    Mr. WEICHER. Well, certainly we are very concerned about differences in home ownership rates between the white majority of the population, where it runs about 75 percent, and the African-American and Hispanic communities, where it runs about 50 percent.
    The President established a year ago a commitment to create 5.5 million more minority homeowners. And we at HUD have been certainly working vigorously to contribute to that goal, as have many of the professional organizations in the industry and other entities.
    Last year, FHA insured 260,000 mortgages for first-time minority home buyers. This fiscal year, we are running at about the same rate so far.
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    That is almost half of the 5.5 million, on an annual basis, that the President called for. Other programs, the U.S. Department of Agriculture's Rural Housing Service and the Veterans Administration's Home Loan Guarantee Program, are also participating in this effort. We are the agencies which do serve lower-and moderate-income families as they become homebuyers, as well as serving them when they are renters.
    Mr. CLAY. Final question, let me ask you, we have a supply of low-cost housing that I feel is getting smaller and smaller, and an increase in the number of low-income households. If having a job does not guarantee affordable housing, what needs to be done to stem the tide of this critical affordable housing shortage? How can we stem that tide?
    Mr. WEICHER. Well, I think it is important to look at supply constraints on the availability of rental housing. We operate in an environment where the many localities have erected barriers to the production of rental housing, particularly the production of low-and moderate-income rental housing.
    We have the ''not in my backyard'' syndrome, the NIMBY syndrome, which is a problem in much of the country. And it is important, I think, that the federal government, state governments and local governments work together to try to address barriers which limit the availability of rental housing for lower-income families.
    Mr. CLAY. Thank you very much for your response. Thank you.
    Chairman NEY. Mr. Miller?
    Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman.
    Mr. Weicher, it is good to have you here today. And very rarely do I ever take opposition to testimony from HUD, because I usually get around.
    The problem is I have been a developer for 30 years. And most of my friends, close friends, are in that industry.
    And you said you have a problem with legislative increases. Then you come back and say you want governments to work together.
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    There is no private sector alternative. And the thing I like about this is the FHA program pays for itself. It even makes money.
    So we are not giving grants. We are not doing something that is going to lose money for anybody. And it does not take away from low-cost areas, what we are proposing here. And it does not hurt one person's district, period.
    So there is no harm, no foul on what we are doing out here. But I am going to ask you some questions. And I am going to speak for Ms. Velasquez, Mr. Frank, Mrs. Waters, Mrs. Lee and myself because this concerns all of us.
    You said that you are doubling the volume of loans. That sounds good.
    But according to HUD data, FHA multifamily loans for new construction or substantial rehabilitation in Massachusetts in fiscal year 2002 and 2003, only one loan was approved. So we are going to give them two.
    In California, in 2002 and 2003, only one loan was approved. We are going to give them two.
    In New York, no loans. So two times zero is still zero.
    And in Boston, the same situation. So I am not trying to argue with you. But you list the reasons here why they are underutilized. And they have nothing to do with what we are doing here today.
    One is suitable sites are not readily available. They are difficult. But there are suitable sites out there.
    The problem is by the time you acquire the sites, based on the limits today they are able to borrow, they cannot get a loan because it cannot be done. I will give you an example of a developer in Boston who I received a letter from.
    Two available sites in Boston have substantial environmental issues that render them cost-prohibitive. We just passed a bill this year—and I correct Mrs. Waters—that included petroleum so we can go out and clean these sites up in communities that are needed so we can go build affordable housing. We are taking care of that one ourselves.
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    That might be true. But we are going to deal with that.
    And many of those sites are located in areas that are not suitable marketplaces, no public transportation. Again, we are dealing with that in some areas. In others, that does not apply.
    And regulatory barriers, if you want to drive a nail into anything today, to build anything, there are regulatory barriers. It does not matter what you want to build, NIMBY applies to single family detached, multifamily, apartments.
    It does not matter. Nobody wants it anywhere if it is near where they live.
    The problem is that in areas that do need rental housing, we are not building it. California is an example. The multifamily, as far as for sale, is almost non-existent because of litigation, as you know.
    Most developers will not build condos or townhomes because they know they are going to get sued, without a doubt. A friend of mine, Lewis Holmes, owns Lewis Operating Company, now will only build rental units and commercial shopping centers because of litigation.
    They are a fine builder. They probably own 15 to 20 percent of KB homes out there. But they are stockholders and not principals.
    But all they are building in rental houses, they cannot, at all, get an FHA loan. And there is a gentleman from Mr. Frank's district in Boston that he says he wants to build a 180-unit garden style walkup apartment in Burlington. Twenty percent of the units will be affordable to seniors and low incomes up to 80 percent of the area median income.
    The units range from 700 square foot one-bedroom units to a 1,200 square foot two-bedroom unit. They have a clubhouse and a pool. So it is a nice unit.
    They are quality affordable housing. The problem is the total development costs are $176,000 per unit.
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    Now the reason they are that low is because he has had the land for quite a few years. So the cost of land is only $15,000 per unit. But the current market value is $50,000 per unit.
    His hard costs are $113,000 per unit, sticks and bricks, plus $3,000 a unit in impact fees. And permits run $10,000.
    Based on a case-by-case exception to get him up to 240 percent, which we all understand that going by a case-by-case protracts the process, increases the cost because it is going to take longer to get a HUD case-by-case approved. This puts him at $124,608 per unit.
    He cannot do it. What we are proposing puts him a little over $140,000 per unit, which he can do.
    This is discretionary on the part of HUD. What I do not understand is there is no alternative. So for us, giving HUD this authority to increase it to this amount does nothing but benefit all of our areas, does not in any way hurt HUD, impact HUD, cost HUD any money.
    In fact, if you do have a foreclosure in California or Boston or New York, you are going to have more buyers standing in line to buy that from you, as you know, than you can deal with. So the high-cost areas are what we are trying to deal with.
    We are not talking about areas that do not need high-cost loans. We are talking about the areas that cannot build because they do need a high-cost loan.
    That is what we are trying to deal with, giving HUD the discretionary authority to do that, without having to go through a protracted process just to get you up to 240. We need to go to 270.
    The costs are there. The demand is there.
    Boston, San Francisco, Oakland, Orange County, Los Angeles, the Inland Empire, the vacancy rates are three percent, which they are 100 percent occupied, sir, because you know three percent means three percent or under restoration while we are trying to put them back on the market.
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    So you have zero available product. You have States where they are building very little attached product: townhomes, condos.
    You made a statement that we have the highest home ownership in history. And I applaud that. And being a developer, I think that is great.
    But that is not the people we are trying to help here. We are trying to help people, not giving them a grant, but raising the loan amount so these units can be built to help people who need those units. Not subsidies, we are not talking about any of that.
    The people who can afford a home are buying homes. Those are not the people who will want to rent these units we are trying to make sure they build out there.
    And I really think I am trying to help HUD. I am a developer. I am a Republican. Martinez is a friend of mine. I think this is good.
    And I am not impugning you. With all respect, your four reasons here just do not, in reality, hold water.
    And Mr. Chairman, you have been really nice in giving me some extra time. I was going to ask Ms. Waters, but she used hers up.
    But there are such issues here that we need to deal with. And we are trying to deal with them. And we would like your help.
    I yield back the time I do not have.
    Chairman NEY. Well, I thank the gentleman. And I want to thank Mr. Weicher and the members. And that concludes panel one. Thank you.
    We will move on to panel two.
    I want to welcome panel two. I want to introduce first Howard Cohen is the President of the Beacon Companies Limited Partnership, a Boston-based residential development company. Beacon has been in business for 60 years and owns and manages 8,500 residential units, primarily in the New England, Pennsylvania and Virginia areas.
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    Linda Cheatham is the Senior Vice President of Berkshire Mortgage Finance. She has over 30 years of experience with FHA multifamily insurance programs. She is testifying today on behalf of the Mortgage Bankers Association of America, a national association representing the real estate finance industry.
    Casimir Kolaski is the President of Kolaski Housing Advisors, Incorporated, a company that provides consulting services focused on the development of affordable rental housing. Before entering the private sector, Mr. Kolaski had a long career at HUD, having served as the Director of Housing in HUD's Boston office and later in its Rhode Island office.
    And our last witness is Gary Ruping, is the founder and owner of Ruping Builders in Billerica, Massachusetts. Ruping Builders has been involved in the development of a range of housing, including affordable housing, since 1985. Mr. Ruping served on the Massachusetts Special Commission on the Barriers to Housing Development.
    I want to thank all the witnesses. And we will begin with Mr. Ruping.
    Mr. RUPING. Good morning, Mr. Chairman.
    Good morning, Chairman Ney, Ranking Member Waters and subcommittee members. I appreciate the invitation to represent the 211,000 members of the National Association of Home Builders and myself to testify on H.R. 1985, the FHA Multifamily Loan Limit Adjustment Act.
    My name is Gary Ruping. I am the founder and owner of Ruping Builders, in Billerica, Massachusetts, part of the greater Boston area.
    Formed in 1985, my company has been involved in the development of a wide range of housing, including quality apartment homes, condominium communities and affordable housing. During former Governor Cellucci's term, I served as Co-chairman of the Special Commission on the Barriers to Housing Development.
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    As the subcommittee is aware, important reforms were made to the FHA multifamily insurance program in the 107th Congress, such as increasing the limits by 25 percent and indexing programs to inflation beginning in 2004. However, despite these significant improvements, there are pockets in this country—high-cost, urban areas—where the FHA multifamily programs, particularly the 221(d)(4), are not really working.
    NAHB wholeheartedly endorses H.R. 1985, which would permit, but not require, the HUD Secretary to increase the multifamily mortgage insurance loan limits in high-cost areas from 210 to 270 percent. According to data published by HUD, there are 16 cities that are currently at the statutory maximum of 210 percent.
    Another five cities are just below 210 percent or between 205 and 209 percent. In 2002, there were 13 cities at the maximum limit. In other words, the problem is growing.
    Available HUD data for 2002 and part of this year indicates that in most of the high-cost areas, the 221(d)(4) program cannot work. For example, in fiscal year 2002, there were no initial endorsements in the city of Boston, none in Providence, New York, Philadelphia, Chicago, Los Angeles, San Francisco and Seattle.
    This year, there have been no initial endorsements for Boston, Providence, New York, Greensboro, Los Angeles, San Francisco and Seattle. While H.R. 1985 permits the Secretary to go up to 270 percent, it eliminates the current provision to approve mortgage loan limits by up to 240 percent on a case-by-case basis.
    We believe that this is sound policy because of the additional administrative and paperwork burdens attendant to the case-by-case approval process. From a developer's perspective, I will have already expended a considerable amount of money to apply for the loan before I know if the loan is then possible.
    The effectiveness of the 221(d)(4) program would be greatly enhanced if builders in high-cost areas were confident they could proceed with an FHA-insured loan without the additional cost, time and difficulty of applying for a case-by-case exemption, exception. When the statutory limits are close or at the maximum, builders will have little incentive to use an FHA insurance program.
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    Congressman Miller clearly outlined the project that I have in Burlington, Massachusetts. He is correct. It is a 180-unit, garden style walkup apartment project.
    Twenty percent of the units will be affordable to seniors with incomes up to 80 percent of the area median. The rest will be at market rates.
    The units range in size from 700 square feet for a one bedroom to 1,200 square feet for a two-bedroom unit. The development will include a clubhouse and modest outdoor pool, which are typical amenities offered in this marketplace.
    This development will offer quality, affordable housing. It is not intended to serve the luxury, high-end market.
    I decided to pursue a 221(d)(4) insured loan in part because the program offers terms related to the debt service coverage ratio, interest rate and loan period that are needed to make the project financially feasible. In addition, the construction loan is automatically converted to a permanent loan.
    Conventional loan terms are not as favorable. And I would have to obtain both a construction loan with recourse and a permanent loan.
    With interest rates being comparable right now, the Section 221(d)(4) program seemed the way to go. However, I may not actually be able to obtain the FHA-insured loan.
    My development costs are $176,000 per unit, which exceeds the high-cost limits. This figure is actually somewhat low because I bought the land many years ago at a cost of $15,000 per unit. The land is currently worth $50,000 a unit.
    My hard construction costs are $113,000 per unit. Impact fees are $3,000 per unit. And permit costs run $10,000 per unit.
    The balance of the total development costs include architecture, engineering and legal fees, environmental testing and builders overhead. In addition, labor costs in the Boston area are very high, which contributes to the high construction cost.
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    The current statutory mortgage loan limit for a two-bedroom unit in a non-elevator structure is $51,920. The maximum permitted limit, using a case-by-case exception at 240 percent HCP——
    Chairman NEY. Time has expired.
    Mr. RUPING. Would you like me——
    Chairman NEY. But I would note, without objection, the rest of your testimony can be placed in the record.
    Mr. RUPING. Thank you, Mr. Chairman.
    [The prepared statement of Gary H. Ruping can be found on page 48 in the appendix.]
    Chairman NEY. The reason I want to continue to hold to the time today, we are going to have some votes and I want to make sure we hear all of your testimony.
    Mr. Kolaski?
    Mr. KOLASKI. Thank you.
    Good morning, Chairman Ney, Ranking Member Waters and members of the subcommittee. My name is Casimir Kolaski. And I am the President of Kolaski Housing Advisors. My company provides consulting services on the acquisition, development, financing and management of affordable rental housing.
    Prior to starting my own company, I spent over 25 years working for the U.S. Department of Housing and Urban Development, where I served as Director of Housing in HUD's Boston office, as well as manager of HUD's Rhode Island office.
    Additionally, I served as special assistant to the Assistant Secretary for Housing/FHA commissioner. I appreciate the opportunity to be here today to comment on H.R. 1985, the FHA multifamily programs and how they are working in high-cost urban areas.
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    My company works with clients who are developers of affordable rental housing for families and seniors, as well as for clients developing nursing care and assisted living facilities. We make every effort to use HUD's programs, although frequently we must tap additional sources of financing, such as the low-income housing tax credit, state and city housing trust funds and the Federal Home Loan Bank's Affordable Housing Program.
    Complicating our efforts are the extraordinarily high land and labor costs found in cities such as Providence and Boston, which make use of some programs, particularly FHA insurance, difficult or impossible.
    The 221(d)(4) mortgage insurance program is intended to provide financing for market-rate housing that is affordable to moderate-and middle-income households. The program is unique in that it offers a variety of terms to developers that are not available through conventional financing and are critical to the feasibility of many affordable housing projects.
    Despite enactment of a 25 percent increase in the mortgage limits for FHA multifamily insurance programs, the limits are still not sufficient to meet the needs in high-cost urban markets, such as Providence and Boston.
    High land and labor costs are typical problems in large cities and in metropolitan areas experiencing growth. Other costs, such as impact fees, permitting fees and real estate taxes, also tend to be significantly higher.
    The zoning process is complex and time-consuming, and the NIMBY attitude continues to impact the ability of developers to build rental housing.
    In Providence and Boston, our high-cost percentage is at the maximum of 210 percent, about $109,000 for a two-bedroom unit in a non-elevator building. On a project-by-project basis, HUD may approve an increase up to 140 percent, or about $124,600 for the same unit.
    I am working with a client who is building a new addition to an existing Section 202 elderly housing apartment in Boston. There are no land costs and no construction costs for community space or other amenities because they are already provided in the existing building.
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    The development costs for this addition are $133,000 per unit. As a result, this project could not be financed with an FHA-insured loan.
    The financing for this project will come from a capital grant through the Section 202 program, as well money from Massachusetts Affordable Housing Trust and the city of Boston's neighborhood housing trust funds, which are substantial subsides not easily available to projects financed with FHA-insured loans.
    During my service with HUD in Boston, I worked with MassHousing on the disposition of 2,000 HUD-foreclosed units in the Multifamily Demonstration Disposition Program. Of the 11 projects in the program, three involved the total demolition and new construction of the projects.
    The per unit total development cost of Academy Homes II, the last of the three new construction projects, which is currently nearing completion, is $233,000 per unit. Of that amount, about $21,000 is attributed to demolition, asbestos removal and other environment issues, leaving a development cost of $212,000 per unit.
    That figure does not include land costs. And there were no impact fees to pay. All of these projects were competitively bid.
    Clearly, these projects could not be financed with a Section 221(d)(4) insured loan. In fact, MassHousing calculates that the average development cost for new family rental housing in greater Boston for last year was $195,045.
    In summary, I urge the Housing Subcommittee to support H.R. 1985, introduced by Representatives Miller and Frank. We must remember the 25 percent increase in the base loan limits was long overdue, as the limits had not been raised for a decade.
    This bill is an important step towards making the FHA multifamily insurance programs work more effectively in high-cost areas, which continue to suffer from lack of access to the program. With unemployment rising and wages not keeping pace with rising rents, it is especially important that the program be available to provide much-needed affordable housing to our cities' working families and individuals.
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    There are few, and often no, alternatives in the market available to them. These are the people who teach our children, protect the citizens, serve you in restaurants and retail establishments, take care of our office buildings, provide public transportation to residents and visitors and keep our streets and parks clean. We must find a way to provide them with decent qualify affordable housing.
    Chairman NEY. Time has expired.
    Mr. KOLASKI. Thank you.
    [The prepared statement of Casimir Kolaski can be found on page 44 in the appendix.]
    Chairman NEY. I want to thank you.
    Ms. Cheatham?
    Ms. CHEATHAM. Thank you.
    Good morning, Mr. Chairman and members of the subcommittee. My name is Linda Cheatham. And I am the Senior Vice President for FHA lending at Berkshire Mortgage Finance. I am appearing on behalf of the Mortgage Bankers Association of America, the MBA.
    MBA is grateful for the opportunity to present its views to the Housing and Community Opportunity Subcommittee today on the FHA Multifamily Loan Limit Adjustment Act of 2003. And we applaud Representative Gary Miller and Representative Barney Frank for introducing a bill to increase the nation's affordable multifamily housing stock.
    I have over 30 years of experience with FHA mortgage insurance programs. Currently, I head FHA production at Berkshire Mortgage Finance, a multifamily mortgage banking company headquartered in Boston with offices around the country, including Irvine, Santa Monica and Walnut Creek, California.
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    Our company has originated over $190 million in FHA-insured multifamily loans so far this year and over $1 billion in our servicing portfolio.
    Before joining Berkshire, I was director of the Office of Multifamily Development at HUD headquarters and with HUD for over 25 years, working in FHA multifamily programs.
    MBA strongly supports the Federal Housing Administration's multifamily mortgage insurance programs. FHA multifamily mortgage insurance has operated successfully for over 65 years, working with private sector partners to expand the supply of rental housing.
    Over the past six decades, this private/public partnership has leveraged more than $100 billion of private sector investments to provide rental housing for more than four million families and the elderly throughout the country. The Center for Housing Policy reported in a recent study that more than 4.8 million working families had a critical housing need in 2001. And many of these are moderate-income households, where a full-time job simply does not provide sufficient income to afford the fair market rent in that community.
    In many communities in this country, the economics simply will not allow developers and builders to construct units where the rents will be affordable to many working families. FHA's multifamily mortgage insurance programs are one of the most effective tools to provide affordable multifamily apartments to low-and middle-income families.
    H.R. 1985 is a major step in allowing the FHA programs to help finance the development of affordable rental housing. MBA applauds Congress and the administration for taking steps over the past 2 years to update the FHA multifamily loan limits.
    Unfortunately, the current maximum FHA multifamily mortgage limits are inadequate in some areas and continue to constrain new construction and rehabilitation in many selected, high-cost areas, where construction costs are significantly higher than in the rest of the country.
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    H.R. 1985 establishes an additional mechanism for addressing the need for new construction or substantial rehabilitation in extremely high-cost areas of the country by giving the Secretary of HUD the authority to increase the maximum high-cost percentage in extremely high-cost areas to 170 percent.
    High costs in these areas can be attributed to a number of factors, including location—for example, inner-city sites can be expensive to develop—or scattered sites or environmental concerns, to name a few. This proposed increase for high-cost areas is crucial, as I can attest from my own personal experiences with worthy projects that could not be financed, due to the confines imposed by the mortgage limits.
    Berkshire has examined several new construction projects with affordable components in the Boston area, for example, that have been infeasible because the mortgage that resulted from the statutory limits required substantial cash investment far above the borrower's ability to generate. Currently, we are looking at a mixed income project to be located in a sub-market in the northern greater Boston area.
    The vacancy rate for affordable housing in that area stands at 1.8 percent and for higher income housing at 5.4 percent. The project has all of its local approvals and is proposed for two phases.
    However, our preliminary analysis shows that for the two phases, the borrower would have to come up with more than $10 million in equity because the stat limits control the mortgage amount. The vacancy rates clearly indicate a need for the proposed housing. But it cannot be built using FHA mortgage insurance and will not likely go forward absent the increase that MBA is supporting.
    Mr. Chairman and members of the committee, it is critical to institute this final step to update the FHA multifamily loan programs in order for the programs to reach their full potential and serve the many needy families in America. MBA stands ready to work with you to advance this important legislation.
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    Thank you.
    [The prepared statement of Linda D. Cheatham can be found on page 36 in the appendix.]
    Chairman NEY. I thank the witness for her testimony.
    And the last witness, thank you.
    Mr. COHEN. My name is Howard Cohen. I am President of the Beacon Companies, Limited Partnership, a Boston-based development company.
    Beacon has been in the development business for over 60 years. We develop, own and manage both market rate and affordable developments. We currently own and manage 8,500 residential units, primarily in New England, Pennsylvania and Virginia.
    Our portfolio consists of developments financed through FHA, as well as Fannie Mae, Freddie Mac and various HFAs and conventional financing sources. I am here today speaking on behalf of Citizens Housing and Planning Association of Greater Boston, a broad-based housing advocacy group.
    I am a resident of Newton, Massachusetts. And I also have the honor of being represented in Congress by Congressman Frank.
    Over the last 8 years, we have been unable to access FHA for any of our developments in the Boston and Providence area, due to the constraints imposed by the statutory mortgage limits. I first became intensely aware of this issue in 2000 when we tried to develop a residential high-rise in Providence Capital Center.
    Capital Center is a major effort by Providence to redevelop the downtown area. The city believed that a residential component was highly desirable.
    In my experiences, that would have been a perfect fit for FHA insurance. However, the statutory mortgage limits prohibited the use of FHA.
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    Shortly thereafter, I was asked to serve on a commission established by Boston's Mayor Menino on housing finance. In reviewing the history of housing finance in the city, it quickly became apparent to the commission that a substantial proportion of the city's most successful and innovative residential developments had been FHA assisted, but that all these developments were at least 10 years old.
    Again, as we probed the issue, it became apparent that due to the statutory mortgage limits, FHA was no longer a viable housing finance tool in the Boston area, although it had played a very important historic role. One of the commission's primary recommendations for federal action was to encourage the adoption of legislation such as H.R. 1985.
    As the commission was meeting, we learned about the admirable efforts of the Bush Administration and this committee to support the first increase in the FHA mortgage limits in a decade. However, the 25 percent increase in statutory limits did not solve the problem in our high-cost area.
    It was at this time, through the auspices of the city of Boston and the Massachusetts Housing Advocacy Organization that we began to discuss with our congressman the need for additional legislation.
    Let me provide an example from our own portfolio. We are currently completing construction of a 200-unit development on Boston's South Shore and anticipate commencing construction of another 150-unit development in the same area.
    In both cases, we have mixed income developments. Pursuant to the state's zoning law, 20 percent of the units must be set aside for occupants with incomes below 50 percent of median income.
    These are exactly the type of developments where FHA's experience and mission would make it a perfect lender. However, the per-unit cost of these developments, including land, is in the range of $150,000 per unit. Direct construction costs are in the range of $90 per square foot.
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    This is the general range of the cost of new suburban low-rise, multifamily developments in the Boston and Rhode Island area. For urban high-rise development, these numbers would have to be essentially doubled.
    At the current statutory limits, the maximum FHA loan would be much less than could be obtained with conventional financing. Were H.R. 1985 in effect, with loan limits at 270 percent of the statutory base, FHA insurance would be a prime candidate for financing.
    It is beyond our level of expertise to justify or even explain why there is such a vast divergence in the cost of creating a housing unit between various parts of the country. As previous speakers have noted, older, highly developed regions such as ours, we face steep land costs and high site development costs, with many of our sites requiring environmental remediation.
    Because of our land constraints and slower rate of growth, we cannot accomplish some of the economies of scales that I see in other parts of the country. The in-fill nature of much of our development requires particular attention to design and neighborhood compatibility.
    There are some obvious artificial cost burdens imposed by unnecessary code and permitting requirements that our current governor, Governor Romney's administration is working hard to correct. The cost of housing in Massachusetts has become a severe impediment to our economic development.
    Efforts to redress these costs and to encourage more residential development are a priority for both our governor and the Massachusetts legislature. The passage of H.R. 1985 would revive FHA as a viable tool in our region, which contribute to reduction in our costs of financing and thus, the overall cost of producing housing.
    Enactment of H.R. 1985 would be a significant federal contribution to this effort at no additional cost to the federal government. Thank you.
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    [The prepared statement of Howard Earl Cohen can be found on page 41 in the appendix.]
    Chairman NEY. I want to thank the panel for their testimony. I do have a letter from Steven Fifield from the Fifield Company of Chicago, Illinois for the record, without objection.
    [The following information can be found on page 58 in the appendix.]
    And I would also note that some members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
    Do appreciate your testimony. It does count, I believe, here with us on this important issue.
    If members do not have questions, we will move into the markup. With that, this concludes the hearing portion of our meeting. Without objection, the subcommittee will take a short recess to allow the staff to set up the room for the markup.
    Thank you.
    [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]