[Federal Register: March 17, 2003 (Volume 68, Number 51)]
[Rules and Regulations]
[Page 12791-12795]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17mr03-19]
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Part V
Department of Housing and Urban Development
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24 CFR Part 207
Mortgage Insurance Premiums in Multifamily Housing Programs; Final Rule
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DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
24 CFR Part 207
[Docket No. FR-4679-F-03]
RIN 2502-AH64
Mortgage Insurance Premiums in Multifamily Housing Programs
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This final rule adopts, without change, the prior interim rule
published in the Federal Register on July 2, 2001, which revised
Federal Housing Administration (FHA) regulations to permit the
Secretary to set mortgage insurance premiums by program, within the
full range of HUD's statutory authority, through notice. Premiums for
Fiscal Year (FY) 2003 were announced in an August 30, 2002, Federal
Register notice published.
DATES: Effective Date: April 16, 2003.
FOR FURTHER INFORMATION CONTACT: Michael McCullough, Director, Office
of Multifamily Development, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410, at (202)
708-1142 (this is not a toll-free number). Persons with hearing or
speech impairments may access this number via TTY by calling the
Federal Information Relay Service toll-free at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
On July 2, 2001, HUD issued an interim rule revising the regulatory
system for establishing mortgage insurance premiums. (See 66 FR 35072.)
Rather than fixing a specific premium, expressed as a percentage of the
outstanding principal balance on the mortgage loan, the interim rule
authorizes HUD to set a premium anywhere within the range permitted by
statute, that is, between .25 percent and 1 percent of the outstanding
principal balance. Specific premium rates would be set by subsequent
notice, which would provide a 30-day period for public comment. More
detailed background information can be found in the preamble to the
interim rule at 66 FR 35070-35072. The notice that followed the July 2,
2001, interim rule, and published on August 30, 2002 (67 FR 55859), set
the actual premiums for FY 2002 and FY 2003.
II. This Final Rule
This final rule adopts the interim rule without change.
III. Public Comments
HUD received five public comments on the interim rule and the
accompanying notice. Four comments were from housing and mortgage
industry trade groups, and one was from a law firm. The commenters
addressed both rulemaking concerns and substantive concerns regarding
the new mortgage insurance premium rates and the method of establishing
rates by notice.
A. Rulemaking Issues
1. Interim Rulemaking
Comment: Four commenters objected to the use of interim rulemaking
in this case. Two commenters stated that this type of change is highly
significant to program participants and requires HUD to have the
benefit of public comment. One of these commenters further stated that
the purpose of advance public notice is to ensure public participation
in rules of substantial import, such as this one. Without the benefit
of public comment, Congress and the public cannot be assured of fair
consideration of all significant impacts of the interim rule.
This commenter also stated that this rule does not fall into any
rulemaking exception in the Administrative Procedure Act (APA) or HUD's
rulemaking regulations at 24 CFR part 10. The commenter stated that
program shutdown does not constitute ``good cause'' to dispense with
regular public rulemaking procedures because decreasing credit subsidy
is not a new crisis. The commenter stated that this has happened in the
past and is something with which program participants are familiar. The
commenter stated that, in the past, similar situations have always been
resolved by appropriate legislative action in Congress. In addition,
the new fiscal year is only weeks away and new credit subsidy will be
available.
HUD Response: Unlike prior fiscal years, the amount of credit
subsidy that Congress appropriated for FY 2002 would not have sufficed
to keep the programs requiring credit subsidy in operation for the
duration of the fiscal year. Additionally, HUD believes this situation
is likely to recur. Therefore, an immediate change in the credit
subsidy structure was necessary, in order for FHA's major section
221(d)(4) and certain other programs to be able to operate without
credit subsidy in future fiscal years. Notwithstanding the commenter's
opinion that participants have become used to repeated program
shutdowns, HUD does not believe that an environment of repeated
shutdowns is an appropriate way to operate mortgage insurance programs,
and that good cause existed to remedy this situation in the most
expeditious manner possible, and indeed that it would have been
contrary to the public interest not to do so.
Comment: Two commenters stated that the ``good cause'' exemption is
not met because the lack of credit subsidy could have been addressed in
another way, which is by taking advantage of an emergency credit
subsidy allocation of $40 million, but the Department decided not to
take this action. The commenters stated that issuance of the
accompanying notice was based on the same faulty justification for
interim rulemaking.
HUD Response: The Conference Report (H.R. Conf. Rep. 106-1033) that
accompanied the FY 2001 Consolidated Appropriations Act (Pub. L. 106-
554; approved December 21, 2000), was highly critical of HUD for being
in the situation where the emergency appropriation might have to be
used. (See House Report 106-1033, at 331-332.) In order to access the
emergency appropriation, HUD would have had to request the President to
transfer to Congress an official budget request including a designation
of the amount as an emergency requirement. While HUD believes that it
is important that there be sufficient credit subsidy for its housing
programs, HUD does not believe that the shortfall rose to the level of
an emergency, particularly as there are other solutions.
Furthermore, use of ``ad hoc'' appropriations will not solve the
long-term credit subsidy problem. For example, Congress need not
approve HUD's requests for such appropriations (as in the case of HUD's
request for a non-emergency supplemental appropriation in FY 2001).
Rather, the credit subsidy problem can best be solved by the approach
of adjusting mortgage insurance premiums (MIP) through regulation so as
to decrease the need for credit subsidy.
Comment: Two of the commenters stated that the use of abbreviated
comment procedures for future MIP changes also would violate the APA.
One commenter stated that by removing future premium changes from full
notice and comment rulemaking, the rule would make them subject to the
``whim'' of the Department. The commenter stated that since changes in
the premium can affect the viability of housing projects and the rents
of the
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tenants, there should be an opportunity to comment prior to changing
the premium. Two commenters stated that a full notice and comment
procedure would allow those affected to comment on both the credit
subsidy analysis and the effect premium changes would have on the
program and the families served.
HUD Response: A 30-day public comment period can be sufficient even
for a proposed rule under the APA. The APA provides no specified
minimum time period for public comments (although, for proposed rules,
HUD's regulations at 24 CFR 10.1 state a general policy of a 60-day
comment period, which may be abbreviated or extended for reasons
provided by HUD). HUD finds that a 30-day period is sufficient time for
comments to the MIP notices, and therefore, this time period is not
altered by this final rule. HUD will give appropriate consideration to
all comments received. HUD declines to adopt any change to the interim
notice procedure as a result of this comment.
2. Regulatory Flexibility Act
Comment: Two commenters stated that the rule violated the
Regulatory Flexibility Act (5 U.S.C. 605(b)). One commenter stated that
the certification under the Act was insufficient because it was not
sufficiently based on facts as required by the statute. Another
commenter stated that HUD had available a course of action that would
have been less burdensome to small entities, which was use of the $40
million emergency credit subsidy. The commenters stated that the
accompanying notice was faulty for this same reason.
HUD Response: Section 605(b) of the Regulatory Flexibility Act
requires that a certification that a proposed rule will not have a
significant economic impact on a substantial number of small entities
be accompanied by ``a statement providing the factual basis for such
certification.'' HUD provided its factual basis in the preamble to the
interim rule.
Furthermore, for reasons stated in HUD's response to an earlier
comment on HUD's use of a good cause exception to proposed rulemaking
(above), HUD does not believe use of the $40 million emergency
appropriation was an appropriate alternative.
B. Substantive Issues
1. Program Continuity
Comment: One commenter stated that the rule does not meet the
expressed purpose of ensuring program continuity. This commenter stated
that now that HUD can change the mortgage insurance premium ``in a
matter of days,'' the new rule actually would create more uncertainty
about the program than when the rate was set by rule. The commenter
stated that the only way to ensure program continuity is by calculating
an adequate amount of credit subsidy. Another commenter agreed, stating
that the authority to increase MIPs on 30 days' notice undermines
confidence in the FHA as a stable financing vehicle. This commenter
stated that projects can take months or years to plan, and it is
important that there be enough time to re-evaluate and re-underwrite
projects when MIP increases occur. This commenter stated that an
increase in MIPs should occur no more often than annually, and be
preceded by 180 days prior notice.
HUD Response: HUD recognizes that applicants for mortgage insurance
need to know the mortgage insurance premium applicable to their
proposed project as far in advance as possible. Mortgage insurance
premium changes are typically included in the proposed HUD budget
announced in February of each year. Therefore, the industry will have
received notice through the annual budget process. Additionally, any
increase in MIP will generally not be effective until October 1, of
each year, the start of the federal government's fiscal year.
Any decrease in premium rates will be made as soon as possible
consistent with regulatory and budgetary requirements. If increases and
decreases in premiums are combined in one notice, HUD reserves the
right to treat the increases and decreases under identical time frames.
2. Other Negative Effect on Programs
Comment: One commenter stated that the increase in premiums in the
rule and accompanying notice would have a negative effect on the
Section 221(d)(3) insurance program for cooperatives. The commenter
stated that because of the high mortgage insurance premium, some low-
and moderate-income families without Section 8 assistance will not be
able to afford to buy into cooperatives. The commenter stated that,
conversely, for Section 8 residents, the increase in premiums will
result in higher Section 8 costs to the government, resulting in no net
savings.
HUD Response: For FY 2002, Congress appropriated $15 million in
credit subsidy. Of this amount, Congress allocated $6,919,000, for the
Section 221(d)(3) program for nonprofit sponsors and cooperatives to
construct or substantially rehabilitate multifamily housing. The
increase in mortgage insurance premiums lowered the Section 221(d)(3)
credit subsidy rate and allowed more mortgages to be insured.
Cooperatives have the option of using Section 213, which does not
require credit subsidy and has a 50 basis point premium.
Comment: The proposed increase would further depress the production
of much-needed rental housing and negatively affect the quality of life
of working families. This commenter stated that the FHA plays a
``unique role'' in increasing the willingness of developers to build in
harder-to-serve areas. The timing of the MIP increase will have a
negative effect during a ``national crisis'' in rental housing
production. It will further depress the production of much-needed
housing. The commenter stated that, according to HUD's FY 2002 budget,
HUD predicted that $3 billion in FHA-insured 221(d)(4) commitments
would have been issued in FY 2002. The 30 basis point increase in MIP
will amount to increased costs of $105 million (present value of the
increase over 40 years) on new multifamily projects. The increased
costs will either result in fewer projects being built or will be
absorbed by tenants through rent increases.
HUD Response: An increase in the MIP for Section 221(d)(4) was
necessary to continue to operate the program without the need for
credit subsidy. A large number of Section 221(d)(4) projects that could
not obtain credit subsidy in FY 2001 received firm commitments in FY
2002 at the higher premium. HUD believes that providing more housing
under its programs is a benefit that outweighs the slightly higher
insurance premiums that participants have to pay.
Comment: Similarly, another commenter stated that the increase will
``significantly impair the capacity of the FHA multifamily mortgage
insurance programs to address the nation's critical need for affordable
rental housing.'' This commenter states that analysis shows that the
premium increase will result in rent increases of 3% to 4%, which will
undermine the ability of the programs to serve low- and moderate-income
families. In some cases, projects will not be built at all, resulting
in fewer affordable housing units.
HUD Response: Without the credit subsidy increase, HUD would not be
able to operate the programs requiring credit subsidy in a satisfactory
manner. Avoiding program shutdowns and approving more housing projects
is a benefit that outweighs the slight increase in premiums in some
programs.
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3. Credit Subsidy Analysis
Comment: One commenter stated that its analysis of the credit
subsidy model showed that FHA would earn excess income at the expense
of multifamily projects and, ultimately, tenants. One reason for this,
according to the commenter, is that the default rate under the Section
221(d)(4) program has, since 1990, been significantly less than the
rate assumed in the model. This commenter stated that if HUD and OMB
fairly evaluate the current default risk of the multifamily portfolio
over the past 10 years, they will likely conclude that a 60% increase
in insurance premiums is not necessary to create a revenue-neutral
program. In the Section 221(d)(4) program, the default rate has been
under 1% for loans originated after 1990. Using this figure would
require a much lower MIP than implemented by this rule and accompanying
notice.
HUD Response: Section 221(d)(4) insured loans typically have a term
of 40 years. In looking at loan performance and claims, FHA has to
consider a much longer period than 10 years to take into account
varying economic conditions.
Comment: Another commenter objected to the notice of rate increases
that accompanied the rule. The commenter believes that there are flaws
in the current subsidy calculation process that should be remedied
before any MIP increase is implemented. This commenter cited a study by
Abt Associates of various multifamily programs from 1987-1998, which
concluded that the Sections 221(d)(3) and 221(d)(4) programs result in
positive cash flow to the federal government. According to this
commenter, many of these programs can break even without an MIP
increase.
HUD Response: As stated in the response above, FHA has to consider
a longer period for 40-year loans than the 10-11 year ``snapshot''
reflected in the Abt study. Considered over the long term, there is not
the positive cash flow to the government that the commenter claims.
Comment: The MIP increase is a function of two kinds of
underwriting risk, one being the risk of poor underwriting and the
other the economic risk that the area will deteriorate economically
such that the owner will not be able to achieve the predicted rents. As
to the first, HUD has made significant underwriting changes since 1991
that have proven to be very successful in reducing defaults. As to the
second, if HUD were to lower its estimates for the Section 221(d)(4)
program from 28.5% to 21%, which is still more than 12 times the actual
default rate since 1992, there would be no need for an increase in the
MIP beyond 50 basis points.
HUD Response: HUD did make changes in 1991 that tightened FHA's
underwriting requirements. However, it is difficult to quantify whether
the improved loan performance of Section 221(d)(4) loans originated
since that time are due to improved underwriting or the robust economic
conditions of the 1990s. Credit subsidy calculations have to consider
longer historical periods with varying economic conditions in order to
estimate future insurance claims.
Comment: The credit subsidy model is ``widely criticized'' and a
review and analysis that the commenter understands HUD is currently
conducting should be completed before any MIP increase is implemented.
The flaws in the model include: (1) Too much emphasis is placed on high
claims rates from the early 1980's, caused because of conditions that
no longer exist; and (2) overly pessimistic assumptions about recovery
from asset sales. If the model took these factors into account, the
Section 221(d)(4) program would not require a premium increase.
HUD Response: The new MIP was necessary to keep the Section
221(d)(4) program operational in FY 2002 without the need for credit
subsidy. For some time, the industry has questioned both the underlying
data used in the credit subsidy calculations and the underlying
assumptions. In response to concerns about the data and assumptions,
Secretary Martinez committed to a comprehensive review of the credit
subsidy calculations to determine the appropriate credit subsidy rate
and MIP. HUD staff had several meetings with the industry and agreed to
consider industry concerns regarding changes in the tax code and FHA
underwriting. HUD examined the statistical techniques that were used to
evaluate loan performance; updated and refined FHA's data; considered
FHA underwriting changes; and incorporated the major tax law changes in
the 1980s that affected the profitability of multifamily housing. As a
result of the reanalysis of credit subsidy, HUD was able to make
Section 221(d)(4) a self-sustaining program at a 57 basis point
premium. HUD also lowered the premiums for Section 207 manufactured
home parks and the Section 220 urban renewal/neighborhood
revitalization areas and made them self-sustaining at 61 basis points.
The credit subsidy rates for two programs still requiring credit
subsidy, Section 221(d)(3) and Section 241(a), were substantially
lowered. All of the new rates and MIP were reflected in the HUD budget
for FY 2003. The new premiums are in effect as of October 2002.
4. Cooperative Housing Should Be Treated Differently
Comment: One commenter stated that for a variety of reasons,
cooperative housing is a special case and should not be subject to an
increased premium. First, cooperative mortgages have not been included
in the accelerated mortgage processing program, which results in cost
savings. Until cooperatives are included in the accelerated procedures,
there should be no increase in their MIPs. Second, cooperatives are an
integral part of affordable homeownership efforts, and raising the MIP
for cooperatives will impede the goal of increased homeownership
opportunities for low- and moderate-income families. Third,
cooperatives statistically have been superior performers (in terms of
lower default rates). For these reasons, if HUD decides to continue
with this rulemaking rather than accessing the emergency credit subsidy
appropriation, the MIP for cooperatives should not be increased.
HUD Response: As to the first point, HUD does not agree that there
is any relationship between credit subsidy and whether or not
cooperatives are processed under the accelerated mortgage processing
program. Whether or not a program requires credit subsidy, which is the
basis for the MIP calculation, is independent of any cost or time
savings to the borrower that may be achieved by accelerated processing.
HUD currently plans to add cooperatives to the Multifamily Accelerated
Processing program in the future.
As to the second and third points, HUD supports affordable
homeownership and cooperative housing. Cooperative housing under
Section 213 of the National Housing Act does not require credit subsidy
because of the excellent performance of the Cooperative Management
Housing Insurance Fund. Because the mortgage insurance premium was not
raised for Section 213, but remains at 50 basis points, cooperatives
are encouraged to use that program rather than applying under Section
221(d)(3), which is also open to cooperatives but, because of past
performance, has consistently required credit subsidy. Therefore, HUD,
through Section 213, in fact recognizes the performance of cooperatives
in its MIP calculation. No change to this rule is required as a result
of this comment.
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IV. Findings and Certifications
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action'' as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the Office of the Rules Docket
Clerk, Regulations Division, Room 10276, 451 Seventh Street, SW.,
Washington, DC 20410-0500.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this final rule, and in so
doing certifies that this rule will not have a significant economic
impact on a substantial number of small entities. While this rule and
the related notice for FY 2002 raised mortgage insurance premiums in
certain programs, the amount of increase remains in the limits of HUD's
statutory authorization. Indeed, under some circumstances, this rule
would allow MIP rates to decrease, as the MIP rate for the Section
221(d)(4) program will do in FY 2003. Furthermore, without the
authorization for necessary changes in the MIP rate, it is likely that
the effect on business entities will be much greater, as a number of
HUD's mortgage insurance programs would have to cease operations
completely, causing hardship and uncertainty to those who depend upon
these programs to secure mortgages. Therefore, this rule acts to
minimize adverse impacts on the business community.
Environmental Impact
In accordance with 24 CFR 50.19(c)(6) of HUD's regulations, this
rule involves establishment of rate or cost determinations and related
external administrative requirements and procedures which do not
constitute a development decision that affects the physical condition
of specific project areas or building sites. Accordingly, under 24 CFR
50.19(c)(6), this rule is categorically excluded from environmental
review under the National Environmental Policy Act of 1969 (42 U.S.C.
4321).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of section 6 of the Executive Order are met. This rule
does not have federalism implications and does not impose substantial
direct compliance costs on state and local governments or preempt state
law within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA), establishes requirements for
federal agencies to assess the effects of their regulatory actions on
state, local, and tribal governments, and on the private sector. This
rule does not impose any federal mandates on any state, local, or
tribal governments, or on the private sector, within the meaning of the
UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number applicable to the
program affected by this rule is 14.134.
List of Subjects in 24 CFR Part 207
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
Accordingly, the amendment to 24 CFR part 207, published in the
Federal Register on July 2, 2001 (66 FR 35072), is adopted as final
without change.
Dated: March 5, 2003.
John C. Weicher,
Assistant Secretary for Housing--Federal, Housing Commissioner.
[FR Doc. 03-6319 Filed 3-14-03; 8:45 am]
BILLING CODE 4210-27-P