House Financial Services Subcommittee on Insurance, Housing and Community Opportunity Hearing

Chairman Biggert, Ranking Member Gutierrez and members of the Committee, thank you for inviting mime to testify today. My name is Michael Bodaken, and I am President of the National Housing Trust.

The National Housing Trust ("NHHT"), a national nonprofit organization formed in 1987 that is dedicated exclusively to the preservation and improvement of existing affordable housing. Our Board of Directors includes representatives of all major interests in the area of affordable housing preservation, including resident advocates, nonprofit and for profit owners, state housing agencies,, national and regional nonprofit intermediaries, housing scholars and other housing professionals who care deeply about preserving and improving existing affordable housing. Through our work in real estate development and affordable housing finance, NHHT has saved and improved more than 22,000 apartments in 41 states, leveraging more than $11 billion in investment for affordable housing. The majority of these apartments have HUD subsidized mortgagees or project-based rental assistance contracts.

NHT regularly engages with HUUD, FHA, thee GSEs and the Federal Home Loan Banks at thee policy level and in our work as a nonprofit housing developer.

The Housing Finance System Must Serve Rental Housing as well as Homeownership

It is imperative that the nation's housing finance system fairly balance homeownership and rental housing. FHA helps provide liquidity, counter cyclicality and flexibility to assure the ongoing finance of rental housing. Rental housing currently houses at least 1//3 of all Americans, provides shelter four about 50%% of all low-income households.

All too often in housing finance discussions, policymakers overlook the central role rental housing plays in so many people s' lives. Nevertheless, the fact ream aims that 1/3 of our nation's families and seniors depend on quality rental housing. Nowhere in the U.S. is a household earning minimum wage able to afford a HUDD Fair Market priced apartment. Manny in our nation's workforce, including teachers, firefighters and municipal workers, are reenters. Yet in discussions of housing finance, these people--and their housing needs- are too frequently sidelined. Thus, when examining FHA's role in the multifamily housing market, it is important to understand the ways in which FHA supports the creation and preservation of affordable rental housing.

As Secretary of HUD, Shaun Donovan, remarked at the White House Conference on the Future of Housing Finance:

"[A robust housing finance system] means ensuring that financing is available for those who will build the rental housing that we need to provide choices for those families for whom homeownership may not be the best option. n1

The Role of FHA in Preserving Project Based Section 8 Housing

The housing market has experienced a significant shift since 2008. Homeownership opportunities have decreased while demand for rental housing has steadily increased. There are now over 40 million renters across the country with over 10 million renters paying more than 50% of their income for housing. n2 Meanwhile, the rental vacancy rate has declined, recently hitting a decade low. n3 Preserving existing affordable housing is particularly trenchant. For every three extremely low income families or senior households, there is only one affordable rental apartment available. Thus, preservation of housing available to extremely low income households is the first step in resolving our nation's housing affordability dilemma.

Historically, FHA's role has been pivotal in the development and insurance of HUD insured and Section 8 assisted housing, the occupants which have an average annual income of $12,000. Fully 40% of the HUD Project-Based Section 8 portfolio is FHA-insured, totaling $13.8billion in outstanding debt insured by the FHA. n4 As HUD observed in its recent FY2013 budget justifications submitted to Congress, the financing and refinancing of HUD-assisted properties allows owners to undertake rehabilitation projects that create local jobs and generate local tax revenue. Nonetheless, this Administration proposed "short funding" of Section 8 contracts in FY'13. Notably this could have significant consequences for FHA. Under funding or short-funding these Section 8 contracts would not only have negative consequences on the residents, 2/3 of whom are elderly or disabled, but also on the FHA given its significant exposure-over $13 billion- to insuring Section 8 housing. The link between FHA financing and Section 8 subsidies cannot be severed. It's therefore critical that the properties with Section 8 contracts receive 12 months of full funding to continue operating and servicing the underlying FHA insured debt.

FHA-Insured Project-Based Section 8 Properties in Congressional Districts of Subcommittee Members

Member of Congress ....Number of Section 8 Properties ....Number of Section 8 Apartments ....FHA-Insured Outstanding Mortgage Balance

Bradley Sherman ......12 ..........1,228 ..........$43,470,444

Emanuel Cleaver ......29 ..........3,104 ..........69,088,063

Gary Miller ........1 ..........93 ..........3,809,247

Judy Biggert ........3 ..........329 ..........25,171,196

Luis Gutierrez ........10 ..........918 ..........43,632,718

Lynn Westmoreland ......10 ..........864 ..........18,162,573

Maxine Waters ........10 ..........512 ..........17,676,421

Melvin Watt ........22 ..........1,518 ..........37,357,686

Michael Capuano ......83 ..........10,456 ..........615,974,047

Nydia Velazquez ......13 ..........1,739 ..........182,851,371

Patrick T. McHenry ......9 ..........433 ..........10,390,577

Robert Dold ........9 ..........656 ..........34,893,193

Robert Hurt ........6 ..........339 ..........5,424,425

Scott Garrett ........4 ..........415 ..........20,121,653

Sean Duffy ........12 ..........509 ..........104,269,477

Shelley Moore Capito ......25 ..........2,284 ..........54,034,024

Steve Strivers ........28 ..........3,138 ..........50,339,721

William "Lacy" Clay, Jr. ....29 ..........3,291 ..........79,212,068

Total ..........315 ..........31,826 ..........$1,415,878,903

Source: NHT's analysis of HUD's Multifamily Assistance and Section 8 Contracts Database.

Earlier this year, HUD announced the 223(F) Low Income Housing Tax Credit ("LIHTC")-the so called "Super F"- program to streamline application and processing of FHA-insured mortgages for properties with equity from the LIHTC. Notably, the LIHTC has increasingly been used for the preservation of federally subsidized properties. Each year, it supports the preservation and improvement of tens of thousands of Section 8 apartments. Today, 46 state and housing finance agencies prioritize the use of LIHTC to preserve and rehabilitate existing affordable housing.

The "Super F" product prudently targets federally subsidized properties and older LIHTC properties in need of rehabilitation. When fully phased in, the program will allow for rehabilitation to move forward on these properties where financing otherwise may have been unavailable. We are encouraged that HUD will use a streamlined and separate approach for processing these loans. According to the notice, "the Tax Credit Pilot" is designed to expedite application processing to meet the tight deadlines of the tax credit program and will only allow experienced tax credit lenders to process applications.

The Trust applauds this approach. The first phase of the program provides permanent financing for transactions involving recently occupied buildings, for preservation and moderate rehabilitation of properties with Section 8 rental assistance and for older, stabilized tax credit properties. n5 The success of the Super F program in assisting the rehabilitation of Section 8 properties depends on the continued, reliable, 12 month funding of Section 8 contracts.

We have two recommendations that would make the Supper F program more useful:

* One recommendation for the Super F program is to double thee relocation period during rehabilitation. Given that the program allows rehabilitation up to $40,000 per unit, the tight two week rehabilitation window may make it more difficult for dev elopers to maximize thee program's principal benefits.

* While only a pilot program, we encourage HUD to make this program accessible to other areas of the country, including the Midwest and the South.

FHA Multifamily Programs

HUD's FFHA programs serve multifamily housing development and preservation. The 221(d)(4) Mortgage Insurance program is FHA's largest insurance program for new construction and substantial rehabilitation for multifamily housing, funding up to 90%% of replacement costs. The average property funded with a 2221(d)(4) loan contains 1160 units. Recently, HU D has made changes to tighten the 221(d)(4) program for market rate housing. Notably, HUD's losses inn affordable housing financed by Section 221(dd)(4) are not significant...

By way of example, NHT/Enterprise and Mercy Housing Lakefront recently used the 221(d))(4) program to redevelop Pullman Wheelworks in Chicago, Illinois. This property is located on the site of the former factory where Pullman trains were constructed. The factory was previously converted to an affordable housing development that fell into disrepair. Together with the City of Chicago, the Macarthur Foundation, Illinois Housing Development Authority and the Community Investment Corporation, we used FHA to preserve and improve the entire property for its resideents The transaction cost roughly $300 million, including a $9..5 million 2221(d)(4) FHAA-insured loan. We are now undertaking a $10 million renovation that will preserve the apartments for the building's low-income residents. The City off Chicago is targeting the Pullman area for an investment of $350 million for mixed use development on the site off an old nearby steel plant. When complete, Thee Pullman Park project will consist o of about 670,,000 square feet of new retail space, a 125,000-squuare-foot neighborhood recreation center carved out of a factory building and 1,100 housing units. The American Planning Association designated Pullman one of 10 Great Neighborhoods for 2011 for its innovative approach to workforce housing and its residents' efforts too preserve the community.

As we work to preserve and improve the existing affordable multifamily housing stock, it is important that appropriate measures be taken to improve long-term project operations. In addition to the environmental benefits of energy efficiency improvements, research has shown that instituting energy- and water-efficiency measures can yield long-term cost savings that exceed the costs of the improvements.

Sources of capital are necessary to finance these improvements. One such source is the new Green Refinance Plus Loan program, a partnership between Fannie Mae and thee U.S. Department of Housing and Urban Development. Green Refinance Plus provides funding for the refinance, preservation and energy-efficient retrofits of older affordable multifamily housing properties. The program allows for lower debt service coverage and higher loan--to-value ratios to generate extra loan proceeds for the project's energy-efficient rehabilitation/retrofit.

Last month, Enterprise Community Investment, Inc. announced the closing of the first loan under this program. LINC Housing Corporation, a California-based nonprofit, will receive a $19.4 million first mortgage to refinance the 2274 unit City Gardens property in Santa Ana. The loan has a 10 year term, 300 year amortize action, and interest rate of 44.28%. Of the $19.4 million loan, $22.8 million is for hard and soft costs associated with renovations and upgrades. The total cost of energy/water conservation upgrades, which includes low flow plumbing fixtures, a low flow landscaping irrigations system, passive solar hot water heating system, and energy efficient air conditioning units, is approximatelly $515,000.

In addition to providing needed capital for the refinance of the property, the Greene Refinance Plus mortgage enhances long-term project viability by reducing the project's utility and maintenance expenses.

Reducing Costs to the American Taxpayer: To lower the costs of ongoing subsidy, Congress recently reauthorized the Mark to Market Program which reduces FHA's exposure to properties with Section 8 rents above market rate. To save taxpayer funds and preserve affordable apartments serving low-income families, HUD developed the Mark to Market (M2M) program. This program helps preserve HUD insured properties with rental assistance by restructuring the underlying debt and reducing project-based assistance. This program controls long-term costs of the Section 8 rental assistance program and, not unimportantly, reduces potential risk to the FHA. In 2011, HUD restricted 122 properties, covering 11,951 units under the M2M program, of which resulted in annual net savings over $62.9 million to FHA. n6

FHA Market-Share

The Committee is interested in whether the private market could assume some of the risk that FHA is now taking in multifamily lending. Recent history helps answer this important question.

As shown in the chart below, approximately $100 billion in multifamily acquisition lending occurred in 2006. Of this, approximately $21 billion originated from banks and insurers (private market), $38 billion from Commercial Mortgage Backed Securities (CMBS; private market), $1 billion from Ginnie Mae and $39 billion from Fannie Mae and Freddie Mac. In 2007, the private market share of the market increased. The private market (banks, insurance companies and CMBS) provided approximately $75 billion - approximately 63% - of that year's total $120 billion of multifamily acquisition lending.

However, the Great Recession saw a parallel "great retreat" in purely private multifamily lending. As demonstrated in the chart above, related to the Committee's question about the private market taking up the slack from FHAA, by 2008, the CMBS market became virtually nonexistent. Banks and insurers exited the market as well, constituting no more than $2.5 billion of the $60 billion in multifamily acquisition loans made that year. NNHT and others have provided the Committee the facts that defaults in the private sector, particularly multifamily mortgagee backed securities, rose to over 8%.. FHA's default rate has never approached that number.

According to HUD inn 2011 FHAA had a significant increase in activity from 20100. n7 Driven by low interest rates and constrained conventional sources of financing, more owners and developers are turning too FHA for financing. Nevertheless, the market is coming back and HUDD projects its multifamily commitments to decrease in 2012 and 2013 due to the emergence of conventional lending sources. n8

If we have learned anything from the Great Recession, it is that we cannot count on the private market too maintain lending commitments consistently. Today, the rental market is healthy. Vacancies are at a decade low. S o long as thee market remains healthy we will continue to se e the private mmarket involved in financing multifamily housing. But if a downturn occurs, and it will inevitably occur, we can expect the private mmarket to exit multifamily lending much as it did in 2008 and 2009. Far from "crowding out" private lending, FHA served an important and useful function by providing liquidity and proper underwriting of multiform mortgagees in 2008 and 2009. Wee need a consistent, robust secondary housing finance system backed by the government to support lending during both good and bad times.

An exemplary loan made by the FHA during the economic downturn is a 300 unit Section 2336 property occupied by seniors in Atlanta, Georgia. In 2009, the National Church Residences (NCR) completed a full rehabilitation of the property with a 221(d)(44) loan in the amount off $5.235 million.

NCR is a 50 year old nonprofit that serves the housing needs of seniors, families and adults, the homeless, persons with disabilities, and a host of supportive health care services. NCRR owns 2455 properties totaling nearly 16,750 units. Their properties are located in 28 states and Puerto Rico.

When confronted with the acquisition and turnaround of a troubled Section 236 property in Atlanta, NCR turned to HUD for FHA financing. The total development costs of thee rehabilitation and refinancing of Baptist Towers was approximately $ 17 million. Of this, nearly $7.5 million was for hard rehabilitation costs. The HUD 221(d)(4) loan amounted to less than one-third of the cost, but was essential to the project's success.

Reforms to the FHA Multifamily Programs

FHA has played a critical role in providing credit to multifamily developers and owners during the economic downturn. NHT/Enterprise, NHT's affiliated nonprofit developer, is one of many developers who rely on FHA's low-interest rates and longer amortization periods to make the rehabilitation and development of affordable housing possible. However, some improvements could be made to these programs to make them more efficient, easier to use and reduce duplicative paperwork.

1 The limitation on construction period debt not exceeding permanent period debt is an issue for affordable housing developers. Construction period debt is often repaid by a combination of a permanent loan and LIHTC equity. If construction loans are capped at the amount of the permanent loan, the result is that more equity needs to be paid in up front, reducing the price investors pay for LIHTC, and creating a financing gap for projects.

2 The slow processing time for FHA loans makes it difficult to also use competitive funding programs with readiness and closing deadlines, including the LIHTC program. The use of FHA loan proceeds is limited and often conflicts with use of tax exempt bond proceeds.

3 Related to the previous issue, HUD does not allow loan proceeds to be used for developer fee, soft cost contingency, both of which are allowed uses of bond proceeds in LIHTC transactions. This makes the flow of funds a challenge. The developer must submit two different versions - one to HUD and one to bond counsel, increasing the costs and time of the transaction.

Other Multifamily Housing Development/Preservation Initiatives: Amending the 542(c) Risk Sharing Program

In addition to the current programs run by HUD and FHA to help increase the supply of affordable housing and preserve the existing stock, NHT supports a legislative proposal to amend the 542(c) Risk-Sharing program for state housing finance agencies (HFAs).The proposal would enhance the efforts of state HFAs to develop and preserve assisted multifamily housing by authorizing Ginnie Mae to securitize FHA-HFA Risk-Sharing loans. Since the inception of the program in 1992, the FHA-HFA Risk Sharing has been a successful program, with very low portfolio default rates. The Congressional Budget Office estimates that this proposal would generate $20 million in mandatory savings over ten years. HUD included this proposal in its FY2013 budget request and that language is identical to language that this Committee approved in 2010.

H.R. 4253: Rep. Paulsen (R-MN) has introduced H.R.4253, the Preservation Enhancement and Savings Opportunity Act to enable owners of LIHPRHA properties to access excess project funds and refinance the property to undertake rehabilitation projects to preserve the property. NHT is concerned that the legislation, as filed, may enable owners to strip a property of its equity through refinancing and not actually ensure long-term physical feasibility. NHT and the National Preservation Working Group (PWG) have suggested changes to the introduced legislation that would ensure the long-term preservation of these properties. We intend to work with the Committee and the sponsor of this legislation to make changes to the bill that will achieve the common goal of rental housing preservation.

n1 Prepared Remarks of Secretary Shaun Donovan at White House Housing Finance Conference, August 17, 2010.

n2 Joint Center for Housing Studies of Harvard University, The State of the Nation's Housing 2011

n3 Joint Center for Housing Studies of Harvard University, The State of the Nation's Housing 2011

n4 NHT's analysis of HUD's Multifamily Assistance and Section 8 Contracts Database.

n5 The 223 Super F pilot program relies on full-funding of Project-Based Section 8 Contracts for 112 months for properties utilizing FHA--insured loans.

n6 FHA Annual Management Report, Fiscal Year 2011

n7 HUD FYY2013 Budget Fact Sheet: Stabilizing the Housing Market

n8 HUD FY''13 Justification ns, p. B-19.

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