Detailed Information on the
FHA Multi-Family Mortgage Insurance Assessment

Multifamily Housing's indicator is "the share of multifamily properties in underserved areas insured by FHA is maintained at 33 percent of initial endorsements". The endorsements for this fiscal year are expected to achieve that indicator, and are at 35% as of June 2007. Multifamily has been exploring ways in which it can streamline and enhance the Multifamily Accelerated Processing (MAP) underwriting process. These efforts have included convening internal task forces and accepting suggestions from industry groups. The suggested enhancements are being reviewed for possible implementation. When implemented, the enhancements are expected to increase the number of mortgage insurance applications, including those for business in underserved areas. Based on the May 25, 2007, study by the Federal Housing Administration Office of Evaluation, entitled Developing an Affordability Metric, 54% of the housing units in FHA insured properties were located in underserved areas and 96% of the units were affordable to low- and moderate-income families (mortgages endorsed between February 25, 2004 and March 30, 2006).

Measure: For Households living in assisted and insured privately-owned multifamily properties, the share that meed HUD's fiancial management compliance is maintained at no less than 95 percent.

Explanation:The review and follow-up procedures have resulted in over 95 percent of the properties being in compliance; the Department's goal now focuses on maintaining this level over time.

Measure: The average number of Exigent Health and Safety or Fire Safety Deficiences per property does not exceed 2.10 for multifamily Housing.

Explanation:From the Performance and Accountability Report for FY2004; this measure has continued to be refined over time and been expanded to address additional types of deficiencies. When such deficiences are detected during HUD's on-site physical inspections, citations are issued to property owners and agents requiring corrective actions and response to HUD within three business days.

Measure: Multifamily mortgage endorsements

Explanation:

Measure: Expand Access to affordable private market housing

Explanation:From HUD's Strategic Plan FY 2003--FY 2008

Measure: Among households living in multifamily properties, the share living in developments that have substandard financial management decreases by 2.5 percent per year.

Explanation:From HUD's Strategic Plan FY 2003--FY 2008; for the FY 2000 reporting period, the share of housholds living in subsidized multifamily properties that had substandard financial management was 28.6 percent.

Measure: The share of assisted and insured privately owned multifamily properties that meet HUD established physical standards are maintained at no less than 95%

Explanation:The review and follow-up procedures have resulted in over 95 percent of the properties meeting HUD's physical standards; the Department's goal now focuses on maintaining this level over time.

Measure: The number of multifamily rental units in underserved areas newly insured by FHA increases by 5 percent

Explanation:This goal is from the FY 2003 Annual Performance Plan

Measure: The share of housing units that meet HUD's physical standards will exceed 92% by FY 2005

Explanation:From HUD's Strategic Plan FY 2003--FY 2008

Measure: The share of multifamily properties in underserved areas insured by FHA is maintained at 33 percent of initial endorsements. (C3.2)

Explanation:This goal is from the FY 2004 and FY 2005 Annual Performance Plan

Is the program purpose clear?

Explanation: The Federal Housing Administration (FHA) provides mortgage insurance for multifamily rental dwellings and healthcare facilities in order to encourage and enable private enterprise to serve the nation's goal of providing a decent home and a suitable living environment for every American Family. It is intended to support HUD's strategic goal of increasing access to affordable housing. FHA is a market driven program, and it aims to facilitate capital mobilization so that the need for affordable market rate housing is met, particularly in areas where the unmet demand is highest. FHA, through its monitoring and inspection programs, aims to ensure that housing facilities using FHA mortgage insurance continually offer a decent, safe and suitable living environment over the entire 40-year mortgage period.

Evidence: FHA's programs are authorized by Title II of the National Housing Act. Rental properties are governed primarily under Section 221 of the Act and healthcare facilities are governed under Section 232. In addition to the primary insurance vehicles, FHA programs are authorized under Section 207, which provides for the purchase or refinance of apartments and Section 220, which focuses on the production of rental housing as part of HUD's efforts in elimination of slums and blighted conditions. FHA is also governed under Title V of the Housing and Community Development Act of 1992, Section 542, which established risk-sharing programs to encourage State Housing Finance Agencies (HFA) and other qualified participating entities (QPE) to issue FHA mortgage insurance. Both HFAs and QPEs must adhere to FHA's underwriting guidelines and share the risk on any credit losses with FHA should mortgages issued by those entities default.

Does the program address a specific and existing problem, interest, or need?

Explanation: Although its impact on increasing access to affordable housing is unproven, the program is intended to increase access. Around 5 million households have "worst-case" housing needs, paying more than 50% of income on rent or living in substandard housing.

Evidence: HUD research on "worst-case" housing needs.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: There are a variety of programs that increase access to affordable housing. Although FHA may offer a unique form of multi-family financing, there is no proof that, in its absence, there would be less affordable housing. While FHA insurance may have been helpful in developing project-based subsidized housing, these programs do not exist as a form of new development. FHA accounts for only a small share of the multifamily loan market. It is not clear that FHA addresses market failure in multifamily financing.

Evidence: Many other programs (e.g., vouchers, HOME block grant) directly address the issue of expanding affordable housing and there is a large amount of conventional financing available for unsubsidized development. FHA properties are not income-targeted nor subsidized so there is no guarantee that occupants are low-income residents who would otherwise have diffculty affording housing. Segal and Szymanoski (Cityscape, volume 4, number 1, page 67) found that the FHA new construction program "devotes proportionately fewer resources to underserved areas than others do."

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: FHA offers a 100% loan guarantee. This insulation to credit risk weakens the incentives for lenders to minimize claims as these costs are not borne by them. The program may also encourage over-building of rental properties by providing credit enhancement without a proven commensurate benefit in increasing affordable housing.

Evidence: Circular A-129 establishes principles for federal credit programs, including a strong preference for less than 100% loan guarantees and an objective to provide credit enhancement only when the existing market is not meeting a public policy objective. FHA provides only a small share of the multifamily financing market. There are a wide variety of conventional financing options available for credit-worthy projects, including lending for Low-Income Housing Tax Credit projects.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The program does not have targeting mechanisms to ensure that properties are developed to address shortages of affordable housing. There are no mechanisms to ensure that properties are contributing to the stated goal of increasing access to affordable housing.

Evidence: FHA guarantees all multi-family loans that meet underwriting criteria. Although there are per-unit loan limits that prevent the insurance from being used in luxury developments, there are no requirements that would target the program to meeting affordable housing needs. For example, there no rent restrictions or requirements to house low-income tenants.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: FHA has only two outcome measures that reflect a commitment to HUD's goals: penetration of underserved communities and percent of properties that meet physical standards. This is too narrow of a focus. Given that there are many alternatives to FHA insurance in serving underserved areas, there is no measure to capture what the effect of FHA insurance is on these areas. For example, is FHA creating additional investment in underserved areas? Are there low-income residents who benefit from living in FHA-insured developments? This indicator is also market-driven, a tracking measure not a performance measure that FHA can directly affect, making the program a weak policy tool for increasing affordable housing.

Evidence: HUD Performance Plan.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: See 2.1 for explanation of why FHA Multi-family lacks long-term measures.

Evidence: HUD Performance Plan

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: HUD's Annual Performance Plan includes specific goals for each field office to meet for insurance endorsements and for the financial management and physical condition of properties within their portfolio. These goals are monitored by the Department on a quarterly basis.

Evidence: The Department has specific annual goals that all field offices must meet as their contribution to meeting HUD's national goals. Each field office must strive to meet a specific number of initial FHA insurance endorsements, with at least twenty-five percent of the endorsements located in underserved areas. The Department also has specific goals for inspecting multifamily rental properties, and it has follow-up protocols to assure that at least 95% of the properties continue to meet HUD MPS property and financial standards. HUD has strict physical inspection follow-up procedures to ensure that project owners expeditiously correct all health and safety conditions identified during physical inspections, especially those that pose an imminent health or safety threat to residents. The financial condition of each property is reviewed annually to assure that at least 95% or more of the properties in FHA's portfolio continue to meet HUD's financial compliance requirements in a timely manner. The condition of the FHA portfolio should continue to improve due to these initiatives.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: FHA's goal for penetrating underserved areas is not amibitous. The targets for 2005 and 2006 are below the level of the 2002 actual result. The HUD Performance Plan acknowledges that there is little FHA can do to achieve ambitious results in this area: "The achievement of this goal is influenced by national economic conditions....The program data are subject to variance caused by fluctuating market condtions." Given the existence of these external factors, it is difficult to establish an appropriate baseline against which to compare targets and measure performance.

Evidence: HUD Performance Plan

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Outside of Low-Income Housing Tax Credit properties, partners (lenders, borrowers) do not make commitments to deliver on performance goals such as increasing affordable housing. Their responsibilites to FHA are strictly financial: meeting underwriting criteria and meeting procedural requirements that deal with origination, servicing and disposition of credit assets.

Evidence: Underwriting criteria, program requirements, regulatory agreements.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: While there have been management and financial audits conducted by GAO and the HUD IG and academic studies on the financial performance of FHA multi-family, there are an insufficient number of evaluations that assess whether FHA is having a significant and beneficial impact on affordable housing and community development. There are no regularly scheduled evaluations that address effectiveness and relevance to the problem, interest, or need. The existing studies are not of sufficient scope to determine the effectiveness of the program: what is the incremental contribution it makes to affordable rental housing supply?

Evidence: GAO reports, IG reports, research studies.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: FHA's Multi-family resources are not at all tied to performance results. As a demand-driven program, FHA's performance is determined completely by market demand for FHA insurance and there is no budget levers that policy-makers can use to affect performance. The impact of funding, policy, and legislative changes on performance is not made clear in the budget documents. This is in contrast to other HUD affordable housing programs such as HOME and vouchers, which are scaleable and where different levels of budget requests produce certain levels of performance.

Evidence: HUD Budget documents.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: FHA is not working to adopt a set of specific, ambitious performance goals. Instead, the goals for multi-family programs are focused on outputs and, in deference to external factors, do not seek levels of performance above that which should be easy to achieve given historical experience.

Evidence: HUD Performance Plans.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: FHA collects data on multifamily borrowers, lenders, applications, endorsements, prepayments, defaults, claims, assignments, foreclosures, and note and property sales as well as other information necessary to prepare credit subsidy estimates and to monitor compliance with program guidelines. This information is relevant for financial and credit management of the program. None of this information, however, is relevant to program performance in meeting HUD outcome goals. For example, information that might serve to illustrate progress toward meeting affordable housing needs such as rents and tenant income are not collected.

Evidence: On the development side, the computer-based system, Development Application Processing (DAP), tracks each loan through processing stages, from submission of application through initial and final endorsement.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: Federal managers in headquarters and field offices are held accountable for performance results through performance plans and goals. HUD has a variety of mechanisms for holding mortgagors and mortgagees accountable for their performance, including timely mortgage payment, provision of fair and adequate rental services, and the maintenance of the properties that are securitized by the insured mortgages.

Evidence: Performance Plans, loan guarantee and regulatory agreements.

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: FHA obligates funds in a timely manner and spends them for intended purposes.

Evidence: Quarterly obligation and spending reports as well as Congressional justifications and operating plans show the timely obligation of funds. In FY 2004, FHA utilized all of its guarantee authority, and Congress twice had to increase the budget for guarantee authority. The accelerated processing deadlines assure that project guarantee authority is used in a timely manner.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: FHA has implemented multiple systems to improve its operations. In addition, FHA has outsourced many of its underwriting functions to private mortgage companies (MAP lenders). MAP lenders, approved by FHA after demonstrating they meet financial and program experience standards, have the authority to underwrite FHA multifamily mortgage insurance and submit it to FHA for review and approval. FHA has introduced and continued to improve upon its REAC Physical Assessment Subsystem as a performance indicator for maintaining housing quality standards that meet both HUD's minimum property standards as well as all local building codes. In addition, FHA has upgraded its REAC Financial Assessment Subsystem as an early warning system for projects that may be headed into financial trouble. Finally, the LQMD program monitors the effectiveness of MAP lenders as well as project underwriting approvals for troubled projects.

Evidence: MAP lenders underwrote 59.8 % of the applications for basic FHA mortgage insurance in FY 2004 (vs. 32.2% in FY 2001), which permitted FHA to outsource a higher percentage of its underwriting efforts over the three-year period. For multifamily projects, FHA has exceeded its financial performance goal of achieving a 95th percentile level of standard of resolving all financial compliance and audit issues for its insured projects in FY 2004. FHA achieved a 98% financial compliance level for FY 2004. In addition, for the REAC Physical Assessment Subsystem, 95.5% of all FHA multifamily projects met FHA's more stringent physical inspection quality standards established by the Department for the FY 2004 operating period. The goal was 94.7%.

Does the program collaborate and coordinate effectively with related programs?

Explanation: FHA multifamily mortgage insurance is used in tandem with low income housing tax credits, CDBG and HOME funds, Section 8 assistance, Section 202, OHMAR low-income housing preservation, and Hope VI programs. Each of those programs provides project assistance that is directly targeted to supporting low- and moderate-income tenants in rental housing. FHA multifamily insurance also is integrated with GNMA, and GNMA multifamily class securities are being used extensively for both construction and permanent financing.

Evidence: FHA market rate rental units house a substantial number of low and moderate-income persons. FHA approved 229 LIHTC loans in FY 04 with approximately 29,400 units, with more that 25% of those units housing very low-income families. Many of the LIHTC projects also utilize HOME, CDBG and Hope VI funds in their financing structure. Many FHA projects have units that house tenants that are subsidized by the Section 8 rental housing assistance program. GNMA securitized 92.4% of FHA mortgages, exceeding its goal of 80%.

Does the program use strong financial management practices?

Explanation: FHA has a material weakness and therefore receives a negative response to this question. The auditors have acknowledged that the weakness cannot be removed until the entire Subsidiary Ledger Project is complete, early in FY 2007. FHA is, however, making progress toward this goal. FHA is in the final stages of the implementation of the Subsidy Ledger, a new system that manages financial transactions in accordance with Federal requirements. FHA implemented a new general ledger on October 1, 2002 and plans to have the fully integrated financial management system in place by the end of calendar year 2006. FHA completed Phase II of the system integration and now has a new core financial management system supporting its general ledger accounting operations, financial statement reporting, central funds control, accounting for certain contracts and grants, and cash management. In addition the project is well into Phase III and is in the parallel stages of the Multifamily Insurance and Multifamily Claims components, Single Family Refunds component and has developed a prototype for the Single Family Property Management financial component.

Evidence: All of FHA's financial systems were deemed to be in compliance with FFMIA in the most recent self-assessment except for three which are under discussion, all systems, which have been independently reviewed by the CFO, have been found compliant. FHA's Subsidiary Ledger Project has demonstrated success of sufficient magnitude to be recognized in the last several clean audits FHA has received. The fact that FHA has received consecutive clean audits and eliminated three material weaknesses/reportable conditions in 2003 indicates that, while not perfect, FHA's financial management practices are improving.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: FHA has instituted management improvements on the monitoring and oversight of its programs aimed at achieving improved underwriting of its mortgage insurance requests. FHA also focused on setting deadlines to facilitate faster processing of applications as well as achieving a higher degree of quality control of its underwriting and credit approval activities. FHA developed procedures to require that its MAP lenders to implement quality control plans and operational mandates. FHA has implemented an active monitoring program of its MAP lenders aimed at enhancing credit quality.

Evidence: The monitoring of FHA approved private MAP lenders has uncovered a number of problems that resulted in personnel changes and in a revision of operating procedures of MAP lenders, especially those that have higher default rates. In response to a GAO recommendation that HUD develop a computer-aided risk assessment tool, HUD implemented the Integrated Risk Assessment (IRA) tool through OPIIS, the On-Line Property Integrated Information Suite. IRA scores all active properties monitored by the Office of Housing using FASS and PASS scores, MDDR (Multifamily Delinquency and Default Reporting) mortgage size and performance, management reviews, and program characteristics some external (census) data to classify each property into one of three risk categories: Low, Moderate and High. Asset managers use IRA to prioritize their workloads. The scores are updated every time applicable data change.

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: FHA lacks cohort data for re-estimation purposes. This is not compliant with reporting requirements for federal credit programs.

Evidence: Circular A-11, Budget Credit Supplement

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: HUD has developed cash flow models for preparing its liability for loan guarantee and credit subsidy estimates that use all available historical data. The models are automated to speed data processing and reduce the likelihood of human error in data handling. Each year improvements are made in data quality. Econometric methods are used to project conditional claim and prepayment rates by risk category. An additional improvement would be the ability to model stressful flutcuations in the real estate sector.

Evidence: As a result of improvements in its modeling, FHA has been able to justify lowering its mortgage insurance premiums for its largest mortgage insurance programs??Section 221(d)(4) new construction and Section 223(a)(7) and Section 223(f) refinancing.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: See answer 2.1 for why this program does not have long-term performance measures that would be necessary for a positive assessment under this question.

Evidence: HUD performance plans. Schnare ("The Impact of Changes in Multifamily Housing Finance on Older Urban Areas," discussion paper, June 2001) found that FHA provided less financing to underserved areas than thrifts or banks and that the provision of affordable rental units under FHA financing compared to GSE financing was less than half for new developments and comparable for existing developments.

Does the program (including program partners) achieve its annual performance goals?

Explanation: This is the highest rating the program can achieve given its lack of ambitious measures. See answer 2.4 for more detail. FHA has met many targets but they are not aggressive targets.

Evidence: FHA's goal in FY 2004 was to endorse 1000 projects for mortgage insurance. FHA endorsed 1497 projects, exceeding its target by nearly 50%. Although the low interest environment has generated significant numbers of refinancings, approvals for newly insured properties have risen from 347 in FY 2000 to 802 in FY 2004, an increase of 131%. GNMA securitized 92.4% of FHA mortgages, exceeding its goal of 80%. FHA endorsed 34% of its projects in underserved areas exceeding its goal of 25%. The continuing demand for the FHA multifamily insurance program is evident from the fact that 157,200 housing units or beds were financed with $6.63 billion in Fiscal Year 2004, not including the risk-sharing program. FHA has also met the objective of the mortgage insurance program to encourage the flow of money from the financial community on a continuous basis to multifamily housing lenders by enabling the sale of insured mortgages through Ginnie Mae. In FY 2004, 92% of multifamily mortgages were sold as Ginnie Mae multiclass securities. (Sources: National Housing Act and pages 2-46 and 47 of U.S. Department of Housing and Urban Development Performance and Accountability Report, FY 2004.) The risk-sharing programs accounted for 192 loans, housing 21,584 low-income tenants in FY 2004. Fannie Mae and Freddie Mac are the only two participants in the 542(b) program. Thirty-one states and other governmental entities are eligible to participate in the 542(c) program for housing finance agencies. Over 98% of all FHA multifamily projects met HUD's FY 2004 goal of having all financial compliance and audit issues resolved (goal was 95%), while 95.5% of all FHA multifamily projects met their goal (94.7%) of meeting rigid physical inspection quality standards established by the Department. Owners with unacceptable physical inspections scores below 60 and owners who failed to submit the annual financial statements are referred to the Department of Enforcement if they failed to take corrective actions to comply Departmental requirements governing these loans. (The enforcement actions may be sanctions or other adverse action, e.g., civil money penalties, debarments, foreclosure, or abatement of subsidies. as well as flag(s) in the APPS system.)

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: FHA multifamily mortgage insurance programs have demonstrated improved cost effectiveness in achieving program goals as measured by the falling mortgage insurance premium for its most important new construction and substantial rehabilitation program, Section 221(d)(4).

Evidence: In FY 2002, FHA charged a mortgage insurance premium (MIP) of 80 basis points (bp), which was then needed in order to transform the FHA insurance program from a positive to a negative credit subsidy status and avert program shutdowns that resulted from the exhaustion of credit subsidy appropriations. FHA reduced the MIP to 57 bp in FY 2003, 50 bp in FY 2004 and 45 bp in FY 2005. In FY 2006, the President's budget proposes that the 221(d)4 projects utilizing tax credits be reduced from 50 bp to 45 bp and that the MIP for the 223(f) and 223(a)(7) programs also be reduced from 50 to 45 basis points. In each case, the reductions have been justified by financial data demonstrating that FHA's property management improvement programs are resulting in significant cost reductions. For properties that have defaulted on their FHA obligations, HUD has implemented a program of timely and regular note sales. After analyzing various note and property disposition strategies, FHA determined that the prompt sales of notes and properties maximize financial recoveries relative to other disposition strategies.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: Because little is known about the program's contribution to affordable housing, it is impossible to affirmatively respond to questions about this program's performance in comparison to programs with similar purposes. Other such programs (e.g., vouchers, HOME, Low-Income Housing Tax Credits) have a definitive contribution to affordable housing and therefore compare favorably to FHA Multi-family.

Evidence: FHA Multi-family lacks the performance data or rigorous evaluations to demonstrate its contribution to affordable housing.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: There are no evaluations of sufficient scope that indicate the program is effective and there is some evidence to the contrary. There are an insufficient number of evaluations that assess whether FHA is having a significant and beneficial impact on affordable housing and community development. There are not regularly scheduled evaluations that address effectiveness and relevance to the problem, interest, or need of housing problems. The existing studies are not of sufficient scope to determine the effectiveness of the program: what is the incremental contribution it makes to rental housing?

Evidence: "Multifamily Finance: Pathway to Housing Goals, Bridge to Mortgage Market Efficiency" by Kerry Vandell (11 Journal of Housing Research, pp 319-356) found that the FHA small projects program has been "limited in its activity and success" and that FHA Multi-family in general suffers from "excessive regulatory compliance requirements."