[Federal Register Volume 68, Number 51 (Monday, March 17, 2003)]
[Rules and Regulations]
[Pages 12792-12795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6319]



[[Page 12791]]

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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

  Federal Register / Vol. 68, No. 51 / Monday, March 17, 2003 / Rules 
and Regulations  

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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

[[Page 12793]]

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