Subcommittee on Housing and Transportation


Oversight Hearing on the Office of Multifamily Housing Assistance Restructuring
Department of Housing and Urban Development


Prepared Testimony of Mr. Michael F. Petrie
President
P/R Mortgage and Investment Corporation


9:30a.m., Thursday, August 5, 1999

Good morning Mr. Chairman and members of the Subcommittee. My name is Mike Petrie. I am Vice Chairman of the Legislative Committee of the Mortgage Bankers Association of America (MBA)*, on whose behalf I am testifying today. I am also President of P/R Mortgage of Indianapolis, a mortgage banking company that specializes in the financing of multifamily rental housing. I personally have 19 years of experience financing all types of multifamily rental housing utilizing the various secondary market and government agency programs. In addition, P/R Mortgage is a subcontractor to the City of Indianapolis' Housing Agency for the restructuring of loans under HUD's mark-to-market program. Accompanying me today is Mike Ferrell, Senior Staff Vice President and Head of the Legislative Department at MBA.

I would like to address two issues in my testimony:

  1. Compensation for Participating Administrative Entities (PAEs) involved in the financing of multifamily Section 8 loans that are being restructured and marked-to-market; and

  2. The restructuring and financing of those loans that have been marked-to-market

COMPENSATION FOR PAEs

The Multifamily Assisted Housing Reform and Affordability Act of 1997 was passed in large measure to address a problem in the formula originally used for establishing rents for the new construction or substantial rehabilitation of properties under the Section 8 program. The rents for many of these properties are at levels that are substantially above the market rents for comparable properties, with the result that the government has been paying rental subsidies that are artificially high. When addressing this problem in the 1997 Act, Congress determined that HUD needed assistance in marking the rents on these properties down to the market. In the Act, Congress gave state housing finance agencies and local housing agencies preference when qualifying as the Participating Administrative Entities (PAEs) to mark rents to market in their jurisdictions. The result of this policy has been that housing finance agencies have a virtual monopoly on being PAEs. Because of this, the Office of Multifamily Housing Assistance Restructuring (OMHAR) at HUD has been handicapped in its negotiations with state agencies over the payment of fees for performing the restructurings.

It is our understanding that the state agencies have been requesting $50,000, plus the costs of third party reports such as market studies and engineering reviews, for each loan they restructure. Many state agencies have been refusing to sign agreements with OHMAR until these fee requests are met. This has delayed the processing of these restructurings throughout the country.

By giving PAEs this virtual monopoly, the law enacted in 1997 has put OHMAR in the position of paying exorbitant fees to state agencies or face the prospect of delaying the process while attempting to negotiate a reasonable fee.

MBA believes that OHMAR has been justified in its attempts to negotiate more reasonable fees, and that the fees reportedly being asked by the state agencies are excessive and do not reflect actual costs.

In 1992 and 1993, the Federal Housing Administration (FHA) implemented a program under which they delegated the processing and underwriting of FHA loan applications to a number of FHA approved mortgages. My company, P/R Mortgage, was selected as one of those Delegated Processors. We performed many of the same functions that OHMAR is asking the PAEs to perform under mark-to-market. And we were paid, on average, $20,000 per loan, including all third party costs.

Mortgagees would gladly perform the PAE functions for $25,000 or less per loan if the third party costs were reimbursed separately and the indemnifications accorded state agency PAEs were extended to mortgagees. Some mortgagees are already approved as PAEs and are beginning the process of restructuring loans. We recommend that Congress either remove the preference given to state and local housing agencies so that private companies can compete for this business, or that OHMAR be given the discretion to disqualify a state or local agency if OHMAR determines that the fees demanded are excessive.

THE FINANCING OF RESTRUCTURED LOANS

MBA believes that an inherent conflict of interest exists when the PAE is both restructuring the loan and providing the financing on the new first mortgage. We believe that such a practice should be prohibited.

When a state agency PAE restructures a loan, it must determine the amount of debt the project can support. The PAE will write down the current HUD mortgage to an amount supportable by the new Section 8 rents. If the state agency PAE is also the new lender, and is determining the amount of the HUD mortgage write-down, whose interest is being served? The greater the HUD mortgage write-down, the safer the new state agency loan, but the greater the loss to HUD. With this conflict of interest OHMAR staff must closely review the PAE's restructuring proposal, raising the issue of why OHMAR should pay the PAE for restructuring and still incur the costs of an in-depth review by OHMAR staff.

State agency PAEs that are also acting as the new lender have an enormous competitive advantage over a private lender who might compete for the financing. First, they are already being paid by OHMAR to restructure the loan so they do not have to expend their own funds to perform the underwriting on the new loan. The third-party costs and personnel costs are reimbursable to the PAE, allowing the PAE to potentially be compensated twice: by OHMAR, and by the owner through an origination fee. Second, under the current system, mortgagees must submit their loan proposals to the PAE for review. Consequently the PAE has only to match or slightly better the lender's loan proposal in order to make the determination that their financing is "in the best interest of the government" and obtain the financing for themselves. This can be a lucrative business for state agencies who will get a loan origination fee, income from the spread on the bonds and a servicing fee. These fees are in addition to the restructuring fee and Section 8 contract administration fees. Such a system, by virtually guaranteeing that the PAE will finance any restructured loans that it chooses, will inevitably discourage private lenders from submitting loan proposals, therefore eliminating free market competition.

To increase competition and level the playing field, MBA would recommend that where the state agency wants to provide the financing for the restructured loan, another PAE should be assigned the loan for restructuring. This would eliminate conflicts of interests and increase competition, ensuring that the government will receive a fair and competitive price.

Mr. Chairman, MBA believes that competition is the key to achieving the best product at the lowest cost. We urge you to encourage the staff of OHMAR to structure the final program so that it provides the greatest level of competition in the financing of the restructured mortgages. We believe that this is the only way to achieve a program that is truly cost-effective and efficient.

Thank you.




Note:

* MBA is the national association representing exclusively the real estate finance industry. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand home ownership prospects through increased affordability; and to extend access to affordable housing for all Americans. MBA promotes fair and ethical lending practices and fosters excellence and technical know-how among real estate financial professionals through a wide range of educational programs and technical publications. Its membership of approximately 2,700 companies includes all elements of real estate finance; mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others in the mortgage lending field.




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