Until recently, the aged, 757-unit Valley Brook apartment complex in Glen Burnie was a leading candidate for the wrecking ball.
Built in the 1960s between Baltimore and Annapolis, the 26 buildings had turned into a housing disaster by last year, when it was taken over by a Boston-based firm specializing in troubled properties.
"It was virtually a slum," said A. Kenton Drury, vice president of Corcoran Jennison Co.
By the time Corcoran Jennison officials visited the site, the complex was in foreclosure, nearly half the apartments were empty, and many of the remaining residents were not paying rent. Police were frequent visitors because of drugs, holdups and burglaries.
Since last summer, however, Corcoran Jennison has been completely overhauling the complex -- now renamed Villages at Marley Station -- in a $38 million rehabilitation project.
But the rescue hinged on securing mortgage insurance from the Federal Housing Administration for much of the project's debt. According to Mr. Drury, Corcoran Jennison would not have been able to obtain funds from lenders and investors without FHA's guarantee of repayment in the event of default.
"Quite honestly, the only program that would make this work would be FHA [insurance]," said Mr. Drury.
That's typical of affordable apartment construction, rehabilitation and refinancing in the region, according to industry and government sources.
Some industry estimates say that more than 90 percent of new apartments in Baltimore and surrounding counties were guaranteed by FHA insurance in 1994. FHA also plays a major role in refinancing and rehabilitating existing apartment complexes in the area, like Villages at Marley Station.
The high dependence of the Baltimore apartment industry on FHA mortgage insurance illustrates the obstacles facing congressional Republicans who want to abolish the U.S. Department of Housing and Urban Development, FHA's parent.
Congress has already sharply reduced the amount of money -- called the "credit subsidy" -- that FHA uses to close the gap between mortgage insurance premiums and claims due to foreclosures on projects it has guaranteed.
Industry observers say that while it is likely that the program will have to be self-supporting eventually, they don't foresee the elimination of FHA's multifamily mortgage insurance role.
If that happened, "You wouldn't have any affordable multifamily housing," said Margaret Allen, senior vice president of AGM Financial Services Inc. of Baltimore.
Ms. Allen played a major role in structuring financing for the Marley Station project. It was a complicated deal that included a federal tax credit, as well as tax-exempt revenue bonds issued by Anne Arundel County and purchased by the Federal National Mortgage Association (Fannie Mae).
The FHA insurance allowed Corcoran Jennison to secure a 40-year mortgage at 7.61 percent interest. The tax credit was awarded by the Maryland Department of Housing and Community Development, which is authorized by the federal government to award them on a competitive basis to affordable housing projects.
Sale of the tax credit to oil giant Chevron helped generate cash that allowed Corcoran Jennison to immediately launch extensive repairs of the apartments.
The result of the deal was to help Corcoran Jennison overhaul the complex while keeping rents on the studio, one- , two- , and three-bedroom units at $415-$650 plus utilities.
Across the state
The Maryland office of HUD -- which covers all of the state except for Montgomery and Prince George's counties -- has insured some 500 market-rate apartment projects in its jurisdiction over the years. Most of these are in Baltimore and Baltimore County.
In 1995, FHA insured 18 multifamily projects in the Baltimore region, Western Maryland and the Eastern Shore with a value of $127.6 million. These included construction of Piney Orchard Apartments in Anne Arundel County, rehabilitation of the Marley Station complex, also in Anne Arundel, and the rehabilitation and refinancing of 16 other existing apartment complexes and nursing homes, mostly in Baltimore and Baltimore County.
Refinancings allowed existing complexes to take advantage of lower interest rates, helping to keep rents affordable, and they also freed up funds to help with renovations. Often, repairs are required by FHA before the insurance will be committed to refinancings.
And proposed projects representing hundreds more area apartment and senior citizen units, many involving substantial rehabilitation of existing buildings, are working their way toward FHA insurance commitments, according to the state HUD office.
FHA multifamily mortgage insurance is appealing to apartment developers because it guarantees the mortgage for up to 40 years, rather than the shorter-term balloon loans available conventionally. It also allows a high loan-to-value ratio, enabling builders to borrow up to 90 percent of the project's cost. Because apartment projects are risky ventures, the FHA insurance enables developers to get lower interest rates than they normally would.
The program has its critics, however, because of large defaults nationwide in the 1980s. Until recently, HUD was not closely tracking whether premiums were exceeding claims.
"Actually the projected losses in the multifamily mortgage insurance program came down in the audit that was issued in '94, compared to the audit of '93," said Ina B. Singer, director of Maryland HUD's multifamily housing division.
Ms. Singer and other HUD officials say underwriting has improved nationwide to steadily reduce the need for a subsidy to cover the deficit between FHA premiums and claims.
Under the current, short-term legislation that keeps the federal government running during the budget debate, FHA has an $85 million 1996 credit subsidy for its multifamily insurance program. Also, according to an aide to Baltimore County Republican Rep. Robert L. Ehrlich Jr., around $30 million unspent from last year can be carried into this year, plus HUD can use any profits from the sale of foreclosed apartment complexes. Last year, the subsidy was around $185 million.
"We think there will be a sufficient subsidy for this year," said Wesley Bissett, the Ehrlich aide. Mr. Ehrlich sits on the housing subcommittee of the House Banking Committee.
But local HUD officials say that the congressional debate over their agency has raised the level of uncertainty experienced by apartment developers.
"It's very difficult from a planning point for people to invest hundreds of thousands of dollars," said Mary Ann Henderson, housing programs chief for the local HUD office. "I'm looking at the project in Columbia, Riderwood, new construction. They probably have at least two or three hundred thousand dollars in start-up money, and they have to really believe that they're going to get it through the system to do that."
"So there is definitely a concern on the part of the industry about credit subsidy, and whether or not it's available, how much is available," said Ms. Henderson.
Agreeing was Josh Fidler, president of Chesapeake Realty Management, which owns and manages 4,200 multifamily units.
"With any uncertainty introduced into the pipeline, you have a ripple effect for years," said Mr. Fidler. It can take three to seven years to move a project through the financial and regulatory mazes, said Mr. Fidler. "It doesn't take much of a hiccup in either of those arenas to change people's ability to enter into that process," said Mr. Fidler.
If developers believe that federal mortgage insurance will be increasingly difficult to obtain, they will be reluctant to spend hundreds of thousands of dollars planning new complexes, he said.
FHA-insured projects in Maryland, 1995
Federal Housing Administration mortgage insurance was used in the construction and rehabilitation of moderate-income housing, rehabilitation of nursing homes and refinancing of apartment communities. Total value of the Maryland projects insured in 1995 was $127.6 million. This does not include the counties of Montgomery and Prince George's.
Project, Type, Units, Location
Piney Orchard Apts, New construction, 258 units, Anne Arundel Co.
Villages at Marley Station, Rehabilitation, 757 units, Anne Arundel Co.
Paradise Board & Care, Rehabilitation, 30 beds, Baltimore Co.
Old Towne Manor, Refinance, 138 units, Allegany Co.
Americana Southdale, Refinance, 506 units, Anne Arundel Co.
Woodington Gardens, Refinance, 194 units, Baltimore City
Thames Points, Refinance, 32 units, Baltimore City
Carriage Hill Apartments, Refinance, 806 units, Baltimore Co.
Richmar Apartments, Refinance, 251 units, Baltimore Co.
Lansdowne Garden, Refinance, 168 units, Baltimore Co.
Timbercroft Townhouses, Refinance, 162 units, Baltimore Co.
Timbercroft Apartments, Refinance, 122 units, Baltimore Co.
Mannasota Apartments, Refinance, 121 units, Baltimore Co.
Ivy Hall Nursing Home, Refinance, 120 beds, Baltimore Co.
Fellowship Apartments, Refinance, 76 units, Baltimore Co.
Harper's Forest, Refinance, 289 units, Howard Co.
Hunter Hill Apartments, Refinance, 105 units, Washington Co.
Moss Hill Townhouses, Refinance, 200 units, Wicomico Co.
Source: Maryland Office of U.S. Department of Housing and Urban Development