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Promises of less red tape have become reality, and are beginning to pay off, according to affordable housing developers. That was the perspective I offered at 2017 AHF Live, The Affordable Housing Developers Summit, on a panel that shared the latest strategies for tax-exempt debt financing. The consensus among the developers, financing professionals and investors at the Summit is that recent procedural changes at the U.S. Department of Housing and Urban Development (HUD), coupled with its low interest rates, have furthered the Federal Housing Administration (FHA) as an increasingly attractive option for affordable housing financing.

Key Learning Points:

  • HUD has consolidated its offices and streamlined its processes.
  • The FHA offers some of the lowest interest rates in the market and attractive loan terms.
  • HUD offers reduced Mortgage Insurance Premiums on affordable housing deals.
  • The 223(f) program has increased the limits on rehabilitation costs.

The Old Pros and Cons of FHA Financing

HUD financing had been known for very attractive loan terms, a long amortization period, and a low debt-service coverage ratio. But, in the past, borrowers also knew HUD for its confusing and arduous loan approval process and the time it took – as much as six to twelve months.

About six years ago, in the wake of the financial crisis and during the time government-backed financing was the most attractive source in the market, the department realized it was over-exposed on market-rate FHA-insured deals. In keeping with their mission, the agency piloted a new affordable housing program, and paired it with improved processes. The program has been a huge success—particularly thanks to the speeding up and streamlining of the underwriting process.

High Interest in Low Interest Rates

No conversation on FHA can be had without talking about fantastic interest rates. The current FHA 223(f) Multifamily Loan Program offers an interest rate of about 3.20 and the FHA 221(d)(4) Construction & Rehab Loan for Developers offers an interest rate of about 3.71.

FHA continues to deliver some of the lowest rates in the market, which has gone a long way to empowering the private sector to help fight the affordable housing crisis. Low interest rates have made a significant number of deals possible, where otherwise the numbers may not have worked.

What You Need to Know Now

Digging into the impact of administration policies and the new FHA Multifamily Accelerated Processing (MAP) Guide, I identified four key developments affordable housing developers and investors should be aware of as we enter 2018.

#1 HUD consolidation has streamlined underwriting. What used to be 50-plus offices with different ideas on how deals should be underwritten has been consolidated to 13, with hubs covering larger regions: San Francisco for the West Region, Fort Worth for the Southwest Region, Chicago for the Midwest Region, New York City for the Northeast Region, and Atlanta for the Southeast Region.

#2 HUD offers reduced Mortgage Insurance Premiums (MIP) on certain loans. The MIP for a conventional, market-rate HUD deal is 60 basis points. For standard affordable housing deals, the MIP is reduced to 35 basis points, and for deeply affordable deals in which 90% of units have rental assistance, the MIP is 25 basis points.

Another thing to note is that the FHA 221(d)4 multifamily new construction and substantial rehabilitation programs are based on cost rather than value. For affordable housing properties, the loan amount is maximum proceeds subject to 87% loan to cost (LTC), and for rental assistance properties, it is 90% LTC. Especially in the middle part of the country, where loan proceeds are value constrained, this can be a significant way to drive proceeds.

#3 The 223(f) – Rehab Pilot is now permanent. This gives borrowers the ability to do rehab in excess of $40,000 per unit. The new loan limits are calculated by $15,000 per unit multiplied by the high cost factor. The adjustments range from 198% in San Antonio to 405% in the U.S. Virgin Islands.

#4 The new HUD is faster and more efficient. The new MAP Guide helps cut the time required to approve loan applications and to assure consistent application of program requirements and credit standards across all HUD processing offices. FHA’s new MAP Guide also delegates more underwriting responsibility to approved “MAP lenders.”

Year-to-date annual production volume is up 15% over 2016. HUD is meeting a 60-day review period 91% of the time for the 221(d)(4) program, and a 45-day review period 85% of the time on the 223(f) program. Refinances are being approved 92% of the time, and, once you get past the pre-approval, new construction and substantial rehab deals are being approved 90% of the time. These stats when compared to the HUD of five years ago represent a staggering improvement.

Understanding Agency Financing Starts With the Right Advisor

Even with the current unknowns related to impending tax reform, let’s discuss your affordable housing development, refinancing and acquisitions. The crisis isn’t going away.

Al Beaumariage, SVP and National Affordable Program Manager or 214-540-9129