MORTGAGE LENDING: FHA

APARTMENT FINANCE TODAY • JANUARY 2008

A New Day?

As the capital crisis sends more business its way, can the FHA overcome its limitations?

By Jerry Ascierto

The Federal Housing Administration (FHA) is hoping that brighter prospects in 2008 will help it forget an ugly 2007.

As large conduit lenders and local banks alike tighten underwriting standards and increase interest rates, the FHA is poised to reap more business this year. But staff defections and dysfunctional processes may conspire to keep the agency’s loan volume shrinking.

In fiscal 2007, which ended Sept. 30, 2007, the FHA’s volume was down in many major categories. The administration insured just 846 multifamily loans, totaling $4.26 billion. That’s a 29 percent drop from the 1,185 loans it insured in fiscal 2006, and a 31 percent decline in dollar volume from $6.18 billion in 2006.

Refinancing activity, which drove the 2006 numbers, was also down in 2007. The agency’s overall refinancing activity numbered 604 loans in fiscal 2007, down about 36 percent from fiscal 2006, with a total volume of $2.2 billion, a decline of nearly 46 percent from fiscal 2006’s $4.2 billion.

That $2.2 billion accounts for more than half of the FHA’s overall volume, and lenders say the pipeline for refinancing opportunities should continue into the first half of 2008. But those refinancing opportunities can’t last forever. “The big question for the Department of Housing and Urban Development (HUD) is, what’s after that, what comes next?” said Nick Gesue, a senior vice president for lender Lancaster Pollard.

New business for new construction

One bright spot last year was the FHA’s flagship Sec. 221(d)(4) program, which insures loans for new construction or substantial rehabilitation. That program increased to 114 loans and $1.15 billion in fiscal 2007, up from 105 loans and $962 million in fiscal 2006.

The FHA’s business often runs counter to the mortgage industry at large, and last year was no exception. The mortgage industry saw aggressive growth in the first half of 2007, with lenders offering rates and terms similar to those offered by the FHA, which cut into the agency’s business.

But 2007 was a tale of two halves, split by a credit crunch that arose mid-year. As the mortgage industry continues to become more conservative heading into 2008, brighter prospects are on the horizon for the FHA.

Lenders report renewed interest in the FHA as developers are again attracted to the steadily favorable terms offered by programs like Sec. 221(d)(4). The Sec. 221(d)(4) program offers 40-year fully amortizing terms, and is non-recourse. Developers can borrow up to 90 percent of the cost to build or rehabilitate through the program, and interest rates for Sec. 221(d)(4) loans were hovering around 6 percent as of press time.

“Our FHA pipeline is up about 15 percent from what we had projected,” said Thomas Booher, executive vice president at PNC MultiFamily Capital. “Some of the business that we were losing to the [commercial mortgagebacked securities] market, we’re just not seeing that competition at all.”

Booher is seeing more market-rate new construction projects use the Sec. 221(d)(4) program as many banks pull back on construction lending. “All of a sudden, the terms and non-recourse nature of the 221(d)(4) program are looking attractive again,” he said.

The question is, will the agency stumble over itself trying to process this new business? At a time when the agency is likely to see more money coming in, it’s severely understaffed, the field office structure is dysfunctional, and the agency’s notoriously slow processing times continue to turn off developers, industry watchers say. “The main impediment for expansion into the future is just reliability and timeliness,” said Gesue.

Many industry veterans applaud the efforts of interim multifamily chief John Garvin but sympathize that he is under-funded and filling two or three vacant posts himself. What’s more, many of the FHA’s senior staffers are retiring, and the agency has been slow to fill those positions.

Still working on it

In 2008, the FHA will continue to focus on niche businesses like health care and seniors facilities owned and operated by small organizations, segments that lack an abundance of financing options on the broader market. “Seniors and health care seem to be really where they feel their niche is heading,” Booher said.

The agency is still working on improvements to its Sec. 232 program for owners/operators of health care facilities by updating professional liability requirements and broadening its list of acceptable liability insurance providers, a list that many industry participants complain is too short.

The agency also continues to work on updates to accounts receivable issues in the 232 program. At present, it’s unclear whether HUD allows owners/operators of nursing care facilities to use accounts receivable financing, a way of borrowing money against the future receipt of expected Medicare and Medicaid payments.

Many conventional lenders allow this type of financing, but it’s an area for which HUD never provided guidance. “It was left up to the field offices to make decisions as they saw fit,” said Gesue. “One office would be perfectly acceptable with it, and another would place restrictions on it.”

Changes to the program aren’t expected to be swift, though. The agency has been working to resolve these issues for about two years.

The agency is, however, devoting resources to promoting its Sec. 242 program, which provides mortgage insurance for new construction or substantial rehabilitation of hospitals. The agency is actively staffing up and promoting the program, and since the program is handled centrally out of the FHA’s Washington, D.C., office (without field office interaction), it’s a much more nimble program. Unique among HUD programs, the Sec. 242 program is being advertised in industry journals.