FHA faces new demands
By Alec Roberts

HUD has a winner on its hands with the multifamily accelerated processing (MAP) reforms it rolled out last year to speed up the application process for FHA-insured loans. But industry groups are warning that FHA will fall far short of its potential to help ease the nation's housing crunch without fast action to increase loan limits and credit subsidy authority. They also want to see further processing improvements to make FHA a viable tool for financing tax credit projects.

Developers would jump at the chance to finance affordable multifamily deals with FHA's combined construction/permanent loans with 40-year terms. HUD addressed FHA's biggest weakness - slow processing time at many field offices - when it rolled out MAP last May. While that effort appears to be succeeding, other problems have reached a crisis point, lenders say.

Several major housing organizations banded together as the Coalition for Affordable Rental Housing in March to ask Congress to increase by 25% the base amount FHA can insure for multifamily housing loans, with additional allowances for high-cost areas. Those limits have not been raised since 1992, while housing construction costs have increased 25%.

The group released data showing that new construction of federally insured affordable rental housing has "all but disappeared in several large cities where there is a critical need for affordable housing." The figures show that in New York City, Boston and San Francisco there were no new units of FHA-insured multifamily housing produced in 2000. Dallas, Los Angeles and Washington, D.C., each saw only one new multifamily development.

Other major cities where federally insured rental housing production dropped to zero in 2000 included Akron, Ohio; Baltimore, Md.; Birmingham, Ala.; Cincinnati, Ohio; Norfolk, Va.; Oakland, Calif.; Providence, R.I.; Rochester, N.Y.; Salt Lake City, Utah; San Jose, Calif.; Syracuse, N.Y.; and Tampa, Fla.

In addition to the Mortgage Bankers Association of America (MBAA), other groups in the coalition include the AFL-CIO Housing Investment Trust, the National Apartment Association, the National Association of Home Builders, the National Leased Housing Association, the National Multi Housing Council, the National Association of Realtors and the U.S. Conference of Mayors.

"It's extremely expensive and difficult to build multifamily projects, and the resulting rents are often higher than what working families can afford," said Bruce Smith, president of the National Association of Home Builders and a home builder from Walnut Creek, Calif. "Our builders want nothing more than to be able to meet this great demand, but they are hindered by the FHA loan limits. Raising the cap on FHA-insured multifamily loans would help to finance the construction of affordable rental housing, particularly in high-cost urban areas where it is desperately needed."

A 25% increase in the base, for example, would mean that the maximum loan amount the FHA would insure for a multifamily building with two-bedroom units and an elevator in a city with a high-cost limit of 150% would increase from $68,375 per unit to $85,468 per unit.

A 25% increase may be too modest in some cities, lenders said. "San Francisco hit FHA's 210% high-cost limit several years ago," says Mark Ragsdale, senior vice president of TRI Capital, San Francisco. "HUD can waive those limits on a project-by-project basis up to 240% of the base amount, but developers are hitting even that limit," he said.

Congress may have to increase the high-cost limits to 310%, the same as for Hawaii and Alaska, to make FHA viable in places like San Francisco, says Cheryl Malloy, senior staff vice president for the MBAA.

At a minimum, Congress would need to double the current cost base, which ranges from about $30,000 a unit to about $65,000 a unit in the (d)(4) program, to make projects feasible in high-cost areas, some say.

"If you doubled the base limits and then applied the 210% high-cost factor, you'd be approaching $200,000 a unit," says Ragsdale. "That's what it takes. Land costs alone in San Francisco are approaching $100,000 a unit."

Industry groups also are working to make sure HUD doesn't run out of credit subsidy for its existing programs, like it did last year.

Loan commitments came to a halt late last year as a result of the subsidy depletion, which helped pull down HUD's FHA multifamily production volume for the year even as MAP processing kicked in. Total volume for fiscal 2000 was about $3.3 billion, compared to about $3.8 billion in fiscal 1999.

"The drop in volume was directly related to the credit subsidy problem," says Linda Cheatham, senior vice president at Berkshire Mortgage, Bethesda, Md., and a former FHA multifamily official. "We had several deals lined up that couldn't close last year." (HUD officials would not comment on any aspect of FHA operations for this story because, as of mid-March, the Bush Administration had not yet nominated anyone to head the agency.)

The credit subsidy limits could curtail activity much earlier in the year this year. "Typically we don't see a credit subsidy issue until the first of summer, but HUD was already at a crisis level in early February," says Marie Head, principal of Prudential/ Huntoon Paige, Atlanta, Ga.

While $141 million in credit subsidy was appropriated for fiscal 2001, due to the volume of new multifamily loans, particularly under the Sec. 221(d)(3) program, MBAA anticipated that the credit subsidy will be entirely committed by May or June. Unless additional credit subsidy is obtained, MBAA said it anticipates the shutdown of FHA's Sec. 207, 220, 221(d)(3) and 221(d)(4) programs that require credit subsidy for four to six months.

GMAC Commercial Mortgage did more FHA multifamily business last year than any other lender, but if credit subsidy funds lapse, it could not make any more loans for new or substantially rehabilitated apartments, said Karl Reinlein, a senior vice president in the firm's St. Louis office. Even if more funds are provided before the programs close down, the uncertainty is problematic, he added. "It chases people away from the program to have this added uncertainty."

MBAA is lobbying Congress to increase the subsidy. In addition, lenders would like to see the subsidy requirements changed to better reflect project risk, which would enable HUD to finance more projects with the same amount of subsidy.

The subsidy requirement for HUD's main FHA multifamily product, Sec. 221(d)(4), is about 3.5% of the loan amount, down from about 12% several years ago.

That figure should come down even further or be eliminated altogether because the (d)(4)s have proven to be safe loans, say supporters. "We've been trying to convince the Office of Management and Budget for several years that (d)(4)s shouldn't require subsidy," says Malloy. "They've had low defaults since 1996. We did an analysis of HUD data, and the department's making money on the (d)(4) program."

The subsidy requirement for Sec. 221(d)(3) loans, which are for nonprofit developers, is about 17.5%. The subsidy requirement for this program also be can safely reduced, even though it lacks the recent historical data of the (d)(4)s, as long as program underwriting changes are made or the mortgage insurance premium requirement increased, says Malloy.

Meanwhile, lenders are hoping to see HUD make additional refinements to MAP. As successful as the new processing procedure is, there are a number of tweaks lenders say are needed to make FHA more competitive with other financing sources. First among them is processing speed for projects hoping to get an allocation of tax credits.

Under MAP, HUD requires the submission of third-party reports such as environmental assessments and market studies, along with architectural drawings and the initial underwriting at the pre-application stage.

For new construction and substantial rehab, a complete application is guaranteed a response in 45 days. This response generally is a letter inviting the borrower to apply for a firm commitment and setting acceptable rent and expense levels. This allows borrowers to know what size loan they can obtain. They then submit a full application, and FHA has another 45 days to respond to that with a firm commitment.

For Sec. 223(f) loans for refinancing and acquisitions, there is no preapplication stage. FHA has 60 days to respond to applications for firm commitments.

Lenders said HUD has made good on its promise to stay within its processing timeframes, but they added that it's not good enough to make tax credit deals feasible in many states. So lenders are pushing HUD to create accelerated time-frames for tax credit projects.

"We'd like to see HUD get tax credit applications through in 21 days, maybe even 15 days," says Michael Berman, president of Continental Wingate Capital, Needham, Mass.

Absent quicker processing, developers will keep getting their tax credit applications knocked out of contention in some states. "California has knocked out the possibility of doing HUD financing with tax credit projects because of the timing issue," says Berman.

Subsidy layering review also needs refinement, lenders said. Developers trying to pull together different sources of public financing continue to get snagged on the programs' different timing and requirements, making it hard to combine funding sources.

Both of these issues are getting a sympathetic hearing at HUD, lenders said. "Mike McCullough [director of the Office of Multifamily Development] and other key HUD staff have made incredible progress pushing the MAP system through effectively," says Berman. "If they can do that, I wouldn't doubt they can reshape the system for tax credit deals."

One question mark that remains for FHA's makeover as an enhanced production vehicle is risk sharing. Under this program, FHA lets state and local housing agencies, as well as Fannie Mae and Freddie Mac, process FHA insurance applications provided they take a share of the risk.

With the exception of last year, which was plagued by the subsidy-depletion problem, the program has posted annual volume gains since its launch in fiscal 1995. However, virtually all risk-sharing activity under the state housing finance agency (HFA) component of the program is posted by about half the HFAs in the country, and there's little sign that the other half will get on board soon.

So far this fiscal year, HFAs have closed on 20 loans totaling about $85 million under risk sharing. The HFAs in California and Colorado, which closed four each, accounted for 40% of those loans. Eight other HFAs have made risk-sharing loans so far in fiscal 2001.

"HUD has reached out to HFAs to get them to join the program, but some of them are doing little or no multifamily, and many don't have the internal capacity to do the underwriting that's required," says Cheatham.

Participation in the risk-sharing component by Fannie Mae and Freddie Mac also is lopsided. Since fiscal 1995, Fannie Mae has done 25 and Freddie Mac has made one loan each in fiscal 1998 and fiscal 1999. Those 27 loans financed 3,493 units.

Much of the disparity in their participation stems from concerns Freddie Mac has over program policies. Freddie Mac officials would not comment on the nature of those concerns.

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