Lower Federal Housing Administration (FHA) multifamily mortgage insurance rates took effect this month in a move to stimulate the production and rehab of affordable, mixed-income, and energy-efficient housing.

Federal housing leaders estimate that the rate reductions will spur the rehab of an additional 12,000 units of affordable housing annually, create new units, and improve energy efficiency to help reduce utility costs for residents.

Rob Likes

“The bottom line is that the reduced rates will make it possible to build more affordable housing units and complete more meaningful affordable housing rehabs,” says Rob Likes, national manager of Community Development Lending and Investment at KeyBank. “The reduced rates improve the loan proceeds on debt-service limited deals, allowing more affordable developments to be financed on feasible terms.”

Since the rate reduction went into effect April 1, developers will see an almost immediate improvement in the feasibility of deals that are being underwritten this year, according to Likes.

Commercial real estate lender Walker & Dunlop has seen a substantial increase in client interest in FHA programs, both on new construction opportunities and refinancing existing assets, following the rate reduction, according to Chris Rumul, senior vice president, at the firm.

“Existing deals, stabilized assets for the Sec. 223(f) program, are probably going to see the biggest jump for new business for affordable housing transactions,” he says.

One of its longtime affordable clients, which was recently on the fence about refinancing a stabilized asset in Boston, is now moving forward under these improved terms. The mortgage insurance premium (MIP) changes alone will reduce its closing costs by approximately $370,000 and lower its payments by $100,000 each year in the 223(f) program, he says.

FHA leaders announced their plans to reduce rates in January.

For affordable housing where at least 90% of the units are under Sec. 8 contracts or covered by low-income housing tax credit (LIHTC) affordability requirements, FHA has lowered the annual rates to 25 basis points (bps), a reduction of 20 or 25 bps from current rates.

For mixed-income properties, which have units set aside based on affordability through the LIHTC, Sec. 8, inclusionary zoning, or other local requirements, FHA lowered the annual rates to 25 bps, a reduction of 10 to 35 bps from current rates.

For energy-efficient properties, which include those committed to industrywide green building standards and committed to energy performance in the top 25% of multifamily buildings nationwide determined by the Environmental Protection Agency Portfolio Manager score, FHA lowered annual rates to 25 bps, a reduction of 20 to 45 bps.

FHA also reduced up-front premiums to support these goals and to streamline the premium structure.

Market-rate properties that are not energy efficient did not see any changes in multifamily insurance rates or up-front premiums.

Earlier this year, the National Association of Home Builders (NAHB) opposed the reductions.

In a letter to the Department of Housing and Urban Development’s Office of General Counsel, it stated that “NAHB is very concerned about HUD’s proposal to use substantially reduced MIPs as incentives for affordable housing preservation and energy-efficiency upgrades. NAHB’s long-standing position has been, and continues to be, that the FHA MIPs must be determined based on the prudent management of risk to the government of the potential and severity of mortgage credit losses.”

The organization said “MIPs should be set at levels that are actuarially sufficient to cover expected credit losses and other costs associated with each year’s book of business. A failure to pursue this course could lead to a greater risk for the Guaranteed Insurance/Special Risk Insurance Fund, which houses a wide range of mortgage insurance products to address specialized financing needs.”