While the Federal Housing Administration (FHA) is a steady source of liquidity, it is often perceived as a lender of last resort due to the sometimes slow and bureaucratic process of working with the Department of Housing and Urban Development. But the lack of viable construction financing on the market has forced many borrowers to take another look at the FHA's programs.

“Our FHA pipeline is substantially higher than it has been in the past,” says John Cannon, executive vice president and head of agency lending at Capmark Finance. “They are one of the very few viable construction lending sources right now.”

Capmark reports a pipeline of about $2.5 billion in FHA financing. But there's one big problem: pricing. Rates for FHA loans are set by Ginnie Mae securities, which are pricing at around 300 basis points (bps) over the 10-year Treasury. A year ago, that spread was about 100 bps. As a result, a typical Sec. 221(d)(4) deal is being priced at 6.85 percent, but once the mortgage insurance premium is figured in, that figure climbs to 7.3 percent. A year ago, the loans were going in the low to mid-6 percent range. “Nothing is closing because the spreads are so high,” says Cannon.

Many believe that it's only a matter of time before Ginnie Mae's spreads shrink. Once that happens, FHA lenders will see a wave of business, especially for programs like the flagship Sec. 221(d)(4), a non-recourse construction-to-permanent loan that features 90 percent loan-to-cost, a 1.11x debt-service coverage ratio, and 40-year amortization. Developers can lock in the interest rate for both the construction and permanent phases at closing.

It remains to be seen if the agency can handle this coming wave. Reduced staff and funding have made the FHA a shadow of its former self, and some offices have been overwhelmed by loan requests.