Freddie Mac and Fannie Mae have been saviors for the multifamily sector since the credit crisis began, but developers are increasingly turning to another agency lender.

While the Federal Housing Administration (FHA) is a steady source of liquidity, it is often perceived as a lender of last resort by multifamily borrowers due to the sometimes slow and bureaucratic process of working with the Department of Housing and Urban Development (HUD).

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; in fact, it’s never been higher,” says John Cannon, executive vice president and head of agency lending at Capmark Finance, the No. 1 FHA lender in 2008. “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 clogging that artery: the pricing. Rates for FHA loans are set by Ginnie Mae securities, which are currently pricing at around 300 basis points (bps) over the 10-year Treasury. A year ago, that spread over the 10-year Treasury was about 100 bps.

As a result, a typical Sec. 221(d)(4) deal was 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; it’s like water building up behind a dam,” says Cannon. “The deals are stacking up waiting for Ginnie Mae security spreads to come back to somewhere close to normal levels.”

Many believe that it’s only a matter of time before Ginnie Mae’s spreads shrink—after all, the securities are backed by the full faith and credit of the U.S. government, just like Treasury notes. 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.

Questions remain, however, on whether the agency is equipped to deal with this coming wave. Reduced staffing and funding levels have made the FHA a shadow of its former self, and some offices have been overwhelmed by loan requests.

“The (hub) offices are being hit hard by this very large increase in pipeline,” says David Durning, managing director of originations at Prudential Mortgage Capital Co., the No. 2 FHA lender in 2008. “There are throughput limitations in the structure, as it exists today, in working through the FHA, given all the demands being placed on them.”

While the tagline “lender of last resort” is generally unflattering, there’s a silver lining to glean from that phrase: The FHA is always there, in good times or bad. And hopes are high that new HUD Secretary Shaun Donovan will help to revive the organization at a time when the multifamily industry needs it most.