While construction loans for affordable housing developments are well-priced, fewer deals pencil out these days, and underwriting standards continue to tighten.

The healthier regional banks are still in the game. And many large banks, such as Wells Fargo/Wachovia, U.S. Bank, and Bank of America are still actively lending, but their loans are being driven mostly by Community Reinvestment Act needs.

Construction lenders are proceeding very cautiously these days, serving only their biggest and best clients. The most viable new construction deals this year include developments in which the lender is also the equity investor, a way of keeping the deal pipeline flowing and helping their best customers.

For those who can get it, construction financing is still affordable, thanks to the low London Interbank Offered Rate (LIBOR), the benchmark upon which most construction loans are based. With LIBOR at less than 1 percent, many banks are offering spreads of about 400 basis points, but the all-in rate is usually higher than the spread would suggest.

Union Bank is quoting new construction deals in the 5 percent to 5.5 percent range. Like many banks, Union Bank has instituted interest-rate floors on its deals, usually around 5 percent. So, borrowers are really paying the rate of the underwriting floor in many cases, as opposed to an all-in rate of the benchmark rate plus the lender’s spread.

“It’s something we’ve been doing over the last year as the interest-rate markets have gone pretty wild,” said Jim Mather, a senior vice president and regional manager at Union Bank.

Underwriting standards continue to tighten up on affordable housing deals. Most new construction affordable housing loans will be underwritten today closer to a 1.20x to 1.25x debt-service coverage ratio (DSCR), a stark contrast to the 1.10x to 1.15x DSCRs seen a year or two ago.

And while affordable housing deals often featured more than 80 percent loan-to-value (LTV) ratios in the past, that standard is closer to 70 or 75 percent. The strongest deals by the best sponsors can still get 1.15 DSCRs and approach 80 percent LTV ratios, but the rest of the industry can expect tighter credit standards.

Like Union Bank, PNC still has some appetite to lend off its books this year, but the near-term economic outlook is difficult to understand, leading to tighter underwriting.

“If you’re making a construction loan today, and you’re trying to figure out LTV, but no properties are being sold, what do you use for a cap rate?” asked Keeley Kirkendall, an executive vice president at PNC MultiFamily Finance.  “As the future unknown grows, the cushion required to deal with that is going to grow.”