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FHA Gets Friendly with Tax Credits-Finally

By Jerry Ascierto

The Federal Housing Administration (FHA) has updated some multifamily programs to make them work better with low-income housing tax credits (LIHTCs), correcting some longstanding flaws.

The changes, which the FHA has worked on for more than a year, streamline requirements for LIHTC developments using the Secs. 221(d)(4), 220, and 231 programs.

In the past, most tax credit developers wouldn't use FHA mortgage insurance since the FHA's requirements were outdated and in stark contrast to the needs of LIHTC developers.

The biggest barrier was an FHA requirement that mandated 100 percent of a project's equity to be deposited in cash before the closing of the construction loan. This requirement severely limited a tax credit investor's cash-flow, forcing many to take out a bridge loan just to fund the escrow. Most conventional financing requires a much smaller percentage of the equity upfront, allowing the rest to be paid as development goes on.

One effect of that requirement was that tax credit investors would pay less for credits used by an FHA-insured development, since they couldn't phase in the equity contribution over time. The end result was less equity for a project, averaging about five cents less per tax credit dollar compared to a more conventionally financed LIHTC development.

"We took a serious look at the 100 percent tax-credit-equity escrow situation," said John Garvin, HUD's deputy assistant director for multifamily and senior advisor, at a recent congressional hearing. "No one wanted to put 100 percent of the equity up front."

The newly issued HUD Mortgagee Letter 2008-19 reduces that requirement to just 20 percent, allowing developers to pay the remainder over the development period, meaning no escrow is required. If the initial equity installment is less than 20 percent, deals can still get done, but a recommendation must be approved by HUD headquarters.

"This provision alone will significantly increase the tax credit proceeds for these properties and will allow many more projects to be feasible," said Kieran Quinn, chairman of the Mortgage Bankers Association, in a statement. "Investors will pay more for the tax credits if they can phase in the purchase price over time."

Another significant change, aimed at speeding up deal cycle times, allows developers to defer submission of final plans and specifications-developers can now submit schematics with their application.

And borrowers will get some relief from the FHA's notorious 2530 system, also known as the Active Partners Performance System (APPS). APPS requires deal participants to disclose and certify past performance in multifamily mortgage insurance programs, basically an outline of their history of meeting financial and legal obligations.

APPS clearance had to be obtained prior to the FHA's issuance of a firm commitment. But it was a slow process, frustrating borrowers that were seeking to strike while the iron was hot by rate-locking favorable rates or procuring higher equity prices. The new regulations give borrowers the ability to condition the firm commitment upon 2530 approval, meaning they have more timing flexibility on the deal.

The new regulations also require each HUD field office to have a LIHTC coordinator that will work with local allocation agencies, and train HUD staff on the program to ensure consistency among offices.

With these changes, "I think the development community will turn back to FHA," Garvin said.