It’s been a busy 14 months for Chris Tawa, to say the least.
The senior advisor in the Department of Housing and Urban Development’s (HUD) office of multifamily housing programs has helped to enact some major changes to the Federal Housing Administration (FHA), with many more on the way.
Tawa looked back on his eventful tenure so far at HUD while giving a preview of what borrowers can expect to see out of the agency in 2011 to kick off the panel “When All Roads Lead to HUD” at AHF Live: The 2010 Affordable Housing Developers’ Summit in Chicago on Nov. 3.
A well-known veteran of the affordable housing industry, Tawa previously led Fannie Mae’s targeted affordable housing program in the 1990s and most recently led MMA Financial’s affordable housing debt division.
In some ways, his tenure at HUD is a titanic clash of styles—a no-nonsense, results-oriented guy helping to transform a slow, infuriating bureaucracy. But if his first 14 months are any indication, the current administration will leave quite a mark at the agency as it refocuses on its core affordable housing mission.
Modernization is the overall theme of the changes under way. “You ask a staff member for a reference, and they pull out a three-ring binder with all these yellow pages, circa 1972,” said Tawa. “This is our current guidance. It’s like looking into the catacombs.”
A look ahead
To speed up the agency’s notoriously slow processing times, the FHA will implement a pilot program that expedites the processing of tax credit transactions early next year.
Modeled on the agency’s LEAN program for health care deals, the pilot will put tax credit deals on the fast lane to closing. The FHA will form regional tax credit execution teams comprised of an appraiser, an underwriter, and a credit person, which will streamline the process.
The program will start modestly, only for 9 percent transactions with real equity in them (not Tax Credit Assistance Program and exchange-driven deals) and only with certain lenders and in certain markets.
“The core concept of this pilot is to get the staff out of the middle,” said Tawa. “You have able lenders with greater delegation that know how to underwrite, and an express lane to final commitment.”
By the end of this year, the FHA will also publish a new underwriting guide, with a new focus. The last time the Multifamily Accelerated Processing guide was published in 2000, it contained virtually no references to affordable housing underwriting. But the new guide hones in on affordable and includes some new flexibilities, such as allowing equity bridge loans and adopting the identity of interest standard that’s already in place at Fannie Mae and Freddie Mac.
Another big change for 2011 will be an expansion of the amount of rehabilitation that borrowers can do through the FHA’s Sec. 223(f) refinancing program. In the past, most developers looking for rehab dollars had to go through Sec. 221(d)(4), a more cumbersome and not always appropriate program.
“I’m very enamored of the Freddie Mac Mod Rehab program, it’s going to look something like that,” said Tawa. “We’ll look at using it much more effectively as a tool for preservation, instead of forcing many transactions into the (d)(4) program just because they have rehab of a certain type.”
The FHA will also release new multifamily loan documents—the first in 20 years—that, among other things, will eliminate the note rider imposed on subordinate lenders that says they can’t get paid until the mortgage has been paid off. The new loan docs also clarify the difference between project funds and non-project funds so that HUD doesn’t overreach in terms of trying to control grants or late payments of equity. The agency will also move to standardized underwriting narratives.
“These are some of the basic foundational items that we did not find when we encountered this platform,” said Tawa.
A look back
The FHA’s fiscal year 2010 ended Sept. 30, and the final numbers are staggering. The agency saw a record $13.85 billion in closed loans last year—including a record $10.4 in rental housing—three times the total of 2009 and four times that of 2008.
The agency processed its largest refi ($125 million) and new construction ($187 million) transactions in its history this past fiscal year, both of which were for luxury housing. Indeed, the FHA has become a lender of first resort for many in the market-rate space, but the agency is now refocusing on its core affordable housing mission.
The first initiative was the well-publicized change to the FHA’s underwriting of Sec. 221(d)(4) and 223(f) deals, “which had been operating for 40 years untouched.” The changes gave the most favorable terms to Sec. 8 rental assistance deals (1.11x debt-service coverage ratios and 90 percent loan-to-cost or value), while making it tougher on market-rate deals.
Next up, the agency worked to clear a variety of program impediments that limited the ability to execute tax credit deals through the FHA. The FHA eliminated an entire processing step, pre-applications for 221(d)(4) loans using tax credits, while implementing a variety of Housing and Economic Recovery Act of 2008 directives, such as eliminating the need to submit duplicate cost certifications.
Most important, it no longer requires 100 percent of a project’s LIHTC equity to be funded up-front in cash before the loan closed. This was one of the main reasons that tax credit developers avoided the FHA in the past.
The FHA also initiated a new screening process for its network of lenders. In the past, a lender just had to do three refinancings, then was deemed qualified to make any type of FHA loan for any type of asset. “Nobody operates this way, and we’re not going to either,” said Tawa. “We’re going to require that all lenders submit to qualifications and be tiered in different program areas depending on expertise.”
That new screening process should be in place in the first quarter.
In all, the FHA closed on 68 tax credit transactions in 2010, $446 million in activity, tripling the output of fiscal year 2009. While a good start, that’s still a drop in the bucket compared with the overall market.
“To say that’s pretty sad is an understatement,” said Tawa. “What we’re trying to do now is clear the way to allow the FHA platform to be more usable for all of you in the affordable housing industry.”