While many lenders are experiencing declining volumes and tightening their underwriting standards in the first quarter of 2008, the Federal Housing Administration (FHA) is having a resurgence.

As other sources of construction financing, such as banks, continue to rein in their lending appetites, developers are showing a strong renewed interest in the administration’s programs.

“A lot of banks are at full capacity right now because they have taken up so much slack from the [commercial mortgage- backed securities] market, and a lot of lenders have tightened their underwriting standards,” said Bruce Minchey, chief underwriter for KeyBank’s FHA program. “All of that is causing people to take another look at the FHA.”

Developers are again flocking to the steadily favorable terms offered by programs like Sec. 221(d)(4) for new construction or substantial rehabilitation. The FHA’s Sec. 221(d)(4) program features 90 percent loan-to-cost, a 1.11x debt-service coverage ratio, 40-year amortization, and is non-recourse. What’s more, developers can lock in the interest rate for both the construction and permanent loans at closing.

Rates for the FHA’s Sec. 221(d)(4) program were hovering in the 6.15 percent range as of early January, Minchey said, down from as high as 6.5 percent in the fall. And rates for borrowers looking to refinance FHA loans are about 20 to 25 basis points less than that, around 5.9 percent, he said. Based on the renewed interest, KeyBank plans to double its FHA production to $300 million in 2008.

KeyBank is hardly alone. In November and December 2007, Grandbridge Real Estate Capital signed up more than $80 million in construction and permanent financing through the FHA’s Sec. 221(d)(4) and Sec. 223 programs. The company expects to close these deals this summer and expects this uptick in interest to continue through most of 2008.

Grandbridge sees more developers interested in the Sec. 221 program, which provides a combination construction and permanent loan, as regional banks pull back their lending volumes in 2008. “We’re going to see more people very interested in construction/perms that were normally sitting in the bank,” said Thomas Dennard, CEO of Grandbridge. “We plan on reintroducing a lot of borrowers to HUD [the Department of Housing and Urban Development].”

This resurgence couldn’t have come at a better time for the administration. The FHA’s fiscal 2007 was ugly—the administration insured just 846 multifamily loans for $4.26 billion in 2007, a 29 percent drop in deals and 31 percent decline in dollar volume compared to 2006. But in the first two months of its fiscal 2008, the FHA had already processed about 23 percent more Sec. 221(d)(4) loans than it had in the first two months of fiscal 2007.

Still working on it

In 2008, the FHA will continue to focus on niche businesses like health-care and seniors facilities owned and operated by small organizations, segments that lack an abundance of financing options on the broader market.

The agency is still working on improvements to its Sec. 232 program for owners/operators of health-care facilities. The FHA is looking to relax its stringent professional liability requirements and broaden its list of acceptable liability insurance providers, a list that many industry participants complain is too short.

The agency also continues to work on updates to accounts receivable issues in the 232 program. At present, it’s unclear whether HUD allows owners/operators of nursing-care facilities to use accounts receivable financing, a way of borrowing money against the future receipt of expected Medicare and Medicaid payments.

Many conventional lenders allow this type of financing, but it’s an area for which HUD never provided guidance. “It was left up to the field offices to make decisions as they saw fit,” said Nick Gesue, a senior vice president at Lancaster Pollard. “One office would be perfectly acceptable with it, and another would place restrictions on it.”

Changes to the program aren’t expected to be swift, though. The agency has been working to resolve these issues for about two years. What’s more, the FHA’s process for closing deals continues to frustrate developers. The administration is understaffed, and its field office structure continues to be dysfunctional, lenders and developers report.

Many industry veterans applaud the efforts of interim multifamily chief John Garvin but sympathize that he is underfunded and filling two vacant posts himself. Additionally, many of the FHA’s senior staffers are retiring, and the agency has been slow to fill those positions. But the FHA did fill a key post recently, tapping Joyce Allen as director of the office of multifamily development. Allen was previously a deputy director at the U.S. Department of Agriculture’s Rural Housing Service.

MIP increase averted at zero hour

In early January, HUD canceled its proposal to increase the mortgage insurance premiums (MIPs) on a number of multifamily programs.

The Bush administration’s proposed 2008 budget included a 35 percent MIP increase, from 45 to 61 basis points, to the Sec. 221(d)(4) program, as well as the Sec. 223(f) and (a)(7) programs. The rate hikes were due to go into effect Dec. 3, 2007, but HUD delayed implementation as industry organizations such as the Mortgage Bankers Association (MBA), continued to fight the proposal.

In November, the MBA sent a letter of protest to HUD Secretary Alphonso Jackson signed by 38 senators and 117 members of the House of Representatives. HUD also received 229 letters submitted by industry participants opposing the move.