Tax credit developers are turning to the Federal Housing Administration (FHA) as they get set to ramp up longdormant projects.

Last summer, the FHA made several changes to the way it approaches tax credit deals, eliminating some very onerous hurdles, such as the equity pay-in requirement. In the past, 100 percent of a project's equity had to be deposited in cash before the closing of the construction loan, which ultimately alienated low-income housing tax credit (LIHTC) deals. Now, only 20 percent is required.

The long overdue changes were applauded by the affordable housing industry, but suffered from bad timing, coming as they did during the equity market's free fall. But FHA lenders are beginning to see the effects of the Tax Credit Assistance Program enacted through the American Recovery and Reinvestment Act.

Lancaster Pollard has a pipeline of 15 tax credit deals looking at the Sec. 221(d)(4) new construction/substantial rehabilitation program, up from just four deals in process six months ago.

“Now that we're starting to see exchange funds become a little more formalized and a queue developing of projects that believe they're going to get exchange money, demand for (d)(4) is starting to pick up,” says Nick Gesue, a senior vice president at the Columbus, Ohio-based lender. “A lot of people are dusting off the deal that's been on the shelf for 18 months.”

The FHA also will soon release guidance providing examples of the 20 percent up-front requirement for equity pay-in to clarify that it is 20 percent of the Department of Housing and Urban Development (HUD)-required equity, not the entire tax credit equity. And the FHA will soon release regulations that would allow historic and New Markets tax credits to use the same equity pay-in as LIHTCs, according to the Mortgage Bankers Association (MBA).

For new construction capital, the FHA is practically the only game in town. And the FHA is exploring ways to expand its booming pipeline by possibly raising its per-unit cost limits, a roadblock to building in many high-cost areas. The agency is even considering allowing development on brownfield sites, which the FHA has always prohibited, according to one industry watcher who requested anonymity.

The agency's flagship 221(d)(4) program, which blends a construction and permanent loan, offers some outstanding terms. The program is nonrecourse, offers a 1.11x debt-service coverage ratio (DSCR), and 40-year amortization after construction is complete. All-in rates for the program (including the mortgage insurance premium) were at around 7.1 percent in late June.

Many affordable housing owners are also taking advantage of the FHA's flagship refinancing program, Sec. 223(f). Lancaster Pollard has seen healthy demand for Sec. 223(f) refinancings of affordable housing properties without tax credits, such as Sec. 8 properties.

The 223(f) program offers better rates and terms than government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. All-in rates for the program were at about 5.85 percent as of mid-June, about 40 basis points lower than what the GSEs were offering. For cash-out refis, the 223(f) program features 80 percent loan-to-value (LTV) and a 1.17x DSCR, a sharp contrast to the 70 percent LTV and 1.30x DSCR that many such executions are seeing under the GSEs. For cash-in refinances, the FHA will go up to 85 percent.

“The other options, like Fannie Mae or bank financing, are less readily available,” says Gesue. “And a benefit of HUD today is that it's maintained its underwriting. Fannie Mae's standards continue to evolve on a monthly basis, but HUD doesn't do that—they're exactly where they were years ago.”

The great debt terms are an obvious benefit of FHA loans. But the tidal wave of loan requests trying to capitalize on those terms is reportedly overwhelming many FHA field offices. This may add time to the FHA's already lengthy processing cycle. Most refis through the FHA take about four months, compared with about two months for the GSEs, lenders report. Sec. 221(d)(4) deals can take closer to eight or nine months.

Last year, the FHA took the processing of health care loans out of the hub offices by instituting a dedicated office for such loans. Hopes were high that processing times would improve by allowing field offices to concentrate on multifamily loans.

“Since the FHA is the primary game in town, they're getting inundated,” says Phil Melton, a senior vice president focused on affordable housing with Grandbridge Real Estate Capital. “With all the volume that is trying to get pushed through the FHA pipeline, I don't know that you're seeing the benefit of those changes yet.”

One of the tax credit-related changes recently enacted at HUD was a sixmonth pilot program for each field offi ce to use a chief underwriter, basically an affordable housing guru that would process tax credit-related applications. In the past, the FHA did an inefficient, multi-step review, but the new program is expected to speed up deal cycle times. That pilot program is under way.

And while the FHA's staffing levels are historically low, the administration was recently given approval to hire 70 multifamily staffers—65 for field offices.

Rule change is changing

In February, the FHA issued a rule change easing restrictions on the 223(f) program. The change allowed borrowers to refinance a property that was built or rehabbed within the past three years. In the past, the FHA would not insure a loan for a property built or significantly rehabbed within the three-year period prior to the date of application.

Since the rule change was announced, a few glitches have come to light. Borrowers need to have their certifi cates of occupancy issued as of July 31, 2008, so anything that wasn't operating by then needs to get a waiver. That waiver has to be sent to FHA headquarters, further delaying the deal.

The bigger problem, however, was that borrowers had to apply for the waiver at the same time as filing a firm application. The application fee and related charges, which run around $25,000, are nonrefundable. That's a lot to shell out if you don't know whether the waiver will be granted: Borrowers could be out $25,000 and never get the loan.

But at a recent meeting between an MBA steering committee and FHA offi cials, the agency said it would consider entertaining a waiver request prior to receiving an application. While this verbal acknowledgement was good to hear, most FHA lenders don't believe it until they see it in writing.