Federal Housing Administration (FHA)-insured multifamily loan firm commitments dropped 25% from $7.3 billion in fiscal year 2004 to $5.5 billion in fiscal year 2005, which ended Sept. 30, 2005. But FHA is implementing new, faster underwriting along with favorable terms that lenders expect will attract more borrowers.

FHA is allowing lenders to make firm commitments directly for new construction and substantial rehabilitation loans, instead of having to submit an additional review with the Department of Housing and Urban Development (HUD) (see Affordable Housing Finance, October 2005, page 24).

Lenders estimate that the new process can save as much as 30 to 60 days of underwriting time. “To utilize the new one-step option effectively, a developer would need to have all of the predevelopment work completed, including complete plans and specifications and costs bid out,” said Dee McClure, senior vice president and HUD national program director for CWCapital.

Reilly Mortgage Group processed seven loans under the one-step program in 2005. All of these loans were Sec. 221(d)(4) substantial rehabs, said Lemar Seats, Reilly senior vice president and head of production. Two deals took approximately 220 days to process from engagement to closing, he added.

FHA also declared that refinancings under the Sec. 223(a)(7) program for existing insured loans have the same processing priority as Multifamily Accelerated Processing loans. “As such, we expect to see faster turnaround times on Sec. 223(a)(7) commitments and closings,” said Mark Beisler, president and chief operating officer for Red Capital Group.

Rates to favor FHA

FHA lenders expect long-term interest rates to rise moderately in 2006. In early February, the adjusted federal long-term rate was 4.26%.

“If [short-term] rates do rise steeply, FHA production will be a key alternative in refinancing out debt,” said McClure.

“Overall FHA loan production should expand in 2006 and 2007 as the refinancing of Sec. 202 and Sec. 223(f) deals begin to close, as well as the growth of substantial rehabilitation and repositioning of Class B properties,” she added.

If long-term interest rates continue to be attractive, 2006 will be a robust year for Sec. 202 seniors housing refinancing, said T. Brian Pollard, senior managing director for Lancaster Pollard.

Of the 150 FHA refinancing deals in Lancaster Pollard’s 2006 pipeline, 80% to 90% will be under the Sec. 202 program.

Tax credits still tricky

For a few years, FHA had financed record-breaking numbers of low-income housing tax credit deals. That changed in fiscal year 2005, when only 153 tax credit deals were insured by FHA, compared to 196 deals in the previous fiscal year.

The lack of experienced HUD field office personnel makes meeting speed requirements for proposed affordable housing developments a challenge, said Mark Ragsdale, senior vice president of originations for PNC MultiFamily Capital.

“One challenge with tax credit and FHA financing is that you need bridge financing for the tax credit equity, which doesn’t come in until the project is near completion,” said Pollard. “That’s where FHA doesn’t work as well, and where commercial banks have the leg up.”

“The FHA program has phenomenal terms, but borrowers, if they can get favorable terms from conventional financing, will go there instead,” he added. “But banks are getting more comfortable now with FHA.”

When that happens and borrowers have greater choices, Pollard is confident that more of them will opt for FHA financing.

Summerwood gets rehabbed

Prudential Huntoon Paige is one of several lenders that provide interim and mezzanine financing to make tax credit projects work with FHA insurance.

The firm provided an $8.5 million loan to rehab and convert the 190-unit Summerwood Apartments in Redmond, Wash., into affordable housing. Like all FHA loans, the terms were for 40 years with no recourse.

The new loan refinances a $14 million interim loan; a $4.3 million loan from Prudential's Preservation Loan Fund; and a $400,000 loan from Enterprise Community Investment, Inc., used to acquire the property in 2004.

The nonprofit developer is Downtown Action to Save Housing.