If you want proof that the Federal Housing Administration (FHA) is redoubling its focus on affordable housing, look no further.
The FHA has released a much-anticipated new version of its Multifamily Accelerated Processing (MAP) guide, with an eye on improving its track record in the affordable housing arena.
The new guide consolidates all of the agency's multifamily program changes and guidance—notices, mortgagee letters, and frequently asked questions—into one place, collecting information that lenders, and even Department of Housing and Urban Development (HUD) staff, sometimes had trouble finding. By offering a single point of reference, the new guide may help improve the agency's notoriously long processing times.
But most important, the guide provides clarity around affordable housing transactions, an area that had been severely neglected in previous versions. An entire chapter is devoted to underwriting low-income housing tax credit (LIHTC) and New Markets Tax Credit deals, offering clarification on issues such as how equity pay-ins can be structured.
“In the long run, the new guide is positioning FHA to be a more relevant player in the affordable housing space," says Phil Melton, director of affordable housing debt at Centerline Capital Group. “For a long time, Fannie and Freddie were driving the bus, and the FHA was being left behind. But now you've got a really relevant change in philosophy there in terms of affordable housing."
Some of the clarifications in the new guide—including the elimination of cost certification for new construction projects—stem from changes set out in the Housing and Economic Recovery Act of 2008. When a LIHTC deal has a loan-to-cost ratio of less than 80 percent, it no longer has to complete an audited cost certification at the completion of construction.
Though programmatic changes like that have been out for years, their canonization in the new guide is an important step. For instance, last year the FHA issued a mortgagee letter explaining how to defer submission of final plans and specs on a new construction LIHTC deal until 30 days before closing.
“But it wasn't highly utilized. We had done a few projects that began to process applications under the mortgagee letter, but found that few offices had processed any,” says Ryan Miles, an assistant vice president at MAP lender Lancaster Pollard. “I think there will be a wider acceptance with HUD field offices by having it in the guide, and not just a mortgagee letter."
Indeed, the guide clears up a lot of issues that lenders and HUD offices would get hung up on in the past. Most important, it gives every HUD field office the same set of rules to work off of, ensuring a level of consistency from office to office that was severely lacking in the past.
For instance, when refinancing a property built before 1991—before fair housing accessibility requirements for the disabled became law—a lot of HUD offices wouldn't allow the deal to proceed until noncompliance issues were fixed. Other offices, however, would proceed with the understanding that those issues would be remedied post-closing. The new guide adopts the latter approach, clearly stating that any issues of nonconformance can be repaired after closing.
Another new addition to the guide is the Sec. 231 program for new construction or substantial rehabilitation of rental housing for the elderly, or those 62 and older. The program has been very underused in recent years, mainly because it wasn't part of the guide.
“People didn't know the specific criteria, and without that specific guidance, lenders, owners, and field offices were hesitant to send a project down that path,” says Miles. “I've spoken with some field offices that hadn't processed a 231 application in 10 years, and now all of the sudden they're starting to see a re-emergence of the product."
Most nonprofits developing or rehabbing age-restricted properties would instead use the more widely accepted 221(d)(3) program, but that presented problems too. Though owners can age-restrict a 221(d)(3) property, that restriction only applies to the head of the household—under fair housing guidelines, the children and grandchildren of an elderly resident were allowed to live in a (d)(3) property too. Sec. 231, in contrast, insures independent living deals that are only available exclusively to residents who are 62 and older.
The FHA is trying to make affordable housing more of a priority and is processing affordable deals slightly faster than market-rate deals. In fact, the FHA recently established a lead LIHTC coordinator for each office that expedites and coordinates the processing of LIHTC deals. Some (d)(4) deals are being processed in six or seven months, and a 223(f) deal turned around in four or five months.
But these timelines vary greatly depending on the deal as well as which HUD regional office you're dealing with. Some offices are taking closer to a year for (d)(4)s and nine months for 223(f)s. But others, like the regional office in Columbus, Ohio, are saying they can turn around Sec. 223(f) applications in 60 days.
But are those 60 calendar days or 60 business days? In a slight of hand, the definition of “days” changed in the new MAP guide. The agency promises a pre-application review of 45 days for Sec. 221(d)(4) loans and another 45-day review of the firm commitment application. Those days used to be calendar days, but now they're measured in business days, stretching out the timeline.
Processing times could theoretically improve thanks to the new guide, since lenders and HUD staff won't have to spend so much time researching and debating what's allowable. But don't expect material improvements in the short term—the FHA is still digging itself out of the wave of business that has come its way over the last year.
“To be honest, I don't think many offices at this point, given their staffing and resources, can meet the time frames that are established,” says Ed Tellings, FHA chief underwriter at Columbusbased MAP lender Red Mortgage Capital. “It's a little better now than it was six months ago, and that has a lot to do with HUD getting through that volume of business they received last September."
Indeed, much of the current logjam can be traced to last September. The FHA changed its loan parameters in July 2010 to make them less generous for market-rate deals—debt-service coverage went up, and leverage went down. But deals that were sent before Sept. 1, 2010, were grandfathered in under the previous, more generous terms, and the resulting wave of volume buried the agency.
The focus on affordable deals is apparent now as many HUD offices bend over backward to help developers meet the time frames set by local housing fi- nance authorities.
For instance, the housing authorities in Kentucky, New Mexico, and Texas are requiring tax credit deals to close on their debt by the end of the calendar year. To help expedite the process, some HUD field offices are “unofficially” accepting an appraisal in advance and providing comments on it before a full application is prepared by the lender. That way, when the full application is submitted, the field office doesn't have to spend much time on appraisal documents.
Overall, lenders are pleased with how the new MAP guide turned out and applaud the HUD multifamily brain trust, especially Chris Tawa, Dan Sullivan, and Janet Golrick, for delivering on their promise.
“By providing clear guidance, it should allow people to move quicker on those issues where HUD offices and lenders get hung up,” says Tellings. “HUD's done a really good job of taking a lot of questions and issues and putting them all in one place."