While many lenders saw their Federal Housing Administration (FHA) volume decline in 2006, others made strides by positioning themselves in niche areas where the FHA continues to expand.
Though overall new construction/substantial rehabilitation loan activity declined 35 percent in 2006 for the FHA, ?We experienced a dramatic increase of over 100 percent in Sec. 207/223(f) apartment refinances, primarily driven by refinances of Sec. 202 direct loans with Sec. 8 project-based assistance,? said HUD spokesman Lemar Wooley. ?We also experienced an 11 percent increase in Sec. 232 originations.?
Sec. 202 loans, which target nonprofit organizations developing affordable housing for seniors, saw their heyday in the 1970s and 1980s, when interest rates were significantly higher. Since the Department of Housing and Urban Development (HUD) changed its regulations at the beginning of 2005 to make it easier to refinance Sec. 202 loans, this area has taken off. HUD refinanced 249 Sec. 202 loans for $854.6 million in fiscal 2006, a more than fourfold increase from the 48 loans refinanced for $212.2 million in 2005.
?It?ll increase this year even further,? said Karl Reinlein, executive vice president of Capmark Finance, Inc., the No. 1 FHA lender in 2006. ?Those properties are in dire need of improvements and renovations.?
Lancaster Pollard Mortgage was one company that rode the wave of a surging Sec. 202 refinancing market. While the firm, which focuses on healthcare and seniors housing, has been offering FHA products since 1990, ?2006 was when it really all came together for the first time,? said Managing Director Brian Pollard.
?One of the bigger opportunities of the moment is the refinancing of these HUD 202 loans,? Pollard said. ?We recognized that as an opportunity several years ago and tried to position ourselves in a way to become a market leader.? The Columbus, Ohio-based company has been steadily expanding its FHA business since 2002, opening regional offices in Austin, Texas; Denver; Lawrence, Kan.; and Atlanta. The firm has more than doubled its staff in that time, with the biggest increase in its origination and production forces.
Based on the strength of last year?s Sec. 202 refinance surge, the firm jumped from 21st to sixth in the FHA?s 2006 top originators ranking. The year before, the company jumped from 27th to 21st.
In 2006, Lancaster Pollard made 47 FHA loans totaling $184 million. According to the FHA, the company refinanced the most Sec. 202 dollar volume in fiscal 2006, at $137.74 million, ahead of such heavy hitters as Capmark Finance, Inc. ($136.01 million), and Capstone Realty Advisors ($77.36 million).
The rise in Sec. 202 refinancing activity can boost the firm?s volume in other FHA areas. Many of the Sec. 202 properties that Lancaster Pollard is working on are being coupled with low-income housing tax credits, ?and the extent of the rehab or renovation that?s going to be done pushes the facility into the Sec. 221(d) program,? Pollard said. ?You hit a threshold with 202 programs that makes [the loan] move over to 221(d).?
The Sec. 221(d) program provides mortgage insurance for new construction/substantial rehabilitation of rental and cooperative housing for moderate-income families, the elderly, and the handicapped.
Lancaster Pollard also forecasts a rise in Sec. 242 loans, which provide mortgage insurance for hospitals. The firm didn?t close any Sec. 242 loans in 2006, and only nine were done nationally. Although there are few such deals, each loan is sizable?those nine transactions last year added up to $943 million, according to the FHA. There are two to five Sec. 242 deals in Lancaster Pollard?s pipeline, mostly replacement hospitals for small rural community healthcare providers, which will typically run between $25 million and $50 million each, Pollard said.
Sec. 232 health care
KeyBank also is bullish on its FHA program for 2007. Gary Alex, FHA program director for KeyBank Real Estate Capital, said his division increased its FHA volume in 2006, partly because of the overall strengthening of the apartment market, but also because the firm saw a fairly significant jump in its FHA healthcare business, Alex said. ?We?re putting more emphasis on that.?
The FHA?s Sec. 232 program provides mortgage insurance for new construction, substantial rehabilitation, or acquisition of nursing homes, intermediate care, board and care, and assisted-living facilities. In 2005, KeyBank closed about $5.2 million in Sec. 232 loans; in 2006, that figure shot up to $18.5 million.
?That whole segment saw occupancies improve last year over the previous year,? Alex said. ?The high default rate that program experienced in the late ?90s and probably into 2001 has abated. The excess inventory has been absorbed. The health of the assisted living industry just improved fairly significantly during 2006.? The company?s biggest increase was in the Sec. 221(d)(4) program. In 2005, KeyBank made $57 million in Sec. 221(d)(4) loans; in 2006, that number soared to $102 million.
Alex expects the FHA to continue its market leadership in the assisted living, skilled nursing, and acute-care hospital markets in 2007. ?It?s a niche that the FHA has very little competition in compared to the multifamily business,? Alex said. ?There?s just not as much capital chasing that asset type.?
The rise in Sec. 232 originations, from $1.24 billion in 2005 to $1.59 billion in 2006, has caused the FHA to rethink how it administers the program. ?We are looking at ways to streamline processing of Sec. 232 loans while increasing monitoring and controls on lessee/operators,? the FHA?s Wooley said.
Additionally, the agency would like to update some aspects of its underwriting parameters, and is working on ?reducing the liability insurance requirements and allowing cash-outs on refinances,? for the program, Alex said.
While lenders expect to see further clarification of the Sec. 232 guidelines in 2007, FHA also is sprucing up its Sec. 232 infrastructure. Capmark?s Reinlein expects the FHA to staff up its Sec. 232 program, from the executive to the field office level, to help speed up deal cycle time. He also sees the agency focusing on consistency of regulations and administration around the country. That would be a change from current practice, where ?The HUD offices seem to do things differently from hub to hub,? he said.