The Federal Housing Administration (FHA) offers several options to borrowers in default or struggling to make debt-service payments on their FHA-insured loans.
A popular misconception with FHA borrowers is that they are unable to refinance or restructure their loans. However, there are a few solutions available to FHA borrowers failing to make ends meet.
Borrowers can take advantage of supplemental financing, request that the Department of Housing and Urban Development (HUD) agree to a partial reduction of the mortgage principal, or restructure the loan.
“Many people have said that they’d love to refinance the debt on their project, but the FHA has me locked out from prepayment,” said Elliot Auerbacher, an FHA loan specialist formerly with Greystone Servicing Corp., Inc. “Well, the FHA doesn’t have anybody locked out; it is an insurance company which provides an insurance contract to the lender. Most people don’t realize that with an FHAinsured loan, the borrower has options, even for loans that are locked out from prepayment.”
The FHA offers supplemental loans for properties, as long as the borrower demonstrates that the project can support both the supplemental and existing first mortgage debt. “If you had to fund out-of-pocket to keep a property going, HUD is oftentimes willing to do a supplemental loan,” Auerbacher said.
For instance, HUD’s Sec. 223(d) program insures two-year loans that cover operating losses incurred within the first 10 years after a project’s completion. This “operating loss” loan program is open to any owner of a multifamily property that has a first mortgage insured by the FHA.
Also, borrowers struggling to make ends meet due to circumstances beyond their control can request a partial payment of claim. A borrower can argue that the market has changed dramatically since the original loan was closed, for instance. Subject to certain program requirements, HUD will reduce the mortgage principal and hold a second mortgage that is payable from project surplus cash.
Once the property is sold or refinanced, the borrower must pay off the first and the second mortgages. Until then, while waiting for the market to improve, the borrower maintains day-today control of the property. Eligible projects include those insured under the Secs. 207, 213, 220, 221(d), and 223(f) programs.
The FHA is also willing to restructure loans in some circumstances. A property with a $10 million loan and a 7.5 percent interest rate can save around $120,000 a year by refinancing into an FHA loan at today’s rates, which are currently in the low- to mid-6 percent range.
Greystone has seen an increase in borrower interest in FHA-insured loan programs as the debt financing markets grow increasingly conservative. New construction projects using the Sec. 221(d)(4) program are on the upswing, the company reports.
The FHA’s flagship Sec. 221(d)(4) program for new construction or substantial rehabilitation features a 90 percent loan-to-cost ratio, 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 loan at closing.
Borrowers were getting interest rates of between 6.25 percent and 6.5 percent for Sec. 221(d)(4) loans in mid- May, down from as high as 6.75 percent last fall.
Additionally, many borrowers with floating-rate construction loans are interested in refinancing into FHAbacked loans to take advantage of the low interest-rate environment, long terms, and non-recourse nature of the debt.
“If you look at the interest rate levels over the past 35 years, a note rate of 6.25 percent is definitely on the low end of the spectrum,” said Auerbacher. “We have done many transactions where people are unhappy with their current interest rates and think right now might be the bottom of the interest-rate cycle.”
The FHA has been working on a rewrite of the Multifamily Accelerated Processing (MAP) guide, which would codify the many frequently asked questions and lender notices that serve as amendments to the guide. Ultimately, such a move would speed up deal cycle times, which have long been the FHA’s Achilles’ heel.
At the Western HUD Lenders conference in April, Joyce Allen, the FHA’s director of multifamily development, said the MAP rewrite was in the final stages but still had to go through departmental clearance, as well as oversight clearance—meaning it’s still probably a year away.
Meanwhile, another promising development is taking shape at HUD. The Seattle hub office has been piloting a new electronic system that would streamline the process of getting a Sec. 232 loan, either for new acquisitions or for refinancing. Sec. 232 provides mortgage insurance for new construction, substantial rehabilitation, or acquisition of nursing homes, intermediate care, board and care, and assisted-living facilities.
The present system sometimes takes four days just to process the check submitted for the application fee. The new system would allow the application fee to be paid online instantly. It also would streamline the review process.
“As long as you don’t trigger any red flags, you’d eliminate certain reviews that HUD would do,” said Bruce Minchey, vice president and chief underwriter for KeyBank Real Estate Capital’s FHA program. “And if something pops up that would be a concern for the appraiser, they would look at only that one item of concern, instead of reviewing the whole appraisal report.”
HUD plans to roll out the new process across all of its offices this summer.