As the shutdown of the federal government stretches into its third day, some affordable housing developers are waiting for their Federal Housing Administration loans to close.
“We will have a handful of FHA financings that need to close … at the minimum, it’s going to create delay for those projects,” says Todd Crow, executive vice president for PNC MultiFamily Capital.
During the shutdown, the FHA still plans to close on multifamily deals that have firm commitments with scheduled closings and final endorsements that have critical external deadlines, according to the contingency plan for the shutdown on the website of the U.S. Department of Housing and Urban Development. But loans near the end of the FHA process that are waiting for their firm commitment to schedule a closing date will have to keep on waiting.
“The FHA can’t sign the firm commitment because they don’t have the commitment authority from Congress,” says David Lacki, managing director of affordable housing for Lancaster Pollard.
Time running out
The FHA ran out of its commitment authority to make new multifamily loans in September, Lacki says. The borrowers whose financings were delayed knew they might have to wait a few extra weeks to close their deals until Congress renewed its commitment authority. “We all saw it coming,” says Lacki. “But we thought that on Oct. 1, we were going to get a continuing resolution.”
The government shutdown extends that few weeks of delay in September for an extra, uncertain amount of time … and no one knows whether the shutdown will last for days or weeks. So far, a small number of deals have been affected. Lancaster Pollard has eight or nine affordable housing transactions stuck in this limbo. Most are construction or permanent loans for developments that also received reservations of low-income housing tax credits (LIHTCs) in 2013. These developments will need to be placed in service by the end of 2014 to comply with LIHTC rules. Some of the larger projects have construction periods as long as 15 months, meaning they needed to close their construction financing by the end of September.
“Now, we have developers going to general contractors and asking if they can compress the construction period,” says Lacki. The clock is already ticking. “It doesn’t take 30 days to process one of these loans,” he says. “We’ve been working on these transactions for four to six months.”
Problems to persist
The effects of the shutdown on interest rates are likely to persist for 30 to 60 days after the shutdown ends—and that might affect more deals, according to Ben Truit, national production director for Amerisphere Mortgage Finance.
That’s because with no FHA loans closing, FHA lenders aren't issuing bonds backed by the mortgages. The bond shortage began over the summer, when the FHA first approached the end of its commitment authority. These Ginnie Mae bonds are usually bought by large banks, which form real estate mortgage investment conduits (REMICs) to hold the bonds and sell stock to outside investors. With so few Ginnie Mae bonds available, banks have taken a break from buying them. That leaves few investors to buy any bonds that do come to market, so the price for these bonds has paradoxically gone down, driving yields up. Even though the supply is temporarily very low, the demand is even lower.
“The market is broken,” says Truit.
And it could take a month or two to restart and begin operating properly after the government starts up again.