In the last two years, the Federal Housing Administration's (FHA's) leadership has breathed new life into its approach to tax credit deals.

The agency started with the lowhanging fruit, eliminating an entire processing step, pre-applications for Sec. 221(d)(4) loans using tax credits, while implementing a variety of other directives. Most important, the FHA no longer requires 100 percent of a project's low-income housing tax credit (LIHTC) equity to be funded up front, in cash, before the loan closes. This was one of the main reasons LIHTC developers avoided the FHA in the past.

Despite those efforts, the agency still has a long way to go. Last year, it closed on just 68 tax credit transactions, for $446 million in activity, tripling the output of fiscal year 2009. While a good start, that's still a drop in the bucket compared with the overall market, and compared with the FHA's own multifamily volume of $11.3 billion.

When Carol Galante was appointed deputy assistant secretary for multifamily housing in 2009, her first order of business was to update the agency's programs for tax credit developers. “That's what I expected to spend my first 100 days working on,” says Galante. “What I didn't expect was how frozen the credit markets were going to be, and how much impact that would have on the FHA."

One of the affordable housing programs delayed by the crush of marketrate business was the tax credit pilot program, which seeks to expedite the processing of tax credit transactions. The program was mandated by the Housing and Economic Recovery Act of 2008— and is only now ready for prime time.

Modeled on the agency's LEAN program for health care transactions, the pilot will put tax credit deals on the fast lane to closing. The FHA will form regional tax credit execution teams comprised of an appraiser, an underwriter, and a credit person, which will streamline the process. The program will start modestly, only for 9 percent transactions, and only with certain lenders and in certain markets.

“It definitely will be coming this year," says Galante. “We have vetted it with the Mortgage Bankers Association working group, and we're working with some of the staff in the field about how it might be implemented."

Long cycle

Processing times are a particular concern at the FHA. The explosion of business that has come its way in the last year has slowed the pipeline considerably. “We know that we're not delivering in nearly as timely a way as we would like to,” says Galante. “But we are actively working on re-engineering some of our processes. The reality is we can't expect a lot of new resources in terms of staff, so we've got to work smarter."

The FHA's new National Loan Committee (NLC), which reviews deals from regional offices before giving them the final seal of approval, started last September. Any affordable Sec. 221(d) (4) or Sec. 223(f) deal greater than 250 units or $50 million must go to the NLC.

This new extra layer of review and approval has slowed down the agency's processing times by a couple of weeks. And many FHA lenders have expressed concern that there's little predictability regarding the outcome when the committee reviews a loan. Still, only one deal among the first 41 applications reviewed by the NLC was rejected outright.

“It's fairly efficient and only adds about two weeks to the processing time," says Tyler Griffin, senior underwriter at Beech Street Capital, which received its FHA license early this year. “By the time a deal gets to the NLC, the local HUD offices and hubs have vetted it thoroughly, sending only the best deals through."

An expanded mortgage credit review process has also slowed things down. Last year, the FHA expanded the defi- nition of a principal to include anyone serving on a company's board, and that has proven to be a somewhat intrusive process. Now, lenders have to gather the Social Security numbers, run credit checks, and get previous participation clearance (known as the 2530 process) for every member of a company's board.

Lenders report that average turnaround times for a Sec. 223(f) loan are around six months, and an average Sec. 221(d)(4) is taking closer to 10 months. For those with the patience, it's worth the wait—rates on permanent loans were still at least 100 basis points inside of what Fannie and Freddie were offering as of mid-March, and the (d)(4) program offers some very generous terms.

On the horizon

Later this year, the FHA hopes to expand its Sec. 223(f) program to include more significant levels of rehab. The program currently offers light rehab dollars, and anyone looking to do more has to go through the Sec. 221(d)(4) program, which is a more cumbersome and timeconsuming process. But the agency is looking to scale up that program to more closely mirror something like Freddie Mac's Mod Rehab program.

“The biggest groundwork we've done is some work around the legal aspects of how we define what's substantial rehab," says Galante. “We have a lot more flexibility in how we define what goes into sub rehab versus what goes into a 223(f), so that's good news."

The FHA will also soon publish a new underwriting guide, with a new focus. The last time the Multifamily Accelerated Processing guide was published in 2000, it contained virtually no references to affordable housing underwriting. But the new guide hones in on affordable and includes some new flexibility, such as allowing equity bridge loans and adopting the identity of interest standard that's already in place at Fannie Mae and Freddie Mac.

Also on the horizon are some underwriting changes around large loans, or deals of $50 million or more, for the Sec. 221(d)(4) program. The industry buzz is that debt-service coverage ratios will be raised and loan-to-cost ratios will be reduced some time later this year.