The credit crisis has helped transform the Federal Housing Administration (FHA) from a lender of last resort to the hottest ticket in town.

And the new Department of Housing and Urban Development (HUD) administration is hoping to seize on this opportunity to complete the transformation and turn the FHA into a perennial all-star regardless of market cycles. The leadership has been courting affordable housing borrowers by tweaking programs and issuing rule changes since it seized the reins.

For instance, Sec. 223 refinancings have boomed over the last year, partly due to rock-bottom all-in rates, which were around 5 percent as of mid-December. That's 50 basis points (bps) lower than where they started in 2009, and about 50 bps inside of what Fannie Mae and Freddie Mac were offering.

But just as significant was the “three-year rule” waiver, a temporary rule change the FHA enacted just after the new administration took office. The change allows borrowers to refinance a property that was built or rehabbed within the past three years, which was not allowed in the past.

The three-year waiver was extended in July 2009 to January 2010 and will likely be extended again. There are even rumblings that the FHA may make it a permanent rule.

“The FHA stepped out of the mold when they did that,” says Marie Head, president of Atlanta-based FHA lender Prudential Huntoon Paige. “The industry suggested it to them in early 2009, and within days, the FHA had vetted it and issued a temporary policy. It was a huge step for them.”

The rule change opened the program to a bigger universe of borrowers, and it shows in the bottom line. More than $500 million in Sec. 223(f) loans were committed in September compared with an average of $200 to $225 million per month in the prior months of the fiscal year, according to HUD.

That responsiveness to industry concerns has so far characterized the new administration, which is led by former affordable housing veterans like Shaun Donovan and Carol Galante. The FHA also recently brought in Chris Tawa, an industry veteran who led Fannie Mae's affordable housing group and MMA Financial's affordable debt group, as a senior adviser to Deputy Assistant Secretary Galante.

The new administration has also eased environmental rules regarding developing on “brownfield” sites and has also made its Sec. 221(d)(4) construction/ permanent loan program easier to use for tax credit developers. In the past, 100 percent of a project's equity had to be deposited in cash before the closing of the construction loan, which alienated low-income housing tax credit deals. Now, only 20 percent is required.

Still, for all its work in courting tax credit developers, the rule changes have taken awhile to be clarified, and the pace of that business has been slow. In an October meeting with the Mortgage Bankers Association, Galante pointed out that the FHA is only insuring about 10 percent of new tax credit business, which she called “embarrassingly low.”

In fact, one lender who requested anonymity said that a recent tax credit deal that crossed his desk had some problems using FHA financing. The deal was using Tax Credit Assistance Program (TCAP) money as gap financing, but a spat broke out between the FHA and the housing finance agency regarding some of the regulatory requirements of the program. At issue was who would be responsible for repaying the TCAP money should the loan go into default. In the end, the developer couldn't wait for this spat to be resolved, so he went to a local bank to secure financing.

This is a common lament from affordable housing FHA lenders, who have urged the agency to get quicker at processing deals. The FHA was working on implementing a pilot program for a tax credit lead underwriter, an affordable housing guru at each multifamily hub office that would streamline the process ing of tax credit loan applications. But the effort has been delayed mainly due to staffing issues, as all hands are on deck to process the business at hand.

Opportunity for FHA ahead

Construction capital remains one of the crown jewels of the FHA. All-in rates on the Sec. 221(d)(4) program were around 6 percent in mid-December.

The low rates reflect the robust investor interest in Ginnie Mae securities. It's an incredible turnaround from December 2008, when all-in rates were more than 7.5 percent and lenders were holding commitments for 60 days looking for investors and trying to lock a rate.

The FHA is taking a harder look at project feasibility, and many lenders expect the FHA to get more conservative in its underwriting in 2010.

“I think we'll see that,” says Head. “The FHA is concerned about markets for new construction, and prudent lenders are vetting them much more.”

With such a robust pipeline of business, there were fears in the affordable housing industry that tax credit deals would have a hard time competing with all the larger, market-rate business that has suddenly flooded into the FHA.

“There's an overworked, understaffed FHA that is struggling to keep up with the demand that nobody really foresaw for them,” says Phil Melton, who leads the affordable housing debt group at Charlotte, N.C.-based Grandbridge Real Estate Capital. “Trying to get their attention for a $2 million to $4 million tax credit deal is a challenge.”

But many believe the FHA will prioritize affordable housing deals, once there is a critical mass of such deals seeking debt.

“You're going to see a lot of focus on getting those deals done, and those deals may get some priority coming into HUD,” says Head.

Regardless, the FHA now has a huge opportunity to change perceptions.

“What we all need to accomplish, the FHA and the FHA industry, is making sure that borrowers using FHA now are not just borrowers in the worst of times, but also in the best of times,” says Head.