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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2011

What to Expect from FHA Loans

The multifamily and health-care programs are more popular than ever, so prepare clients for the wait

In the world of commercial real  estate today, few financing options are as readily available for owners and developers of multifamily housing and health-care facilities as Federal Housing Administration (FHA) mortgage products. Whether for acquisition, refinancing, new construction, or substantial rehabilitation of a multifamily or health-care property, an FHA-insured mortgage is an option for many owners and developers who historically have not used that type of financing.

Since conventional lenders backed out of the market, FHA has been filling the void left by their absence, and commercial mortgage brokers should know what to expect when arranging this type of financing. 

HUD’s high demand

The FHA and the U.S. Department of Housing and Urban Development (HUD) are producing record volume in terms of number of deals and amount of loans insured. In HUD’s fiscal year 2010 (October 2009 through this past September), the agency issued 1,001 commitments for mortgage insurance and closed more than $8.65 billion in loans on the multifamily side. For comparison, HUD issued 466 commitments and closed $3.98 billion in ’09. These are impressive numbers for HUD. Even more impressive, however, is that HUD’s pipeline of multifamily loans in processing as of press time consisted of 1,249 deals totaling more than  $17.5 billion.

"Because HUD is fulfilling so many loans, processing times can be extreme."

These statistics do not include health-care deals (i.e., assisted-living facilities, skilled-nursing facilities, intermediate-care facilities and board-and-care homes), where there has been an equally impressive increase in business. Health-care deals done via HUD’s Section No. 232 loans were broken out into their own channel, separate from multifamily, in 2008 after HUD transferred the program to its Office of Insured Health Care Facilities. There were 487 more applications for mortgage insurance on health-care facilities in fiscal year ’10 than in fiscal ’09. As of this past November, there was a processing queue of 320 loans, and it was reported that HUD is seeing new applications at rates of 30 to 40 per month.

What to expect

The fact that HUD is producing record loan volume translates into good and bad news for borrowers looking to tap it as a source of capital. The good news is that because HUD is open for business, owners and developers have a viable option to finance their multifamily and health-care projects. Also, HUD provides borrowers with unparalleled long-term, low-interest rate, nonrecourse financing.

Unfortunately, because HUD is fulfilling so many loans, processing times can be extreme, and brokers who work with these programs should be aware of this when deciding if they are right for their clients’ financing needs. Lenders that work with HUD also should have a good idea of what borrowers might expect in terms of timing and should set their clients’ expectations accordingly.

The low interest rates available on FHA-insured mortgages are attractive, prompting even more demand for the product. The multifamily and health-care production channels of HUD are working at full capacity to handle the onslaught of business, and it is not showing signs of slowing any time soon.

Exacerbating the problems that have come with the increase in business is the fact that HUD is a government agency with limited budget authority to add staff for more business. The HUD staff is managing the increase in demand with the resources it has by implementing new processes and tightening their underwriting standards to mitigate risk.

Recent changes

For the first time since the FHA-insured loan programs were rolled out, HUD changed the underwriting criteria for its multifamily mortgage products this past year. These changes were specifically designed with the purpose of mitigating the inherent risk to the FHA insurance fund.

The revised underwriting standards increase debt-service-coverage ratios, decrease loan-to-value and loan-to-cost ratios, increase project reserves and sponsor equity investment, and control the release of cash-out proceeds. The ratios are targeted differently to property types based on their risk profiles, with smaller ratios for subsidized affordable-housing properties and larger ratios for market-rate properties. The effect of these changes, in addition to reducing the lending risk, has eliminated projects and sponsors that do not meet the more-stringent underwriting criteria from applying for an FHA-insured mortgage.

In addition to the underwriting changes made to its multifamily-loan programs, HUD has been working to make the delivery system for its products more efficient and is exploring ways to reorganize to better handle the increased workload. Under the LEAN program for health-care deals, the Office of Healthcare Programs has implemented a green lane for processing lower-risk deals more quickly. In an effort to make the LEAN program more efficient, the department has reorganized the queue to separate portfolio transactions into their own channel. 

Prepare clients

Brokers must prepare their clients for what they can expect from FHA-insured financing. After an application is submitted to HUD, it falls in line behind all the other applications before the agency reviews it. In some instances, it might take nine to 12 months before the loan makes it to the closing table. Construction loans go through a two-stage processing, which can take even longer. Currently, health-care deals can take almost 12 months from submission to closing. These time frames won’t last forever, but at the moment, this is what everyone using FHA financing must deal with.

Although this is probably not what any borrower wants to hear, it is far better business to deal with reality and manage your client’s expectations than to overpromise, underdeliver and completely frustrate your clients. Your borrowers’ patience will likely be rewarded with attractive long-term, low-interest, fully amortizing, nonrecourse, assumable financing.


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