Affordable housing developers continue to face limited options when looking for construction debt.

The government-sponsored enterprises (GSEs) have all but abandoned their forward commitment programs, pricing them so high that, in effect, they are a non-starter. Regional and national banks are employing a targeted approach to fill their CRA buckets, and many are scaling back their balance-sheet exposure to real estate.

And the Federal Housing Administration (FHA) is making underwriting changes to its flagship new construction program, Sec. 221(d)(4), for the first time in decades. While the changes mostly affect market-rate deals, some affordable housing developments will also see tougher restrictions.

In the past, the (d)(4) program offered a 1.11x debt service coverage ratio (DSCR) and a 90 percent loan-to-cost (LTC) across the board. Under the proposed changes, market-rate deals seeking 221(d)(4) loans would be underwritten to a minimum 1.20x DSCR. Projects with subsidy levels of 90 percent or greater would still enjoy a 1.11x DSCR, but tax-credit deals would be bumped up to a minimum 1.15x.

LTC ratios would also be adjusted under the new rules. Projects with rental assistance would still qualify for 90 percent LTC, but LIHTC deals would tap out at 87 percent and market-rate deals at 83.3 percent.

Defining the Problem
The big question, unfortunately, is how to define what’s called affordable, and what’s called market-rate.

The underwriting changes probably won’t have a big effect on tax-credit deals. Most syndicators are requiring a 1.15x DSCR anyway, and a change of 3 basis points in the LTC ratio is not a dramatic shift. But the changes will certainly have an effect on workforce housing. If a project’s rents were affordable to those earning up to 70 percent of the area median income (AMI), for instance, the FHA would classify that as market-rate.

The bigger question concerns mixed-income developments. It remains unclear if the FHA would treat a deal that had some affordable set-asides—say 40 percent of units affordable to 60 percent of the AMI—as pure market-rate, or if those deals would be underwritten more like LIHTC deals.

“That’s still a question being posed,” says Phil Melton, a senior vice president and head of FHA production at Charlotte, N.C.-based Grandbridge Real Estate Capital. “Often, municipalities have a preference to do mixed incomes as opposed to 100 percent market-rate. So, it’s serving a need, and you’d hope that workforce housing or minimum set-aside properties will still get treated at the 87 percent, 1.15x level.”

To classify a mixed income deal as affordable, a test needs to be applied, which hinges on a commitment to long-term affordability, such as a 15-year promise to keep rents affordable for projects getting refinanced.

“There has to be a recorded regulatory agreement in place that regulates the rents to affordable levels,” says Doug Moritz, associate vice president of multifamily at the Washington, D.C.-based Mortgage Bankers Association. “So, it has to have either a regulatory agreement, have 90 percent of the units supported by rent subsidy or Section 8 contracts, or be a tax-credit deal. Outside of those three affordable tests, it would be market-rate.”

Spotlight Search
Outside of the FHA, affordable housing developers continue to face limited options when looking for construction debt.

Fannie and Freddie are offering forward commitments in the 9 percent to 9.5 percent range, but aren’t finding many takers. Word on the street is that the GSEs have decided they simply don’t like the product and are intentionally pricing themselves out of the market.

Part of the problem is history—too many tax credit deals have taken too long to lease up. The average time for getting a deal stabilized under Fannie Mae’s horizon is not 24 months, the program’s window, but more like 36 to 42 months, lenders say. Another reason for the GSEs’ disinterest is that the forward commitment is a non-recourse loan, whereas construction debt from banks requires recourse. But the GSEs’ reluctance is striking, especially given its public mission to support affordable housing.

Local banks (or consortiums of local banks) are happy to fill some of the void, and can often provide mini-perm loans that are hundreds of basis points cheaper than what the GSEs are offering. But finding a bank with the wherewithal and interest to fund your loan is another story.

Often, national banks are only interested in deals in which they are also the tax-credit investor, while consortiums of smaller banks look to fill the gap at the local level. What’s more, liquidity requirements from many banks have climbed so high over the past few years that it’s almost as though a construction loan has to be cash-collateralized, developers say.