The FHA has become the most prolific and popular construction debt source since the advent of the credit crunch. But last month, the agency dropped a bombshell when it unveiled proposed changes to its Sec. 221(d)(4) and Sec. 223(f) programs, which could make it much harder for developers to gain access to those programs.

The proposed changes will be published on the Federal Register and could have huge ramifications on the multifamily industry. Most notably, the FHA wants to raise the debt service coverage ratio (DSCR)—currently at 1.11x—for the popular Sec. 221(d)(4) program, which has become the only game in town for construction capital throughout the recession. According to the proposed changes, underwriting for a market-rate deal under the program would be at a minimum 1.20x. Low-income tax credit deals would be bumped up to a minimum of 1.15x.

And that’s not all. Another proposed change would increase the minimum required amount of working capital funds. In the past, developers had to put up 2 percent of the total loan amount in a working capital fund, but that figure will be 4 percent under the proposed rules. That’s a big change: On a $10 million loan, a developer will have to come up with an additional $200,000.

Several lenders wondered why the FHA would fundamentally alter the program’s terms, rather than implement a more incremental change, such as increasing the Mortgage Insurance Premium. But Carol Galante, HUD’s deputy assistant secretary of multifamily housing, says HUD was concerned with the weaknesses seen in its existing portfolio of 221(d)(4) loans, with a large amount of losses expected in 2010 through that program alone. The broader issues of overbuilding and market weaknesses also bolster the case for changes to be made. The fear is that the agency is setting itself up for more losses over the next two years, since the FHA has become the predominant lender of new construction.

The changes will be open for public comment on the Federal Register. Translation: Stay tuned.