The Federal Housing Administration (FHA) recently greased the wheels on its notoriously slow approval process, and the move is already paying dividends.
At the end of December, the FHA issued new rules regarding which loans need to go through regional and national loan committees—a time-consuming process which has gummed up the agency’s bottlenecked pipeline.
In the past, market-rate construction/rehabilitation loans of at least $15 million, or any deal of more than 150 units, had to go through the FHA's National Loan Committee. That threshold has been dialed up to $25 million, or 250 units. What’s more, any existing FHA-insured loan looking to refinance through the Sec. 223(a)(7) program no longer needs to go through either the regional or the national loan committee.
“It’s a huge help,” says Jonathan Camps, managing director of production for Washington, D.C.-based Love Funding. “You have this huge slew of deals that all of the sudden don’t need to do it, and we’ve already seen processing speed up quite a bit. It’s had a real trickle-down effect.”
For instance, Love Funding had a Sec. 221(d)(4) deal being processed through the Fort Worth HUD office. The loan had already gone through the regional loan committee and was getting ready to go to the national loan committee.
“Because of all the preparation that was required, they said it would take about four to six weeks,” says Camps. “All of the sudden, it didn’t need to go to national anymore, and I had a commitment two days later.”
Though the new rules have been around for less than a month, their presence has already affected how HUD lenders manage borrower expectations. In the past, Love would tell clients that a 223(f) loan would likely take nine months from start to finish. Now, Camps would drop that average down to six months.
But recent news coming out of HUD wasn’t all borrower-friendly. The FHA also toughened up on large loans at the end of December, making the terms a little less favorable the bigger a loan gets.
Market rate 221(d)(4) deals of $40 million to $60 million will see their minimum debt service coverage ratio (DSCR) move from 1.20x to 1.25x, while maximum loan-to-cost (LTC) ratios will decline from 83.3 to 80 percent. Anything more than $60 million will be underwritten with a minimum DSCR of 1.30 and a maximum 75 percent LTC.
Sec. 223(f) loans of more than $50 million will see similar movements in debt coverage and leverage. The changes also require higher levels of borrower experience, liquidity and net worth than were required in the past.
The changes have been rumored for a year, and were motivated by the FHA’s exploding pipeline since the credit crisis began. The former “lender of last resort” found itself incredibly popular when capital dried up in the private sector, and many large developers, such as Archstone, used the FHA for the first time in their history during the recession. The resulting larger loan sizes was a new phenomenon for HUD, and the agency became increasingly worried about the risk such large loans posed to its portfolio.