The changes underway at the Federal Housing Administration (FHA) are steering the agency back to its affordable housing roots.

Since the credit crunch began, the FHA has become the premier source of construction capital for market-rate developers. In its fiscal year (FA) 2010, the FHA processed more than $3.7 billion in new construction or substantial rehab multifamily loans, more than double the amount it issued in FY 2009, and more than triple the amount issued in FY 2008.

Last year, the FHA changed its underwriting to make it less friendly for market-rate developments, and those changes are now beginning to affect proceeds. But there are other changes underway—both on and off the radar—that will likewise make it a little more difficult for developers of Class A deals going forward.

What many borrowers may not realize is there are four hot-button bullet points—sustainability, green building, urban, and affordable—that the FHA is now using when assessing new Sec. 221(d)(4) deals. These are not formal policies, more like a desired framework that the agency has expressed to its stable of loan originators.

“You’ve got to have at least two of the four, or it’s an uphill battle,” says Phil Melton, a senior vice president at FHA lender Charlotte, N.C.-based Grandbridge Real Estate Capital. “If you only have one of them, you’ll have a much harder road to go down. At this point, it’s not about fulfilling what developers want to build, it’s about fulfilling what HUD has given as a mandate for their mission going forward.”

1. Sustainability
“New urbanism” has been a focus of the administration at HUD, which created an Office of Sustainable Housing and Communities to partner with the Department of Transportation in an effort to promote transit-oriented development (TOD). If your deal is a TOD, it’s likely to be viewed much more favorably by the FHA. But it doesn’t have to be a strict TOD. The main requirement here is that a deal be located near employment and/or public transportation centers. Basically, the FHA wants to combat the trend of urban sprawl.

2. Green Building
Likewise, green developments are being viewed much more favorably than deals that have no green components. It’s not as though the FHA expects LEED certification, though. The agency just wants to see some effort made in using green building components. Since many of these components are becoming common, such as low-flow toilets and energy-efficient windows, this isn’t a high barrier, but it’s something to keep in mind—your application stands a much better chance if green building components will be used.

3. Urban
Getting a suburban or rural deal through the FHA will be a little more challenging going forward, unless those markets have very robust economic climates. Basically, the FHA wants to stop the trend of housing being built further and further away from employment centers. Just as the sustainability requirement seeks to combat urban sprawl, this requirement is aimed at containing suburban sprawl—the trend of building where land is the cheapest, but jobs are the scarcest.

4. Affordable
This would seem to preclude market-rate developers, but that’s not entirely true. You don’t have to be a low-income housing tax credit developer to fulfill this requirement. The bottom line is, HUD is giving preference to deals that have some affordability component. And given that affordable housing deals can get better underwriting terms—higher loan-to-cost and lower debt service coverage requirements—market-rate developers might want to include some portion of workforce housing units in their properties. If you can make 20 percent of your units affordable to those earning 50 percent of the area median income, you not only stand a better chance of getting an FHA loan, you also may get better underwriting terms.