THE FHA IS WORKING on some changes to the way it approaches large loans for new construction.
While nothing is set in stone yet, the agency is getting ready to toughen up the underwriting terms on any Sec. 221(d)(4) deal of $50 million or more. It's concerned with the threat posed to its portfolio by such large loans, especially since the agency is on the hook all by itself. Unlike Fannie Mae, the FHA has no risksharing requirements for its lenders.
“We've definitely seen much larger loan sizes, and that's a new phenomenon for FHA,” said Carol Galante, HUD's multifamily chief, in an interview last month. “We've got something like 80 projects in our pipeline that are over $50 million, and five over $100 million."
The underwriting changes for large loans would be tiered so that anything over $50 million would require a minimum 1.25x debt service coverage ratio (DSCR) and an 80 percent maximum loan to cost (LTC). For deals of $75 million or more, the DSCR would bump up to 1.35x and the LTC ceiling would drop to 75 percent.
The FHA would also bolster operating deficit reserve and working capital escrow requirements and may also layer in some new liquidity requirements. The agency hopes to have a notice out to the industry some time in the next month.
“It's somewhat of a push-back," says Mark Beisler, CEO of Columbus, Ohio–based FHA lender Red Mortgage Capital. “And it goes back to the issue that the lenders have no skin in the game."
Red Mortgage Capital recently closed a $125 million Sec. 221(d)(4) loan for the 544-unit Shores, a community to be built in Marina Del Rey, Calif. The loan—the largest currently active (d)(4) in the country—had an LTC of 89.9 percent because it was submitted before the agency changed its underwriting standards in September of last year, when HUD instituted LTCs of 83.3 percent, and DSCRs of 1.20x, for any market-rate (d)(4) deal, regardless of size.
These incremental changes point to the need for greater participation from the private sector. “What HUD ought to do, instead of bickering around the edges, is go into the heart of it and make lenders responsible, make them take a first-loss position like Fannie Mae does,” says David Goodman, chairman of Red Mortgage Capital. “What they need is a co-insurance program that's got teeth in it.”