The Federal Housing Administration (FHA) continues to win more business as the credit crunch deepens and many sources of liquidity recede.
More new construction loan originations are coming the FHA’s way, and many borrowers looking to refinance are finding the rates and terms of FHA programs too good to pass up.
Lancaster Pollard, a member of the FHA’s Multifamily Accelerated Processing (MAP) program, has seen renewed borrower interest in the FHA’s construction financing programs, such as Sec. 221(d)(4) and the Sec. 232 program that targets health-care facilities.
“We attribute that largely to the credit crunch and tightening of underwriting standards,” said Nick Gesue, senior vice president of Lancaster Pollard. “The leverage you could get with the FHA, the debt-service coverage and the non-recourse provisions, are more attractive than a lot of other finance options.”
The FHA’s flagship Sec. 221(d)(4) program features a 90 percent loan-tocost ratio, a 1.11x debt-service coverage ratio, 40-year amortization, and is nonrecourse. What’s more, developers can lock in the interest rate for both the construction and permanent loans at closing.
Borrowers were getting interest rates of between 6.25 percent and 6.5 percent for a Sec. 221(d)(4) loan in mid- April, down from as high as 6.75 percent last fall.
MAP lender Greystone Servicing Corp., Inc., has also seen a big increase in borrower interest in the FHA-insured loan programs. New construction projects using the Sec. 221(d)(4) program are on the upswing, the company reports. Additionally, many borrowers with floating- rate construction loans are interested in refinancing into FHA-backed loans to take advantage of the low interest-rate environment, long terms, and nonrecourse nature of the debt.
“If you look at the interest-rate levels over the past 35 years, a note rate of 6.25 percent is definitely on the low end of the spectrum,” said Elliot Auerbacher, Greystone’s senior originator. “We are doing many transactions where people are unhappy with their current interest rates and think right now might be the bottom of the interest- rate cycle.”
The company also has significant experience in completing workouts for borrowers that are in default or are struggling to make debt-service payments on their FHA-insured loans. A popular misconception with FHA borrowers is that they are unable to refinance or restructure their loans, but the truth is, there are circumstances where they can.
“Many people have said that they’d love to refinance the debt on their project, but ‘the FHA has me locked out from prepayment,’” Auerbacher said. “Well, the FHA doesn’t have anybody locked out; it is an insurance company that provides an insurance contract to the lender. Most people don’t realize that with an FHA-insured loan, the borrower has options.”
A variety of solutions are available to FHA borrowers struggling to make ends meet, such as taking advantage of supplemental financing, restructuring the loan, or requesting that the Department of Housing and Urban Development (HUD) agree to a partial reduction of the mortgage principal.
The FHA offers supplemental loans for properties, as long as the project can support both the supplemental and existing first mortgage. “If you had to fund out-of-pocket to keep a property going, HUD is oftentimes willing to do a supplemental loan,” Auerbacher said.
The FHA is also willing to restructure loans. For instance, a property with a $10 million loan and a 7.5 percent interest rate can save around $120,000 a year by refinancing into an FHA loan at today’s rates.
Also, borrowers struggling to make ends meet can request a partial payment of claim. A borrower can argue that the market has changed dramatically since the original FHA loan was closed. Subject to certain program requirements, HUD will reduce the mortgage principal and hold a second mortgage that is payable from project surplus cash.
Once the property is sold or refinanced, the borrower must pay off the first and the second mortgages but can maintain day-to-day control of the property while waiting for the market to improve.
Signs of improvement?
The FHA has been working on a rewrite of the MAP guide, which would codify the many frequently asked questions and lender notices that serve as amendments to the guide. Ultimately, such a move would speed up deal cycle times, which have long been the FHA’s Achilles heel.
At the 2008 MBA/CREF convention in February, Deputy Assistant Secretary for Multifamily Housing John Garvin said the rewrite still had to go through departmental clearance as well as oversight clearance, meaning it’s probably still a year away.
But the administration continues to be hampered by its own bureaucratic structure. Case in point: The FHA requires deal participants to disclose and certify past performance in multifamily mortgage insurance programs through the electronic Active Partners Performance System (APPS). APPS has been so troublesome that last year, legislation was signed into law allowing participants to file paper versions in lieu of using the electronic system.