The Federal Housing Administration’s (FHA) flagship products are the Sec. 221(d)(3) and (d)(4) programs, which provide mortgage loan insurance for new construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, the elderly, and the handicapped.
“That product is their shining star,” said Mark Dellonte, president of Love Financing. “I think it’s one of the best financing vehicles in the market.”
Sec. 221(d) programs feature a 40-year amortization period and are non-recourse during both the construction and the permanent phases. Nonrecourse means that if the borrower defaults and its collateral doesn’t cover the outstanding balance, then the borrower has no further liability for the loan. Since the FHA insures the loan, the lender would be covered for the loss.
“Most construction loans would have recourse,” said Bruce Minchey, chief FHA underwriter at KeyCorp Real Estate Capital Markets, Inc. The ability to lock in the interest rate when the construction loan is closed is a huge plus. “You don’t have the interest rate risk as you go through construction, which could be 12 to 18 months or longer.”
In the healthcare field, the FHA’s flagship is the Sec. 232 program, for the construction or substantial rehabilitation of nursing homes, intermediate care facilities, board-andcare homes, and assisted-living facilities.
“Nursing homes in particular have other sources available to them, but not at the interest rates that are available under the FHA program,” said Brian Pollard, president of Lancaster Pollard. “So FHA truly provides, with that credit enhancement, with that guarantee, a real value-add to a nursing home owner/operator.”
The FHA’s healthcare programs (hospitals, nursing homes, assisted-living facilities) are as popular as its 221(d)(4) program, since many capital providers, such as conduit lenders, Fannie Mae, and Freddie Mac, rarely serve this market segment.
Marie Head, president of Prudential Huntoon Paige, is helping to modernize Sec. 232 as chair of a Mortgage Bankers Association FHA-focused committee, and as a member of the nonprofit Committee on Healthcare Finance. One proposal would allow borrowers to use accounts receivable financing in the 232 program, which most conventional lenders currently allow. “There are so many receivables coming in on these types of properties, and to be able to leverage that would be great for borrowers and operators of those facilities,” Head said.
Another change would relax the level of professional liability insurance that the FHA currently requires of its borrowers. “FHA issued some instructions years ago which required certain levels of professional liability insurance, and a lot of people don’t maintain those levels; it’s very expensive,” she said. “A lot of people were put off and wouldn’t come into the program because they had to do that.”