The most visible changes recently rolled out by the Federal Housing Administration (FHA) address higher debt service and lower leverage levels on market-rate Sec. 221(d)(4) and Sec. 223(f) loans. But it’s not just underwriting that’s changing: The process of securing an FHA loan has also been tweaked.

One of the biggest process changes is the new project concept meeting, where lenders will have to meet with FHA staff to do an early review of larger market-rate 221(d)(4) deals before submitting a pre-application. Lenders must assemble a long list of documentation for this early review, which HUD staff will then assess.

“I’ve heard it could take a week to two weeks to get back on that, depending on how big the transaction is,” says Phil Melton, who leads the FHA division of Charlotte, N.C.-based Grandbridge Real Estate Capital. “That could potentially slow down things.” 

Here's a look at the specific changes put forth across four arenas that could further slow down the already time-intensive FHA process.  

Credit Review Process

A new mortgage credit review process has now been instituted under the new requirements, which will require all principals in a company to be more heavily scrutinized. Lenders must now do financial reviews on all of a borrowing entity’s principals, analyzing their creditworthiness and schedule of maturing loans, and come up with a financing plan for any projected shortfalls.

FHA lenders concede that this will also likely add to the overall deal cycle time, especially for larger organizations with many principals, or even smaller organizations with very experienced principals.

What’s more, the FHA expanded its definition of a principal in announcing the change. Now, each member of a company’s board is considered a principal—not just the officers such as CEOs—and as a result, the accompanying credit reviews will take a little longer now. “It could be extremely problematic and invasive to a large group of people," says Nick Gesue, a senior vice president and director at Columbus, Ohio-based FHA lender Lancaster Pollard.

Sec. 223(f) Program

The Sec. 223(f) program will now offer leverage levels of 83.3 percent for market-rate deals, down from the previous 85 percent. And debt service coverage ratio (DSCR) requirements are now set at a minimum of 1.20x, up from the former 1.17x.

Occupancy standards for 223(f) loans are now a little tougher as well. Market-rate deals can only be underwritten to a 93 percent occupancy ceiling, down from the previous 95 percent, even if that apartment building has been 99 percent occupied for years. In other words, when determining the size of a loan, underwriters can only assume that a market-rate project will run at 93 percent occupancy.

The FHA will now also require 223(f) borrowers to have three years of their tax returns and property financial statements reviewed by a CPA. In the past, a borrower could just print out their data and certify it. Another new requirement allows HUD to mandate a separate market study—beyond the study included in the appraisal—for 223(f) deals in volatile or declining markets.

This requirement in and of itself raises a number of questions as to who determines the need for the study, what exactly makes a market "volatile," and who has the final say in this process—questions yet to be answered or clarified by HUD. Meanwhile, the Mortgage Bankers Association (MBA) says its members are resigned to the fact that there will be no mediation process under these new requirements and that HUD will have the final word.

Sec. 221(d)(4) Program

Market-rate 221(d)(4) deals must now be underwritten to a 1.20x DSCR, up from the previous 1.11x, while loan-to-cost ratios fall to 83.3 percent, down from the traditional 90 percent.

Another big change concerns how quickly a new deal can fill up, as the FHA is now requiring a tighter absorption period. In the past, 221(d)(4) developments had two years to meet their occupancy goals, now it’s just 18 months. Lenders feel this could particularly hurt deals in solid secondary markets that exhibit strong fundamentals, although lease-ups proceed at a slower pace than in the bigger metros.

Additionally, 221(d)(4) loans will now be required to have their appraisal and market studies done by separate firms.

License to Loan

The FHA is also working on some more changes to its multifamily programs that it expects to propose or enact in the second half of 2010. The biggest proposal surrounds heightened standards for FHA lenders and underwriters, a highly contentious issue in the lender community.

Under the current structure, any lender given an FHA license can make any FHA loan—new construction, refinancing, market-rate, affordable, you name it. But under a proposed change, the FHA would create tiered licenses—some lenders will be able to do new construction deals, for instance, and some will get that privilege revoked.

The MBA recently conducted a study with four of its FHA lenders to see how many people in those organizations would be qualified to make all FHA loans. The results were troubling: Of 41 employees among four different companies, only two were qualified to make all levels of FHA loans.

The FHA proposes assessing each lender’s recent history (the past three years) to determine the level of license. But many argue that the last three years are not a representative sample given the state of the multifamily market during that period.

“We concluded that the standards were too restrictive for the existing base of approved MAP lenders,” says Doug Moritz, associate vice president of multifamily at the Washington, D.C.-based MBA. “The period they use to identify qualifying activity has to be longer. If you’re asking people to show experience based on a three-year period that has seen maybe the biggest decline in 20 years in overall activity, there’s a mismatch there.”

To read more on the recent FHA changes read "New Requirements May Mean Longer Wait for FHA Loans."