The Federal Housing Administration (FHA) recently unveiled sweeping changes to its multifamily programs, making it tougher on market-rate deals.
As expected, the FHA tweaked underwriting standards for its new construction and refinancing programs, lowering leverage levels, upping debt service requirements, and increasing reserve requirements. The changes were initially announced at the MBA/CREF convention in February.
But the FHA also unveiled a clearinghouse of other risk-management initiatives in announcing the underwriting changes. In general, as a result of the new provisions, multifamily borrowers will have to produce more documentation, lenders will have to spend more time analyzing deals, and the overall process of securing a loan has grown to include a few new steps.
Clearing Backlog but Causing Delays
The changes are designed to clear out the FHA’s congested pipeline of market-rate deals—to better sort the wheat from the chaff—which could ultimately make the process more efficient. But many in the industry fear that the new requirements may have the opposite effect.
“The changes are going to have the intended consequence of making it harder, and slightly less palatable, for those looking to develop market-rate housing to use HUD,” says Nick Gesue, a senior vice president and director at Columbus, Ohio-based FHA lender Lancaster Pollard. “I think the process is going to be a lot slower.”
Taking a page out of the government-sponsored enterprise's model, the FHA will delegate more responsibility to its network of lenders, which should help deal processing in the long term. But with so many changes unveiled at once, it may take a little while before those efficiencies are realized.
“It’s short-term pain for long-term gain. There will be a real learning curve for the lenders and for HUD staff, but is it a six-month or three-year learning curve?” says Phil Melton, who leads the FHA division of Charlotte, N.C.-based Grandbridge Real Estate Capital. “That will make a huge difference as to whether the FHA continues to be a big player, or as new alternatives come back to the market, whether they will become a lender of last resort again.”
Two of the biggest changes include a “new concept planning meeting” between lender and HUD staff (already enacted), and a proposed new loan committee within HUD that the agency hopes to enact in the second half of the year.
The new concept planning meeting “will put extra burden on HUD staff that are already burdened, and that’s a concern,” Gesue says. “This is almost like a pre-pre-app—you may have to spend a month going back and forth on this initial concept meeting. My concern is that this becomes a third stage of the application process.”
In the second half, the FHA hopes to roll out an internal HUD loan committee that would align field offices with headquarters in reviewing particularly complex transactions. The idea is to ensure consistent underwriting throughout all field offices.
The big question is whether the FHA has the staff to accommodate some of these changes. While the FHA has a hiring goal on its single-family side, those expansion plans haven’t made it to the multifamily division. The already-understaffed FHA has been under a casual hiring freeze for its multifamily divisions over the past 18 months.
When asked how much it has grown the multifamily staff in the last year, HUD declined to produce any numbers. The FHA is hiring multifamily staff only “where critical vacancies exist,” a spokesman explained. “The goal is to utilize resources in the most efficient manner during a period of flat or declining funding.”
Translation: They're still understaffed. And there will undoubtedly be a learning curve at the staff-level as the agency deals with some of these changes. For instance, some FHA staff will need to be trained in analyzing REO schedules during the credit review process.
“They need more and better staff, across both single-family and multifamily,” says Doug Moritz, associate vice president of multifamily at the Washington, D.C.-based Mortgage Bankers Association. “And it’s not only staff, but it’s training the staff, and adding to the technology, that they need to do.”
To read more on the recent FHA changes read "Sizing Up the FHA's Recent and Proposed Changes."