Proposed changes from HUD for New Construction

HUD is planning on changing the underwriting parameters of the 221d4 program from 90% of cost and a DSCR of 1.11 to 83.3% of cost and a DSCR of 1.20 for market rate new construction or substantial rehab projects. They are planning this change in response to rising default rates in the program. What do you think? How will it help or hurt our industry?

HUD is proposing these changes, as you stated, but I am hopeful FHA can come to a meaningful resolution of half and half.

Changes from a 1.11x to a 1.20x DSC is not going to impact proceeds since it's still on a 40yr amortization schedule.

The 90% of cost down to 83.5% of cost is something that is being discussed very heavily. In general, the 90% of cost doesn't take into account operating deficits, working capital, and other non-mortgageable costs. It is the hope that if HUD drops the cost down to 83.5% that HUD count all of these additional costs that are typically nonmortgagable in the mortgage.

In general though, most mortgages, especially in SoCal, are restricted based on Statutory Limits.

NonRecourse financing is still a blessing so even if the borrower has 20% cash equity in the deal, it's still not a bad program at the end of the day.

Allan Freedman
Berkadia Commercial Mortgage
310-209-3243

I agree...long term (40 years) non-recourse money is a great program feature. There is talk of changing the statutories and adjusting for the land value. That should help with the statutories in high cost urban areas.

Holly Bray
Love Funding
202-887-1849

As an owner/operator of a B/C class portfolio, I think anything that gives the overbuilt sunbelt MSAs time to breath before another onslaught of new construction is a good thing! Let's get back up to 95+% from our current 87% in Dallas and 85% in Houston before we start filling the pipeline again.

Ian, we have been finding that HUD is swamped with new construction loan requests and they are cherry picking the deals. We learned from Baltimore last week that last year they received 20 new construction loan requests and rejected 11 of them.

On another note, HUD sent out a Mortgagee Letter on Friday of last week amending the calculation for the Statutory Mortgage Limits. They will allow you to add the warranted price of the land to the stat limits. This will help folks in high cost areas like New York City, San Francisco, Chicago etc.

Holly Bray
Love Funding
202-887-1849

Does anyone know of a timeline associated with these proposed changes?
thanks,
Les

I'm not surprised, considering they're one of the few who will still lend on new construction. Selfishly, I'm glad to hear they're turning deals away, though I recognize that less liquidity in the market in general will probably be a problem when we try to sell or refinance something.

The current state of affairs at HUD, although a God Sent to the Industry, create another series of problems. HUD moves at its own pace, disimiliar to that of private industry underwriting. I believe frequently their holding patterns are capital market driven, as well as federal civil servant mentality driven.

I have been resourceful in securing a "position" as a "facilitator" within the HNWI & Private Capital Funds Arena, and have participated in 2 closings in the Multi/Family and Senior Living Programs. I have 6 addl projects in Underwriting, clients
have 10% "paid in" capital in all the deals.
Each client has preferred to stay away from HUD at this time until there is a clearer performance history.
Please feel free to contact me should you have clients interested
in private funding. All deals stand on there on Merits, and in that context, important components are: experience, liquidity,
past performance and the submitted projects exit strategy.
My email: [email protected][/b]
I look forward to all comments and mail. Include email & phone numbers.

All the Best,
Terry Smith

HUD's track record varies by the HUD office. I believe it is imperative to work with a lender that has a lot of HUD experience and work closely with the individual HUD office. Private funding is great if you can afford it. There is still something to say for long term, non-recourse, assumable debt. Especially at such low interest rates.

Holly Bray
Love Funding
202-887-1849

You speak to the d4 program here but does this impact the % ltv and dcr for a non profit sponsor? Will a nfp be allowed to ramp up these percentages by using the d3 window instead of the more typical d4?

My thanks.

Good question about non-profits.

The proposed changes to the 221d4 program do not change for 100% L8 deals - still lower of 90% of cost or DSCR of 1.11. My guess is that if there are 100% L8 deals being done under 221d4 they will be substantial rehabs of existing properties. The risk management proposal for LIHTC deals is to lower the loan to cost to 87% and the DSCR of 1.15.

I have not heard any talk of proposed changes to the 221d3 program. If and when I do I will post a note.

Holly Bray
Love Funding
202-887-1849