One of my HUD lenders recently sent me an e-mail from the Mortgage Bankers Association informing market participants about possible changes to the popular 221(d)4 apartment construction program. Much of Cheryl Malloy’s e-mail is reproduced verbatim so that I get the message right, because this could lead to a major change in direction for one of the only apartment construction programs available in the country right now.
It was reported that Deputy Assistant Secretary for Multifamily Housing Carol Galante told representatives of more than 10 industry trade groups that HUD will be making changes to the multifamily program based on the need to "target and tighten" the department's multifamily activities. Galante said the changes will be made in four major areas:
— underwriting and risk management
— addressing problem loans in the portfolio
— expediting the processing of new loans
— instituting performance measures in headquarters and field offices to reflect priorities
There are no official details available yet on how these changes will be implemented, though there are rumors of increased debt coverage ratio requirements and other safety measures.
Discussing the basis for the changes, Galante reported that the unassisted, market rate business had become "increasingly troubled" and the department has a significant number of unstabilized new construction projects. She added that, in the last two months, default rates have climbed from 3% to 6%. Galante also referenced the current market environment in which property values have dropped significantly and other financing sources have tightened underwriting. She noted that the Department's new chief credit officer and FHA commissioner have been involved in the discussions, and the consensus is that the prudent approach would be to proactively address issues.
There will be an open discussion of the proposed changes next week at the MBA's annual CREF/Multifamily Convention in Las Vegas. Perhaps we will get more details at that time.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
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