In the world of commercial real estate finance the preferred property type on which lenders are still making loans are apartments. This should be no surprise (except the part that lenders are still lending) since the apartment has been the golden child of real estate for some time.
And in the world of apartment finance, the top program has been the HUD 221(d)4 program, a combination construction to 40-year permanent loan product available through a select numbers of lenders who obtain government guarantees on the loans.
It has been true for some time that, while the program has been the preferred vehicle for many developers, not everyone uses the program because of its complexity and processing time. In addition, HUD will not approve a new loan in close proximity to a competing project with a guarantee for fear of cannibalizing the rental pool. But still, developers who have cracked the code on 221(d)4 loans love the product and use it as much as they can.
With other sources of construction financing cutting back, particularly at the banks, deal flow and applications through the 221(d)4 program are skyrocketing. It seems that the word has gotten out about the program and many more people are turning to this form of financing for new construction.
The resulting volume of underwriting has begun to strain the back office capacity at these lenders across the country, even to the point where at least one lender has placed a moratorium on new deals until their backlog gets down to a reasonable point. Other lenders will pick up the slack, but the processing times will lengthen as these lenders experience the same capacity issues themselves.
And it is just a matter of time before HUD calls a moratorium on new loans, either as a function of total capacity or in recognition of volume in certain submarkets.
I have a meeting with the HUD office in New Orleans this week and will report back in the next column on how our local markets are looking.
(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.)
