COVER STORY, APRIL 2010

MULTIFAMILY FINANCING UPDATE
FHA/HUD programs fills the money void for some.
Carolyn Whatley

In the FHA/HUD financing world, it didn’t matter if Punxsutawney Phil saw his shadow, because there is no credit freeze at HUD. FHA-insured programs are performing the vital role of filling the financing void for multifamily properties across the country. Production has increased to levels never experienced by most employees working within the Agency. Some states, such as Florida, are seeing a balance between new construction and refinance activity; while others are seeing refinance applications take the lead. Mixed income properties, with multiple sources in the capital stack, are a growing trend in Georgia for new construction applications. Developers should discuss markets with their FHA-approved lender to ascertain if there are any issues within the insured portfolio for the subject market and if there are applications in the pipeline that might compete during lease-up.

FHA is being more vigilant with asset management and being pro-active when problems arise. FHA offers insurance on loans originated by approved lenders, which facilitates the financing of multifamily properties nationwide. The loans are non-recourse and fully amortizing for 35 to 40 years, depending on the program. Financing is available for new construction, sub-rehab, refinance and acquisition for properties with five or more units, including affordable and market rate housing. Currently, the underwriting parameters for new construction include the lesser of 1.11:1 DCR; 90 percent of Allowable Replacement Costs; or the Statutory Loan Limits based on allowable costs. For refinance, the limitations are 85 percent LTV; 1.17:1 DCR; Greater of Cost to Refinance or 80 percent LTV; or Statutory Loan Limits, whichever is less. Acquisition parameters include the lesser of 85 percent LTV; 85 percent of Acquisition Costs including transaction costs; or Statutory Loan Limits. HUD has proposed changes to the programs as a means of addressing increases in the default rates and the rapidly emerging pipeline.  The industry has provided comments on the proposed changes and is awaiting final determination by HUD. Ultimate implementation is expected to occur during the month of May.

Representatives from Freddie Mac’s Southeast region report that they are preparing for the worst in 2010 by increasing asset management resources and loan loss reserves. However, after touring in the field in North Carolina, he is finding that borrowers are experiencing 95 percent occupancies at properties and are seeing revenues increase. Generally, if a borrower has 10 or more properties, it will be a mix of a few that are performing very well, along with those that are at status quo and a few that are struggling a bit. There is a strong sense of optimism outside of the tough markets. Cash-out loans can still be had with Freddie Mac financing based on a 75 percent LTV and a 1.30:1 DCR. Freddie Mac’s volume is expected to be around $12 to $15 billion, down from prior years.

The Economics and Mortgage Market Analysis (March Report) provided by Doug Duncan and Orawin T. Velz at Fannie Mae, provides a current overview of the various components of the economy that influence job growth and subsequent demand for housing. The authors view the housing setback to be temporary and expect activity to rebound later in the year, at a lower trajectory than previously thought.  Overall, their U.S. outlook calls for moderate economic growth of 3 percent in 2010, compared with 3.2 percent in a previous forecast. While consumer-spending growth was revised slightly lower in the fourth quarter of last year, the current quarter should show improvement. February chain store sales posted another sizable gain over reports of 1 year ago — the fifth time in the last 6 months.

The report notes that consumers refuse to believe that the recession is over and will be looking for sustained job growth to convince them otherwise. Temporary employment has posted healthy gains for the fifth consecutive month and the authors expect substantial job gains in March as weather improves and census hiring picks up substantially.

The most encouraging part of the revision in GDP was a sizable upward revision to non-residential business investment. Investments in equipment and software posted the fastest increases since the first quarter of 2000, but are expected to slow down in the first half of this year. February marked 7 consecutive months of expanding manufacturing activity according to the Institute for Supply Management. The residential sector continues to struggle, however, January sales remained nearly 12 percent above their record low. With financial conditions improving in recent months, a strong rebound is anticipated in the second half of the year, with an expected growth rate of about 10 percent.

The Beige Book, which summarizes regional conditions across the 12 Fed districts, reported weak demand for loans, as well as continued caution about lending on the part of banks. These conditions are not expected to improve anytime soon and will likely continue to constrain consumer spending growth going forward. Consumer debt increased in January as non-revolving credit, such as student loans from the Department of Education, was made available. It is believed this increase is temporary.

On the heels of flat readings in February, the report concluded that inflation poses no risk in the near term. It is expected that the Fed will hold the federal funds rate unchanged for the balance of 2010.

While clearly the economic outlook remains mixed, an equity panel at the National Multi Housing Council Conference held in Boca Raton, FL, reported that foreign investors believe this is the ideal time to invest in U.S. multifamily properties. Going forward, the product will be well-positioned for increased revenues. Development opportunities will return in those markets that have not seen any meaningful new development in a couple of years. Job growth and consumer confidence remain the key factors that will drive our recovery. As those factors inch forward, we should expect to continue seeing improvement in the overall economy, albeit slow.

Carolyn Whatley is a first vice president, senior loan originator with Love Funding’s Palm Beach, Fla. office.

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