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FHA Construction Tightening on the Horizon!

Posted by admin in Brian's Blog, Commercial Real Estate

The FHA has become the most prolific and popular construction debt source since the advent of the credit crunch. But the agency unveiled proposed changes to its 221(d)(4) and 223(f) programs that could make it more difficult for developers to gain access to those programs.

The proposed changes would include:
• Raising the debt service coverage ratio (DSCR) for the popular 221(d)(4) program – Currently the only construction-to-perm capital available during the recession.
• Market-rate deals seeking 221(d)(4) loans would be underwritten to a minimum 1.20x DSCR
• Projects with subsidy levels of 95 percent or greater will still enjoy a 1.11x DSCR
• Low-income tax credit deals would be bumped up to a minimum 1.15x
• Increase the minimum required amount of working capital funds – previously 2 percent (raised to 4 percent) of the total loan amount in a working capital fund
• Increasing the program’s required operating deficit reserves, from three months of debt service to four months.

Changes proposed to the 223(f) program for refinancing or acquisitions
• Market-rate deals will be bumped up to 1.20x – That program, has also been a key source of liquidity for the multifamily industry
• Tax-credit deals and HAP-contract deals will stay at the program’s current level of 1.1765x DSCR

Since FHA has become the dominant lender of new construction throughout the past year or so. With loan requests increasing, concern has been expressed over the broader issues of overbuilding and market weaknesses.

FHA is sensitive to the potential impact of deals already in process and would work on the grandfathering issue.

As seen in the CFO Newsletter….