Weak Real Estate, Finance Markets Impact Mortgage Insurance
In a letter dated July 6, 2010, HUD advised multifamily housing mortgagees of revisions to underwriting standards, policies, and procedures for mortgage insurance under certain Federal Housing Administration (FHA) programs.
According to the letter, the core program underwriting standards have not been adjusted since the inception of the program. The timing of the revisions is deemed appropriate now considering changes in the real estate and financing markets. The changes are intended to mitigate HUD's risk while ensuring the continued availability of FHA insurance and will become effective 60 days from the date of the letter.
Risk Management: Key Driver
On Jan. 6, 2010, the Federal Financial Institutions Examination Council (FFIEC) issued an advisory to remind institutions of expectations regarding sound practices for managing risk. The FFIEC noted the challenging financial environment and stated:
Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings.
Specific patterns have emerged that prompted the FFIEC's cautionary note. Increases in vacancy and delinquency rates and increases in defaults and claims in FHA's portfolio have caused concern for some time, according to the HUD correspondence. Interest in FHA insurance has dramatically increased as other sources of commercial financing have not been available.
The letter further emphasizes FHA's commitment to “play a critical role in restoring health to the multifamily housing market by assisting qualified borrowers to access mortgage financing when private capital is scarce.” With this increased role, the letter notes, comes increased risk and responsibility for the integrity of the FHA mortgage insurance fund.
Separately, HUD is revising lender capitalization, licensing, and monitoring requirements; updating legal documents; and modernizing its information systems and business processes. HUD maintains that it is enhancing those efforts by updating underwriting requirements to better reflect industry standards and best practices.
For the purposes of applying the new underwriting standards and program requirements, the letter defines “affordable housing” as:
1. Projects that have had a recorded regulatory agreement in effect for at least 15 years after final endorsement;
2. Projects that meet at least the minimum Low Income Housing Tax Credit (LIHTC) restrictions of 20 percent of units at 50 percent of the area median income (AMI), or 40 percent of units at 60 percent of AMI, with economic rents (that is, the portion paid by the residents) on those units no greater than LIHTC rents; and
3. Mixed-income projects if the minimum low-income unit rent and occupancy restrictions and regulatory agreement meet the above criteria.
Projects need not use LIHTCs to qualify for affordable underwriting as long as they have, and are in compliance with, a recorded regulatory agreement imposing the minimum low-income occupancy and restricted rent tests in (1), above, and having a term of at least 15 years after final endorsement.
Generally, the revised underwriting standards, reserve, and processing requirements are applicable to transactions processed under the Section 220, 221(d)(3), 231, and 241(a) programs. The underwriting standards for projects that have project-based rental assistance will apply for projects that meet the definition of “affordable housing” above, but also have non-project-based rental assistance for greater than 90 percent of the units.
The letter includes tables that outline, by project type, the changes to Debt Service Coverage Ratio and Changes to Value/Cost Loan Ratios. Details also cover underwriting and refinancing changes by project type.
HUD reports that it will continue to monitor market conditions and the impact of the revised risk mitigation measures it is implementing. Additional guidance will be published based on experience and industry input. Questions about the changes in underwriting standards should be directed to Joyce Allen, Director, Office of Multifamily Development, at (202) 402-2471.
Mortgagee Letter 2010-21 can be found online at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-21ml.pdf.