Andrew Dale Director, Prudential Mortgage Capital Co., Centennial
Colorado’s broad appeal helped propel it to No. 1 on the 2016 U.S News & World Report Best Places to Live ranking. Population growth has helped spur construction of new high-end multifamily properties but the state is struggling with a shortage of affordable and workforce housing.
Increasing land and construction costs have sent the cost to develop multifamily properties skyrocketing in recent years, creating a difficult environment to develop affordable and market-rate communities. In response, developers in Colorado and nationwide have focused on high-end housing in prime locations with higher price points, where Americans’ preferences to live close to urban centers and to be more mobile are fueling demand.
Beginning April 1, the Federal Housing Administration enacted two major changes to its guidelines that should help stimulate the development of affordable and energy-efficient communities.
First, FHA revised its mortgage insurance premium schedule, lowering the cost of capital and making it more financially practical for developers to build or rehabilitate quality affordable housing and market-rate, energy-efficient communities. The revised MIP schedule reduces upfront costs and effective interest rates for affordable and energy-efficient properties, while also increasing loan proceeds in many situations.
Additionally, the U.S. Department of Housing and Urban Development issued an updated Multifamily Accelerated Processing guide, which allows property owners to borrow at higher leverage levels for market-rate properties. It also streamlines the processing requirements for affordable and market-rate loans, making it more cost effective to borrow.
Combined, these changes are intended to make FHA financing terms more attractive to property owners and developers for constructing energy efficient, market-rate properties, affordable properties and refinancing affordable properties, particularly 100 percent Section 8. Designated FHA lenders can provide property owners with expert guidance on these new guidelines.
Colorado’s multifamily market has clearly heated up with an influx of people moving to the state and to Denver in particular. These changes in federal guidelines should help spur the development of affordable and workforce multifamily communities by increasing loan proceeds and reducing the effective interest rates of FHA loans for many properties.”
Why make these changes now? FHA recognizes the national affordable housing shortage and has emphasized its desire to be more proactive in building both affordable and energy efficient properties, and these policy changes are designed to encourage owners and builders to undertake such projects.
A breakdown of the new programs follows.
So what exactly is an MIP? The FHA does not provide direct loans to property owners. Instead, it insures loans made by FHA-approved mortgage originators. To compensate for the risk of default, the FHA charges an initial fee and an annual mortgage insurance premium, or MIP. The premiums vary depending on the type of loan. A construction loan carries a different premium than a refinance, for example.
However, an MIP is separate and apart from the mortgage rate and is not part of amortization. Rather, it is based on the unpaid principal balance of the loan, meaning it declines as the loan amortizes.
Historically, the FHA charged MIP rates of 0.65 percent for market rate construction and substantial rehabilitation loans and 0.6 percent for refinances. Under the new schedule, the MIP rate for all projects is now 0.25 percent provided they meet certain energy-efficient standards.
Regardless of energy efficiency, properties can still qualify for reduced premiums. Rates are being lowered from 0.45 percent to between 0.25 to 0.35 percent depending on the level of affordability.
What about the MAP guide? Under the new guidelines, owners and developers of market-rate properties can borrow at higher leverage rates. For example, the guidelines increased leverage on a market rate construction or substantial rehabilitation project from 83.3 percent loan-to-cost and 1.2 times minimum debt service coverage to 85 percent LTC and 1.18 times DSC. Similar increases were implemented for acquisition and refinance loans.
The new guidelines also allow for significantly higher repair/ upgrade costs, allowing properties to undergo moderate rehabilitation without having to pay Davis-Bacon wages. In Denver, the maximum repairs allowed under the federal 223(f) program, which is for construction and substantial rehabilitation projects, has increased to $40,500 per unit from $17,550 per unit. Certain guidelines apply.
FHA also changed its approach to calculating replacement reserves for construction and refinance loans, which is expected to reduce reserve requirements in many situations.
Another benefit of the new MAP guidelines is a streamlined processing protocol for affordable and certain market-rate developments. Certain projects undertaken by experienced FHA developers may qualify for bypassing the pre-application stage and submitting plans and specs on a delayed schedule.
Colorado’s multifamily market has clearly heated up with an influx of people moving to the state and to Denver in particular. These changes in federal guidelines should help spur the development of affordable and workforce multifamily communities by increasing loan proceeds and reducing the effective interest rates of FHA loans for many properties.
