The Federal Housing Administration has issued new multifamily guidelines that standardize the lending process, adjust loan-to-values based on risk and provide more transparency for a property’s financial performance. It is also establishing a loan committee system that will impact most loans.
FHA said it is instituting a loan committee process that will strengthen oversight of multifamily transactions. Hub and national committees will oversee transactions and are expected to “provide oversight for most transactions in the multifamily insurance program, depending on loan size and a project’s number of units.”
Implementation of the committee process is expected by the end of July.
Early in FHA’s loan process, proposals will be pre-screened for feasibility so that its staff resources are focused on transactions likely to close.
Underwriting changes detailed in Mortgagee Letter 2010-21 were the first since the inception of FHA multifamily programs, “some of which are over 40 years old,” FHA Commissioner David H. Stevens said in the statement. He said the updates reflect best practices and standards in the multifamily market.
With the changes, FHA hopes to align standards for loan applications, submissions and approvals.
A standard underwriter’s narrative will be required for FHA transactions. The standard is intended to prevent “uneven and sometimes inadequate analysis of transaction risks.” A standard table of contents will also be needed. Within the next few months, lenders are expected to be required to use the new forms.
FHA said it is raising debt service coverage ratios but cutting loan-to-values as it targets property types based on risk profiles. Lower ratios will be given for subsidized affordable housing properties and higher ratios for market rate properties. Loan-to-cost ratios are also being cut.
Project reserve requirements are being increased as are those for the sponsor’s equity investment.
FHA is additionally beefing up its ability to verify the financial performance of properties in an attempt to make it more difficult to deceive the agency.
Borrowers will be more closely scrutinized for contingent liabilities and ballooning term debt, which could undermine the sponsor’s financial stability. Sponsor cashout is being limited.
An update to the Multifamily Accelerated Processing underwriting guide, which was originally published in 2000, is expected to be issued by Dec. 31. The revised edition will include all changes made since its original publication.
Mortgagee Letter 2010-21
