On July 6, 2010, HUD-FHA issued new guidelines to implement a series of changes to its multifamily insurance programs. The guidelines, provided in Mortgagee Letter 2010-21, update underwriting policies, increase lender and underwriter quality review requirements, and align loan application, submission and approval standards.
Some of the underwriting standards have not been updated since the inception of FHA's multifamily programs over 40 years ago. On July 7, 2010, Commissioner David H. Stevens stated that "these program updates will help us to continue serving our mission of providing liquidity to the multifamily market and decent, affordable rental housing to our nation's communities."
Program changes will be implemented as follows:
> i) 60 days after the effective date of the ML for any new pre-applications, (existing or previously submitted pre-application submissions are covered under iii. below),
> ii) up to 120 days for projects with outstanding invitation letters, or such shorter time as the invitation letter provides, so long as a complete application for Firm Commitment can be submitted within the time allowed by the invitation with no extensions, or
> iii) up to 90 days after the effective date of the ML for any complete new applications for direct to Firm Commitments.
According to HUD's announcement plans, the following additional program changes are expected to be promulgated through forthcoming Mortgagee Letters by December 2010:
- Heightened standards for lender and underwriter qualifications
- Update to the Multifamily Accelerated Processing underwriting guide
- Standardization of underwriter's narrative and application file contents
- New Loan committee approval process
By means of the Rule Making Process, HUD-FHA also plans to implement enhanced features in the Multifamily Credit Watch.
- Revised underwriting standards to raise debt service coverage ratios, lower loan to value and loan to cost ratios, increase project reserves and sponsor equity investment, and limit sponsor cash out.
- Underwriting ratios will be targeted to different property types based on their risk profiles, with lower ratios for subsidized affordable housing properties and higher ratios for market rate properties.
- Enhanced verification of property financial performance to decrease opportunities for misrepresentation and fraud.
- Expanded borrower mortgage credit analysis to include a detailed review of contingent liabilities and ballooning term debt that could undermine a sponsor's financial stability.
- Pre-screening of proposals for early identification of transactions that are not feasible or are not likely to proceed to a commitment, allowing staff to focus on a deeper analysis of transactions that will close.
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HUD-FHA Multifamily Risk Mitigation
Mortgagee Letter 2010-21
July 6, 2010