HUD Lending Provides Certainty in Times of Crisis: Q&A

Dwight Capital Managing Principal Josh Sasouness on how a combination of HUD’s approach and historically low interest rates has boosted commitments since the onset of COVID-19.

Josh Sasouness, Managing Principal, Dwight Capital. Image courtesy of Dwight Capital

The economic disruption propelled by the pandemic has prompted numerous shifts in deal volume and lenders’ approach. While certain sectors have borne the brunt of the crisis, the multifamily industry hasn’t lost its footing.

Multi-Housing News spoke with Dwight Capital Managing Principal Josh Sasouness about U.S. Department of Housing and Urban Development loans and why this financing alternative is thriving amid COVID-19. According to Sasouness, “HUD has issued more commitments through the third quarter of its 2020 fiscal year than any other full year in history.”

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Dwight Capital has remained active despite the ongoing health and economic crisis. How has deal flow shifted since the onset of the pandemic?

Sasouness:  Not only did HUD maintain its pre-pandemic terms, but HUD’s COVID-19 mitigation requirements were very reasonable and much more palatable to our clients relative to the agencies. Between HUD’s approach and historically low interest rates, our pipeline has doubled in size over the last five months.

Have you noticed any change in demand for new construction/rehabilitation loans in recent months?

Sasouness: Traditional construction lenders have pulled back and are either offering less favorable terms or are now out of the market completely. As a result, the HUD 221(d)(4) construction lending program has certainly become more popular since the pandemic began. Some developers believe that by the time they hit lease-up in 18-24 months, COVID-19 will be behind us.

What about acquisition and refinance deals?

Sasouness: Acquisitions have slowed down as the pandemic created a pricing gap between buyers and sellers, but that gap is continually shrinking. Primarily as a result of the historically low interest rate environment, refinancing volumes are off the charts. HUD has issued more commitments through the third quarter of its 2020 fiscal year than any other full year in history.

What is your take on HUD’s multifamily mortgage payment relief under the CARES Act?

Sasouness: Fair and reasonable. Forbearance is available to all HUD-insured multifamily assets and a Ginnie Mae facility has been set up for servicers who are overburdened by forbearance requests. Thankfully, we have not seen many forbearance requests by our clients, primarily due to the resiliency of the multifamily asset class amid the pandemic. But that can change at any time, and we must be prepared.

What can you tell us about the mitigating constraints HUD has implemented to offset risk for market-rate and affordable transactions?

Sasouness: HUD has implemented a nine-month interest reserve escrow that can be utilized if delinquencies spike. However, if the property maintains the minimum programmatic debt service coverage ratio—1.11 to 1.176 depending on affordability—for months 4, 5 and 6 after closing (on a trailing three-month basis after six months), the escrow is released in full. HUD now also requires a 250 percent non-critical repair escrow to ensure borrowers follow through with the repairs they committed to completing at closing.

What are the advantages of HUD financing over other government-backed financing alternatives?

Sasouness: HUD’s terms rarely ever change, unlike the agencies. HUD is also known as a reliable source of financing even in times of crisis. Leverage, term, amortization and debt-service coverage ratio covenants have all remained constant throughout the pandemic, and aside from a sudden spike in interest rate spreads during the first 45 to 60 days of the pandemic, rates have only fallen.

One of the main particularities is the very low interest rate that is fixed throughout a 35-year term. HUD rates are consistently over 0.5 percent lower than a standard 10-year Fannie Mae loan and well over 1.0 percent lower than a 30-year Fannie Mae loan.

What are the basic requirements for a multifamily property/project to be eligible for the HUD financing program?

Sasouness: Almost every single multifamily property in the country is eligible for HUD financing, but some properties require more effort and cost to become eligible. For example, in order to qualify for a HUD loan, a property must be in a position to endure a 35-year term.  For a property that’s 40 to 50 years old, hundreds of thousands of dollars of repairs may be required. This is a nonstarter for many owners. Or when a loan is smaller (under $5 million), the transaction costs associated with closing a HUD loan may be prohibitive. We work with both experienced HUD financing clients and clients who are exploring HUD financings for the first time and help them assess if a HUD financing is the right fit for their property and needs.

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