HUD Modernizes FHA with LIHTC Program

By Anuradha Kher, Online News EditorWashington, D.C.–The U.S. Department of Housing and Urban Development (HUD) recently issued the Mortgagee Letter 2008-19, streamlining the processing of Federal Housing Administration (FHA) multifamily insurance applications with Low Income Housing Tax Credits (LIHTC).The Mortgagee Letter includes important changes to FHA processing, which will provide flexibility and cut costs, making FHA insurance a competitive financing vehicle for affordable rental properties with Low Income Housing Tax Credits. “There are two very significant benefits that come with this letter,” Cathy Pharis, director at Deutsche Bank Berkshire Mortgage, tells MHN. “For one, FHA will be able to commit on loans much earlier in the development cycle, and secondly, by not requiring investors to post all of the equity up-front, developers will be able to raise more funds through higher pricing on the tax credits.”A key feature of the streamlined process permits the deferred submission of full plans and specifications, which will better align the FHA process with the tax credit process and will allow borrowers to lock rates earlier. Another significant change is that 20 percent of the tax credit equity (reduced from 100 percent) must be funded at the time of HUD’s initial endorsement, with the remainder allowed to be paid in over the development period—as is the case for most conventional financing. “For lenders, the step to modernize the process for combining FHA insurance with LIHTC results in a faster, more efficient way of financing these properties.  It is structured to fit much more readily into the development process,” says Pharis.Other changes introduced by the Mortgagee Letter permit firm commitments to be conditioned, under certain defined circumstances, upon HUD-2530 approval. This approval must be received prior to initial endorsement, but the ability to condition firm commitments will provide timing flexibility to transactions and will improve borrowers’ chances of obtaining favorable rate locks and equity pricing. In addition, the Mortgagee Letter requires the designation of a LIHTC Coordinator in each Multifamily Hub and Program Center to work with credit allocation agencies and developers to better synchronize tax credit funding cycles with FHA’s application process.“We think this memo goes a long way, making huge strides in marrying FHA Mortgage Insurance with Low Income Housing Tax Credits. Many more LIHTC developers will now be willing and able to utilize the attractive attributes of the FHA programs,” adds Pharis.Kieran Quinn, chairman of MBA, says, “The improvements will assist the tax credit market by removing some of the impediments to financing with FHA insurance as well as eliminating unnecessary costs in the program.” The Mortgagee Letter is effective July 22 and should immediately have an impact on properties being financed. “There are, however, a number of legislative impediments to using FHA insurance with tax credits that need to be resolved,” continued Quinn. “Most of those issues were addressed in the House version of the omnibus housing bill. We are hopeful that Congress will include those provisions in its final version of a housing bill this year.”