FHA issued restrictive and costly new requirements (Notice H-2011-36 and FHA Mortgagee Letter ML-2011-40) that apply to loans of more than $50 million.
The changes, issued Dec. 29, include requiring higher levels of net worth, liquidity and experience for principals, changes in property valuation and additional delays in the release of cash proceeds. The requirements increase as loan size increases, and even more stringent requirements are imposed for loans over $60 million. For those larger loans, FHA will reduce the size of the loan based on the project’s loan-to-cost (LTC) ratio, and it will require higher debt service coverage levels.
Areas of most concern are the requirements for additional cash reserves and longer reserve periods during property lease-up and stabilization.
The new requirements apply to all new and pending applications that have not already received a firm commitment. Different and less punitive requirements are imposed on affordable properties. For refinancings, the thresholds increase to $50 million and $75 million and they are less restrictive than new construction loans.
NAA/NMHC have objected to the new policies being issued prior to stakeholders having an opportunity to comment. While NAA/NMHC support FHA’s goal to manage its credit risk, we believe these changes will likely have the opposite effect. Credit-worthy developers would seek alternative financing sources, reducing the overall credit quality of FHA’s mortgage insurance loan pool.
NAA/NMHC will meet with the HUD Secretary and FHA Commissioner in the coming weeks to discuss this and other issues related to the FHA backlog. NAA/NMHC have also requested a separate meeting with FHA program staff to further discuss our serious concerns with the new guidance.