Housing Stimulus: FHA Lowers Rates for Affordable and Energy Efficient Properties

Reduce rates, spur activity. That seems to be the thinking in Washington these days regarding the development of affordable and energy efficient multifamily housing. And to those in the housing industry, that thinking is definitely welcome.

In the last edition of The Capital Issue, we detailed how the new Multifamily Accelerated Processing (MAP) Guide published by the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) continues FHA’s efforts to improve and streamline underwriting standards for FHA-insured loans. In addition, we provided a general overview of the mortgage insurance premium (MIP) rate reductions. In this article, we provide further detail on the requirements for obtaining reduced MIP rates for both affordable and energy efficient housing. 

In January of this year, HUD announced new initiatives to further promote the financing of affordable housing and energy efficient housing. Through the reduction of MIP rates for properties in these two categories, HUD is firmly standing behind its mandate to provide affordable, quality housing to renters nationwide. HUD estimates that the rate reductions will equate to the rehabilitation of 12,000 affordable units each year. The new MIP rates went into effect on April 1, 2016, and housing developers are already starting to enjoy the benefits. 

Reduced Rates for Affordable Projects

In a clear effort to be as inclusive as possible, FHA has reduced mortgage insurance premiums for a broad category of affordable projects. Most projects demonstrating at least a 10% level of affordability will qualify for reduced rates. The lowest MIP rates will be available for the projects that have the highest level of affordability and provide the most affordable housing units.

The following criteria outlines FHA’s guidelines for this reduction, which is broken out between two distinct categories. The first, “broadly affordable,” will garner the lowest rates with MIPs of 25 basis points. An “affordable” designation will carry a slightly higher MIP rate of 35 basis points.

Broadly Affordable Designation

For these projects, FHA has lowered annual rates to 25 basis points, which is a reduction of 20 or 25 basis points from previous rates. Broadly affordable is defined as housing with:

  • At least 90% of units covered by a Section (Sec.) 8 project-based rental assistance (PBRA) contract or other federal rental assistance program contract serving very low income residents, with a remaining term of at least 15 years; or
  • At least 90% of its units covered by an affordability use restriction under the low-income housing tax credit (LIHTC) program or similar state or locally sponsored program. A recorded regulatory agreement must also be in effect for at least 15 years after final endorsement.

Affordable Designation

For affordable mixed-income properties that implement partial LIHTC, partial Sec. 8, inclusionary zoning, or other local affordability requirements, FHA has lowered annual rates to 35 basis points. The effective reduction is a 10-to-35 basis point decrease from previous rates. The qualifications for the affordable mixed-income use properties are further detailed as follows:

  • Evidence of a deed covenant or housing ordinance on “inclusionary zoning” at the subject property to evidence the affordable unit set-asides. A minimum of 10% of the units must be affordable to a family at 80% area median income (AMI), with rents no more than 30% of the income at that level. The affordability set-aside must be in effect for at least 30 years after final endorsement of the FHA-insured mortgage and be recorded in a regulatory agreement; or
  • Demonstrate that the project has between 10% and 90% of units covered by a Sec. 8 PBRA contract or other state or federal rental assistance program contract serving very low-income residents, with a remaining term of at least 15 years; or
  • Demonstrate that the project has between 10% and 90% of its units covered by an affordability use restriction under the LIHTC program or similar state or locally sponsored program, with rents sized at no greater than 30% of the income eligible for occupancy under the LIHTC program, with a recorded regulatory agreement in effect for at least 15 years after final endorsement.
  • Additionally, the project must also agree to accept voucher holders under Sec. 8 or other federal program voucher holders as residents for vacancies in units not covered by project-based Sec. 8.

Not only has FHA implemented the reduction of the annual MIP rates, but the agency has also lowered the upfront rates from a previous high of 100 basis points to as low as 25 basis points. As affordable units are leaving the system, more than 300,000 per year due to aging stock, FHA is diligently looking to reverse this trend. Furthermore, FHA has demonstrated its concern by implementing several programs in recent years, including the Rental Assistance Demonstration (RAD) program and the LIHTC Pilot Program. We should expect FHA to continue to confront this issue with innovative programs and policies such as the MIP rate reduction.

Energy Efficient Housing

In addition to promoting affordable housing, FHA is motivated to encourage energy efficient housing. Its new green and energy efficient initiative can be a great option for the new construction or substantial rehabilitation of market-rate projects. With appropriate initial planning, the expectation is that new construction projects can qualify rather easily. For substantial rehabilitation projects, borrowers should research the feasibility of implementing efficiency changes to meet the energy compliance benchmarks. The new MIP rates for all programs under the green and energy efficient designation will be 25 basis points, down from as high as 100 previously (Figure 1).

FHA is setting participants up for success by including a broad category of energy efficient programs.  The inclusivity of this initiative will allow many projects to meet the requirements. Acceptable qualifications for the reduction include six distinct industry recognized standards and leaves the door open for the approval of additional programs as well. 

The following are programs that will qualify under the initiative:

  • U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) for Homes, LEED for Homes Midrise and LEED for New Construction
  • EarthCraft’s House and Multifamily
  • Earth Advantage New Homes
  • Greenpoint’s Rated New Home and Rated Existing Home (whole home or whole building label)
  • National Green Building Standard (NGBS)
  • Others approved at FHA’s sole discretion

Seeking early assistance from specialized architects and consultants will be critical to ensure that the design and build appropriately meet the necessary requirements to qualify for the reduced MIP.

Substantial rehabilitation projects that wish to qualify for the program will likely need to include significant renovations such as heating and cooling systems, energy efficient windows, modern insulation and appliances. If an energy audit finds the proposed rehabilitation to meet the efficiency requirements, 75% of the projected savings may be recognized by FHA. The savings are eligible in the underwriting process before any changes to the physical plant have occurred, which makes the energy-focused rehabilitation even more attractive. It should be noted, however, that simple kitchen and bathroom renovations are unlikely to meet the required standards and will not provide recognizable utility savings. Owners engaging in these projects can expect not only the MIP reduction but also reduced operating costs through energy efficient components. This could make the allure of energy efficient building appealing to affordable properties as well. 

FHA is clearly motivated to make strides in both providing more affordable housing as well as partnering on projects that are highly energy efficient. Expect transactions with these attributes to be very well received.

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