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Improving FHA Financing: MAP Guide Update and MIP Fee Reduction

The last time the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) updated its Multifamily Accelerated Processing (MAP) Guide in 2011, it consolidated all of its program changes and guidance into one document with the ultimate goal of reducing application processing time while appropriately balancing risk to the FHA mortgage insurance portfolio. With its 2016 MAP Guide update just released, HUD hopes to build on that progress as part of its continued efforts to improve and streamline underwriting standards for FHA-insured loans, bring FHA programs to industry standards, promote the development and preservation of affordable housing and further reduce processing time.

With the 2016 update, HUD has rolled all previous notices and letters into the new guide and streamlined the underwriting by making adjustments to reserve requirements, non-critical repair amounts, loan-to-value (LTV) and debt service coverage (DSC) ratios. Although the guide has numerous changes, we will highlight some key ones that have created excitement among users of FHA financing, including the ability to fund more repairs and obtain reduced rates. Separately, we will detail HUD’s recent announcement that it will be reducing mortgage insurance premium (MIP) rates, which should help reduce the overall cost of financing for affordable housing and green development.

Increased Repair Amounts under Sec. 223(f)

Perhaps the most anticipated change in the MAP guide is the increase to the non-critical repair cap. Previously, a borrower using Sec. 223(f) financing could only complete per unit repairs totaling $6,500 times the high cost factor (HCF). Now, the per unit limit to repairs has increased to $15,000 times the HCF, allowing borrowers to fund significantly more improvements without crossing into the “substantial rehabilitation” threshold and triggering Davis Bacon Wage rates. For example: a property in Kansas City, Missouri, could now undertake maximum repairs of $40,500 per unit compared to only $17,550 under the previous guidance.

Replacement Reserve and PCNA Changes

The new requirements for replacement reserves will be based on the first 10 years of the FHA-insured loan as opposed to the first 20 years, as was previously required. However, this does not mean years 11 to 20 will be ignored, as the study period will still be the first full 20 years, it is just that the focus will be on years one to 10. After year 10 the reserve balance could go negative as long as the dollar amount of negative balance does not exceed 50% of the cumulative principal repaid through the future date. This change allows lenders and borrowers to be flexible in picking the right combination of initial deposit to replacement reserve (IDRR) and annual deposit to replacement reserve (ADRR), with the goal of balancing the reserve account for the first 10 years.

Another big change is the introduction of the capital needs assessment (CNA) e-Tool platform. This tool creates an automated process for preparation, review, submission, approval and periodic updating of CNAs and will be used by participating federal and state agencies such as FHA, the U.S. Department of Agriculture (USDA), and state housing finance agencies. The purpose is to allow standardization, automation and data warehousing. Additional benefits include the ability to achieve energy efficiency through benchmarking and real time asset management. The CNA e-Tool is still being finalized and is expected to be available sometime during 2016.

Improved Underwriting Ratios

The new MAP guide has relaxed underwriting ratios for most multifamily property types. Under the 223(f) refinance program, projects with more than 90% rental assistance will benefit from a higher LTV ratio of 90% and lower DSC ratio of 1.11x. Previously, these limits were 87% and 1.15x, respectively. Low-income housing tax credit (LIHTC) properties with achievable tax credit rents that are at least 10% below market rents can now enjoy a LTV of 87% (previously 85%) and DSC of 1.15x (previously 1.176x). Similarly, market rate properties can now go up to 85% LTV (previously 83.3%) and a DSC of 1.176x (previously 1.20x). 

For new construction and substantial rehabilitation projects using the Sec. 221(d)(4) program, market rate properties will now enjoy a higher loan-to-cost (LTC) of 85% (previously 83.3%) and lower DSC of 1.176x (previously 1.20x). Sec. 221(d)(4) is not a value constrained program. Figure 1 presents the specifics of the LTV and DSC changes.

 

Defeasance

Previously, the MAP guide prohibited the recognition of certain costs in a refinance transaction. These costs include defeasance and/or costs associated with the prepayment of derivative instruments. The new guidance allows the payment of these costs utilizing up to 10% of the FHA-insured loan amount.

Streamlined Processing

The new MAP guide has not only brought relief to underwriting standards, it has also provided clarity and improved the application process. For new construction and substantial rehabilitation of affordable and market rate properties using the Sec. 221(d)(4) program, HUD will now allow less than 100% completed plans and specifications to be submitted with the application for firm commitment. The caveat is that 100% complete design documents must be submitted 30 days before closing. Based on the experience of the LIHTC Pilot program which uses this guidance, this may save developers five to seven weeks compared to the standard Sec. 221(d)(4) application process.

Single Underwriting Model

Like its LEAN sibling, MAP is moving toward a single-underwriting model with an eye on improving timing and overall customer experience. Under this approach, applications are assigned to underwriters based on risk and complexity. One underwriter manages the whole process while seeking technical expertise on an as-needed basis. Consolidating underwriting is critical for this model to work and the Multifamily for Tomorrow transformation is a vital cog in implementing this strategy. With the Southwest, Midwest, and Southeast transformations complete, and Northeast and West more than halfway through, FHA is well on its way to lower processing times and improving the overall experience. Early results from regions that have gone through the transformation indicate the work-load sharing program is successfully improving efficiencies and optimizing resources.

Sustainability and Green Underwriting Standards

With the release of the new MAP Guide, HUD now allows 75% of energy savings to be underwritten between pre- and post-rehabilitation. This change has brought HUD closer to the prevailing practices of Fannie Mae and Freddie Mac, both of which have long promoted green underwriting practices. In order to qualify, owners must achieve and maintain industry-recognized green standards such as the U.S. Green Building Council’s (USGBC) LEED, Enterprise Green Communities, and EarthCraft Communities standards, among others. 

Mortgage Insurance Premium Changes

Although not part of the new MAP guide, the reduced MIPs for affordable and green buildings were a welcome change. HUD has reduced both upfront and ongoing MIP for affordable and green projects, with upfront MIP cost reduced by 75% and ongoing by ~45% for a refinance or acquisition. This means that a $15 million refinance loan will save $112,500 in upfront costs and $30,000 in annual costs. Figure 2 summarizes the before and after MIP rates for broadly affordable housing.

 

The updated MAP Guide and MIP reductions should work to provide a smoother path forward for housing developers and help them spend more funds on improving their properties and thus the lives of their tenants. The new Guide is scheduled to be implemented on May 28, 2016, however, waivers for some of the features may be considered before that date.

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