MBA Commends FHA on Housing Tax Credit Program

MBA (7/23/2008 ) Vasquez, Jason
HUD yesterday issued Mortgagee Letter 2008-19, which streamlines processing of FHA multifamily insurance applications with Low Income Housing Tax Credits. The Mortgage Bankers Association commended HUD, saying the letter incorporates important changes to FHA processing that will provide flexibility and cut costs.
MBA Chairman Kieran Quinn, CMB, said the changes will enhance FHA insurance as a “very competitive financing vehicle for affordable rental properties with low income housing tax credits.”

“I want to thank FHA Commissioner Brian Montgomery and John Garvin, his senior advisor and deputy assistant secretary for multifamily housing programs, for taking a leadership role on this issue. This 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,” Quinn said. “This is a major step forward in modernizing and enhancing FHA processes and will make it much easier to combine tax credits with FHA insurance, producing more affordable housing at a lower cost.”

A key feature of the streamlined process permits deferred submission of full plans and specifications, which HUD said would better align the FHA process with the tax credit process and 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.

“This provision alone will significantly increase the tax credit proceeds for these properties and will allow many more projects to be feasible,” Quinn said. “Investors will pay more for the tax credits if they can phase in the purchase price over time. This is critical for the feasibility of many of these projects and will bring new entrants into the FHA-insured market.”

Other changes 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.

The Mortgagee Letter became effective yesterday and should immediately have an impact on properties being financed, Quinn said.

“There are, however, a number of legislative impediments to using FHA insurance with tax credits that need to be resolved,” Quinn said. “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.”

With the changes outlined in the Mortgagee Letter, along with the legislative changes under consideration, a number of affordable rental properties that have not been able to find financing at terms that would allow the development to move forward will now be built, Quinn said.

“This is an extremely challenging time for the tax credit program,” Quinn said. “At the same time that there are fewer sources of financing, investors are demanding higher returns and interest rates are higher. With these adverse market conditions, it has become more difficult to make these developments work. FHA should be commended for understanding the need for the FHA multifamily programs in this market and stepping in to improve their product.”