Caldera Asset Management

back to January 2012 issue

Despite all Borrower Complaints, HUD actually did a Good Job

By Karsang Sherpa and Melinda Hudson
Caldera Asset Management, Denver

When multifamily professionals hear the word HUD (Department of Housing and Urban Development), the first reaction historically has been to cringe. Massive bureaucracy, no transparent decision making process and long execution periods have plagued HUD for years. However, when one looks back over the tumultuous last 4 years, HUD actually played a vital part in keeping the new apartment construction world alive. When the financial world took a dive in the fall of 2008 after Lehman Brothers filed for bankruptcy, loans for new construction and large renovations effectively stopped, and typical bank lending was nonexistent. Into this void, HUD was able to step in and ramp up its pipeline very quickly and partially fill the gap, despite the long lead time for 221(d)(4) transactions.

Compared to 2008, HUD provided more than double the number of construction loans in 2010 and 2011. In spite of its large staff, this is quite an accomplishment especially since 221(d)(4) loan approval processes take an inordinate amount of time.

The number of new HUD insured construction loans in FY 2010 jumped to 32,605, a 128% increase from 2009. Although the numbers dropped 20% to 26,085 in FY 2011, the absolute amount insured per unit increased by 10%, continuing the trend since 2007.

Future of the 221(d)(4)

During the past 90 days, we have heard of a large number of 221(d)(4) applications either being denied soon after the pre-application meeting or somewhere early in the process. This is on top of the significant change in the overall approval process that was implemented in November 2011. The chart above already shows a decline of approximately 10% or $350 million from FY 2010. This brings into question the future volume of the 221(d)(4) program, including the following:

•	*Is HUD purposely slowing down the approval process?*
•	*Is HUD concerned with the increasing per unit cost of the loans it is insuring?*
•	*Is there political pressure to reduce HUD's exposure to new construction?*
•	*As typical construction lenders increase their loan books, are they making the HUD loans less attractive, therefore eating into HUD’s loan book?*

223(a)(7) refinancing program offsetting 221(d)(4) slow downs

So far, any slowdown in the 221(d)(4) program has been more than offset by the massive increase in the 223(a)(7) program that is designed to refinance existing FHA loans.

While the number of 221(d)(4) new construction loans dropped from 173 to 165, with $350 million net reductions in loan amount from FY 2010 to FY 2011, the number of 223(a)(7) refinanced loans increased from 233 to 560, i.e. $3.06 billion additional amount, during the same time frame.

Conclusion

Recent Mortgage Bankers Association studies have indicated a decreasing involvement of U.S. Government in multifamily financing. While this may be true when adding the large number of construction loans done by commercial banks, the above data in conjunction with the recent numbers from Fannie/Freddie show that the Government still controls the majority of multifamily permanent financing market.