HUD Changes Apartment Programs

Late on Monday July 6th, 2010 HUD issued Mortgagee Letter 2010-21 which changes the underwriting standards for the HUD’s multifamily insurance programs.

For New Construction and Substantial Rehabilitation Programs:

The loan is the lesser of maximum insurable limits,  83.3% of all allowable costs and a debt service constraint of 1:20.  In addition there are minimum escrow reserves and operating deficit reserves  of 3% of the mortgage amount or as determined by the appraiser.  The working capital which is refunded upon sustaining occupancy, has been increased from 2% to 4%.

For refinance and acquisition loans:

A maximum of 83.3% of value and a 1:20 minimum debt service coverage ratio are now required. Properties must have a minimum of 85% occupancy and exhibit this for the six months prior to final endorsement.  A rent roll will be requested within 30 days of final endorsement and all commitments will have the following language:

The Borrower must submit an updated, certified rent roll detailing the occupancy level at the project. The rent roll must be dated no more than 30 days prior to endorsement.  If HUD determines that the updated rent roll shows a significant change in occupancy from that submitted at the time of application and that was assumed in the loan approval, then this Commitment shall be of no force or effect and will be canceled by HUD.

New Project Concept Meetings

All Section 220, 221(d)(3), 221(d)(4), 231 and 241(a) projects (both market rate and affordable) must participate in a concept meeting with the program center, either in person or by teleconference, where the project has an early review before submitting a pre-application or direct to Firm application.  Concept meetings are not required, but are strongly encouraged for Section 223(f) transactions.  The submissions required from the Lender for a concept meeting review should address the following items, to the extent possible at this preliminary stage.

New Construction / Substantial Rehabilitation Proposals:

  • Section of the Act
  • Number of market rate and affordable units
  • Projected mortgage amount
  • Basic information on developer and principals
  • Management company
  • General contractor
  • Previous HUD experience
  • Geographic location with map
  • Photographs of the subject and immediate surroundings
  • Site improvements (existing/proposed)
  • Commercial component – discuss potential tenants
  • Amenities
  • Community / city / state support
  • Green / sustainability Issues
  • Development status (e.g., have any permits/approvals been obtained?)
  • Discuss general market conditions, competitive properties and comparables
  • Environmental issues
  • Potential risks and mitigating factors
  • Any anticipated waiver requests

Refinancing or Acquisition Proposals:

  • Section of the Act
  • Number of market rate and affordable units
  • Projected mortgage amount
  • Mortgage term and estimated remaining economic life
  • Refinance or acquisition
  • Basic information on developer and principals
  • Management company
  • Previous HUD experience
  • Geographic location with map
  • Photographs of the subject and immediate surroundings
  • Actual and effective property age / class
  • Physical condition
  • Prior / proposed renovations (per unit cost)
  • Discuss eligibility for Section 223(f) versus substantial rehabilitation
  • Amenities
  • Existing debt / cash out
  • Current occupancy (physical / economic)
  • Income and expenses
  • Discuss green / sustainability issues as appropriate
  • Discuss general market conditions, competitive properties and comparables
  • Environmental issues
  • Actual / potential risks and mitigating factors
  • Any anticipated waiver requests

The Lender should complete the form HUD-92013, “Application for a Multifamily Housing Project” to the extent possible.  Where practicable, site visits by the appropriate Program Center staff are encouraged The Program Center will respond in writing (either by e-mail or more formally) within 5 working days of the concept meeting / site visit.  Depending on the completeness and quality of the submission, the Program Center may recommend or not recommend that the Lender make an application, or they may request additional information or specify conditions or recommendations for the Lender and sponsor to consider.  Consideration should be given to the effect on other FHA-insured projects in the subject’s market area that are already in the pipeline, developer experience and overall feasibility based on the exhibits and information presented.
There are other changes that affect affordable housing, tax credit deals etc. and the entire Mortgagee Letter can be viewed at:

http://fhadirect.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/letters/mortgagee/files/10-21ml.pdf

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