Jay Porterfield

FHA multifamily mortgage insurance, in conjunction with HUD-assisted housing programs, has provided multifamily lenders and owners with the ability and the incentives to create and recapitalize tens of thousands of rental projects that otherwise may not have existed. FHA provides some outstanding terms and structural features that can be advantageous to apartment owners and developers. Here is a brief overview to answer some common questions borrowers have about the many FHA programs that Arbor provides: 

Q. What is the difference between FHA and HUD?

A. The Federal Housing Administration (FHA) offers mortgage Loan Insurance Programs with non-recourse loans to owners and buyers of qualifying properties. The U.S Department of Housing and Urban Development (HUD) is the Federal agency that oversees FHA and acts as a lending facilitator.  HUD licenses lenders such as Arbor to provide HUD-insured loans.  

Q. What kinds of properties are eligible for FHA loans?

A. Traditional market rate apartments, affordable apartments and cooperatives, independent living/senior housing, nursing homes and manufactured housing communities.

Q. Does FHA only offer construction loans?

A. FHA is often thought of primarily as a construction lender because of the success of the 221(d)4 program.  However, FHA also offers loans for the acquisition or refinance of existing stabilized properties or for the acquisition and rehabilitation of properties that need to be repositioned.

Q. What kinds of terms do FHA loans provide?

A. For construction or rehabilitation, FHA offers fully amortizing loans with maturities up to 40 years and will provide up to 90% loan-to-cost.  For acquisition loans, FHA will provide 85% loan-to-cost with maturities as long as 35 years on a fully amortizing basis.  Refinances can be as much as 100% of costs to refinance with a 35-year term and amortization period.

Q. How long does it take to close an FHA loan?

A. For construction loans, the typical time from initial conversation to closing of the loan is about 9 months.  It is important to get an Arbor originator involved very early in the process as there are lots of issues that need to be cleared with HUD throughout the process.  For acquisition and refinance loans, the typical time from application to close is 6-7 months.  The timing is obviously a little longer than a typical Fannie Mae loan and may not be right for every situation (for example, acquisitions that must close quickly).  An Arbor originator can help you determine if an FHA loan is right for a given situation.

Q. How do we get started?

A. For acquisition and refinance loans, provide Arbor with a typical loan request package that includes 3 years of historical operating statements with occupancy history, year-to-date operating statements, current rent roll, proforma operating statement, photos of the property, a short narrative describing the property and the experience and net worth and liquidity of the borrower.  For construction loans, start talking to an Arbor originator as soon as possible even if the land is not currently under contract.  Arbor has significant expertise (including our Chief FHA Underwriter) that can help get the project off the ground and it is important to get HUD involved early in the process to avoid potentially costly delays.

 Jay Porterfield is a Director in Arbor’s full-service Dallas office. He can be reached at 972-516-3824 or at jporterfield@arbor.com.

The National Association of Homebuilders (NAHB) is forecasting that the housing market could reach bottom by the second quarter of 2008, with a "pretty good expansion" occurring once again in 2009. The top builder association shared the news during a pre-holiday conference call hosted by CEO Jerry Howard and David Seiders, NAHB's Chief Economist.

Seiders sees new home sales bottoming out in the first quarter of 2008. He noted that recent price declines, which he labeled a "correction process," are helping to "revive affordability." He sees housing starts reaching their lows in the second quarter of 2008, and beginning to rise once again. Seiders also cautioned that while single family and multifamily building would see recovery, the condo market could still be in for more pain.

Seiders conceded that the economy is currently in a "danger zone" nearing recession, but thinks the U.S. will avoid one. Seiders assigned a 40 percent chance of a recession in 2008. He also said that a housing turnaround hinges on several outside forces, including another rate cut by the Fed at the end of January 2008, and more help for the short-term credit markets. Programs to help borrowers with ARM loans are also critical, since mass foreclosures will flood the real estate market with excess inventory.

Housing should cease to be a drag on the economy after the first half of 2008, and Seiders sees positive growth for the second half, which "will be a major turning point for the economy." In 2009, NAHB forecasts the housing industry will grow about 6.5 percent.

Source: The National Association of Home Builders, www.NAHB.org

While the impact of the slowing housing markets will vary according to region, overall economic resilience will endure throughout the country, according to Marcus & Millichap’s 2008 National Apartment Report Healthy business investment and stronger export activity will help to offset slowing consumer spending and housing related industries.

According to the report, overall construction costs are expected to rise in 2008, though the cost of specific materials may stabilize due to the cooling housing sector. High land prices, however, will continue to make it tough to pencil out new development. Rents have increased recently, but they still fail to justify new development in many markets.

Developers are expected to deliver 100,000 apartments this year, up from 84,000 units in 2007. This year’s new supply will remain moderate compared to the late 1990s through 2001, when construction averaged closer to 170,000 units per year.

The report also found that apartment vacancy is forecast to hold steady at 5.8 percent in 2008 as added competition from the shadow-rental market is offset by expansion in the renter pool due to foreclosures. Asking rents are expected to rise 4 percent this year, while effective rent growth will be limited as a result of the increased use of concessions to compete with shadow-rental stock.

As far as the capital markets are concerned, the 2008 National Apartment Report found that the commercial mortgage market has bounced back to some degree in recent months, but fears that lax underwriting standards have compromised the integrity of CMBS pools continue to swirl. Following the capital markets shock last year, the yield on the 10-year Treasury has declined 100 basis points to the low-4 percent range, counterbalancing higher spreads. The 10-year Treasury yield is expected to end 2008 at or below 5 percent. The Fed continues to assert its intent to act as needed to prevent the broader economy from entering into recession. Assuming inflation remains under control, the Fed is likely to cut rates again in 2008.

Source: Marcus & Milichap’s 2008 National Apartment Report