The U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2020-03 on March 2, 2020 to announce that applications for refinancing of newly built or substantially rehabilitated properties will now be accepted as soon as properties achieve the applicable programmatic Debt Service Coverage Ratio (DSCR) for not less than one full month. This new policy supersedes the previous policy, which stated that applications for refinancing or acquisition of existing properties under Section 223(f) of the National Housing Act were not to be accepted unless and until three years had passed since completion of construction or substantial rehabilitation of the property.

The new policy may have an impact on the volume of new applications associated with 221(d)(4) New Construction & Sub-Rehab programs. One key benefit that the HUD 221(d)(4) programs had over new construction outside of HUD was associated with immediate long-term 223(f) financing at the completion of construction. New construction deals outside of the HUD 221(d)(4) program will no longer have to wait three years to obtain the 223(f) financing. Thus, a previous benefit of choosing the 221(d)(4) pathway is no longer relevant.

After discussing the policy change with various HUD lenders, the views on 221(d)(4) volume changes are mixed. With the ability to forgo all of the time and expenses required for a new construction or adaptive re-use projects to be processed through HUD, the thought is that the easiest and quickest way will be taken by completing the project via conventional funding and then convert to a HUD loan after meeting the requirements outlined in the Mortgagee Letter. This does have its advantages with interest rates at all-time lows, and the ability of borrowers to take Cash Out, and have HUD underwrite actual revenue collected less normalized expenses, it seems too good to be true!

However; with proposed changes to the forth coming HUD MAP Guide this summer, a project brought into HUD via the HUD 223(f) Acquisition/Refinance Program will not be eligible for the MIP reduction unless the project is certified by an accepted HUD Energy Program prior to application. In addition, it is surmised that an Owner/Developer will not want to incur the cost of obtaining the Green Energy Reduction and even can obtain the 15% energy savings on a newly constructed building.

Also noted is the fact that there are Owner/Developers who are experienced with the HUD  221(d)(4) program and will continue to use the program as they have integrated their internal best practices to HUD 221(d)(4) program requirements. The proposed HUD MAP Guide changes are rewarding these experienced teams with options for streamlined processing where < 100% of plans and specs are submitted at firm app are permitted not only in LIHTC deals but also where there is a fully experienced development team.

In addition, with interest rates at all-time lows the HUD 221(d)(4) fixed-rate loans guarantee greater financial stability for investors and developers. This is because the interest rate won’t go up or down during the life of the loan. Plus, these HUD multifamily construction loans have a maximum term of 40 years (43 with construction). This makes them incredibly attractive to investors, especially in this low interest environment.

In summary, it appears that HUD’s new policy opens the doors to new construction projects outside of the HUD 221(d)(4) program; however, the continued financial and operational benefits of the HUD 221(d)(4) program are still strong. AEI Consultants expects continued strength in the HUD 221(d)(4) program market in the immediate future. The full impact will not be known until HUD clarifies the policy and finalizes the underwriting modifications.

The link to the Mortgage Letter may be downloaded via following link: