Aiming to address a nationwide shortage of affordable housing, the Federal Housing Administration has launched a risk-sharing pilot program that it hopes will encourage community development lenders to finance the rehabilitation of smaller multifamily apartments.
As it stands, small apartment owners have the option of getting a loan from Fannie Mae, Freddie Mac, the U.S. Department of Agriculture or a community bank, but the transactional costs can make the loans expensive for borrowers.
To lower the costs for borrowers and encourage community development financial institutions to finance more multifamily projects, FHA and the Department of Housing and Urban Development have agreed to insure loans offered by CDFIs. If the loans default, FHA and HUD are on the hook for 100% of the principal balance.
HUD, which oversees FHA, says its program will provide another source of liquidity in market that it believes is underserved by conventional lenders. The CDFIs it's targeting include roughly 80 banks that are certified as CDFIs by the Treasury Department. To meet the CDFI Fund's requirement, the institution would have to agree to target its services in low- and moderate-income communities, according to HUD.
The impetus for the program is the dearth of affordable rental housing. Demand for affordable rental housing has far outstripped supply for many years. The lack of supply, combined with stagnant incomes since the 1980s, has caused rents to skyrocket nationwide, creating an affordability crisis for many renters.
"It's a perfect storm going on," said Doug Bibby, president of the National Multifamily Housing Council, an industry trade group. "The industry is still trying to dig out of a hole created by chronic underbuilding during the recession."
The FHA's small multifamily risk share initiative was created to provide liquidity for affordable rental properties of five to 49 units in need of $3 million or less in financing. The program was designed to increase the flow of credit to small multifamily properties and show the effectiveness of providing federal insurance.
HUD's program is primarily for rehabilitation and refinancing of small apartment buildings (unlike Freddie Mac's small balance multifamily loan program, which was designed to stimulate loans for rental housing development.) The program currently does not allow for new construction but industry experts are asking for HUD to reconsider that restriction given current market conditions.
Rehabilitating older apartment buildings, especially smaller ones, is one focus of the industry, along with preservation and new construction. Roughly 100,000 to 150,000 rental units each year are "lost" to simple aging and obsolescence.
"Most of the housing going out of service serves very low income people and we need to find ways of salvaging and reinvesting in those assets," said Daryl Carter, the chairman and chief executive of Avanath Capital Management, an Irvine, Calif., investment firm.
Roughly 600,000 multifamily rental properties — one third of all occupied rentals in the U.S. — are smaller buildings with fewer than 49 units, according to a 2012 Rental Housing Finance Survey. These small buildings tend to be older, located in low-income neighborhoods and typically have lower median rents and a higher share of affordable units than larger rental properties.
The cornerstone of the risk-sharing program is that the lender shares in the insurance risk with FHA, covering 50% of any losses. In exchange, the lender receives greater flexibility on underwriting terms and compliance than is available in other FHA programs.
HUD is expected to issue a final notice on the program in April. The proposal was first published in the Federal Register in November 2013.
In comment letters, lenders have asked for HUD to reduce the paperwork for mom-and-pop landlords and provide greater flexibility for loan terms and amortization. For example, many small property owners usually produce financial statements that lenders review, but the statements typically are not audited, a HUD mandate.
Lenders also want HUD to eliminate a requirement that applicants have a designated staff officer with at least three years of FHA lending experience.