On December 29, 2011, FHA issued restrictive and costly new requirements (Notice H-2011-36 and FHA Mortgagee Letter ML-2011-40) for loans over $50 million.The changes included requiring higher levels of net worth, liquidity and experience for principals, changes in property valuation and additional delays in the release of cash proceeds.
FHA stepped up the requirements as loan size increases, with more stringent requirements imposed for loans over $60 million. For those larger loans, FHA reduced the size of the loan based on the project’s loan-to-cost (LTC) ratio and required higher debt service coverage levels. FHA’s new requirements applied to all new and pending applications that have not already received a firm commitment.
Affordable properties have different and less punitive requirements. For refinancings, thresholds increased to $50 million and $75 million, but new loan requirements were less restrictive than new construction loans.
NMHC/NAA objected to the FHA’s issuance of the new policies without giving stakeholders an opportunity to comment. While NMHC/NAA support FHA’s goal to manage its credit risk, these changes will likely drive credit-worthy developers to seek alternative financing sources, reducing the overall credit quality of FHA’s mortgage insurance loan pool.
Moreover, many in the industry consider the new criteria unnecessary given the loan volume and associated risk; the FHA approved fewer than 20 new construction loans at this level in 2011 and less than a half-dozen that exceeded $60 million.
NMHC/NAA also share concerns with other industry groups over inconsistency in policy related to borrower principal exculpation requirements, which are likely to restrict HUD/FHA financing to less credit worthy borrowers and ultimately add credit risk.
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