There are some downsides to the standards easing
HUD Eases Underwriting on Affordable Multifamily Rental Housing
Investors, property owners, and developers that are involved in affordable housing were doubtless glad to hear of the Department of Housing and Urban Development’s changes in underwriting requirements — specifically, debt service coverage ratios (DSCR) and loan-to-value or loan-to-cost (LTV/LTC) ratios.
Under the Multifamily Accelerated Processing Guide, “maximum loan amounts are the lesser of: a) the requested mortgage amount, b) the amount allowed by statutory limits, c) the amount supportable by applicable debt service coverage ratios, or d) the amount supportable by the applicable loan ratios.”
According to estimates by the National Low Income Housing Coalition, there’s a U.S. shortage of 7.3 million affordable rental homes. HUD explained that the changes in underwriting policies were intended to boost the housing supply.
Properties with a low-income housing tax credit (LIHTC) with rent advantage to market now need a DSCR of 1.11 and maximum LTV/LTC of 90% compared to the previous 1.15 DSCR and LTV/LTC of 87%. These new standards, now in place, are to help properties that offer rent-assisted affordable rental homes for families at or below 80% of the area median income (AMI).
The Federal Housing Administration also announced new policies for middle-income housing, with at least half of units targeting income levels up to 120% of AMI. LTV/LTC ratios have moved from 85% to 90% and DSCRs from 1.176 to 1.11.
Get a Free Multifamily Loan Quote
Access Non-Recourse, 10+ Year Fixed, 30-Year Amortization
In current markets and interest rates that don’t look as though they will return to lower levels in the immediate future, any flexibility can be of help. Allen Feliz, vice president of U.S. Affordable Housing at the proptech firm MRI Software, and in previous years in structuring affordable housing finance, told GlobeSt.com, “Everyone’s scrambling right now to fill the supply and demand gap.”
He said that the new initiatives do make it easier to finance new affordable housing production, with resources to finance being scarce. “Although these initiatives could create other issues, the need for new affordable housing is so great that the benefits may outweigh the risks,” Feliz says.
The other issues are troubling. “It is a step in the right direction, but it’s not a silver bullet and it doesn’t directly address the issue,” Feliz says. It’s so hard for these deals to pencil out. You can’t get enough resources from tax credit equity, from state and local funds.”
While better than nothing, Feliz says that the results could act like “helping a struggling family with a higher credit line.” It might open time for a bigger problem to build. With tight finances, there might not be enough funds to maintain and improve properties.
“We seem to have kept inflation under control, but if for some reason it creeps back up and we’re relaxing underwriting standards, this could come to a head,” he says. “The timing could be scary. Again, there’s such a great need for it, in the short term it’s worth the gamble. I just hope we can come back to taking these underwriting standards seriously and use better approaches to increase housing production.”
Source: GlobeSt.
Accessibility