HUD Amends Policy to Permit FHA Loans for Projects Already Underway

By Caitlin Jones
October 21, 2009 2 min read

Tax Credit Advisor, October 2009: In response to adverse market conditions, the U.S. Department of Housing and Urban Development (HUD) is making it possible for developers of stalled, partially built multifamily housing projects to apply for FHA mortgage insurance.

New Mortgagee Letter 2009-26, dated 8/26/09, authorizes HUD’s Hub offices to waive the usual requirement that construction must not have started before submitting an application for a HUD-insured mortgage, for six months on eligible projects.

This temporary authority permits mortgage insurance under HUD’s Section 220, 221(d), and 231 programs for multifamily projects unable to complete construction due to a loss of funding. Relief is limited to non- HUD insured new construction apartment projects that begin or complete site improvements and the building foundation prior to the time of application for HUD insurance. Completed construction can’t exceed the site preparation necessary to begin building construction and complete the foundation. Foundation work includes footings, foundation walls, piers, grade beams, slabs, and under-slab utilities.

All construction must cease before submission of an application, and a project must demonstrate feasibility.

Substantial rehabilitation isn’t eligible for waivers.

The mortgagee letter explains what triggered the policy shift. It says, “The Department has received requests to provide mortgage insurance for projects where construction stopped due to the loss of project financing or other sponsor circumstances. The amount of construction work completed ranges from limited work, such as site infrastructure, foundations and footings to those in more advanced stages of construction, such as a 90% completed condominium project that missed the homeowner market and decided to convert to rental. Industry data confirms that both the availability of credit and the existing supply of rental housing are contracting. Due to the illiquidity in the financial markets, lenders are reluctant to make construction loans and are backing out of commitments already made to provide construction draws. This tightening of credit will continue to depress current and future multifamily construction.”
(Letter: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/ files/09-26ml.doc)

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