New Guidance Further Eases Pairing of HUD Loans, Housing Tax Credits

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Tax Credit Advisor, September 2009: The U.S. Department of Housing and Urban Development (HUD) has issued a new notice (H 09-09) and mortgagee letter (2009-24) providing further guidance to implement 2008 legislative changes designed to make it easier to use HUD-insured mortgages for low-income housing tax credit (LIHTC) projects, including those financed by tax-exempt bonds.

The legislative changes, to requirements for multifamily mortgage insurance programs administered by HUD’s Federal Housing Administration (FHA), were made by the Housing Credit Coordination Act of 2008.

The new guidance includes new directives, procedures, examples, and clarifications for HUD staff and HUD-approved lenders, both for processing applications for FHA insurance commitments, and for underwriting FHA-insured loans, for LIHTC projects.

One key change made by the law eliminated a previous requirement for upfront escrow of 100% of the tax credit equity, or the posting of a letter of credit, for an LIHTC project seeking an FHA loan.

The new guidance says that only an “appropriate” amount of tax credit equity need be invested at the time of FHA initial endorsement. It recommends at least 20% of the total anticipated tax credit equity, but permits a smaller percentage upon recommendation by the HUD Hub Office and approval by HUD Headquarters.

The guidance contains an example of a hypothetical project showing how to compute the amount of the initial equity contribution, and an example of a full equity installment schedule acceptable to HUD.

Another example is a sample modified form for a hypothetical project showing how to determine the maximum mortgage amount.

The new guidance also drops, for FHA-financed LIHTC projects, the requirement for HUD certification of the performance of a subsidy layering view.

The guidance also eliminates the normal required borrower cost certification to HUD for an FHA tax credit project, if the loan-to-cost ratio is less than 80%. This exemption applies to HUD’s Section 213, 220, 221(d)(3), 221 (d)(4), and 231 mortgage insurance programs.