Talking Heads: Margaret Allen, AGM Financial
By Darryl Hicks
8 min read
Nationwide, 90 companies originate FHA-insured multifamily debt, among them AGM Financial, Inc., based in Baltimore, MD. Last year, the company ranked 15th overall in production, completing 22 transactions worth $315,403,300. The company’s Founder and Chief Executive, Margaret Allen, is among the industry’s most widely respected thought leaders.
When the mortgage banking firm where Allen learned multifamily lending went out of business in the 1990 recession, rather than look for a new employer, she formed her own company. Twenty-five years later, Allen and her company are still going strong, financing affordable rental housing and upscale market rate apartments using FHA-insured mortgages. AGM’s annual loan production for the last four years averaged $400,000,000.
Tax Credit Advisor sat down with Allen to get her thoughts on RAD, debt market trends, and what changes she would like to see happen within HUD’s multifamily loan programs.
Tax Credit Advisor: How did someone who graduated from Berkeley in 1968 with a degree in Biological Field Sciences choose FHA lending as a career path?
Margaret Allen: Sometimes careers choose us. I started teaching environmental classes to members of the United Auto Workers and wrote grant proposals for them around environmental issues. When I moved to Baltimore, the Department of Housing needed someone to write grant proposals to HUD to fund housing, retail, commercial, and industrial projects. I got to know lenders who were involved in these transactions. One of them was a HUD lender and I was lucky enough to spend eight years there. Getting back to your original question, I mostly studied birds. I asked where does it live, what does it eat, how is this bird like every other bird I have ever seen and how is it different? These are exactly the same questions I ask when financing an apartment project. Why is it located here, who are the residents, how is this project like every other project I have ever seen and how is it different?
TCA: What do you attribute your success after 30 years as a multifamily lender?
Margaret Allen: Partly because the doors are open and we offer a product that some developers appreciate; partly because we have terrific long-term employees who contribute to and share in profits; partly attention to detail and knowing HUD; and partly we are candid with clients up front about the good and difficult parts of the HUD journey.
TCA: What distinguishes AGM from other FHA Lenders?
Margaret Allen: By far most HUD lenders do an excellent job, offer an honest service, and try to be fair to HUD and our clients. AGM is the same. The main difference is that HUD is all we do.
TCA: What major trends are you seeing in today’s debt markets?
Margaret Allen: Unlike 2009-2015, the lending industry is back in full swing and loans are more competitive. Banks, insurance companies, and Fannie and Freddie are in the market, as are lenders offering debt and equity for tax credit transactions. HUD has improved its underwriting standards in order to compete. In spite of (Federal Reserve Board Chairwoman) Janet Yellen’s best efforts, interest rates have not risen. Every so often, she speaks, people worry and spreads blow out, but they work their way back in. They have come down 50 basis points during the past few weeks. We are quoting around 3.65% on new construction/sub rehab debt right now, which is where we were a year ago.
TCA: Has FHA’s new MAP Guide had the desired effect of streamlining the underwriting of affordable housing deals? Do you see it having a positive impact on the future of the business?
Margaret Allen: The new MAP Guide isn’t so much designed to streamline the processing as to modernize HUD’s lending standards. Loan-to-cost and loan-to-value ratios have increased and debt service coverage ratios have decreased. Most of the streamlining is taking place as part of the transformation of HUD and implementation of the single under model. The Department is reorganizing from 51 offices to 12. There are five regions with a satellite office or two in each. The single underwriter model provides knowledgeable underwriters, who, if they are looking at a project that has an operating history, can review the entire transaction on their own and proceed to loan commitment. Regional offices that have been open for over a year – Dallas/Fort Worth, Chicago, and Atlanta – are meeting their 60-day timelines. The New York region is being transformed this month. The underwriters have three more weeks of training, so they should be operating sometime in May. Next up is San Francisco and Denver.
TCA: What has the experience been like dealing with these new regional offices?
Margaret Allen: It has been a good experience. HUD is using people who came from different segments of the housing industry and are not 100% fluent in FHA or FHA’s history of how things happen. But we normally get everything straightened out. The sentiments are in the right place.
TCA: What were your motivations for getting into the RAD program and how would you describe your experiences so far?
Margaret Allen: When (former HUD Secretary) Shaun Donovan said this is a program the Department wants to do, I said okay. Anything that Shaun Donovan wants to do, I want to do. RAD provides a tremendous benefit for the preservation of affordable housing for the poorest people in the country. The conversion to Section 8, 4% tax credits, interim income, and seller-take-back debt, allow us to afford $35,000 to $50,000 to $80,000 a unit in rehab dollars, at no additional expense to the federal government.
TCA: Do you have any tips on how to facilitate smoother RAD – FHA transactions?
Margaret Allen: Yes, there was a meeting recently with RAD officials to talk about this topic. A lot of RAD falls within HUD’s Office of Public and Indian Housing, which is completely separate from housing (FHA). We need an expeditor who can work across these fields to achieve everyone’s goal of a successful rehabilitation.
TCA: Was the purpose of your meeting with HUD to identify possible expeditors?
Margaret Allen: HUD closed about 70 RAD transactions in the 4th quarter of 2015 and they are expecting several hundred in the 4th quarter of 2016. The Department will be overwhelmed if it doesn’t streamline its processes. They know they have a problem and so they’ve reached out to the practitioners to see if we have suggestions. HUD absolutely looks at us as its partner in this program.
TCA: What multifamily policy changes would you like to see FHA enact before you retire?
Margaret Allen: There are a few regulatory problems that people are running into. Interestingly enough, one of them is street noise. HUD’s guidelines date to the 1970s, so they are a little unrealistic in terms of transit-oriented urban developments. Everybody agrees that interior noise can’t exceed 45 decibels, but current limits for balcony noise need to be reassessed 40+ years later. Timing is always a problem, but the whole point of Transformation is to improve timing. Consistent underwriting is important so that we can expect the same underwriting decisions in each region, which is also a goal of Transformation.
TCA: Where do you see your company in the next five years in terms of its strategic vision?
Margaret Allen: We would love to still be doing HUD transactions. I would like to make more alliances so that we can improve access to bridge financing for acquisitions, for example. The new lower Mortgage Insurance Premiums for energy-efficient apartments will make FHA very attractive for market-rate properties. The single underwriter model, with specialization in tax credit transactions, will certainly help FHA meet tax credit timing requirements.
TCA: For borrowers who are new to FHA – do you have any tips, recommendations or pitfalls to watch out for?
Margaret Allen: You need to make sure that, whoever your lender is, that you have a high-quality, defensible market study, appraisal, and environmental report. You need a Phase 1. If the Phase 1 calls for a Phase 2, get it. If soil or ground water is contaminated, expect to need a “no further action” letter from the state Department of the Environment. You should understand how Davis-Bacon wages work, especially if your building is more than four stories high. You must make sure you meet all of HUD’s experience requirements. In days gone by, HUD used to help train people who had not been in the multifamily business, but the Department doesn’t do that anymore. Three or four years ago, HUD made experience a requirement for loans that exceeded $25 million, but now it’s a requirement for everybody. You might have experience doing single-family, or land development, but now you have to have a multifamily partner. You might have experience doing apartments, but if you include commercial space, you must have a partner experienced in commercial development. And I don’t think that’s an unfair request. HUD’s loans are fully non-recourse; all HUD has is the property and integrity and experience of its borrowers.
