The Federal Housing Administration’s changes to its Project Capital Needs Assessment requirements are putting multifamily lenders in a squeeze at a time when wages are stagnant, job growth is tepid and affordable housing is a growing concern.
The changes to the PCNA standards, multifamily lenders say, requires apartment owners to put away too much money on reserve to keep the properties up.
This reserve, which is for repair and replacement costs, originally had a requirement of 10-12 years, but the new reserve requirement is 20 years.
The bottom line is that affordable rental housing is getting squeezed.
“This makes it harder to do an FHA loan,” says David Stevens, president and CEO of the Mortgage Bankers Association. “For these loans there’s more process, inspection and engineering processes required, and the whole loan decision process and paperwork protects the taxpayer and helps ensure the program performs very well. So it makes no sense to extend the reserves as they have.
“The FHA doubled the amount of reserves the borrower must put up to get a mortgage on a multifamily property, and we’re talking about reserves in the hundreds of thousands of dollars. This also requires an initial deposit in addition to the annual reserve.”
The effect when a buyer is looking at multimillion multi-family property – not luxury housing, but simple older, affordable rental stock – is that it’s making the economics of that purchase nearly impossible.
What that means is lenders are turning instead toward either luxury properties, or doing deals on less expensive product where the effect trickles down to the renter in the form of much higher rents.
“The thing is there’s no reason to modify the PCNA requirement in the first place. This is a program with a good track record of performance and low default. So why make the change?” Stevens asked.
Mike Petrie, president of P/R Mortgage & Investment Corp., a multifamily lender for the last 25 years, said that everyone else is on a 10-year reserve schedule.
"Freddie and Fannie and everyone in the industry use a 10-year schedule,” Petrie said. “FHA thought because interest rates were lower now, loans were going to last longer.…But developers won’t leave that equity in the property for 20 years.
“What happens is that older properties won’t be refinanced and will not be kept up. It is affecting production,” Petrie said.
He said rather than dealing with the 20-year reserve cost, lenders are starting to prefer to refinance newer properties because they have less replacement costs – meaning more affordable rental housing deteriorates.
It is showing in production volumes.
According to FHA’s numbers, the basic multifamily loan production volume of Section 223(f) firm commitments issued was $6.6 billion in all of 2014, with 694 firm commitments issued.
The projected comparison for 2015 is $4.2 billion, with 468 commitments.
“There’s no reason for it. It’s a problem that doesn’t exist. They never had high default rates,” Petrie said. “If you make all this effort to go from a 0.4% default rate to a 0.3% default rate but you cut your production rate, you’re being pennywise and pound foolish.”