FHA ANNOUNCES ENHANCED RISK MANAGEMENT AND INCREASED OVERSIGHT OF MULTIFAMILY LENDERS AND UNDERWRITERS Changes to underwriting criteria, higher standards for lenders and underwriters, and an improved monitoring system part of enhanced FHA Multifamily Insurance Program
WASHINGTON - As part of the Federal Housing Administration’s (FHA) ongoing efforts to enhance risk management practices, Commissioner David H. Stevens today announced plans to implement a series of changes to the multifamily insurance programs that will update underwriting policies, increase lender and underwriter quality, and align loan application, submission and approval standards. FHA’s Multifamily Program Office consulted with stakeholders to bring these changes to market.
The policy changes announced today by Mortgage Letter 2010-21 will affect all multifamily rental programs and include the following:
Revised underwriting standards to raise debt service coverage ratios, lower loan to value and loan to cost ratios, increase project reserves and sponsor equity investment, and limit sponsor cash out. Underwriting ratios will be targeted to different property types based on their risk profiles, with lower ratios for subsidized affordable housing properties and higher ratios for market rate properties.
Enhanced verification of property financial performance to decrease opportunities for misrepresentation and fraud.
Expanded borrower mortgage credit analysis to include a detailed review of contingent liabilities and ballooning term debt that could undermine a sponsor’s financial stability.
Pre-screening of proposals for early identification of transactions that are not feasible or are not likely to proceed to a commitment, allowing staff to focus on a deeper analysis of transactions that will close.
"These are the first updates to our underwriting standards since the inception of FHA’s multifamily programs – some of which are over 40 years old," said U.S. Department of Housing and Urban Development Deputy Assistant Secretary Carol Galante. "These policy changes reflect many of the lending industry’s best practices and standards that have evolved in the multifamily market."
"Today’s changes are a much needed step to insure that FHA multifamily programs are sound. These program updates will help us to continue serving our mission of providing liquidity to the multifamily market and decent, affordable rental housing to our nation’s communities," said Commissioner Stevens.
In addition to the changes outlined in today’s mortgagee letter, FHA’s multifamily programs will be pursuing additional steps to update agency standards and align the programs with the Obama Administration’s broader goals for financial oversight.
Program Changes Expected Through Additional Mortgagee Letters by December 2010:
Heightened standards for lender and underwriter qualifications
All new and existing multifamily lenders and underwriters will undergo an additional screening process to insure that they are qualified and experienced before receiving approval to participate in specialty insurance programs. Under the new policy, a separate approval will be required to offer the agency’s more complex insurance programs, such as those for new construction, substantial rehabilitation and Low Income Housing Tax Credits. Results from the Multifamily Accelerated Processing (MAP) program show that these programs demand skilled lenders and underwriters with specialized knowledge. The existing system grants blanket approval to offer the full range of FHA programs without regard to specialized expertise. We anticipate these lender and underwriter qualifications to become effective in Fall 2010.
Update to the Multifamily Accelerated Processing underwriting guide
Originally published in 2000, this underwriting guide establishes all underwriting and processing requirements for the MAP program. The guide will be updated and revised to incorporate all Mortgagee Letters, Housing Notices, and administrative guidance that have been issued since it was first published, along with new chapters on affordable housing underwriting and environmental requirements, and expanded chapters on market studies, commercial income and mortgage credit analysis. HUD is currently revising the MAP Guide to reflect these changes in underwriting standards and will publish the Guide by the end of the calendar year.
Standardization of underwriter’s narrative and application file contents
To assure critical analysis of the risks of proposed transactions by MAP underwriters, a standard underwriter’s narrative will be used for applications submitted under all insurance programs. Currently, each lender uses its own narrative which leads to uneven and sometimes inadequate analysis of transaction risks. The new policy will also require that a standard table of contents be used to organize application submissions – a simple step toward ensuring consistent and complete presentation of the underwriting materials and to facilitate efficient review of the application package by HUD staff. We anticipate that lenders will be required to use these new forms in Fall 2010.
A new loan committee approval process will align Hub and Program Center commitment authority and practice to ensure consistency in underwriting throughout the regional offices, as well as to provide a platform to share best practices. Loan committees at the Hub and National levels will provide oversight for most transactions in the multifamily insurance program, depending on loan size and a project’s number of units. These reviews by the Hub and National loan committees are targeted to commence by the end of July.
Changes Being Pursued by Rule Making Process
Multifamily Credit Watch
In an effort to better align lending practices across FHA programs, an objective, point-based system modeled on that used in the single family program will track multifamily lender performance, material violations of FHA underwriting standards and the rate of loan defaults and claims paid. The current lender monitoring system identifies lender violations but fails to define associated penalties. Under the new monitoring system, each lender’s underwriting and loan performance will be compared to that of all other lenders in the MAP program. Based on that review, lenders may be placed on probation, suspended or could have their approval terminated. The new system will enhance FHA’s ability to discover and take timely action against lenders that pose unnecessary and unmanageable risk to the insurance fund. It is anticipated that he Multifamily Credit Watch system will be published as a proposed Rule for comment in late summer with final publication scheduled by the end of the calendar year.
In addition to the multifamily program changes announced today, the FHA's overall risk management functions have been strengthened through a number of policy changes made over the last year. The agency’s new Chief Risk Officer oversees the coordination of FHA's efforts to focus risk management in a single division devoted solely to managing and mitigating risk to the FHA insurance fund - across all FHA programs. As announced in September 2009, changes to FHA’s credit policy focused on ensuring responsible lending and risk management for FHA-approved lenders by ensuring that lenders are adequately capitalized and have a long-term interest in the performance of the loans they originate.
HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes: utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination; and transform the way HUD does business. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.