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HUD 221 (d)(4) Loan Program – Right for You?

The U.S. Department of Housing and Urban Development has two special programs that insure mortgage loans for the new construction or substantial rehabilitation of multifamily rental or cooperative housing. These projects must be designed for moderate income families, the elderly or the disabled.

The programs are best known by their section names: 221(d)(3) is available for non-profit sponsors only. These entities may receive an insured mortgage up to 100% of the HUD/FHA estimated replacement cost for the project. Profit-motivated sponsors may quality for the 221(d)(4) mortgage insurance of up to 90% of the HUD/FHA estimated replacement cost for the project. This latter program will be the focus of this article.

Building construction for several apartment blocks
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The insured mortgages may be used to finance the construction or rehab of housing consisting of at least 5 units. They can be detached, semidetached, row, walkup or elevator-type rental or cooperative housing.

Many types of mortgagors can apply for this insurance, including builder-sellers, investor-sponsors, and general mortgagors.

The only restrictions on the type of families that are eligible to live in the resulting buildings are those of normal tenant selection. There are no income limits, and no provision that mandates Section 8 housing for the poor. Projects can be specifically designed for the elderly or the disabled, but don’t have to be.

Loan applicants generally work with a Multifamily Accelerated Processing (MAP) approved lender. The lender will create and submit the required documents in the pre-application stage. After the review by HUD, the borrower will be issued a “letter of invitation” if the presentation passes muster. It should be noted that the word Accelerated does not mean that this process will be fast. In fact, it will take many months, and that’s one reason many project directors first try to find funding from commercial lenders. However, on the plus side, 221(d)(4) loans are fixed, amortizing over 40 years, are non-recourse and assumable. These benefits can make it worthwhile to pursue such a program.

After receiving the go-ahead from HUD, the lender then submits the Firm Commitment application, which includes a full underwriting package. The regional HUD Multifamily Hub or Program Center will then consider the market analysis, zoning, architectural merits, capabilities of the borrower’s team and availability of community resources. If all these pieces suggest an acceptable level of risk, HUD will then issue a commitment to the lender for mortgage insurance.

In spite of all these requirements and hurdles, in 2008, HUD insured mortgages for 88 projects covering almost 14,000 units, for a total of $1 billion.

Read how our group is using the HUD 221(d)(4) program for a new apartment project in North Carolina. You may also be interested in our article on how to pool investor funds without running afoul of the SEC.

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2010 Predicted to Be a Tough Year According to Freddie Mac

Mike May, VP of Multifamily Housing for Freddie Mac sees a tough year ahead, but not as bad as it might have been. Thanks to Freddie Mac and Fannie Mae, the multifamily industry was able to stave off the kind of collapses seen in other commercial real estate sectors. The companies comprised about 80 percent of all multifamily business over the past year, helping to keep values relatively stable by providing liquidity.

Federal Home Loan Mortgage Corporation (Freddi...
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Freddie Mac’s lending dropped to $16 billion in 2009 compared to $24 in 2008. Part of the reason is because REITs moved toward greater liquidity, assuming that there would be a lot of defaulting properties they could pick up.

However, that didn’t materialize, and May has an explanation: “The reason it didn’t happen is that there was liquidity provided by Freddie and Fannie. So people knew they could get financing, and sellers weren’t as fearful as they otherwise would’ve been. And a couple years out, the picture looks fairly positive in terms of supply. So liquidity and a positive picture in the midterm are the two things that have kept it from getting crazy.”

The delinquency rates will continue to climb in 2010, but May predicts that the differences between buyers’ and sellers’ views of the market will converge, leading to more transactions. You can read the rest of May’s thoughts on the new year here.

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