A mortgagee letter published by HUD on July 6 implements a series of anticipated changes to FHA multifamily mortgage insurance programs (not including those for healthcare facilities).

These are the first changes to FHA underwriting standards in 40 years, and are intended to ensure that the multifamily programs remain financially sound. The changes revise underwriting standards to raise debt service coverage ratios, lower loan-to-value and loan-to-cost ratios, increase project reserves and sponsor equity, and limit sponsor cash-outs.

The underwriting ratios are targeted to different property types based on their risk profiles, and market-rate properties will have higher ratios than affordable properties.

Other changes include enhanced verification of property performance, expanded borrower mortgage credit analysis and pre-screening of proposals for early identification of transactions that are not feasible. There will be increased scrutiny related to markets in general, but also to locations with concentrations of existing FHA-insured properties.

NAHB has been anticipating the release of these changes since early this year. When HUD announced its intention to update the programs' underwriting standards, NAHB Senior Officer Bob Nielsen appointed an informal working group of members to review the proposed changes and draw up responses to HUD.

The NAHB staff worked with members to prepare a set of recommendations that were sent to HUD, and set up a meeting between members and the deputy assistant secretary (DAS) for multifamily housing to discuss industry concerns.

HUD agreed to reconsider several proposals in light of its discussions with NAHB, and association members had a follow-up discussion with the DAS during NAHB's spring board meeting.

NAHB also coordinated an industry letter that was sent to HUD in support of its recommendations.

At this time, NAHB members and staff are reviewing the mortgagee letter and plan to continue working with HUD on this issue.

HUD anticipates additional changes to further update agency standards and align the programs with the Obama Administration's broader goals for financial oversight.

Read HUD's mortgagee letter here.

For more information, e-mail Claudia Kedda at NAHB, or call her at 800-368-5242 x8352.