HUD Eliminates Section 223(f) Three-Year Policy

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The U.S. Department of Housing and Urban Development (HUD) has revised a policy that will allow some multifamily property owners to apply for refinancing without having to wait three years.

The change applies to Section 223(f) of the National Housing Act, considered a low-cost source for long-term mortgages of up to 35 years.

Previously, applications for refinancing or acquisition of existing properties under Section 223(f) were not accepted until three years after the completion of construction or the substantial rehabilitation of the property, according to HUD.

With the change, announced March 2, such timing is no longer required.

“The program policy is being modified to provide greater opportunities for borrowers to refinance stabilized properties and to facilitate the supply of affordable and workforce housing," said Brian D. Montgomery, assistant secretary for housing, in a written notice of the policy change.

Applications for refinancing of newly built or substantially rehabilitated properties will be accepted as soon as properties achieve the applicable programmatic debt service coverage ratio for at least one full month, HUD said.

The revisions apply to all mortgage insurance applications, with the exception of Sec. 232 healthcare properties.

Previous waivers

This isn't the first time that HUD has adjusted requirements of the 1975 Sec. 223(f) program.

“Twice since that time, program policy has been temporarily modified to meet program goals when economic conditions decreased the availability of credit," Montgomery said in the latest notice of revisions.

The original 1975 Section 223(f) handbook had a “Special Eligibility Program" for recently completed projects whose construction was started before June 30, 1974, and completed before the end of 1975. The program addressed liquidity shortages at the time.

HUD instituted a second waiver of the three-year policy from 2009-2013 in response to a capital markets credit freeze.

HUD released the following eligibility requirements:

1. A minimum DSCR of 1.17 for market rate projects and 1.11 for “Broadly Affordable" projects for three consecutive months prior to loan endorsement.

2. An income and expense statement from initial occupancy to application submission and a projection of income and expenses for the next 12 months.

3. A rent roll of existing rents and the rents used to underwrite the existing first mortgage.

4. A leasing history of the project from initial occupancy to application submission and the lease-up projection used to underwrite the existing first mortgage.

5. Disclosure of rent concessions, other discounts and short-term leases under 12 months.

6. HUD will underwrite to actual revenue collected, less normalized operating expenses, to determine when and if the required programmatic DSCR has been achieved.

Cash outs may be permitted, HUD said, subject to LTV limits. However, 50% of the available cash will be held by the lender until the property achieves, for each of six consecutive months, the minimum applicable debt service coverage, inclusive of the months of minimum debt coverage required prior to endorsement.

HUD will review the revision in two years to see if it is meeting policy goals and HUD's core mission and whether the overall risk profile of the FHA portfolio was impacted by the change. Depending on what it finds, HUD could further modify the policy, it said.

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