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Dog Days of Summer = Positive HUD Program Developments

We’ve all heard the expression the “Dog Days of Summer”.  According to The Farmer’s Almanac, the term refers to the period July 3 through August 11 when the sun is closest to the star Sirius, part of the constellation Canis Major, or the Greater Dog.  Think hot, sultry, languid days,with not much of anything going on.  Wait a minute!  SMF begs to differ that there is nothing going on, at least in the HUD mortgage insurance space, so this month, we ask:

  • Will the queue be quashed?  In March, we reported that the popularity of HUD’s multifamily mortgage insurance programs, coupled with historically low interest rates, had created large queues of loan applications waiting for review, adding delays to the time it takes to complete a deal.  HUD partially addressed the situation by creating a five-tier loan priority, but that action essentially rearranged deals in the queue, not add review capacity.  Help is now on the way!  HUD has made significant strides in securing the services of a third-party contract for loan underwriting and expects to have it in place by September 30.  This should help reduce the queue and shorten the time to complete a financing. 
  • Will the escrow be eliminated?  In an effort to adjust their multifamily loan underwriting requirements to accommodate the then-growing COVID-19 outbreak, HUD last April imposed a COVID Debt Service Reserve Escrow requirement for Section 223(f) refinance and acquisition loans.  For market-rate loans, the Escrow is 9 months of debt service and could be released within 3 or 6 months of the project maintaining the program debt service coverage ratio of 1.176.  Our sources tell us that HUD is now amenable to removing the COVID Escrow requirement.  However, since the initial requirement was issued through a formal Mortgagee Letter, it will have to be rescinded the same way.  
  • Are speedier surplus cash distributions on the horizon?  One of the critiques of HUD’s multifamily mortgage insurance programs is that they only permit distributions of surplus cash twice a year.  Earlier this year there was some momentum at the senior levels of HUD to allow distributions on a monthly basis.  Could this momentum lead to a positive change?  On the last Dog Day, August 11, a major trade association representing a number of HUD lenders formally petitioned HUD to permit monthly distributions.  This would be a game-changer, as it would bring HUD-insured financing more in line with conventional lending sources, make the program more competitive without incurring additional risk, and attract more quality institutional sponsors, who tend to focus on cash-flow of an investment.       

The Dog Days may be officially behind us, but we look ahead to the days ahead to see how these positive developments at HUD play out.  Stay tuned to this space for updates.