Part II: How to Access the Lower MIP for FHA Multifamily Loans

Part II: How to Access the Lower MIP for FHA Multifamily Loans

This is the second of a two part discussion of FHA’s decision to lower the market rate Mortgage Insurance Premium (MIP) for energy efficient new and existing properties. The standard in both cases is for the property seeking a new FHA multifamily loan to score in the top 25% of energy efficiency. The first post discusses why you should seek the top 25% if you are obtaining an FHA loan. This post emphasizes how to obtain that goal. Here is the operative language: “For energy-efficient properties (those committed to industry-recognized green building standards, AND committed to energy performance in the top 25 percent of multifamily buildings nationwide), FHA is lowering annual rates to 25 basis points, a reduction of 20 to 45 basis points.  Qualification for the top 25% will be determined using EPA’s Portfolio Manager 1-100 score.” For most market rate new construction, the savings will be 40 basis points. For some existing properties with a 45 bp MIP, the savings will be 20 basis points. Either way, this is something that should be done. How do you get there? Here is a good start.  Figuring your present standing differs for existing and new construction/sub rehab properties. Existing properties: The determination for an existing property revolves around the Statement of Energy Performance (SEP). If you have a pending 223(f) transaction and if your SEP is equal to or greater than 75, then you qualify for the reduced MIP. But if the score is less than 75 there are other ways to qualify for the reduction. At this point (if not before) you should hire an energy auditor to...

Two Ways to Improve the 223 (f) Program

Two ways to improve the 223 (f) program that would really extend its usage and help the residents the loan intends to serve  When I left the RTC in 1996 to go back into FHA Multifamily lending, one of my guideposts was Proverbs 19:17, which reads:  “He who helps the poor lends to the Lord and He pays wonderful interest on His loans.” While I have financed my share of high-end apartment properties, my greatest satisfaction in this business is helping to find ways to help less fortunate people live their lives a little better.  While I can’t help them make more money, I can, through FHA, help ensure their homes are working right, are insulated and provide the least headache-inducing home environment possible, at affordable rent I believe the toughest job in the United States is that of a single or unmarried mother of several children struggling with daycare, a low paying job, uncertain child support and an uncertain quality of rental housing.  One of those we FHA Lenders can do something about. I have two proposals for that involve seemingly small technical changes that could have a large impact of the living situation for many families on a tight budget: That ML 10-21 III.B.1 be modified so that 223(f) loans could be submitted for application at a 65% occupancy, and That ML 12-25 V.H. be modified so that the enumerated Repairs and Replacements only require Hub Director approval in, say, the first two years, similar to the terms of ML-12-25 V.D. Let’s discuss these in order: As to reducing the physical occupancy necessary to submit an FHA...

Falling FHA Multifamily Mortgage Rates?

Will Economic Indicators Affect FHA Multifamily Mortgage Rates? Today the Jobs report stated that 148,000 non-farms jobs were added in September when the consensus expectation was 185,000 jobs were to be added.  This gap has led the 10 year Treasury yields to drop from 2.60% to 2.52%, the lowest they have been since mid-July. So what does that mean for FHA Multifamily rates? As I said in an earlier blog post, two things are keeping rates high. First, there are a lot of REMICs that are still underwater, needing the high interest rates of new securities to leaven the entire REMIC so as to increase the weighted average coupon from earlier purchases.  This hangover continues. The security buyers are trying to hold investor coupons above 4% so as to be able to curtail losses on those underwater loans bought before the Bernanke pronouncements in May. Secondly, the investors in the securities have been expecting higher yields next year, based on tapering the purchases by the Fed. This made it likely that next summer’s rates would be much higher than today’s rates, causing investors to want the higher rates expected next year. Securities have been priced accordingly. With today’s Jobs report, and the weak data probably coming out over the next few weeks, it is likely that the Qualitative Easing will continue.  If rates stay low, the large spreads, especially in new construction under the 221 (d) 4, will have to narrow, bringing rates down. As an interested party, what should you be looking for as a sign of lowering rates?  If the 10 year Treasury bond continues/stabilizes in the 2.50%...

Spreads

In the last month and a half, interest rates have spiked, stabilized and come down some.  The question is, why haven’t FHA Multifamily rates come down more?  This brings up how the markets work and how the Fed can raise rates without raising rates themselves. As I write today, the rate spread over 10 year treasuries are about 210 bps, including the servicing of 25 bps.  That means that, given this morning the treasuries were at 2.60%, you could expect to be in the market at about a 4.70% rate, exclusive of the Mortgage Insurance Premium. Why are spreads that large, given that several months ago, the spreads were considerably smaller? Two themes are going through the market right now: The REMICS that were underway when the interest rate sea change occurred are now loaded down with number of below market loans in the Conduit package.  The Investment Bankers need to leaven the REMIC with higher yielding assets in order to make the REMIC profitable in this new interest rate world. Investors in GNMA Multifamily securities are aware that rates are going up, if not now then next year.  While they do not require as much yield on 223 (f) existing apartment loans, since they start paying now, the (d) 4 loans, where funds are committed now but perhaps not put to work until drawn down upon a year from now, generate an uncertainty for investors:  where will rates be in another year?  How do I protect myself from locking in a lower yield in 2014?  The answer is to keep spreads wide. While there is almost equal likelihood...

When Will the Fed’s Tapering Kick In?

Yesterday Chairman Ben Bernanke announced that the U.S. economy is improving and the unemployment rate should accelerate downwards towards a 6.5% level this year. This benchmark is important as the timetable when the Federal government will begin tapering its purchased of $85 Billion per month in government securities, which has been backing about 90% of the residential mortgages being offered this year. The Fed says it will keep buying $85 billion a month in bonds until the outlook for the job market improves substantially. It’s maintaining its plan to keep short-term rates at record lows at least until unemployment reaches 6.5%, or inflation goes to 2%, which is not likely to happen. You have to hand it to the Fed — they can raise interest rates without tapering and without raising rates themselves. How much did our rates go up? Well, it appears to be somewhere between 60-70 bps initially. I saw quotes today at 3.85% for refinances and 4.15% for new construction. If the $85 Billion continues to be purchased, why did they go up at all? It all is based on expectations. Say you are a bond investor buying a d (4) security last Friday, at say, 3.50%. Today, you know that soon, sooner than expected last week (when you expected rates to start moving up in early to mid-2014, you, the higher rates are likely to kick in when the Fed removes its support. You demand more yield going forward, like anyone would. There is another issue: Our securities are put into mortgage back instruments that are sold in tranches. On the short end of the...