The Law Firm Nixon Peabody LLP recently issued an Affordable Housing Alert on a recent HUD Mortgagee Letter. The letter implements changes to facilitate using Low-Income Housing Tax Credits with FHA loans. The letter addresses three primary areas:

  • Elimination of subsidy layering certifications
  • Elimination of cost certifications
  • Elimination of equity escrow

NH&RA will be exploring these developments as part of its multifamily debt update at its 2009 Fall Developers Forum, November 2-3 at the Taj Hotel in Boston. The following text is excerpted from the alert:

HUD recently issued three changes to facilitate using Low-Income Housing Tax Credits with Federal Housing Administration (FHA) loans. On July 29, 2009, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-24 (the “Letter”) implementing the Housing and Economic Development Recovery Act of 2008 (HERA), which requires HUD to take certain steps to make it easier to use Low-Income Housing Tax Credits in combination with FHA multifamily programs. Some of these changes were implemented in whole or part before HERA under a prior mortgagee letter (2008-19). Currently, an estimated 10″“11 percent of FHA-insured projects use the tax credits, and HUD seeks to increase this participation.

Elimination of subsidy layering certifications

HERA removes FHA multifamily mortgage insurance as a basis to require a subsidy layering certification. The Letter notes it supersedes all previously issued guidance about applicable subsidy layering requirements.

Elimination of cost certifications

Projects with FHA mortgage insurance and tax credits can be exempt from the cost certification requirement if HUD determines, at the time of firm commitment, that the ratio of loan proceeds to the actual cost of the project is less than 80 percent. This exemption applies to Section 213, 220, 221(d)(3), 221(d)(4), and 231 FHA programs. At this time only applications with firm commitments issued after the date of the Letter (July 29, 2009) are eligible for cost certification elimination. HUD is considering an industry group request to move this implementation date back to the HERA effective date of July 20, 2008.

Elimination of equity escrow

Finally, the Letter eliminates equity escrows for certain FHA-insured projects with tax credits. Currently, 24 C.F.R. 200.54 requires an FHA-insured mortgagor to deposit sufficient cash in escrow to assure project completion and payment of certain expenses. When tax credits are combined with an FHA-insured mortgage, however, HERA prohibits HUD from requiring an equity escrow or other form of security, such as a letter of credit. The Letter states, however, that an “appropriate” amount of equity must be invested at initial endorsement and that an expenditure of 20 percent of the total equity at the time of initial endorsement is sufficient to assure that the tax credit investor and mortgagor relationship will be maintained, but indicates exceptions can be made. Read More…