New Partnership Seeks to Boost FHA Multifamily Risk-Share Activity

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The U.S. Departments of Treasury and Housing and Urban Development have established a new partnership designed to stimulate greater use of the Federal Housing Administration’s multifamily risk-share loan program and reduce borrowing costs for developers and owners.

The new initiative, announced on June 26, essentially creates a major new investor for risk-share loans to increase their liquidity in lieu of the current inability to securitize these mortgages through Ginnie Mae.

Under HUD’s Section 542 risk-share program, FHA insures long-term mortgages to finance the construction and rehabilitation of multifamily rental housing properties or to refinance such properties. The mortgages are underwritten and originated by state and local housing finance agencies that are FHA lenders and approved to participate in the risk-sharing program. In exchange, HFAs agree to cover a specific percentage of any losses resulting from a default on the mortgage and FHA absorbs the rest. HFAs have often funded risk-share mortgages using the proceeds from tax-exempt bonds they issue.

Under the new initiative, HFAs will originate risk-share mortgages and issue securities or certificates that represent full ownership in the loans. These securities and certificates will then be purchased by the Federal Financing Bank (FFB), a division of the Treasury Department. The FFB has authority to purchase any obligation that is fully guaranteed by another federal agency, such as FHA.

According to a Treasury news release, “The new partnership…will help create more decent rental housing by significantly reducing the interest rate for affordable multi-family apartment buildings compared to the cost of tax-exempt bonds under current market conditions.”

 

Lower Borrowing Costs

A HUD official said the new initiative is expected to reduce the borrowing cost on multifamily risk-share mortgages by 70 to 100 basis points.

The maximum term for risk-share mortgages is 40 years, 35 years for a refinance.

At present, 33 HFAs are approved to participate in the risk-share program, all but four or five of which are state housing finance agencies.

According to the HUD official, “HFAs, without access to a Ginnie Mae execution, are disadvantaged in the market. The objective of this transaction is to provide housing finance agencies with a Ginnie Mae-like execution in terms of mortgage term and rate.”

Unlike other types of FHA-insured mortgages, multifamily risk-share mortgages are barred by law from being packaged by Ginnie Mae into securities that it guarantees and sells to investors.

The first transaction under the new initiative, expected to close in September, will be a risk-share mortgage of about $70 million to be originated by the New York City Housing Development Corporation, to provide long-term financing for a project in Queens called Arverne View (formerly Ocean Village).

            (Details: http://tinyurl.com/mpesy3l, http://tinyurl.com/nuj59fd)