HUD Provides Much-Needed Liquidity in Time of Market Disruption

August 5, 2020

HUD Provides Much-Needed Liquidity in Time of Market Disruption

August 5, 2020

Over the past few months, the U.S. Department of Housing and Urban Development’s (HUD) multifamily lending volume has increased significantly. This is largely the result of the near unprecedented low interest rate environment and more limited immediate financing options—both of which have been brought about by the economic impacts of COVID-19.

Given the global effects resulting from this pandemic, many lenders outside of HUD are temporarily tapping the brakes. At the same time, HUD refinancing opportunities are becoming more sought-after each day due to low interest rates and the suspension of the “3-year rule,” where owners are no longer required to wait for the property to season for three years in order to refinance under the 223(f) Program. Lending activities across other government sponsored entities (GSEs), like Fannie Mae and Freddie Mac, have been relatively strong, but HUD’s business has outpaced all others in percentage of growth year-over-year. In times of economic hardship, HUD has always committed themselves to providing much-needed liquidity in the market. This moment is no different. And whether the need is for construction, sub-rehab, acquisition or refinance of multifamily rental or health care properties, HUD is open for business.

Adapting to a Changing Market

The influx of financing activity is not to say that HUD will take on any opportunity, but rather that they are committed—now more than ever—to working with the commercial real estate industry to find a way to fill business needs. For example, some new construction deals have experienced recent delays due to labor shortages or a shift in sources for materials due to price and/or availability. To address this concern, HUD has asked lenders to consider increasing construction periods to account for supply chain and labor disruptions, as well as increase Initial Operating Deficit escrows when warranted. Additionally, for refinance and/or acquisition applications, HUD will require debt service reserve escrows for certain transactions to mitigate identified potential property-related financial performance risks related to COVID-19.

HUD has quickly adapted to the changing market and is addressing its evolving needs. Their remarkable ability to adapt to teleworking across platforms was paired with workload sharing among other offices that have capacity, and the addition of contract underwriters to accommodate increased application activity. Even with all of this collaboration, HUD still has a number of job openings listed on their site under the “HUD” category in their effort to keep pace with their growing pipeline.  With the addition of contract underwriters and new hires, relief is on the way.

Furthermore, with respect to multifamily closings, HUD has found efficiencies in closing by mail, which previously had not been allowed for HUD multifamily insured loans. While their healthcare property transactions have been comfortable with mail-away for some time, it was exciting to see this flexibility extend to the multifamily arm of their business. We remain hopeful that these efficiencies are here to stay, even when the time comes for all of us to return to the office.

Working Towards the Best Decision

With both the GSEs and HUD still being active during this time, it is critical for all of us to understand the pros and cons of all lending options so that we can guide clients to make the best-informed decisions. While not unique to pandemic times, when looking at transaction options, we are continually examining sourcing possibilities across our own Berkadia platform and various other outlets to deliver the best options for our clients.

To help with this process, Berkadia’s research team regularly compiles hyper-specific market resiliency reports, a tool that our clients have found to be invaluable when making these critical decisions. Reports from this Berkadia platform give the end user the ability to review employment data and understand which regions are the strongest viable options for any given proposal. Berkadia’s diverse portfolio of partners and resources allows us to advise clients and prospects based on data-driven insights uniquely tailored to any initiative in the pipeline.

Our Next Steps Forward

While past market disruptions have taken place because of negatively-trending economic factors, in this case, we went into this pandemic at a time when the economy was roaring. As a result, our hope is that as the U.S. opens back up, we will see recovery happen more rapidly across many markets. The speed of said recovery will depend greatly upon the delicate balance and timing of financial assistance to businesses and individuals.

The importance of a well-underwritten application by any given lender is more critical now than ever before to keep the application flow moving.

Broadly speaking, in times like these, I find myself feeling particularly proud to work with HUD and to be able to help support HUD in providing liquidity to the marketplace. HUD has been actively involved in communicating with the industry—listening, talking and encouraging feedback on how to make their programs and processes better. During difficult times, these small flexibilities have helped to keep applications moving forward. It is truly a collaborative effort all around. Everyone I have the privilege of working with—from colleagues, to HUD, to clients— share this same desire to continue providing and shaping programs that protect our collective long-view success.

-By Carolyn Whatley, Managing Director – FHA/HUD Originations