HUD Multifamily Is Proposing Rule Changes, While Interest Rates Continue to Fall

HUD is planning to relax rules involving refinancing multifamily properties that have recently been built, which could increase demand for HUD 223(f) loans.

The Department of Housing and Urban Development (HUD) is proposing a significant change to its multifamily lending programs. Right now, apartment properties that utilize non-HUD debt cannot refinance with HUD for around 36 months post-construction. However, a proposed change would allow multifamily borrowers to get HUD financing just one-year post-construction. The long gap currently leads many borrowers to seek Fannie Mae, Freddie Mac, or even CMBS loans to refinance their properties, none of which come close to having the up to 35-year fixed-loan terms that HUD offers through its 223(f) loan program. The change, which is currently expected to take place in 2020, could increase HUD’s overall lending (or, more specifically, insuring) volume due to increased demand.

For borrowers who want a long-term, fully amortizing construction or substantial rehabilitation loan, the HUD 221(d)(4) can often be an ideal product. However, it doesn’t always make sense, mainly because it requires developers to pay “Davis-Bacon” prevailing wages to all workers. In essence, rules laid out in the Davis-Bacon Act require that workers be paid prevailing federal wages for any federally funded or federally-assisted construction projects. This includes properties funded with HUD multifamily loans, which can make things significantly more expensive for developers. Experts say that Davis-Bacon wage requirements are one of the main reasons why HUD 221(d)(4) loans aren’t as popular in major markets, despite their incredible 40-year fixed and fully-amortizing terms.

While these reforms may increase demand for HUD multifamily loans, HUD’s shrinking interest rates could be an even greater driver of future demand. As of October 2019, rates for HUD 221(d)(4) multifamily construction loans and HUD 232 healthcare construction loans hovered at 3.49%. Rates for HUD 223(f) acquisition and refinancing loans and HUD 223(a)(7) refinances for existing HUD multifamily borrowers were even lower, at 3.14%. HUD multifamily loan rates are expected to remain relatively steady over the next 12 months.