Apartment Builders Stymied by Wait for U.S. Government Loans
Apartment Builders Wait in Long Line for Government Loans
Even as the number of renters is increasing, multi-family housing starts have slowed to about 100,000 units annually -- compared to about 300,000 before 2008. Photo: Rich Clement/Bloomberg
Even as the number of renters is increasing, multi-family housing starts have slowed to about 100,000 units annually -- compared to about 300,000 before 2008. Photo: Rich Clement/Bloomberg
With Denver apartment buildings filling up, developer Allied Realty decided last year to build 330 new rental units on a hill overlooking the city’s downtown.
Bank credit for multifamily construction, which seized up during the 2008 financial crisis, was still hard to come by. So Allied applied for a loan insured by the Federal Housing Administration, which offers long-term financing at favorable interest rates.
Three months ago, after hearing nothing from the government for nearly a year, the company decided to pull its FHA loan application, said Lauren Brockman, a principal at Allied.
“They couldn’t give us a time when they would get to it,” Brockman said in an interview.
A surge in single-family foreclosures combined with tighter credit markets has given the federal government a dramatically expanded role in financing new construction and rehabilitation of multifamily units.
The result is a backlog of applications. Government officials and developers say the FHA -- constrained by government austerity -- has had a tough time handling the demands of its new role as a cornerstone of apartment lending.
Government-sponsored enterprises including Fannie Mae and Freddie Mac now hold 41 percent of outstanding multifamily mortgage debt, up from 34 percent in 2008, according to the Mortgage Bankers Association. And the FHA expects to endorse a record $12 billion in multifamily loans in fiscal year 2011, up from about $2 billion in 2008.
FHA says it endorsed 1,100 multifamily loans so far this fiscal year, nearly seven times the number just three years ago.
Keeping Pace
“FHA has been hard-pressed to keep pace with the demand,” Carol Galante, acting commissioner of the FHA said in testimony prepared for a congressional hearing last month.
As its loan volume has quadrupled, the number of FHA staff devoted to multifamily loans has dropped through attrition to 1,414 nationwide, down 13 percent since 2005. In addition, the agency tightened underwriting standards last year and began requiring more documentation.
These factors have created a traffic jam of loans waiting for approval, according to David B. Cardwell, a vice president of the National Multi Housing Council, a Washington trade group representing apartment builders. Loans that should take 60 to 90 days are delayed as long as 18 months. Builders have told the group they are frustrated by the difficulty of determining the status of their loan applications and with the lengthy approval process, complicated by tighter underwriting.
“Have they stepped up? Yes, they have,” Cardwell said in an interview. The results of FHA’s efforts to improve the delays caused by underwriting changes are “mixed at best,” he said.
New Guidelines
Officials at the FHA say the delays exist only in some of its 52 field offices around the country -- those where there is the greatest demand. The agency just published a new guide to its mortgage application procedures and is working with the field offices to standardize the loan process and train staff to work more efficiently, officials said.
“Even with the new underwriting guidelines from last year, we are endorsing more loans than ever, providing necessary liquidity to the marketplace while minimizing risk to public dollars,” Galante said in an e-mailed statement.
Apartment builders report a recent slight easing in bank credit, which has in turn reduced some of the reliance on government financing. Eventually, Allied Realty obtained a bank loan for its Denver project, Brockman said. In smaller markets, though, developers might not have that option and could be stuck waiting for the government to act, he said.
Slowing Starts
Even as the number of renters is increasing, multi-family housing starts have slowed to about 100,000 units annually -- compared with about 300,000 before 2008. This, in turn, is sending rents higher.
“The pent-up demand is tremendous, and the ability for us to build product is putting a lot of pressure on rents, which is going to put a lot of pressure on affordability,” Brockman said.
Reliance on the government isn’t likely to decrease any time soon, Cardwell said. The Mortgage Bankers Association reported last week that outstanding commercial and multi-family mortgage debt increased in the second quarter of this year for the first time in seven quarters. Government agencies increased their holdings of multifamily mortgages by $4 billion, while commercial banks increased their holdings by just $1 billion.
“The dominance of the government participation in the market is still a major component of owners’ access to reliable debt,” Cardwell said. “I think that our members and the industry as a whole still have some concern about the way banks are going to respond to the current and near-term economic conditions.”
To contact the reporter on this story: Clea Benson in Washington at Cbenson20@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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