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Risk-sharing loans for small multifamily properties

by Ethan Handelman, National Housing Conference

HUD is working on a new adaptation of FHA risk-sharing to provide more capital to small multifamily properties. At a roundtable with housing stakeholders on March 21, HUD officials outlined the why the small multifamily market segment needs attention and how they’re considering making capital available.

Small properties house many renters but lack scale or capital channels

More than a third of households in this country rent their homes. Of those, about one-third live in small properties of 5-49 units. By and large, those properties are owned by individuals and small businesses, and they’re often financed by local lenders who do very few of these loans. That means many properties do not have reliable access to new financing for renovations or capital repairs.

Risk share proposal in development

HUD is examining ways to adapt the Section 542(b) risk-sharing programs to allow more entities, such as state HFAs and community development financial institutions (CDFIs) to make loans to small multifamily properties. Key elements of the concept, which is still in the early stages, are:

  • Loans for existing small properties that serve low- and moderate-income renters by virtue of their market niche
  • Create an exception to statutory requirements for rent- and income-restrictions, to reduce compliance and monitoring costs on properties that will serve the target market anyway and for whom formal compliance would be a barrier to participation
  • Allow CDFIs, state HFAs, and possibly other mission-oriented entities that qualify (standards TBD) to originate and service small multifamily loans
  • Have FHA insure the full loan to enable Ginnie Mae securitization, but give FHA recourse to the originating lender for the risk-share portion of the loan

All of this is still provisional, with many details still to be worked out—loan limits, qualification standards for originating lenders, types of properties and loans that would be eligible, and more are still being thought through. And there’s still more work to be done to determine whether the new risk-share product can offer pricing and terms that will fit the requirements of these properties. Given the need in the small multifamily arena, HUD’s work is encouraging. NHC will continue engagement on the issue to help HUD and other stakeholders work through the outstanding issues.

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