Many people are familiar with HUD FHA mortgage insurance programs for single-family housing. These programs insure mortgages for lenders providing loans to single-family home borrowers and have been a significant driver in shaping the housing and mortgage markets in the United States over the last 80+ years.
In addition to these more well-known programs, the agency also features insured financing programs for new construction and rehabilitation of multifamily projects, through Section 220 and 221 of the National Housing Act. This post will serve as an introduction to Section 220 and 221 and will be the first of two posts. Part II of this series will examine how these programs are being used in North Carolina.
What are these programs for?
The goal of mortgage insurance programs is to insure lenders against a default on their mortgage. A mortgage insured by the federal government becomes relatively risk free, allowing lenders to underwrite and administer loans to projects that might otherwise seem too risky for investment.
These programs are aimed at sponsors with projects in underserved geographies that are aimed at revitalizing and/or supporting tenants in these areas. The underlying goal is to make capital cheaper for rental projects that benefit target populations and geographies, thereby encouraging sponsors to move forward with particular projects.
What are the benefits?
The borrower should experience two major benefits from participating in the FHA mortgage insurance programs:
- Relatively low interest rates on borrowed funds, resulting from the full faith guarantee to the investor by the United States government.
- Provision of both construction and permanent loans in a single financing–under designated criteria, the construction loan rolls into a permanent loan.
In short, the borrower pays less interest and may avoid multiple capital sources, thereby saving the borrower time, money and alleviating some of the financing risk for both borrower and investor.
The greater community should benefit as well. By targeting areas or people that are in need of assistance, these programs provide incentives for the private sector to initiate projects that might not otherwise see investment.
Section 220 and 221 Program Overviews
Section 220 and 221 have set stipulations around how this financing can be used and by whom and the remainder of this post will give a quick overview of these programs with links for more information. For more information on all of these points, see Section 220 and Section 221.
Section 220: Rental Housing for Urban Renewal and Concentrated Development Areas
This program insures loans for multifamily projects in “urban renewal areas, code enforcement areas, and other areas where local governments have undertaken designated revitalization activities.” Within these areas, insured mortgages can finance either construction or rehabilitation of most types of rental housing (detached, row, walk-up etc.) or even “finance the purchase of properties that have been rehabilitated by a local public agency.”
Section 221(d)(4): Rental and Cooperative Housing
These programs insures mortgage loans in an effort to “facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative housing for moderate-income families, elderly, and the handicapped.” This program encourages the construction/rehabilitation of multifamily units for these communities by helping to make capital more available through loan insurance. Additionally, the agencies insure mortgage loans for elderly rental housing, nursing and assisted care facilities and hospitals.
Eligible Borrowers: private profit motivated entities, public bodies, and others who meet HUD requirements for mortgagors.
Limitations: Like most loans, the program has certain mortgage limits that differ depending on the size of the unit, the type of structure, and location of the project. Additionally there exist ‘loan to replacement cost’ and ‘debt service coverage’ limitations, amongst others.
Application Process: Section 220 & 221 are eligible for Multifamily Accelerated Processing (MAP), an expedited process in which the project’s sponsor works with a specific MAP-approved lender who interfaces with the HUD as the department decides whether or not to commit to issuing mortgage insurance. MAP-approved lenders include major financial lenders like, Citi, Bank of America, CBRE and more. Applications can also be submitted by non-MAP lenders, however the process is more involved for the sponsor.
In FY 2015, the HUD insured mortgages in the following:
|# of Projects||Total Units||Total Investment|
It is difficult to determine why only 1 project utilized under Section 220 in 2015, particularly in the midst of a multifamily boom across the United States. However, it is likely due to the areas which Section 220 focuses, which are largely marginalized geographies that are not attractive to many investors. Since the program seeks alleviate that investment risk, this low volume might suggest it is not as effective as it might be. Section 221 is less geographically restricted and therefore is not subject to the same constraints. Unsurprisingly there exists a much higher volume of insured loans in FY 2015.
Stay tuned for a future post on how this program has been utilized in North Carolina.
Allen Wood is a graduate student in the Kenan-Flagler MBA program at UNC-Chapel Hill. He is also a Community Revitalization Fellow with the Development Finance Initiative.