HUD Seeks Comments on Expansion of Small Multifamily Risk Share Program

On Nov. 4, HUD’s Office of Multifamily Housing Programs published a Notice in the Federal Register to solicit comments about a proposal for the Small Multifamily Building Risk Share Initiative that will help facilitate financing of small multifamily buildings.

According to HUD, small properties are home to more than 30 percent of the nation’s renters and tend to offer housing at more affordable rents than do larger properties. A preliminary analysis of 2012 Rental Housing Finance Survey (RHFS) data indicates there are approximately 587,000 small (5-49 units) multifamily rental properties in the United States, constituting more than one-third of occupied rental units across the nation (2011 American Community Survey).

Small multifamily properties tend to be older and located in low-income neighborhoods, and to have lower median rents and higher shares of affordable units than larger multifamily rental properties. The RHFS suggests that 58 percent of the landlords for this stock are individuals, households, and estates, compared to 8 percent of larger properties. The RHFS also suggests that 85 percent of large multifamily properties are mortgaged, while just 62 percent of small multifamily properties are mortgaged.

HUD contends that long-term fixed-rate mortgages made through this initiative will be especially valuable for smaller properties because such properties tend to command modest rents, and owners are often unable to raise rents to cover upward interest-rate adjustments without causing vacancies. Additionally, the mom-and-pop ownership of this inventory is facing even more constraints in accessing financing in recent years due to increasingly high credit standards and diminished lending in this area, following a significant reduction in community and regional banks in the wake of the 2008 recession.

HUD is formally proposing to expand the Federal Housing Administration’s (FHA’s) existing Multifamily Risk Share program authorized under Section 542(b) of the National Housing Act from only Fannie Mae, Freddie Mac, and state housing finance agencies (HFAs) to include community development finance institutions (CDFIs) that originate and service mortgages on small properties.

CDFIs are private institutions that provide financial services dedicated to economic development and community revitalization in underserved markets. Frequently, CDFIs serve communities that are underserved by conventional financial institutions and may offer products and services that aren’t available from conventional financial institutions.

This risk share expansion was highlighted in HUD’s FY2014 budget proposal. The proposal sought Congressional authority for Ginnie Mae to guarantee securities containing FHA multifamily risk share loans and to amend Section 542(b) to “allow for more flexibility in how affordability is determined in order to make it a more effective tool to recapitalize existing naturally affordable 5-49 unit rental properties.” The expansion would allow 50/50 risk-sharing with CDFIs, and eligible small properties would include those with 5-49 units, loan balances under $3 million, and an affordable component.

HUD is seeking public comments about the proposed requirements, the application process, participant eligibility, and program design features. Interested parties are able to submit comments until Jan. 3, 2014.