4 Quick Takeaways From the Annual HUD SWAC Conference

The HUD Southwest Mortgagee Advisory Council (SWAC) recently held its annual HUD conference in Fort Worth. There’s always a variety of HUD-related topics on the menu with a focus on the Southwest region to whet our appetites and inspire new recipes for success. This year, our team brought back lots of knowledge and ideas that we’re ready to share with you, from wind and storm insurance coverage to enhanced guidance on affordability restrictions.

The conference always allows industry representatives to share ideas, discuss what is working well, and focus on areas for improvement across all platforms. The SWAC conference was no different this year, and it led to some valuable takeaways and relevant updates.

Here’s a quick recap of the annual HUD SWAC conference and what you need to know before your next investment project.

New mortgagee letter announces increase for storm insurance deductibles

HUD announced the long-awaited Mortgagee Letter 2024-05, allowing for a higher wind or named storm insurance deductible that reflects more current industry norms. The wind or named storm HUD deductible requirement was the greater of $50,000 or 1 percent of the insurable value for any insured building up to the maximum amount of $250,000. Due to insurers’ unwillingness to insure at those levels, it has become increasingly difficult for clients to obtain insurance at those thresholds and, in some cases, impossible.  

HUD recognized the need to revisit the wind or named storm requirements, increasing the maximum wind or named storm deductible to the greater of $50,000 or 5 percent of the insurable value per location, up to a maximum amount of $475,000 per occurrence.  

A Regional Director may waive the deductible, on a case-by-case basis, over 5 percent but not to exceed $1,000,000 if the sponsors have the necessary financial strength and HUD multifamily experience. The Director of the Office of Multifamily Production may also approve a waiver above $1,000,000 on a case-by-case basis.

Tax incentives are available to help close the housing shortage gap

Numerous states, cities, and counties are offering tax exemptions or abatements to developers to construct more affordable housing. We are witnessing this across the country, as local and state agencies seek to address the dire need for affordable housing.

The HUD program has certain requirements to underwrite abatements to provide additional loan proceeds. In the Southwest region and Texas specifically, multifamily properties can benefit from property tax exemptions by placing affordability restrictions on the property through a public facility corporation (PFC).

As of June of 2023, HUD will allow for a waiver to underwrite the tax exemption if the restrictions reflect 10 percent of the units for renters at 60 percent AMI and 40 percent of the units at 80 percent AMI.  In addition, HUD is expecting a ~10 percent discount to market in the restricted rents. The 10 percent is not a hard and fast requirement but a desired threshold, and each project will be assessed on a case-by-case basis.

The pathway to green MIP is bright

In today's rate environment, most transactions are debt service-constrained. HUD’s Green MIP offers the lowest available MIP rate to clients at 25 basis points. At the conference, a Green MIP panel discussed all the pathways to achieving Green MIP.  Given the amount of new supply coming online, numerous recently constructed projects with construction debt will need permanent financing.

For recently constructed projects, HUD is looking for several key items:

• A green certification

• An energy score of 75 or higher

• A data collection plan indicating annual energy data can be supplied to generate an annual energy score for ongoing compliance

For recently constructed projects with a green certification already in hand, the pathway to Green MIP is fairly straightforward with a higher level of certainty of execution. There are numerous recently constructed projects that were not designed with a green certification.

For projects with more than 12 months since the last Certificate of Occupancy (CO) was issued, there are several green certifications that a project can pursue to achieve Green MIP, with GreenPoint and NGBS the most common.

This has been a successful pathway for several of our recent transactions. For projects with less than 12 months since the last CO was issued, there is an appeal process with Energy Star New Construction or NGBS New Construction, provided the project was designed to meet those standards. The project could also potentially qualify for the NGBS prescriptive pathway.  

There are numerous requirements to ensure compliance for each of these scenarios, and each project is unique.  It would be best to meet with your lender to assess the likelihood of success.

New HUD initiatives are underway

We learned about numerous initiatives underway at HUD, with some further along in the process than others. For example, the Biden-Harris Administration is focused on increasing our housing supply and lowering housing costs through increasing the availability and affordability of manufactured homes.

A press release 24-041 and a draft Mortgagee Letter were published for comment that utilizes Section 223(f) refinances or purchase transactions for the Manufactured Home Community Program (MHC Program). The eligible borrowers are states, units of local government, resident-owned manufactured housing communities, cooperatives, and non-profit entities including consortia of nonprofit entities, CDFIs, and Indian Tribes. HUD previously financed several manufactured homes under the Section 207(m) program, which focused on construction and rehabilitation. This new initiative will allow for the financing of existing and recently constructed MHCs through the 223(f) program.

Subdivisions for Rent (SFR) and Build for Rent (BFR) have become increasingly popular subjects, given the amount of product coming online. HUD issued a memo in May of 2021 clarifying what types of SFR or BFR projects are eligible for HUD financing.

Generally speaking, market rate SFR or BFR has been discouraged. If the existing market rate development has structures with fewer than 5 units that make up less than half of the development, HUD may consider financing the project. Existing affordable properties that are single-family or 2-3 structures are generally allowed through a waiver, but new construction is discouraged for sites that have fewer than 5 units.

HUD is drafting a clarification memo for SFR and BFR. Although the details are not yet available, we are expecting HUD to address concerns relating to Fair Housing compliance for SFR, ensuring the design and intent is to operate the property as multifamily and ensuring the property is comprised of one marketable, manageable real estate entity such as single contiguous parcels.

Using these HUD SWAC insights to your advantage

We attend conferences like SWAC to learn and grow, not only for our team but also for our clients. If you’re on the hunt for your next HUD project or a new investment opportunity, contact our HUD team and let us put our expertise to work for you!