Navigating Changes in HUD’s Mortgage Underwriting Criteria: A New Era for Multifamily Development

Significant proposed changes to the U.S. Department of Housing and Urban Development (HUD) mortgage underwriting criteria were recently released, focusing on a partial risk mitigation rollback and the introduction of a middle-income program. These adjustments come at a crucial time as HUD has experienced a notable decline in volumes, prompting a reevaluation of its approach to multifamily housing financing.

The Need for Change

HUD’s production levels have declined from approximately $23 billion in fiscal year 2022 to $11.3 billion in 2023 to just under $8.6 billion in 2024. This downward trend raised concerns about liquidity in the housing market, which is one of HUD’s primary objectives. To address this issue, the agency’s recently released Mortgagee Letter (ML), loosens underwriting criteria by adjusting debt service coverage ratios (DSCR) from 1.17x to 1.15x and increasing loan-to-cost/loan-to-value limits (LTC/LTV) from 85 percent to 87 percent. These changes are expected to result in higher proceeds for borrowers, making it easier for developers to secure funding for their projects.

Proposed Risk Mitigation Rollback Changes

Boosting Multifamily Production

Unfortunately, 2023 marked the lowest creation of new housing stock through HUD’s construction programs in 15 years. With only 45 percent of the previous ten-year average being met, there is a pressing need to stimulate multifamily production. The risk mitigation rollback aims to provide the necessary support to boost development, particularly in an environment where rising interest rates have made financing more challenging.

In today’s financial landscape, every dollar counts. These adjustments equate to a rate decrease of approximately 16 to 18 basis points, translating into substantial financial benefits for large-scale projects. Given that our average HUD deal size exceeds $50 million, even minor improvements in loan terms can lead to significant savings for developers. Here is an example on the impact to a $20 million loan under the new Risk Mitigation rollback Mortgagee Notice, all else considered equal:

• Under current parameters: $20,000,000 debt service -constrained loan
• Under new underwriting parameters: $20,470,600 debt service-constrained loan
  • $470,600 additional loan proceeds
  • 2.35 percent increase in loan proceeds

The more favorable underwriting criteria is the equivalent of a 17 basis points rate drop.

Understanding the Implementation Process

The public comment period following the issuance of the ML ends on November 25, 2024. After reviewing comments, HUD aims to finalize any changes by late December or early January. This timeline is critical, as many developers are eager to understand how these adjustments will impact their current and future projects. HUD also confirmed with the release of this ML, changes will be implemented immediately for any application that has not yet closed.

Clarifying Affordable Housing Restrictions

There was some speculation initially that HUD would implement uniform coverage across all categories. However, there are some nuances from deeply affordable Section 8 up through low-income housing tax credit projects that affect the Middle Income Housing options. It will be important for developers to understand affordable asset definitions and the specific requirements to take advantage of the opportunities available under each category.

Call to Action for Developers

W&D's strong reputation and relationships with HUD helped shape and drive some of rollbacks. Our successful track record securing favorable outcomes, along with our insight into the updated criteria, positions us well to help our clients navigate these changes as they are finalized.  

Now is the time for multifamily developers to engage with HUD and take advantage of the newly favorable underwriting criteria.

This latest move by HUD’s mortgage underwriting criteria marks a pivotal moment for multifamily development. By loosening restrictions and providing greater access to capital, HUD aims to revitalize the housing market and support the creation of much-needed housing stock. As the industry prepares for these changes, working with the right partner and proactive engagement will be key to navigating this evolving landscape.

Talk to a Walker & Dunlop expert about the new HUD risk mitigation changes and how you can leverage them in your next project.