From a small northwestern observatory…

I don’t get to visit with these folks as often as I’d like (maybe…. twice in… forever?), but they had a great luncheon meeting yesterday on HUD multi-family and health care finance. As dull as that topic sounds, HUD lenders are almost the only game in town for these sectors, and as such the “deal” volume at HUD has exploded.

Also, unfortunately, the “bad deal” flow has dramatically increased. HUD is seeing a rapid increase bad loans — not the same sort of levels we see in the sub-prime housing market or even in the conventional commercial market, but given the high degree of underwriting on these projects, HUD usually expects a loan-loss problem in the fraction-of-a-percent range. Thus, when loan losses start approaching 2%, it’s time for a lot of serious soul searching.

We had heard some vicious rumors out of the east coast that HUD was “shutting down assisted living lending”. Well, that’s apparently not true. However, there are a few obvious problems in the “New Normal” (I’m increasing stealing that phrase to describe the post-recession financial reality). Based on what I heard yesterday, I think HUD multi-family borrowers are going to see three significant issues:

1. The pipeline is a LOT longer. They haven’t done this on purpose, but the volume of deals coming thru the door at HUD is disproportionately large compared to the number of underwriters. (I saw this in the residential FHA/VA market back in the early 1980’s, when FHA money was the only game in town for start-up homebuyers, and it took longer to process a loan than it did to build the house!)

2. Underwriting criteria will be more subjective, and borrowers with little track record will face significant scrutiny.

3. Terms will be more severe. In the case of assisted living, the LTV went from 90% to 75% (although the Loan-to-Cost is still 90%) and DSCR is now 1.45, up from 1.1. This is mainly reflective of the significant problems in the assisted living market.

On the positive side, some programs are being slightly liberalized (232 program, for example). All in all, though, HUD multi-family borrowers will have a somewhat tougher time in the future than they had in the immediate past. Will this change down the road? Probably. I would expect that eventually we’ll see a return to somewhat easier money, but not until HUD works through the loan-loss problems and the conventional market becomes competitive again.