FHA Increases Multifamily Mortgage Limits by Excluding Land Value in Calculation

March 23, 2010

On March 16, 2010, HUD announced that, effective immediately, the total land value will be excluded from the calculation of the statutory mortgage limits for FHA multifamily mortgage insurance, thus potentially resulting in larger FHA mortgage amounts, especially in areas that have high land costs. The change in policy is set forth in Notice H 10-07 and Mortgagee Letter 2010-10.

In recent years, developers in high-cost areas have been unable to utilize FHA financing for apartment construction due to the existing FHA mortgage limits. Moreover, FHA (which recalculates the multifamily mortgage limits annually based on changes in the consumer price index) recently announced multifamily mortgage limits for 2010 that are approximately 0.75 percent lower than the mortgage limits for 2009, thus exacerbating the problem. Especially in the current market, in which conventional financing for multifamily construction is largely unavailable, developers have been pressing for increases in the mortgage limits so that FHA financing could be used in high-cost areas. The exclusion of land value in the mortgage limit calculation announced by HUD, while a helpful step, will need to be coupled with statutory changes in the mortgage limits in order to make FHA financing available in areas with high development costs.     

Under the National Housing Act, Congress has established mortgage limits for each FHA multifamily program “for such part of the property or project as may be attributable to dwelling use.” Until now, FHA has excluded only those costs attributable to non-dwelling use, such as community rooms, exercise rooms, playgrounds, etc., and the proportionate amount of the land costs attributable to such non-dwelling use. In the Notice and Mortgagee Letter HUD recognized that this practice has inadvertently prevented the development of needed housing in areas with high land costs. HUD has now concluded that the National Housing Act does not require that the cost of land be included in the calculation of the statutory mortgage limit, and has revised its policy to exclude the total land value from the calculation.

Under the Notice and the Mortgagee Letter, for new construction, acquisition and refinancing loans, the amount excluded is the “warranted price of land;” for substantial rehabilitation loans, the amount excluded is the “estimated value of land without improvements.” The excluded amount is determined in accordance with long-standing FHA processing instructions; in particular, the “warranted price of land” generally corresponds to the appraised value of the land for the intended multifamily use.           

The policy change applies to all applications, including those that are in processing; in cases where a firm commitment has been issued, the commitment must be amended at the request of the mortgagee.

As noted above, the exclusion of land value from the mortgage limit calculation must be coupled with changes in the mortgage limit amounts themselves to make FHA financing available in high-cost areas. On September 15, 2009, the House of Representatives approved legislation to make such changes. The bill, H.R. 3527, the “FHA Multifamily Loan Limit Adjustment Act of 2009,” was sponsored by Rep. Anthony Weiner (D-NY). It would replace the current mortgage limits for elevator buildings (which generally are about 9-10 percent higher than the limits for non-elevator buildings) with a flat 50 percent adjuster for elevator buildings.

In addition, H.R. 3527 would give "extremely high cost areas,” as determined by HUD, the same treatment with respect to mortgage limits as is given to Alaska, Hawaii, the Virgin Islands and Guam. Under current law, the mortgage limits for those jurisdictions may be adjusted as high as 50 percent above the otherwise-applicable high-cost mortgage limits. The potential effect of the bill would be to authorize mortgage limits for projects in high-cost areas such as New York, Boston and Los Angeles as high as 405 percent (on an area-wide basis) and 472.5 percent (on a project-by-project basis) times the normal mortgage limits.
For example, the 2010 mortgage limit for a two-bedroom unit in a 221(d)(4) non-elevator building is $61,567. The bill’s 50 percent adjustment for elevator units would increase the limit to $92,351. If the building is located in a high-cost area, HUD could approve a limit for two-bedroom units as high as $374,020 on an area-wide basis or $436,358 on a project-by-project basis. By comparison, under current law the mortgage amount for a two-bedroom unit in an elevator building is limited to $182,428 on an area-wide basis and $212,833 on a project-by-project basis. All of these amounts are net of land value and other costs not attributable to dwelling use.                     

H.R. 3527 has been referred to the Senate Committee on Banking, Housing and Urban Affairs; however, there has been no Senate action yet on the bill. The enactment of such legislation, coupled with HUD's recently announced policy change excluding the total land value from the mortgage limit calculation, would greatly enhance the availability of FHA financing for multifamily construction in high-cost areas.

This article was originally published by Bingham McCutchen LLP.