On June 28, 2023, HUD released Mortgagee Letter 2023-14, revising its Large Loan Risk Mitigation MAP Guide Policies for Multifamily loans.
- The threshold for Large Loans has increased to $120 million, up from $75 million. This is the first update HUD has made since 2014. HUD's risk analysis and industry feedback showed this upward revision was needed primarily due to housing and construction cost increases over the last decade.
- The Mortgagee Letter also provides a method to annually revise the Large Loan threshold based on inflation. This revision will allow HUD to review or adjust the Large Loan threshold on an annual basis, along with similar inflation adjusted items in the MAP Guide.
- HUD will review the threshold amount ($120 million) annually for an inflation adjustment, in $5 million increments, based on the percentage change published by the Bureau of Labor Statistics of the Department of Labor or other inflation cost index. However, in no case will HUD implement a reduction of a current threshold amount.
- This increase to HUD's Large Loan threshold will immediately benefit Multifamily borrowers with projects seeking loans in the $75 million to $120 million range, as many transactions in today's higher interest rate environment are constrained by HUD's minimum Debt Service Coverage Ratio underwriting standards. The change allows loans in the $75 million to $120 million range to benefit from lower DSCR Limits resulting in higher loan proceeds for these transactions and smaller equity requirements from borrowers.
- In particular, Multifamily borrowers seeking new construction or substantial rehabilitation financing under FHA Section 221(d)(4) stand to benefit from HUD's increased Large Loan threshold.
- With many banks and other construction lenders decreasing their appetite for new construction loans more borrowers are looking to FHA for their construction financing needs, particularly for new construction transactions, where FHA sees no direct competition from either Fannie Mae or Freddie Mac.
- In addition, based on the current cost of housing and construction, many new construction and substantial rehabilitation transactions fall within this $75 million to $120 million range.
- The FHA Section 221(d)(4) program offers non-recourse, assumable, fixed rate financing for both construction and permanent in a single execution, at a DSCR Limit between 1.11 and 1.176 (LTCR Limit between 90% and 85%) for loans below HUD's Large Loan threshold (depending on project "Affordability"), and with a fully amortizing permanent loan over a maximum term of 40-years.
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