Is the FHA 207(m) Loan Guarantee Program Still Alive? The Answer May Surprise You
By Edward Hicks
In recent years, there has been a dearth of approvals for the Federal Housing Administrationís (FHA) 207(m) loans program by the manufactured housing industry and as a result, several community owners, investors and developers have questioned its viability. While itís true in the past 8-10 years, there has not been much use of this specialty program, recent improved home financing programs and market conditions make the timing right for qualified projects.
What is the FHA 207(m) Loan Guarantee Program?
Itís a private lender financing program with HUD insurance guarantees for funding on a land-lease community for the acquisition and rehabilitation of, or refinancing and rehabilitation of existing properties or for totally new community development.
Resulting loans are:
40-year term and amortization
Combination construction and permanent financing
Fixed rate, 10 year prepayment lockout, w/3 year option
Up to 90% of acquisition price + 90% of rehabilitation costs or
Payoff existing mortgage + 90% of rehabilitation costs
Build a new community with 90% of hard and some soft costs
Residents may purchase their community as a cooperative
Current loan limits are $20,700 per home site times the HCP factor (High Cost Percentage ) which is area specific and ranges from 178% to 270% and higher in some high cost areas.
Resulting loans are based on underwriting at market rents and verifiable operating expenses at the time of I.E. (initial endorsement), and are later assumable by qualified purchasers.
But first a little history lesson . . .
At the height of new land-lease community development in the late 1980ís and early 1990ís there was a massive failure of several of the larger personal property lenders, primarily the result of the high rate of loan defaults on poorly underwritten loans. This failure caused new community developers to look elsewhere for home financing to fill their newly built home sites within their communities. Without adequate financing, they were doomed to fail by the lack of income from lease payments. At the time, Fannie Mae was considering adopting a personal property loan program for homes with long-term leases, and proposed a set of rules. One of these rules required a "notice of lease" to be recorded on the public records for a community in which their new loans were to be made.
The problem encountered was the FHA 207(m) program financing agreement did not provide for any other recorded instruments, junior or senior, to be placed on a property which was the subject of a loan guaranteed by the 207(m) program. Without this notice, Fannie Mae withdrew the proposed program. As a result, several projects which were being considered were halted, and some which were about to finish construction even "turned in the keys" to their projects, giving up any hope of selling homes and filling vacant home sites. "My project is dead in the water," they added post-mortem.
The word spread rapidly among the HUD offices that in order to seriously consider financing a community using the 207(m) loan guarantee program, the developer/owner would have to show a source of viable home financing for residents to purchase their homes. And, to make matters worse, they required the source to be "proven"; that is to say, they must show an adequate source of committed funding which would provide a sufficient amount of capital at terms and conditions meeting the new residentís resources and credit worthiness to fill the projects needs to stabilized occupancy.
This became almost impossible, since most developers obviously werenít able to provide sources with enough fully committed capital at market terms for new residents, so all but the few that were already starting to fill their communities dropped their applications. The few which were under filled, soon failed, and were foreclosed on by HUD.
The Housing and Economic Reform Act (H.E.R.A.) of 2008.
Recognizing this lack of viable personal property financing for manufactured housing, Congress included some badly needed reforms to the little used FHA Title I financing program. Although the program included financing for site built home improvements, it also had provisions for financing manufactured homes on leased home sites. When President Bush finally signed the bill into act, these reforms were put in place, and the loan limits were indexed for inflation, assuring increasing loan sizes to match market home price increases.
In June of 2010, HUD fully implemented necessary changes to the underlying loan underwriting rules of the Title I program. In the meantime, also in June of 2010, Ginnie Mae lifted their moratorium with some new mortgagee financial requirements.
With the availability of the Title I program, improved home financing options exist for developers/owners considering refinancing, acquiring or developing land-lease communities. And as a result, in most cases, when presented with proof of a relationship with a personal property mortgage lender using the Title I program, HUD is now considering more 207(m) loan applications. Of course the project still must meet the other program requirements.
Note: The developer/owner is not necessarily required to use the Title I program, and may use private financing sources, or other commercial personal property lenders, as long as the project will qualify for financing homes installed in the community.
Retail Home Sales Options
HUD will need to be assured there is an adequate local source of home retailers who are qualified to sell and install homes within the project.
The retailer may be off-site or on-site as long as there are not more than 2 homes per retailer on display. The community owner or developer may also be a retailer but cannot exclude other retailers from placing qualified homes and home buyers within the community. Home and resident standards may be applied, but must be done uniformly and without prejudice.
Home sales profits may not be used to justify the loan equity, working capital, or operating deficit requirements.
Why Consider Using the Program?
Many community owners are having difficulty in obtaining re-financing now that their loans are coming due. If the project qualifies, through the secondary Ginnie Mae market, there are virtually unlimited funds for a private lender to loan, with the FHA guarantees in place.
Rates are as low as they have ever been, typically ranging to within 190 to 210 basis points over 10-year Treasuries. They have nowhere to go but up.
More information may be found at www.fha207m.com/.
Now go: acquire, refinance, or build and fill your community!
Edward Hicks is a licensed RE Broker, and Mortgage Broker in the Tampa, FL area. He has over 45 years experience as a m/h retailer, manufacturer, and developer. In recent years he has assisted investors in acquiring or developing investment grade m/h land lease communities. He is a specialist in the FHA 207m loan program for private lender financing of qualifying communities with HUD loan guarantees.
Lic. RE Broker
Lic. Mortgage Broker