In a rising interest rate environment, senior housing lenders who work with the Department of Housing and Urban Development’s LEAN 232 program say they are anticipating fewer transactions in the coming year.
But it could lead to more opportunity for new construction loans under HUD, which has comprised just a small percentage of HUD lending in the past.
Since many existing HUD loans have already attained historic low interest rates, lenders are expecting to see fewer HUD to HUD refinance transactions, or (a)(7) refinances.
This factor combined with recent improvements in underwriting and staffing could lead to a change in course for the HUD senior housing lending landscape that could mean new opportunities, or fewer players, depending, in the coming year and beyond.
“HUD did a good job when they redesigned the LEAN program,” says Michael Vaughn, senior vice president, FHA Finance for Walker & Dunlop. “The results are more predictable and when the demand was greater than anticipated, HUD contracted more underwriters as needed.”
The improved infrastructure and fewer refinance transactions could mean other types of lending on the horizon, Vaughn says, such as new construction loans.
“I wonder if the refinance volume does die down and HUD has some more resources, whether they’d devote more resources to new construction,” he says.
Other lenders see similar potential for an uptick in new construction lending by HUD.
“Recognizing the high number of transaction refinancing existing HUD debt over the last few years, HUD may now have more resources to devote to new construction transactions,” says Bill Mulligan, President of Ziegler Financing Corporation.” Those transactions (new construction) have been a very small percent of the total over the last three years.”
HUD requested $30 billion in commitment authority for Fiscal Year 2014, and currently is operating with a pro-rated portion of the $25 billion level granted in 2013.
The agency won’t speculate on whether there will be excess capacity, but acknowledges that as refinance transactions, (a)(7) loans are sensitive to interest rates.
In the interim, lenders are hopeful the rising rates and fewer refinances could signal a shift toward more HUD loans for new senior housing construction.
“I think we will generally see a little less volume given the uptick in rates eliminating some economic refinances,” says Nick Gesue, senior vice president and chief credit officer for Lancaster Pollard. “It’s hard to say how that will translate. At a minimum, we are hopping for and expecting to see a faster turnaround on deals. Hopefully, this also means that construction loans will also get greater attention.”
But the flip side could mean fewer transactions and fewer opportunities for lenders, says Jeff Davis, chairman and CEO of Cambridge Realty Capital, who points to HUD’s use of contractors on an as-needed basis.
“HUD will never have excess capacity because they hired contractors when they had the demand and can allocate and reallocate the capacity to different parts of the agency,” he says. “The excess capacity may be not in HUD but through the HUD lenders in shrinkage of the HUD lenders, paring back staff, possible mergers or just not enough demand to satisfy the infrastructure. I see a lot of change in 2014.”
Written by Elizabeth Ecker