Say Goodbye to the Three-Year Rule!
Like Prohibition, and more recently, bell-bottom jeans and eight-track music cassettes, HUD’s “three-year rule” for the Section 223(f) multifamily mortgage insurance program is no longer with us.
HUD’s announcement of the change came earlier this week with Mortgagee Letter (and Housing Notice 20-03). The Notice revises HUD’s policy that applications for refinancing or acquisition of existing properties under Section 223(f) of the National Housing Act may not be accepted unless and until three years have passed since completion of construction or substantial rehabilitation of the property.
HUD now will allow Section 223(f) mortgage insurance applications to be submitted once a project has met a prescribed debt service coverage ratio for one month, and to proceed to closing after the project has maintained that coverage for three consecutive months. The DSC for market-rate deals is 1.17 and it is 1.11 for “broadly-affordable” deals. Contact us if you want to know more about HUD’s definition of broadly affordable.
Better yet, the equity take-out provisions of the Section 223(f) program will remain in place, albeit with some modification. Half of the available proceeds from a cash-out refinancing will be held by the lender until the property achieves six months of the minimum applicable DSC (inclusive of minimum DSC) required prior to closing.
The three-year rule has been a feature since the Section 223(f) program’s inception in the 1970s save for two temporary periods, most recently from 2009 – 2013 when economic conditions prompted by the Great Recession resulted in a significant restriction on credit.
HUD’s stated goal with its new policy is to facilitate the supply of affordable and workforce housing, however, the Notice also covers market-rate projects. HUD intends to conduct a review of the policy in March 2022 to see if its objectives are being met.
We congratulate HUD on this change in policy and expect to see an increase in Section 223(f) mortgage insurance applications for recently completed properties.