Is the Fha207m Loan Guarantee Program Still Alive?

by Edward 'Eddie' Hicks

In recent years, there has been a dearth of approvals for the FHA207m loans by the Manufactured Housing industry and, as a result, several community owner/investor/developers have questioned its viability. While it's 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 FHA207m Loan Guarantee Program?

It's a private lender financing program with HUD guarantees for funding on a manufactured housing land lease community to: acquire and rehab or refinance and rehab 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 rehab costs or
• Payoff existing mortgage + 90% of rehab 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 homesite times the HCP factor (High Cost Percentage) that 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 manufactured housing LLCommunity development in the late 80's and early 90's, there was a massive failure of several of the larger manufactured housing chattel mortgage Mortgagees, 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 homesites within their communities. Without adequate financing, they were doomed to failure by the lack of income from homesite lease payments. The Federal National Mortgage Association (FNMA a.k.a. Fannie Mae) was considering adopting a program for long-term chattel loans on HUD code homes that were installed on leased homesites, 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.

Problem was: the FHA207m program financing agreement did not provide for any other recorded instruments, junior or senior, to be placed on a property that was the subject of a loan guaranteed by the 207m program. Without this notice, FNMA said they wouldn't make the loans as being considered. As a result, several projects that were being considered, withdrew and some that were about to finish construction even "turned in the keys" to their projects, saying in essence, "Here are the keys – without any viable source of financing, there is no way I have any hope to sell homes, and therefore fill my vacant 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 207m loan guarantee program, the Sponsor (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 totally committed funding that would provide a sufficient amount of capital at terms and conditions meeting the new resident's resources and credit worthiness to fill the project's need for stabilized occupancy.

This became almost impossible, since most developers obviously weren't prepared 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 that were under filled, soon failed, and were foreclosed on by HUD and sold for "a few dimes on the dollar" to various "bottom feeder" investment groups. In later years, these investors were more able to fill vacant sites with used and repo homes using self-financing. Others just withered away and eventually were closed down.

The Housing and Economic Reform Act (H.E.R.A.) of 2008

Recognizing this lack of viable chattel mortgaging 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 homesites, and in a lesser manufactured housing land-home package financing; loan limits, and the structure of the guarantees for Mortgagees. When President Bush finally signed the bill into act, these limiting provisions were eliminated, and the loan limits were indexed for inflation, assuring increasing loan sizes to match market home price increases.

It took until July of 2010 for the HUD staff to fully implement necessary changes to the underlying loan underwriting rules of the Title I program. In the meantime, the secondary market Mortgagee of choice, the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae) had placed a moratorium on any new Mortgagees, which left only two active Mortgagees using the program. Finally in August of 2010, they lifted their moratorium with some new mortgagee financial requirements. Since then, several Mortgagees have been approved for the sale of their FHA title I originated notes, and several others are applying for approvals.

The situation now is that the availability of the Title I program greatly changes the home financing options for Sponsors considering refinancing, acquiring or developing manufactured housing LLCommunities. And as a result, in most cases, when adequately explained with proof of a relationship with a chattel home mortgage lender using the program, the HUD staff currently considering 207m loans is eliminating this major objection. Of course, the project still must meet the other program requirements.

Note: the Sponsor (Borrower) is not necessarily required to use the Title I program, and may use private financing sources, or other commercial chattel mortgage lenders, as long as the project will qualify for financing homes installed in the community.

Retail Home Sales Options:

1. 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.
2. The retailer may be off-site or on-site as long as there are not more than two homes per retailer on display. The Sponsor or development entity may also be a retailer, but may not 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.
3. Home sales profits from a Sponsor related home sales entity, if any, 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 GNMA 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 the 10-year Treasury Bill. They have nowhere to go but up.

Now go: acquire, refinance, or build and fill your community!

##

Editor's Note: Eddie is a member of MH SPIRIT, MHMSM.com's team of SPeakers Instructors Resources Inspiration Training that can help you clarify YOUR vision. Click on mhspeakertrainer.org for more information.

Edward 'Eddie' Hicks is a licensed RE Broker and Mortgage Broker in the Tampa, FL area. He has over 45 years experience as a manufactured housing retailer, manufacturer and developer. In recent years, he has assisted investors in acquiring or developing investment grade manufactured housing land lease communities. He is a specialist in the FHA 207m loan program for private lender financing of qualifying communities with HUD loan guarantees. Contact him at (813) 661-5901, www.mobilehomepark.com, www.factorybuilthome.com or This e-mail address is being protected from spambots. You need JavaScript enabled to view it . For more information about the loans addressed in this article: www.fha207m.com.