FHA Multifamily MAP FHA Multifamily MAP

TrainingTraining

May 30, 2012May 30, 2012

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U.S. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT

AGENDA –morningAGENDA –morning

8:45-9:15am … Pre-test. Introduction, 8:45-9:15am … Pre-test. Introduction, overview of agenda and training overview of agenda and training objectives.objectives.

9:15 -10:00am …Processing/MF FHA 1019:15 -10:00am …Processing/MF FHA 101

10-10:15am … Break10-10:15am … Break

10:15am-12:15pm … Case study10:15am-12:15pm … Case study

12:15 pm – 1:30pm… Lunch12:15 pm – 1:30pm… Lunch2

U.S. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT

AGENDA –afternoonAGENDA –afternoon

1:30-3:15pm … Case study1:30-3:15pm … Case study

3:15-3:30pm … Break3:15-3:30pm … Break

3:30-4:45pm … Post-training Exam3:30-4:45pm … Post-training Exam

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U.S. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT

MF FHA 101MF FHA 101

• Basics of FHA financingBasics of FHA financing

• Overview of Processing Overview of Processing

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U.S. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT

MF DEVELOPMENT – OUR MISSION

• BUILD COMMUNITIES

• SUPPORT AFFORDABLE HOUSING

• PROVIDE LIQUIDITY to CAPITAL MARKETS

HistoryHistory• 2000-present MAP2000-present MAP

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U.S. DEPARTMENT OF HOUSING & URBAN DEVELOPMENT

MULTIFAMILY INSURED LOAN ENDORSEMENTS

OVER THE LAST TEN YEARS

PORTFOLIO OF FHA-INSURED MULTIFAMILY APARTMENTS, BY

PROPERTY TYPE

MULTIFAMILY LOAN PORTFOLIO BY LOAN VALUE

Total Insured Portfolio: $43-Billion as of November 29, 2010

Total Insured Portfolio: $43-Billion as of November 29, 2010

FHA PROGRAM BASICS

• MAP (Multifamily Accelerated Processing):NC/Sub Rehab, Refinance/Acquisition,

Supplemental Loans for Apartments

• TAP (Traditional Application Processing):for Other including co-ops, mobile home parks,

lender identity of interest__________________________________________• LEAN/Health Care:

Assisted Living, Board & Care, Nursing Homes, Hospitals

FHA PROGRAM BASICS

New Construction / Substantial Rehab:

• Sections 220 for Mixed Use, 221(d)(4), 231 for Elderly, 241(a) Improvements/Additions

• Section 221(d)(3) -- to be suspended in FY13

Two stages of processing:

• Pre-application• Firm

FHA PROGRAM BASICS

Refinance / Acquisition of Existing Properties:

• Sections 223(a)(7) for already FHA-insured, 223(f)

One stage processing only:

• No Pre-application

FHA PROGRAM BASICS

What about elderly, age-restricted housing?

• 221(d)(4) & 223f: May restrict Head of Households (HOH) to 62+; cannot exclude children

• 231: All residents must be 62+ and/or disabled

• No FHA MF program may restrict HOH or residents to 55+ (otherwise OK under Fair Housing’s “Hsg for Older Persons Act”)

ADVANTAGES OF FHA FINANCING

• Permanent, fixed rate, long term, fully amortizing• Construction/permanent loan combined• Useable in “C” Markets• Can be combined with other resources, e.g., Section 8,

LIHTC (note: new “Tax Credit Pilot”)• High Leverage, especially with Builder’s/Sponsor’s Profit

& Risk Allowance (BSPRA) for NC/SR (note: new Risk Mitigation standards, especially for Large Loans)

• Non-Recourse (note: Regulatory Agreement #50 provision for “bad boy carve-out”)

DISADVANTAGES OF FHA FINANCING

• With increased volume, long processing times (e.g. between 88 and 1,178 days from engagement letter to closing on transactions closed in the last few years by a typical lender)

• With increased volume and Risk Mitigation, uncertainty about results on deals and relationships with HUD Offices

• About 60 - 75% NC/SR, 85 - 90% existing property deals are approved; National Loan Committee is approving 90%

DISADVANTAGES OF FHA FINANCING

• Mortgage Insurance Premium (MIP) Note increases proposed for FY13 Firm Commitments:

NC/SR: from .50% to .70%a7’s: from .45% to .50%223f’s, all others: .45% to .60% No increase if with LIHTC or Project Based Section 8

• Audited Annual Financial Statements, REAC inspections, possibility of enforcement, semi-annual HUD approval to pull $ out, R4R

• Potentially more restrictive repair requirements (e.g. smoke detectors, Fair Housing and Accessibility requirements)

OVERVIEW OF PROCESSING – OVERVIEW OF PROCESSING –

WHO’S WHOWHO’S WHO

Borrower: What/who are they dealing with?• Existing debt, partners, the IRS, lenders, the project• Single asset mortgagor, management agents, tenants

Your friendly lender: • Correspondents, originators, [underwriters], construction loan admin, servicing• Marketing, advertising, borrower contacts, structuring/ slotting, pre-screening, engagement

Your Friendly Local HUD Office: What they are doing . . .• Screening, publishing queue listing • Cashing check (soon to be pay.gov) or sending a letter• HUD Technical Review

Programs A&E CostValuation Env. Asset MgtEMAS Legal FHEOLabor Relations Mortgage Credit

• Loan Approval – Issuing a Firm

Overview of Processing – Who’s Overview of Processing – Who’s WhoWho

WHAT WE DO IN UNDERWRITING: QUESTIONS WE ASK:

• Will they pay us back?• Will enough people live here?• When will they do so?• How much will they pay for doing so?• Will HUD approve it?• Given specific program requirements -- e.g., 223f

repair limits, Remaining Economic Life, DSCR/LTV’s, commercial income standards, environmental requirements -- will it “pencil out?”

• Borrower, lender: Can we make money at this?

DETERMINING INSURABLE MORTGAGE AMOUNT: VALUE, DEBT SERVICE COVERAGE, COST

• Net Operating Income (NOI) = “Rental Income” less “Expenses.” So what to consider in determining these? See 2264 Section F.

• “Rental Income” = Estimated total potential “project income” + estimated “ancillary project income” X residential occupancy % = “Effective Gross Income” (EGI)

• Subtract total residential & ancillary project expenses= “Net Residential Rental Income”

• If commercial income involved, factor it in also, same approach with total potential commercial income X commercial occupancy %, less commercial expenses.

= “Net Commercial Income”

“Net Residential” + “Net Commercial” = NOI

DETERMINING INSURABLE MORTGAGE AMOUNT: VALUE, DEBT SERVICE COVERAGE, COST

• Value = Net Operating IncomeCap Rate

• Example: NOI = $678,500_____ = $10,051,851 Cap Rate = 6.75% or .0675

If 223(f) market rate, mortgage cannot exceed 83.3% of value. So:

$10,051,851 X 83.3% (or .833) = $8,373,100 max. ins. Loan

• Value = “Criterion 3” on HUD- 92264A

DETERMINING INSURABLE MORTGAGE AMOUNT: VALUE, DEBT SERVICE COVERAGE, COST

• DSC mortgage = Net Operating Income X Program Limit (Interest rate + MIP + “Initial Curtail Rate”)

• Example: NOI = $678,500 X 83.3% (4.5% + .45%MIP + 1.5802% Initial Curtail) =

NOI = $678,500 X .833 (.045 + .0045 + .015802 Initial Curtail) = $8,655,000

• Debt Service = “Criterion 5” on HUD- 92264A

DETERMINING INSURABLE MORTGAGE AMOUNT: VALUE, DEBT SERVICE COVERAGE, COST

• Cost-limited mortgage = Mortgageable Costs X Program Limit

• Mortgageable Costs = Fixed Costs + Variable Costs (e.g., fees)

• Example: It costs $100 in fixed costs to build a project and 8% of the total costs are variable costs. The mortgage amount is 90% of the total costs. How much is the mortgage?

MORE ARITHMETIC – BASIC ALGORITHM FOR THE REPLACEMENT COST FORMULA

WORKSHEETTotal Cost = $100 (Fixed) + 8% (variable) of Total CostTC – 8%TC = $100

92%TC = $100 TC = $100 .92

= $108.69

Mortgage = 90% of TC = $97.82

• Replacement Cost = “Criterion 3” on 2264-A“Lowest of” criteria = controlling mortgage amount

SOME OTHER IMPORTANT PROGRAM REQUIREMENTS THAT MAY IMPACT UNDERWRITING

• Davis-Bacon for NC/SR

• “Statutory Limits” = “Criterion 4” on 2264-A • Section 223f repair costs less than $6500/unit X HCP (new policy under review)• Commercial limits by Program and Net Rentable Area, EGI

• More conservative DSC/LTV for Large Loans >$40M

• Reserve for Replacement $ determined by PCNA

• Current MAP Guide, e.g. Chapter 9 Environmental 25

BACK TO THE LENDER

• Borrower Acceptance • Good Faith Deposit • Rate Lock• Prep Closing Docs• Submit Closing Docs, HUD reviews, ENDORSEMENT!!• Construction Loan Administration• Transition to Asset Management

After the Firm Commitment is issued

COMING POLICIES (TO BE DISCUSSED ON TUESDAY)

• Underwriting (a)7’s

• PCNA/R4R requirements

• MAP Guide Revision 2

• Rental Assistance Demonstration (RAD) lending

• Lender/underwriter tiering regulation

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1ST CASE STUDY: 10:15AM-12:15PM10:15AM-12:15PM1. Get in teams, introduce each other, and ensure team is familiar with case

2.“A” Team presents the loan, focusing on strengths and weakness, and issues they analyzed; “B” Loan Committee Team asks questions

3. Loan Committee deliberates (apart from “A” team), votes, briefly writes up decision (approve, approve with conditions, or disapprove), hands written decision to a monitor

4. All teams/groups reconvene in main conference room; leaders of “B” teams acting as loan committees will be prepared to state reasons for their team’s decision

5. HUD Trainer moderates further discussion, conducts summary presentation

6. Final questions from participants