Los Angeles Private Lender Expands into Distressed Residential MarketOctober 17th
Fannie Mae and Freddie Mac are by far the largest players in the highly liquid secondary loan market. This being said, the two do not originate or issue loans. Instead, they buy large pools of loans from traditional originators, thereby injecting additional liquidity into the real estate lending markets.
Fannie Mae’s originators are known as Delegated Underwriter Servicers (DUS). To streamline the application and approval process, Fannie Mae gives DUS’s a strict window in which they can extend loans. If the borrower or project does not meet these requirements, then the DUS must consult with Fannie Mae before offering financing.
Freddie Mac, on the other hand, originates through any number of approved mortgage banking firms. It is important to note that while a loan originator may qualify for Fannie Mae programs, they may not be accepted by Freddie Mac.
Fannie Mae and Freddie Mac lenders offer fixed rate financing for 5, 7, and 10 year terms, usually with a 30 year amortization. They also will price as floaters over LIBOR. While they primarily originate multifamily loans, Fannie and Freddie also are active in financing senior housing, mobile home parks, and student housing.
When Fannie Mae and Freddie Mac became insolvent in 2008, the government took over the private shareholders’ position, and regained control of each agency.
Q: What is HUD/FHA? What does HUD/FHA do?
A: HUD is the Federal agency that works to help the Nation’s communities meet their development needs, spur economic growth in distressed neighborhoods, revitalize urban centers, provide housing assistance for the poor, help rehabilitate and develop moderate and low-cost housing, and enforce the Nation’s fair housing laws. (General information: www.hud.gov, specific Multifamily Program Information is available at: http://www.hud.gov/offices/hsg/mfh/progdesc/progdesc.cfm). HUD’s primary programs include: Community Development Block Grants (CDBG) – helping communities with economic development, job opportunities, and housing rehabilitation; Subsidized housing in the form of Section 8 Rental Assistance certificates or vouchers for low-income households; Subsidized Public Housing for low-income individuals and families; Homeless Assistance in a “continuum of care” through local communities and nonprofit organizations; HOME Investment Partnership Act Block Grants – to develop and support affordable housing for low-income residents; Fair Housing Public Education/Enforcement; Mortgage and Loan Insurance through the Federal Housing Administration (“FHA”).
Congress created the Federal Housing Administration (FHA) in 1934, and in 1965 FHA was made a part of HUD’s Office of Housing. FHA brings liquidity to the housing market by providing mortgage insurance for loans made by FHA-approved Lenders throughout the United States and its territories. FHA insures mortgages for single family homes, multifamily developments, manufactured homes, healthcare (i.e.: nursing homes, hospitals) and, a variety of specialized housing (such as cooperative units and single room occupancy housing). FHA is the only government agency that operates entirely from its self-generated income. (The proceeds from the mortgage insurance and property examination fees paid by the homeowners and developers are captured in an account that is used to operate the program.) FHA and HUD have insured over 34 million home mortgages and 47,200 multifamily projects since 1934.
Q: What is an FHA-Insured Mortgage Loan?
A: FHA-insured mortgage loans are loans on real property (single family homes/apartments/healthcare facilities) that are insured by the Federal Housing Administration. FHA provides liquidity to the housing and healthcare markets by providing mortgage insurance on real property so that their respective mortgages are marketable and attractive to investors. FHA is not a Lender for most of its multifamily and healthcare programs. Instead, FHA accomplishes its mission (for most multifamily/healthcare assets) by approving selected Lenders that meet specific criteria with regard to capitalization, expertise, and successful experience in multifamily/healthcare lending. Following a rigorous underwriting and due diligence process, FHA may offer insurance for the loan proposed by the approved Lender for the mortgage secured by that asset. It is important to note that the FHA mortgage insurance programs cover a large array of multifamily and healthcare assets – from market-rate, suburban, garden-style properties; to rent-subsidized properties; to market-rate, high-rise properties. FHA has the capacity to lend in all U.S. states and territories and, in all locations within those states and territories.
Q: What is the “MAP” Program/What is a “MAP” Lender?
A: “MAP” is an acronym for HUD’s “Multifamily Accelerated Processing” program, which is a “…procedure designed to establish national standards for approved Lenders to prepare, process, and submit loan applications for FHA insurance.” (HUD’s MAP Guide) To utilize the MAP Program a Lender must be an approved multifamily mortgagee and, must be approved by HUD’s Office of Multifamily Housing Development specifically as a MAP Lender. The intent of the program is to delegate certain review and underwriting responsibilities to the approved Lenders so as to maximize the time and processing efficiency of the various FHA Mortgage Insurance programs. Under the MAP process approved Lenders will perform a complete underwriting of a property, including: ordering and reviewing third party reports; performing architectural and cost reviews and, mortgage credit reviews; and, performing various management analyses. HUD has retained certain responsibilities, such as: environmental clearance, approval of an owner’s Affirmative Fair Housing Marketing Program, and approval of the previous participation clearance of appropriate principals. HUD is also solely responsible for the decision to offer mortgage insurance for any application.
Q: How does an FHA-Insured Mortgage Loan differ from other (Fannie Mae, Freddie Mac, Life Company, Bank) mortgage loans?
A: FHA was legislated into existence to provide liquidity to the single family and multifamily markets in the United States and its territories. Like Fannie Mae and Freddie Mac (the “GSEs”), FHA ensures a continual market presence and market share by insuring mortgage loans every business day of the year…year in and year out. However, unlike Fannie Mae, FHA does not purchase loans from its approved Lenders. Instead, the combination of FHA mortgage insurance and a Ginnie Mae guarantee provides individual Lenders with a virtually unlimited source of capital with which to make mortgage loans on an ongoing basis.
Unlike most bank construction loans, FHA construction loans combine both the construction and permanent portions into one loan. Also, unlike most bank loans, these loans are non-recourse to the Borrower (with the exceptions noted below). Further, FHA construction/permanent loans do not have any threshold historic/current occupancy requirements prior to funding the permanent portion. FHA generally requires an Operating Deficit escrow – posted upfront – that provides the property with the required funding to work through the lease-up phase. Finally, the interest rate for an FHA loan is determined and locked prior to construction – thereby eliminating interest rate risk post construction.
Unlike most bank or life company Lenders, FHA can provide tax-exempt credit enhancements for specific housing initiatives. Further, unlike the GSEs (historically), a Ginnie Mae credit enhancement for an FHA insured loan is backed by the full faith and credit of the U.S. Government.
Unlike life company and bank Lenders, FHA will not insure for financing stand-alone retail, office, or industrial properties; however, FHA may choose to insure properties that contain small amounts of commercial space that are housed within a housing asset.
Similar to life company Lenders, FHA programs have been established to accommodate almost any loan size. However, like Fannie Mae, FHA might be locationally/product restricted as to mortgage insurance that exceeds the statutory per unit limits that are periodically set by Congress.
Q: What FHA-Insured Mortgage Loan Programs does OMHHF Offer?
A: OMHHF has the capacity and expertise to offer a wide array of FHA Mortgage Insurance Programs for our Borrowers. The following list of programs provides outline information on the most requested programs sought by OMHHF’s clients.
Multifamily New Construction/Rehabilitation: FHA Sections: 220, 221(d)(4), 221(d)(3): Up to 40-year, fully amortizing, level payment, non-recourse, assumable, pre-payable loans plus, an interest-only construction period for up to 36 months (with interest payments capitalized into the loan). Loans may be as high as 83.3% of eligible replacement costs with a minimum of 1.20:1 DSC. (Loans to not-for-profit entities may be as high as 95% of cost.) No lease-up requirements prior to the conversion to the permanent loan portion, and there is no post-construction loan-to-value test. For Rehabilitation Processing the cost of repairs, replacements, improvements must: A: exceed the greater of (i) 15% of the property’s estimated replacement cost after completion of all repairs, replacements, and improvements; or (ii) $6,500 per unit, adjusted by the applicable high-cost factor; or B: more than one building system is to be replaced. This program requires compliance with wages in accordance with the applicable Davis-Bacon Act regulations. HUD does not monitor or restrict rents or tenants by income for this program unless first restricted by overlying programs such as the LIHTC or Section 8 Rental Assistance programs. This program is eligible for MAP processing.
Streamlined Refinance: FHA Section 223(a) (7): Provides refinancing for properties already insured by HUD under the following Acts: 220, 221(d) (4), 221(D) (3), 223(F), 232, and 241(a). The program typically does not require market studies or appraisals; there may be a requirement for a limited environmental review, and a PCNA report; and, a streamlined/modified mortgage credit review will be performed. The program provides for loan amounts to be set at the lower of: (i) the original principal of the existing mortgage; or, (ii) the amount of the current unpaid balance plus financing fees, soft costs, prepayment penalties, discounts, reserve for replacement deposits, repairs, capital improvements, lead-based paint testing, and (if applicable) bond defeasance costs. The loan term is limited to the remaining term of the existing mortgage or, may be extended by up to 12 years to increase project feasibility (but not to exceed the original term of the mortgage). Debt service coverage is a minimum of 1.11:1. This Program is MAP-eligible, and its limited processing regime provides for generally expedited processing. HUD does not monitor or restrict rents or tenants by income for this program unless first restricted by overlying programs such as the LIHTC or Section 8 Rental Assistance programs.
Multifamily Acquisition/Refinance: FHA Section 223(f): Up to 35-year, fully amortizing, level payment, non-recourse, assumable, pre-payable loans. For an Acquisition, loans may be as high as the lesser of: (i) 83.3% of value; or (ii) 83.3% of the acquisition price plus transaction costs; or (iii) the statutory loan per unit limitations; or (iv) DSC of 1.20:1. For a Refinance, loans may be as high as the lesser of: (i) 83.3% of value; or, (ii) the greater of: 100% of the cost to refinance or 80% of value; or (iii) the statutory loan per unit limitations; or (iv) DSC of 1.20:1. Eligibility requirements include a provision that, based upon the property’s final certificate of occupancy, the project must be at least three years old. Repairs are eligible for inclusion in the mortgage as follows: (i) no more than $6,500 per unit maximum as adjusted by the applicable high cost factor; (ii) less than or equal to 15% of the property’s as-improved market value; (iii) no more than one major building system component may be replaced or substantially repaired. Wages for repairs do not need to be in compliance with applicable Davis-Bacon Act standards. HUD does not monitor or restrict rents or tenants by income for this program unless first restricted by overlying programs such as the LIHTC or Section 8 Rental Assistance programs. This Program is eligible for MAP processing.
Healthcare: New Construction /Substantial Rehabilitation: FHA Section 232: New construction, expansion, or substantial rehabilitation of intermediate care, board and care, residential care, assisted- living and, skilled nursing facilities. This Program does not permit financing for properties charging up-front (“Founder’s”-type) fees. Up to 40-year, fully amortizing, level payment, non-recourse, assumable, pre-payable loans, plus, an interest-only construction period for up to 36 months (with interest payments capitalized into the loan.) Loans may be as high as the lesser of: (i) 75% (85% for non-profit Borrowers) of the estimated value of the physical improvements and major movable equipment (75% for Assisted Living Properties); or (ii) 90% of cost (95% for non-profit Borrowers ); or (iii) a minimum DSC of 1.45:1 (1.40:1 for non-profit borrowers). No lease-up requirements prior to the conversion to the permanent loan portion. This program requires compliance with wages in accordance with applicable Davis-Bacon Act regulations. HUD does not monitor or restrict rents or tenants by income for this program.
Healthcare: Acquisition/Refinance: Section 232 Pursuant to 223(f): Financing for the acquisition or refinance of intermediate care, board and care, residential care, assisted living, and skilled nursing facilities. This Program does not permit financing for properties charging up-front (“Founder’s”-type) fees. No equity take-out is permitted. Up to 35-year, fully amortizing, level payment, non-recourse, assumable, pre-payable loans. For an Acquisition, loans may be as high as the lesser of: (i) 75% of value; or (ii) 75% of the acquisition cost plus transaction costs; or (iii) DSC of 1.45:1. For a Refinance, loans may be as high as the lesser of: (i) 75% of value; or, (ii) 100% of the current debt plus transaction costs; or (iii) a DSC of 1.45:1 per unit. Eligibility requirements include a provision that, based upon the property’s final certificate of occupancy, the property must be at least three years old. Repairs are eligible for inclusion in the mortgage as follows: (i) $6,500 per unit maximum as adjusted by the applicable high cost factor; (ii) less than or equal to 15% of the property’s as-improved market value; (iii) no more than one major building system component may be replaced or substantially repaired. Wages for repairs do not need to be incompliance with applicable Davis-Bacon Act standards. HUD does not monitor or restrict rents or tenants by income for this program.
Additional HUD Programs Offered by OMHHF:
Section 202: Supportive Housing for the Elderly: The Section 202 Program is a direct loan program from HUD that provides capital advances to developers (traditionally, private, not-for-profits) to finance the construction, rehabilitation, or acquisition of housing assets that will serve as supportive housing for very low income elderly persons – including the frail elderly. Housing developed under this Program also includes Section 8 rental subsidies for the tenants. HUD also allows Lenders to refinance selected properties originally financed by HUD under this Program.
Section 213: Cooperative Units: The Section 213 Mortgage Insurance for Cooperative Housing Program insures mortgage loans to facilitate the construction, acquisition, or rehabilitation of cooperative housing projects. These cooperative housing units may be detached, semi-detached, row, walk-up, or elevator-type housing projects consisting of five or more units. Like various of the programs listed above, this Program has statutory per unit mortgage limits that may vary according to the size of the unit, the type of structure, and the location of the project. Contractors for new construction must comply with the prevailing wage requirements under the Davis-Bacon Act. Eligible Borrowers include non-profit cooperative housing corporations or trusts eligible to use Section 213. They may either Sponsor the projects directly or, purchase projects from Investor-Sponsors. Eligible Customers: HUD does not impose restrictions on the income or characteristics of individual shareholders/residents in an insured cooperative. This Program is not eligible for MAP processing.
Section 236/IRP Decoupling: The Section 236 program was designed to stimulate the production of new – or rehabilitated – affordable, multifamily housing. The Program provides an interest rate subsidy that effectively lowers the rate of the HUD-insured mortgage made by a private Lender for the life of the loan (some properties also provide Section 8 rental assistance to the tenants). Section 236 IRP Decoupling involves the prepayment of the outstanding 236 mortgage loan with a continuation of the IRP (Interest Reduction Payment) from HUD. The IRP subsidy may be used to assist with debt service payments and to secure additional mortgage proceeds for the property. New HUD insured loans must minimize impact on tenants; must include sufficient renovation/modernization or repair work to make the property marketable for the duration of the mortgage and, cure any functional obsolescence. Involuntary displacement of tenants is not allowed. HUD-insured 236 properties are authorized to refinance using MAP processing under either the Section 221(d)(4) or Section 223(f) programs.
Section 241(a): Supplemental Loan Insurance: Section 241(a) insures mortgage loans to finance repairs, additions, and improvements to multifamily rental housing and healthcare facilities with FHA insured first mortgages or HUD-held mortgages. The 241(a) program is intended to keep the project competitive, extend its economic life, and to finance the replacement of obsolete equipment. Insured mortgages finance repairs, additions, and improvements to multifamily projects, group practice facilities, hospitals, or nursing homes already insured by HUD or held by HUD. Major movable equipment for insured nursing homes, group practice facilities, or hospitals may be covered by a mortgage under this Program. The maximum insurable loan is 90% of the value of the addition or improvement, or an amount which, when added to the outstanding balance or to the existing insured mortgage, does not exceed the amount insurable under the Program pursuant to the mortgage covering such project or facility that is insured. When the project is covered by a mortgage held by HUD the principal amount of the loan shall be in an amount acceptable to the Secretary. Contractors must comply with the prevailing wage requirements under the Davis-Bacon Act. Section 241(a) requires appropriated credit subsidy. This program is not eligible for MAP processing.
OAHP (f/k/a OMHAR): The Office of Multifamily Housing Assistance (OMHAR) was established by the Multifamily Family Housing and Affordability Act of 1997 to administer the Mark-to-Market program – until its sunset on September 30, 2004. As of October 1, 2004, the Office of Affordable Housing Preservation (OAHP) was established to ensure the smooth continuation of the Mark-to-Market program and to provide assistance to affordable housing areas in the oversight and preservation of other affordable housing programs. The Mark-to-Market program reduces currently subsidized rents on privately owned multifamily properties with Federally insured mortgages to market levels and, restructures the existing debt on these properties to sustainable levels based upon the new rents. Participating Administrative Entities (PAEs) play a central role in this re-positioning, as they administer the Mark-to-Market program and, coordinate the processing of the restructuring commitment with FHA underwriting guidelines – if a Section 223(a)(7) or other type of FHA insured loan is used by a private Lender (i.e.: OMHHF) to refinance the loan.
Common HUD/FHA Terms:
2530/Previous Participation Clearance: All principals in a proposed transaction must submit detailed information regarding previous participation in governmental housing transactions in order to be approved by HUD for participation in any program of mortgage insurance.
Builder’s Sponsor’s Profit and Risk Allowance (BSPRA): (For the Section 221(d) (4) program only). The BSPRA allowance is used as a credit against the mortgagor’s required equity contribution, and provides one of the highest loan-to-cost mortgages available. To use BSPRA there must be an identity of interest between the mortgagor and the general contractor (the identity of interest can be created by a 0.1% limited partnership interest). There is no builder’s profit contained within the mortgage calculation. For new construction, BSPRA is 10% of the estimated cost of on-site improvements; structures; general requirements; general overhead; architect’s fees’ carrying charges and financing; legal, organizational, and audit expenses (total of lines 50, 63, and 67 on the Form HUD 2264), exclusive of land. For substantial rehabilitation, BSPRA is no more than 10% of the above costs exclusive of the as-is value of the existing structure. BSPRA is not required – see: Sponsor’s Profit and Risk Allowance (SPRA), below.
Commercial Space: Limited commercial space may be permissible in a HUD-insured project, subject to program-specific guidelines.
Cost Certification: The mortgagor is required to submit a cost certification (for 221(d)(4) and 232 programs) prepared by an independent public accountant upon completion of construction or substantial rehabilitation. The amount of mortgage that is “Finally Endorsed” for insurance by HUD after completion of construction may be reduced based upon HUD’s review of the cost certified amounts. The General Contractor is also required to submit a cost certification if there is any identity of interest with the mortgagor. Identity of Interest subcontractors are also required to cost certify.
Davis-Bacon Wage Act: The Davis-Bacon Act, as amended, requires that each contract over $2,000 to which the United States or the District of Columbia is a party for the construction, alteration, or repair of public buildings or public works shall contain a clause setting forth the minimum wages to be paid to various classes of laborers and mechanics employed under the contract. Under the provisions of the Act, contractors or their subcontractors are to pay workers employed directly upon the site of the work no less than the locally prevailing wages and fringe benefits paid on projects of a similar character. The Davis-Bacon Act directs the Secretary of Labor to determine such local prevailing wage rates. For more information regarding the Davis Bacon Act wage requirements, please reference Title 29 CFR Parts 1, 5, 6, and 7; or via the web at: http://www.gpo.gov/davisbacon/.
Fair Housing and Equal Opportunity: Mortgagors and contractors and subcontractors must comply with all HUD Fair Housing and Equal Opportunity requirements, including the selection of occupants, employment, and physical and programmatic accessibility.
Ginnie Mae: Formerly called the Government National Mortgage Association, Ginnie Mae is a Federal corporation located wholly within HUD. Ginnie Mae guarantees the timely payment of principal and interest to investors on Ginnie Mae mortgage-backed securities, and backs this guaranty by a pledge of the full faith and credit from the U.S. Government.
Initial/Final Endorsement: The Initial Endorsement is the Construction Loan closing for new construction and substantial rehabilitation projects. The Final Endorsement is the “permanent” loan closing for these projects following the completion of construction (new or substantial rehabilitation). Acquisitions/refinancings only have one “Endorsement” (closing).
HUD developed its LEAN process in 2008 for Section 232 applications: this process only applies to Section 232 applications. Previously, loans were processed under Multifamily Accelerated Processing (MAP) or Traditional Application Processing (TAP) by the local HUD Field Office. HUD’s new LEAN process employs standardized work product and processes to obtain a consistent, timely result. The following are some of the changes implemented with the LEAN process:
1. HUD has developed standardized checklists, statements of work for third party work, certifications, and templates for the Lenders to use in their assembly of the application package. Moreover, HUD has developed standardized punch lists for HUD staff to use in their underwriting of submitted applications.
2. HUD begins its legal review immediately when the Firm Application is submitted – to cut down the time between Firm Commitment issuance and closing.
3. HUD has removed portions of the application process/requirements for submittal that were duplicative or not necessary (e.g. no need to submit closing related documents that are submitted with the Firm Application twice, removal of forms that are not needed, development of consolidated certifications, etc).
4. HUD has revised the third party appraisal requirements so that the appraisal is a market appraisal – no requirement to use HUD forms and no proprietary earnings carve out.
Military Impacted Areas: HUD is generally prohibited from providing mortgage insurance in military impacted areas unless HUD makes a determination that the demand from non-military households is sufficient to sustain occupancy in both the HUD-insured projects and in the market as a whole.
Mortgage Insurance Premium: An amount paid by a Borrower – to HUD – for insurance against the possibility of mortgage default.
REAC: HUD’s Real Estate Assessment Center (REAC) inspects and assesses all insured projects in an effort to: develop and provide accurate, timely, and reliable information to assess the condition of its portfolio; provide information to help to ensure decent, safe, and affordable housing; and to restore the public trust by identifying fraud, abuse, and waste of HUD resources. The comprehensive assessment develops a score for each project, and the score (0-100) a project receives will dictate its future insurability and the frequency of REAC inspections.
Real Estate Requirements: A HUD-insured mortgage must be on real estate: (i) held in fee simple; or, (ii) under a lease for not less than 99 years which is renewable beyond that time; or (iii) under a lease having a period of not less than 10 years to run from the maturity date of the mortgage.
Regulatory Agreement: All mortgagors must execute a HUD Regulatory Agreement governing the operation of the project. This Regulatory Agreement will be recorded at closing (this Agreement does not regulate project rents).
Sponsor’s Profit and Risk Allowance (SPRA): (For the Section 221(d) (4) program only). An amount included in the replacement cost where no identity of interest exists between the general contractor and the mortgagor. SPRA is no more than 10% of the total estimated cost of: architect’s fees; carrying charges and financing costs; and legal, organizational, and audit expenses. Please note: a SPRA computation results in a lower LTC than a BSPRA computation.
Statutory Limits: Congress sets mortgage-per-unit limitations on FHA-insured projects that are adjusted by a mortgagee and HUD for a “high cost factor” specific to individual locations. For additional information and up-to-date statutory limits and high cost factors, please refer to: http://www.hud.gov/offices/hsg/mfh/hicost/hicost.cfm.
Student Housing: Projects financed with HUD-insured mortgages cannot be specifically designed for student occupancy (i.e.: 4-bedroom units with 4 bathrooms), as HUD cannot discriminate against potential family or, other non-student tenants. In some cases, regular, multifamily housing (not housing designed specifically for student occupancy) that happens to be occupied by students may be eligible for financing; however, non-student housing comparables would be utilized for appraisal purposes.
Substantial Rehabilitation: (for the 221(d)(4) and 232 programs): A project qualifies as substantial rehabilitation if it meets one to the following criteria: (i) the cost of repairs, replacements, and improvements exceeds the greater of 15% of the estimated replacement cost after the completion of all repairs, replacements, and improvements, or (ii) $6,500 per unit adjusted by the local HUD Field Office High Cost factor for that area; or (iii) two or more major building system components are being substantially replaced (major building system components include: roof structure, ceiling/wall/floor structure, foundations, plumbing systems, heating and air conditioning systems, electrical systems, and, potentially, windows). Costs for the addition of new units are not included in the eligibility test.
Surplus Cash/Surplus Cash Account/Surplus Cash Distributions:
“Surplus cash means any cash remaining after:
1. The payment of:
(i) All sums due or currently required to be paid under the terms of any mortgage or note insured or held by the Secretary;
(ii) All amounts required to be deposited in the reserve fund for replacements;
(iii) All obligations of the project other than the insured mortgage unless funds for payment are set aside or deferment of payment has been approved by the Secretary; and
2. the segregation of:
(i) An amount equal to the aggregate of all special funds required to be maintained by the project; and
(ii) All tenant security deposits held.”
(Form HUD-92466 – The Regulatory Agreement)
The Surplus Cash Account is the account in which the above defined funds are held. HUD will compute the amount of funds to be held in this account on an ongoing basis. A mortgagor entity is allowed to withdraw funds (distributions) from this account a maximum of two (2) times per year, if “Surplus Cash” from the project is available.
Q: How is an FHA-Insured Mortgage Loan priced? How is the Interest Rate determined?
A: FHA-insured mortgage loans are fixed rate, self amortizing obligations. The loans are usually made with the backing of a Ginnie Mae security, which guarantees the timely payment of principal and interest to the investor with a pledge of the full faith and credit of the U.S. Government. The spread for a taxable mortgage loan will be an amount over the 10-year Treasury security that includes the investor’s spread and, guarantee and servicing fees. The actual mortgage constant will also include an amount paid to HUD for a mortgage insurance premium (MIP) (this amount varies by program). (For tax-exempt transactions the Ginnie Mae security is held by the Bond Trustee, and is used to provide an AAA rating for the bonds). The actual, fixed interest rate for a transaction is determined when the rate is locked with the investor. This usually occurs following the issuance of a Firm Commitment for Mortgage Insurance by HUD for the project. The Borrower will be afforded an opportunity in advance of the rate lock to select a rate range (after consultation with the OMHHF Trader), and then the Trader will sell the Ginnie Mae security to an investor in accordance with the agreement with the Borrower.
Q: What will a typical FHA-Insured Mortgage Loan transaction cost?
A: FHA transactions are costs are generally broken down into categories corresponding to the various stages of processing and, the various programs. Typically, a Borrower will pay for: third party reports such as a market study, an appraisal, a PCNA report, and an Environmental Phase I (and Phase II, if required); HUD Application and Inspection Fees; Ginnie Mae Fees; the Mortgage Insurance Premium; OMHHF’s Financing Fees; and, Legal Fees. The Borrower will also post deposits at closing such as: Tax/Insurance/MIP and, Operating Deficit Escrows. Not all fees and expenses, and not all escrows are applicable to all program financings – please consult with your OMHHF sales professional for a definitive explanation of fees that are specific to your proposal.
Q: How long should a typical FHA-Insured Mortgage Loan process take from application through funding?
A: The speed at which transactions are processed and closed depends, in large part, upon the timely responsiveness of the involved third parties (such as the appraiser/surveyor/attorney) and the Borrower.
New Construction and Substantial Rehabilitation Programs – Multifamily Housing:
9-12 months if the development timetable matches with OMHHF/HUD timelines (e.g.: that plans, specifications, costs, and permits are ready at the time of HUD’s readiness to review).
New Construction and Substantial Rehabilitation Programs – Healthcare:
Please refer to the “LEAN” section of this presentation.
Acquisition/Refinance Program – Multifamily Housing:
Approximately 6-7 months from start to finish.
Acquisition/Refinance Program – Multifamily Healthcare:
Please refer to the “LEAN” section of this presentation.
Q: What are the Recourse Provisions of an FHA-insured mortgage loan?
A: FHA mortgage loans are non-recourse to the Borrower, with the exception (i) for funds or property of the project coming into the hands of the Borrower which, by the provisions of the Regulatory Agreement the Borrower is not entitled to retain; or (ii) for their own acts and deeds of others which the Borrower has authorized in violation of the provisions of the Regulatory Agreement.
Q: Are there any particular ownership requirements for an FHA-Insured Mortgage Loan?
A: The owners of a property must have successful experience, adequate liquidity and net worth, and the Borrower must (generally) be structured as a “single asset, single purpose” entity, which is generally defined as: an entity which does not engage in any business other than the owning or operating of the collateralized property, or which does not acquire or own material assets other than the collateralized property and incidental personal property, and which (a) maintains its assets in a way which segregates and identifies such assets separate and apart from the assets of any other person or entity, (b) holds itself out to the public as a separate legal entity from any other person or entity, (c) conducts business solely in its name, and (d) does not (and shall not) have any other indebtedness other than the particular loan (or pre-approved secondary loans) and indebtedness for trade payables incurred in the ordinary course of business. Additionally: For Section 232 and 232 pursuant to 223(f): Borrowers are not eligible for HUD-insured financing for healthcare assets if they have been in bankruptcy within the past five (5) years. HUD (thorough the 2530 Clearance Process as described above) must also approve prospective owners.
Q: Can Mezzanine or Secondary Financing be utilized together with an FHA-insured Mortgage Loan?
A: Approved, subordinate debt is allowed under various programs in limited amounts. Terms and conditions of such financing are dependent upon the program and, upon its source (public or private). Under the 223(f) Acquisition/Refinance program, the sum of approved, secondary financing plus the FHA-insured first mortgage loan may not exceed 92.5% of the project’s fair market value. This debt cannot be secured by the property; this debt must be secured by a surplus cash note. Under the 221(d)(4) and 232 programs, secured, secondary financing from private sources is not permitted; however, approved secondary financing from Federal, state, or local governmental agencies or instrumentalities may be used to cover up to 100% of the applicable Section of the Act equity requirement.
Q: Can an FHA-insured loan be assumed?
A: FHA-insured mortgage loans are assumable with the consent of both HUD and the mortgagee. A fee may be charged to cover applicable costs.
Q: Can an FHA-insured loan be Pre-paid?
A: FHA – insured mortgage loans are pre-payable based upon terms that are negotiated to meet the needs of the Borrower. Typical FHA-insured loans have a specified lock-out period, and then a pre-payment schedule with a declining penalty (i.e.: a five (5) year lock-out period, followed by a 5% penalty in the 6th year, and then declining by 1% per year until par following year 10).
Q: Is an FHA-insured loan the Best Way for Me to Achieve My Objectives?
A: FHA-insured financing – with a Ginnie Mae guarantee – offers a Borrower a virtually unlimited source of capital to achieve their financial objectives, by helping to facilitate loans for the new construction, rehabilitation, acquisition, and refinance of multifamily and specified healthcare assets.
FHA-insured financing offers:
- Long-Term, Self-Amortizing, Fixed-Rate Financing
- Non-Recourse Debt
- Negotiated Pre-Payments, rather than defeasance or yield maintenance
- Mortgage Interest Rates priced at a rate correlated to Ginnie Mae’s Full Faith and Credit of the U.S. Government
- Certainty of Execution
- Constant Market Presence
FHA’s new construction programs are virtually unbeatable in structure and pricing, their streamlined refinances are quick and cost-advantageous and, FHA is virtually the only Lender providing financing for skilled care nursing homes and hospitals. However, processing times for some of the FHA programs may be slower than those of the GSEs, banks or life companies; FHA’s ability to insure mortgages in high cost areas may be constrained by the mortgage-per-unit limits set by Congress; and finally, properties containing large, non-residential components may not fit into FHA’s currently-offered loan insurance programs.
Two Real Estate Powerhouses Unite to Offer Information, CapitalOctober 17th
San Francisco ChronicleOctober 17th