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HUD Expands Access to Mortgage Insurance and Moves Closer to More User Friendly Practices

In the “dog days” of summer, things are typically quiet and low-key. Not so with HUD this time, as they recently announced an expansion of their Section 202 elderly housing refinance program. Moreover, HUD also has indicated that positive changes to their Multifamily Accelerated Processing (MAP) and Lean healthcare programs should become operational in time to ensure a busy fall, and beyond.

Section 202 Refinancing Program Expanded

On August 11, HUD issued a memorandum that authorizes the recapitalization of Section 202 projects that have obtained Assisted Living Conversion Program (ALCP) grants. These capital grants were utilized by a number of Section 202 projects to convert a portion of their units to assisted living, allowing residents to age in place.

Unfortunately, sponsors who obtained ACLP grants and later wanted to recapitalize their Section 202 properties have been caught in a bureaucratic “no-mans-land”. The licensure requirement of the ALCP rendered projects ineligible for multifamily housing mortgage insurance under Section 223(f); and, the relatively small number of assisted living units financed by the ALCP grants – typically no more than 25% – made projects ineligible for healthcare mortgage insurance under Section 232/223(f). As a result, a number of Section 202 projects with ALCP grants that are in need of recapitalization could not access one of the most effective sources of financing for repairs, capital improvements and developer fees for elderly housing properties – HUD mortgage insurance.

With the August memo, HUD has untangled its Gordian Knot – Section 202 projects with ALCP grants now have a pathway to recapitalization using the Section 223(f) (or Section 221(d)(4)) multifamily mortgage programs. The underwriting generally follows existing Section 202 refinancing guidelines, with some adjustments to accommodate the assisted living component; however, all applications will be reviewed and processed by the HUD Southwest Regional Office in Ft. Worth, TX. This is an added bonus for SMF: that office is one of our busiest locations, as we have closed over $400 million in loans there!

HUD About to Increase Leverage for Multifamily Loans

The draft Multifamily Accelerated Processing (MAP) Guide is in the final stages of being cleared by HUD. When approved, the new MAP Guide will feature higher loan-to-cost and loan-to-value ratios, and lower debt service coverage ratios, resulting in higher leverage opportunities for multifamily borrowers. For example, for market-rate new construction transactions, HUD intends to increase the loan-to-cost ratio from 83.3% to 85.0% and reduce the debt service coverage ratio from 1.20 to 1.17. These changes are a sign that HUD wants to maintain the competitiveness of their multifamily mortgage insurance programs.

…and Lean Refinancing Guidelines Are About to Become More User Friendly

Earlier this year, we reported that HUD was considering a number of revisions that would make the Lean Section 232/223(f) program for refinance or acquisition of existing healthcare facilities more expansive and user-friendly. Those revisions included: reducing the seasoning period for bridge loans used for equity take-outs from two years to potentially six months; and, expanding the definition of eligible debt to be refinanced to include some form of operator-level debt and partner buy-outs in related party transactions.

We understand that HUD will be incorporating these changes into an update to their Section 232 Handbook that was first issued in May 2014. The update should be issued by the end of next month – stay tuned for additional developments.

For additional information, please contact us.

Sims Mortgage Funding