How HUD is Making Things Easier for FHA Lenders

Bradley Fountain, MBA

HUD has made it easier to access funds for the development or financing of affordable housing by updating its Multifamily Accelerated Processing (MAP) guidance , which is used by lenders underwriting Federal Housing Administration (FHA) deals.  In an effort to encourage investment in this much-needed asset class, HUD has simplified the due diligence that must be performed before closing a HUD loan. Specifically, the recent changes to the HUD MAP Guide impact the underwriting requirements relating to environmental risk, radon, reduction in energy expenses, accessibility, and reserve analysis studies that must be performed during the due diligence phase. The new guide will become effective for all program loan applications for FHA multifamily mortgage insurance received on or after May 28, 2016.   I am hosting a webinar on Thursday April 14 ^th where I, along with a panel of HUD due diligence experts, will provide an overview of the changes in detail.  To register for that, please click here .  In the meantime, read on to learn more about the 6 key changes that will streamline the loan approval process!

1. Replacement for Reserve Funding (R4R)

The required minimum reserve balance that lenders must keep on their books has been lowered to reduce pressure on borrowers and encourage loans to be given in support of affordable housing development.  With a new focus on repair reserves for the first 10 years of a loan rather than the the full 20 years, it helps both underwriting and cash flow projections for the borrower. In technical terms, the replacement reserve schedule remains at a 20-year study.  But the good news is that the near term (Years 1-10) is the main focus, in that the Initial Deposit Replacement for Reserve (IDRR) and the Annual Deposit Replacement for Reserve (ADRR) must be balanced. The remaining, or long term (Years 11-20) must simply meet a 50% balance of the accrued value and amortization. This means that the underwriter provides a reasonable IDRR and ADRR calculation to balance just the first 10 years, and years 11 through 20 are allowed to go negative, save for the 50% amortization balance rule. Per the MAP Guide, “If the dollar amount of the negative balance exceeds 50% of the cumulative amortization for the mortgage, then the negative is excessive and must be mitigated.”

2. Unit Sampling Inspection

Requirements for unit inspection were rather vague in the previous version of the HUD MAP Guide (which hadn’t been updated since 2011).  Minimum sample requirements have now been clarified, stating that for properties less than 10 years in age, 10% must be inspected, and anything older, not less than 25 percent of units must be inspected. The selection of units must be proportionally distributed among unit types, buildings and floor levels and otherwise random.

3.  223 (a) (7) Guidance:

A complete Capital Needs Assessment (CNA) is required, including intrusive testing for older multifamily rental housing properties during their purchase or refinancing. Note that the CNA e-tool (for Capital Needs Assessments) has been suspended until further notice as it is not ready to come off the shelf yet.  While certain requirements were clarified or expanded in the guide, other requirements like the e-tool were placed on hold to prevent holdups. 

 4.  223 (f) Increase to Non Critical Repair

The new HUD MAP Guide is opening the door for more property owners to rehab their sites under the 223(f) refinance program (for existing multifamily housing) without being subjected to the extensive planning and review process that applies to projects that are considered a “substantial rehabilitation.” By increasing the high cost factor from $6,500 to $15,000 per unit, doing away with the antiquated 15% rehabilitation cost-to-value ratio threshold, and integrating the International Building Code (IBC) standards for the various levels of repair, HUD is allowing owners of affordable housing to leverage debt to accomplish much needed renovations and achieve energy efficiencies with the assistance of the MIP (Mortgage Insurance Premium) reduction incentive. Now with the integration of the IBC standards, repairs may include the patching, restoration or replacement of damaged materials, elements, equipment or fixtures for the purpose of maintaining them in good condition. Click here to see the complete HUD Map Guide (Table 5.3 discusses the repair levels in detail).

5.  Environmental Updates at a Glance

Environmental due diligence requirements for HUD’s 223(f) and (a)(7) purchasing and refinancing programs were also updated. Chapter 9 of the guide has a few changes, which are briefly reviewed below:

• Phase II Operations and Maintenance Plans will require an assigned responsible party (such as a Maintenance Supervisor, member of Property Management, etc.);
• Radon requires 25% testing per building, and in the event that radon levels are detected above the EPA action limits, mitigation is required on all ground level units if less than 100% of ground floor units were tested;
• Flood Zone – incidental portions now require permanent protective covenants or comparable restrictions placed on the property’s continued use;
• If located within a sole source aquifer, regulatory concurrence/direction is required;
• Acceptable separation distances are now calculated from onsite gas / oil pipelines; and,
• An engineer report is required if a structure is within the distance equal to the height of a support tower.

6. Energy efficiency and sustainability for MIP Reduction

After April 1, 2016 HUD paves the way to reduce the MIP (by more than 25%!) if an energy  audit is performed on a property, and then energy improvements are implemented to achieve an  Energy Star Benchmarking  Score of 75 or greater and Green Certification. The Mortgage Insurance Premium (MIP) program is geared towards substantial rehabilitation and new construction projects, with premium reductions much greater for these projects compared to existing refinance transactions. Aside from the MIP deduction, the savings on operating costs once the energy improvements are implemented could be substantial. Both cost savings incentivize owners in a practical way to reinvest capital into their properties.  Initially HUD considered requiring all properties over ten years old to have an energy audit. However, HUDs decision to utilize the option to energy benchmark these buildings instead should incentivize borrowers to pursue future energy savings measures. To qualify for the MIP reduction, owners must:

1. Provide proof of certification through one of HUD’s recognized green certification programs or commit to green-certifying the property. Acquiring these certifications will involve additional due diligence and documentation.
2. Certify that the property has achieved an ENERGY STAR® score of 75 or better on a 1-100 ENERGY STAR® score (SEP), using EPA’s Portfolio Manager. For new construction, the property must achieve a SEDI score of 75 or better. For existing properties, if that score is below 75, the owners must order a PCNA and ASHRAE Level II energy audit with energy improvement recommendations for achieving the required score.

All these updates to the HUD MAP Guide contribute to a streamlined approval process that will be easier for lenders and borrowers to navigate. By adjusting requirements in favor of energy efficiency and sustainability, HUD has created yet another incentive to boost the viability and profitability of affordable housing. About Bradley Fountain Mr. Fountain, MBA, has significant experience in the environmental and engineering services industry. Mr. Fountain is well versed in the due diligence requirements of varied reporting standards, including: HUD FHA, Multi-family, HUD Lean Process, Architectural and Engineering Cost Review, ASTM Standards, EPA’s All Appropriate Inquiry (AAI), and customized client formats. Specifically, Mr. Fountain provides and reviews Phase I Environmental Site Assessments, Environmental Transaction Screens, Phase II Subsurface Investigations, Remediation Design projects, Property Condition Assessments (PCAs), Construction Progress Monitoring, Probable Maximum Loss assessments, Regulatory Compliance Assessments, Energy Audits Level I and Level II, Vapor Intrusion Reports, Asbestos Surveys, Lead-based Paint Surveys, Radon Studies, Mold Assessments, and Lead-in-water sampling and analysis. Mr. Fountain directs Partner’s HUD- FHA Multi-family and Lean Heath Care due diligence program.