NALHFA 2017 Fall Finance Workshop Section 542 Risk Share Programs Overview

Risk Share Program Overview Background: Section 542 of the Housing and Community Development Act of 1992 established the two pilot risk sharing programs: 542(c) Housing Finance Agency (HFA) Risk Sharing Program 542(b) Qualified Participating Entity (QPE) Risk Sharing Program Section 235 of HUD’s FY 2001 Appropriations Act, Public Law 106-377, converted the pilot program into a permanent multifamily insurance program. Unit allocations and reservation of credit subsidy are currently not in effect. 11/13/2018

542(c) HFA Risk Sharing Program Provides Credit enhancement to state and local housing finance agencies’ (HFA) bond and debt issuances through FHA mortgage insurance. The HFA and HUD share risk on a transaction level. Underwriting and asset management responsibilities are delegated to the HFA. HFA benefits: higher bond ratings resulting in lower borrowing costs and savings passed on to borrowers and tenants HUD benefits: reduced risk at the transaction level, increased affordable housing production with significantly reduced staff resources. 11/13/2018

Traditional FHA Programs vs. Risk Sharing The Risk Sharing program differs from FHA’s traditional mortgage insurance programs in that in the Risk Share programs: FHA assumes only a portion of risk, rather than all; FHA delegates loan processing and asset management functions to the HFA FHA has more stringent eligibility standards for lender participation and sets larger reserve requirements that reduce counterparty risk 11/13/2018

The 542(c) Risk Share Program– How the Program Works Qualified HFAs are authorized to underwrite, process, and service loans and to manage and dispose of properties. HFAs enter into Risk Sharing Agreements with HUD, the HFA contracts to reimburse HUD for a portion of loss on any claims. Over the life of the program no HFA has failed to meet its reimbursement obligation. 11/13/2018

HFA Approval Levels HFAs may be approved at the following risk level percentages: Level I – 50/50 shared risk: HFA uses it own underwriting standards; or Level II – 90/10 or 75/25 shared risk – HFA uses underwriting standards, loan terms, and conditions approved by HUD, or HUD may require changes to HFAs standards as a condition for approval, or require HFA to use standards for HUD’s FHA loan programs (223f or 221d4). In this case only the general framework of the program requirements are used. HUD forms are not required if the HFA has similar documents; or Combined levels of I & II – HFA approved to use both levels. About 2/3 of the portfolio are Level I transactions and 1/3 are Level II. Claim rates do not vary significantly between Level I and Level II. 11/13/2018

542(c) Program Requirements The Risk Share Program is entirely affordable production. All projects insured under the Risk Sharing Program must qualify as affordable housing as defined in the Tax Credit Program: 20 percent or more of units occupied by families whose income is 50 percent or less of the area median income; or 40 percent (25 percent in New York City) or more of units are occupied by families whose income is 60 percent or less of the area median income 11/13/2018

Multifamily Regional/Satellite Office Key Processes – 542(c) Firm Approval Letter Processing The HFA submits an application (Request for HUD-Retained Reviews) and other supporting documentation to the local HUD office for firm approval letter processing following format in Appendix 4 of Handbook 4590.01. Required Exhibits attached to the Request are: Form HUD-7015.15 – Request for Release of Funds (RROF) HUD Form 2530 or evidence of APPS submission Form SF-424 – Intergovernmental review, if applicable Location Map Legal Description of Property Evidence of zoning Sketch Plan of Site 11/13/2018

HUD-retained reviews Previous participation review (2530) Subsidy Layering review – May be delegated to the State Housing Credit Agency – HFAs are often the Housing Credit Agency. Determination if project is in military impact area or proposed HUD projects in area Market comments related to potential impact on HUD projects in area. 11/13/2018

Functions delegated by HUD to HFA Affirmative Fair Housing Marketing Plan Economic and Market Study Labor Standards and Prevailing Wage Requirements (Davis-Bacon) Environmental review – ER review is usually conducted by “Responsible Entity (RE)” (typically a state or city) selected by the HFA or the HFA may perform its own review provided it meets the definition of a Responsible Entity or the Responsible Entity delegates the function to the HFA. The HUD environmental office or appropriate staff can provide assistance in identifying the appropriate RE. 11/13/2018

Multifamily Hub/Program Center Key Processes – 542(c) Firm Approval Letter processing The successful completion of the HUD-retained review results in the issuance of a firm approval letter. HUD has a limited role in issuing the firm. Since loan underwriting is delegated to the HFA, HUD review is not considered in underwriting decisions. The review should primarily focus on the HUD retained reviews The firm approval letter (or firm commitment letter) will expire 1 year if the project has not reached endorsement (initial endorsement) for insured advances; (final endorsement) for existing projects or construction start for insured upon completion. 11/13/2018

HFA Processing, Underwriting, & Construction The HFA must process the application, underwrite, and monitor the project during the construction period, among other things; Approve the development team, including the ownership structure. Determine the market for the project; Establish maximum insurable mortgage, review plans and specs; Approve insured advances; Cost Certification 11/13/2018

Program Monitoring Program monitoring is performed at two levels: Local HUB/Program Centers Headquarters Headquarters and local offices will jointly determine the need to perform monitoring reviews. Monitoring of the HFA is performed on a remote and on-site basis primarily consisting of post-endorsement compliance reviews in accordance with the HFA own or approved procedures as well as compliance with HUD regulations and guidelines. HFAs are not required to adhere to MAP or HUD asset management guidelines. Reviews are based on HFA compliance with the underwriting standards submitted with their original application for participation in the 542 (c ) program. 11/13/2018

Local HUD Office Remote Monitoring Responsibilities (cont’d) The local HUD Office reviews project files on a post-endorsement basis to detect patterns in processing that must be bought to the attention of HFA; The local HUD Office is responsible for monitoring all management, servicing, and disposition functions of the HFA. HFA submits physical inspections reports to local office. Development Staff Responsibilities: Review of HFA activities from origination through closing – compliance with own or HUD approved procedures, i.e., market determinations, construction administration, insurance of advances, cost certifications, etc. Asset Management Staff Responsibilities: staff will make determinations that the HFA is complying with its own project management, loan servicing, and property disposition, monitoring the performance of owner, performing annual physical inspections, etc. 11/13/2018

Headquarters Monitoring Responsibilities Headquarters remotely monitor HFAs for continued eligibility to participate in the program. Headquarters may participate in on-site monitoring reviews. Items to be monitored: HFAs annual audited financial statement Maintenance of “top-tier” and “A” rating on general obligation bonds Maintenance of dedicated account, if required Annual certification of no changes to HFA Semi-annual report Default ratio MIP collections Claims process 11/13/2018

Project Management & Servicing The HFA is responsible for providing loan servicing and loan management. HFA will use their own standards The HFA must provide oversight management of the project owner and management agent HFA must perform annual physical inspections of the projects Analyze project annual audited financial statements 11/13/2018

Claim Payment Headquarters solely manages the claim process. The HFA is responsible for preparation and filing of the claim or partial payment of claim. The HFA files the claim directly with HQ Claims Branch. Upon filing of the claim the HFA issues a debenture to HUD for the full amount of the claim. The HFA has five years to foreclose on the property and determine the amount of the loss. During this period interest is paid to HUD at the Treasury debenture rate established when the debenture was issued. Once the loss is determined the HFA and the HUD claims branch settle up based on the risk sharing percentage 11/13/2018

FFB Initiatives: 542(c) HFA – Federal Financing Bank (FFB) Risk Sharing Program HUD and the US Treasury’s FFB created the FFB Risk Sharing Program to facilitate the expansion of rental housing. The FFB is an inter-agency partnership between HUD, and FFB. The objective is to offer a execution for HFAs that benchmark Ginnie Mae rates. HFAs participating in the FFB program are required to sign a separate Risk Sharing Agreement with modified template for firm approval letters and note endorsement panels. SOA Code Loan Terms, Brief Description of Each 542(c) FFB Risk Sharing Variation Upfront & Annual MIP YHF 542(C) HFA Risk Sharing –FFB Existing 0.25% YHC 542(c) HFA Risk Sharing – FFB NC/SR 11/13/2018

FFB Volume and Status of Program Financing Agreement (PFA) $1 billion through 9/30/15 6/1/15: A&R PFA $1.5 billion through 9/30/16 3/1/16: 1st Amendment to A&R PFA $2.5 billion through 9/30/19 5/1/17: 2nd Amendment to A&R PFA $2.5 billion through 9/30/20 11/13/2018

Waivers and Final Rule Status Typical Waivers still require HQ approval (Indemnity Agreement) (Cash Out) (Higher of S8 or Market Rents) (17 year Balloon) Proposed Final Rule incorporates changes eliminating requirement for waivers Currently gathering responses to public comments 11/13/2018

FHA ACTIVITY / STATISTICS 11/13/2018

MF - Risk Share vs FHA Activity Category FHA Risk Share UPB $116 Billion $7.3 Billion Lenders w/ UPB 135 35 11/13/2018

FY 2017 Risk Share Activity 15 Lenders; 107 Commitments @ $1.5 Billion Loan Size: $650,000 to $103 Million FFB 65 of 107 Commitments $841 of $103 million 11/13/2018

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Questions? Donald Billingsley, Director Program Administration Division Office of FHA Multifamily Production U.S. Department of Housing and Urban Development 451 7th Street, S.W. Room 6138 Washington, DC 20410 Telephone:  (202) 402.7125 E-mail:  Donald.A.Billingsley@hud.gov 11/13/2018