2. Statutes, Regulations, Handbooks Statutes: 232, 223 ((a)(7) and (d)), 241 -- 12 USC 1715w of National Housing Act Regulatory: 232/223f -- 24 CFR Part 232 which refers to Subpart A of Part 200. Original Multifamily Accelerated Processing (MAP) Guide Housing Notices: 01-03 Portfolios and Program Changes 04-15 Professional Liability Insurance 08-09 Accounts Receivable Financing Handbook 4600.1: Section 232 Mortgage Insurance for Residential Care Facilities 2

3. Handbook References Programs Not Covered by MAP 241a: 4585.1 223d: 4470.1, Rev. 2, Chapter 3 223a7: Notice 93-89 3

4. General Guidelines- Apply to all Types of 232 Single Asset Mortgagor/Borrower Non-Recourse: Property = Security Interest Rate: between Mortgagee/Mortgagor Loans Must Fully Amortize: No Balloons 4

5. General Guidelines- Apply to all Types of 232 (continued) Regulatory Agreement HUD/Mortgagor: Regulatory Agreement for Multifamily Projects (HUD-92466) Non-profit mortgagor entities/participants must use HUD-92466-E If Lease, HUD/Leasee: Regulatory Agreement Nursing Homes (HUD-92466-NHL) Rider to each Regulatory Agreement – current versions available in legal section of Section 232 website 5

6. General Guidelines… Replacement Reserves Required Professional Liability Insurance is required – Notice 04-15 has details (we’ll cover below). If owner/affiliate emerged from bankruptcy in past five years, not eligible. Licensing: regulated by State, city or political subdivision. Exception: Board and Care (own rules – Keys Amendment) and Independent Units 6

7. General Guidelines… Our Insurance does not mandate any income restrictions on tenants – there may be restrictions brought on by other sources (e.g. tax credits, TIF) Ineligible facilities: Those with founders fees, life care fees, etc. Those not meeting program intent: hospitals, clinics, diagnostic/treatment centers, halfway houses. Those not providing continuous protective oversight or minimum assistance required. 7

8. General Guidelines… The FHA Mortgage must be in first position. See below slide on secondary debt. Mortgage must be on real estate held: In fee simple, or Under a lease: 99+ years, which is renewable or Maturity date of FHA Mortgage + 10 years. 8

9. Section 223(a)(7) Refinance of FHA-Insured Projects Only Project Number assigned is the next available number for the Section of the Act Any Section of the Act is eligible Term = Remaining Term of Existing Mortgage; May be Increased by 12 Years No value: We primarily look at debt coverage Fewer exhibits required New PCNA only required if requesting term extension. 9

10. 223(a)(7) Loan Sizing Lesser of: Original principal amount Unpaid principal balance plus costs of transaction. For Profit: Mortgage that property supports at 1.11 Debt Service Coverage (1.05 Non Profits) 10

11. Section 232 Projects with Services for the Frail Elderly Nursing Homes/Intermediate Care Facilities Board and Care Homes Assisted Living Facilities Can be combination of the above New Construction/Sub. Rehab. Max. Term = Lesser of 40 years or ¾ of Remaining Economic Life Must comply with Davis Bacon Wage Rates 11

12. 232 New Construction – Loan Sizing Statute, CFR, Handbooks Lesser of: For Profit: Mortgage that property supports at 1.11 Debt Service Coverage (1.05 Non Profits) 90% of Replacement Cost (95% for N/P) 90% of Value (95% for Non-profit) For Non-profit, 100% Replacement Cost minus grants, loans and gifts Statutory Per Unit Limits do not apply Sub. Rehab - very complicated 12

13. Loan Sizing – Continued Not-for-Profit Owners and Operators: To achieve the more liberal LTV benchmark, must demonstrate: A successful operating track record Significant project operating and management experience A solid financial track record If exceeding LTV’s on previous slide, need significant justification/mitigation. 13

14. Section 232/223(f) Existing Elderly with Services Purchase or Refinance Max. Term = Lesser of 35 years or ¾ of Remaining Economic Life Project Must be > 3 Years Old: Additions smaller in size and units ok @ <3 years Critical repairs completed before endorsement; all others may be escrowed at 120% No equity take out allowed 14

15. 232/223(f) Loan Sizing - Statute, CFR, Handbooks Lesser of: If owned, cost to refinance If to be acquired, 85% (90% for N/P) of the total acquisition cost (with closing costs). 85% of Value (90% for N/P) Amount amortized by 85% of Net Income (1.1765 debt coverage ratio) – 90% for Non- profits (1.11 DCR) 15

16. Section 241(a) Supplemental Loans 2 nd Mortgage on Existing FHA-Insured Loan For Financing Improvements/Additions Max. Term = Remaining term on 1 st Mortgage If 1 st Mortgage required Davis Bacon, Section 241a also will require Value of work must = or exceed cost 16

17. 241(a) Loan Sizing - Statute, CFR, Handbooks Lesser of: 90% of Value of Improvements/Additions Existing debt plus Maximum Insurable Mortgage currently insurable under the appropriate Section of the Act. 17

18. Section 223(d) Operating Loss Loans Project #’s xxx-15001 thru xxx-15499 Cover operating losses that occur during any 24 month period within 10 yrs. of completion Property must have reached sustaining occupancy 18

19. Substantial Rehab vs. 223(f) 221(d)(3)/(d)(4) and 232 Following 3.10 B. of MAP Guide Sub. Rehab if meets either 1 or 2 below: 1. Hard cost of rehab. exceeds 15% of after rehab value 2. 2 + major bldg. components substantially replaced (additions not counted) 223(f) if doesn’t meet Sub. Rehab tests 19

20. Benchmarks – 11/20/09 Email Blast Type ofEntity UnitUnitsTypeLTVDSCR SNF/ILUBothFor Profit80%*1.45 SNF/ILUBothNon-Profit85%*1.45 ALFNewFor Profit75%*1.45 ALFNewNon-Profit80%*1.45 ALFExistingFor Profit80%1.45 ALFExistingNon-Profit85%1.45 20 * On new construction, mortgage not to exceed 90% of HUD Replacement Cost 20

22. Predictability, Repeatability, Consistency and Standardized Work in the Lean Application and Review Process 22

23. Changes Implemented by OHP Standardized Work Products Electronic submission – SharePoint OHP Underwriter: Follows project throughout process. Supported by…….. Workload Manager Policy and Leadership staff Technical Experts Appraisers and Construction Analysts OGC Closing Attorney 23

24. Standardized Lender Submission  Narrative - Key Document  Lender Submittal Checklists (for each Loan Type)  Firm Application  Closing 24

25. Standardized Processing by Underwriters  Standardized Checklists  Mentoring and guidance provided by Workload Managers  Weekly production meetings to discuss common issues  Experienced and motivated underwriters  Adequate resources to perform tasks 25

26. LEAN Management and Communications Leadership Conference Calls Outlook Live Meeting Kaizen Electronic communication Sharepoint Sharing Data Queue Workload Management Continuous Improvement Work clearly defined and clearly understood Email Blasts and Lean Thinking Mailbox Workload Manager team meetings and individual coaching 26

27. Underwriting Process Focused on overall risk and the “Big Picture” Specialist not generalist Weekly underwriter conference calls/live meetings Multiple tasks proceed simultaneously: Eliminates waiting for decisions/approvals by technical disciplines Eliminates reworking of work product Eliminates/reduces interruptions End result 27

29. HUD HQ’s Portfolio Reviews Currently Jen Buhlman is performing this review Required on large and mid-size portfolios Details in Notices 01-03 and 04-15 General rule: if > 10 projects, required. There are also aggregate mortgage amount limits. 29

30. Underwriter Punchlist Walks Underwriter through all review processes More standardized – all UW’s use same Punchlist HUD’s process is complicated - less issues fall through the cracks 30

31. Heavier Emphasis On: Credit, character and experience of participants Claims History/Professional Liability Insurance Master Lease/Lease Historical Net Operating Income Occupancy trends at subject and market comparables Sensitivity Analysis State surveys – Medicare star rating (if applicable) 31

32. DSCR and LTV Lean has increased minimum Debt Service Coverage:  1.17 to 1.45 Lean has decreased max. Loan to Value (for profit):  From 85% to 80% on Existing  From 90% to 75% on New Construction (if exceeding, justification/mitigation is required) 32

33. Lean Statement of Work - Market Appraisal Removed proprietary income deduction Confusing Often erroneously calculated, at times resulting in higher value Expanded pool of appraisers – some of the most experienced and nationally renowned refused to do “HUD appraisals” Reduced cost Apples to apples comparison between comparables used in appraisals 33

34. Accounts Receivable Financing New emphasis on reviewing cash flow structure and developing documents that are acceptable to HUD and Lenders Housing Notice 08-09 OHP Underwriter A/R Punchlist OGC Closing Attorney A/R Punchlist 34

35. Deposit Account Control Agreement Newly established for Lean Transactions UCC law changed in 2001 Protects HUD’s interest in Operator’s cash flow in case of Operator default Gives FHA Lender and Asset Management ability to direct funds to mortgage payment/Operator expenses while seeking Operator turnaround or replacement 35

36. Master Leases Risk Mitigation for HUD on portfolios “Cherry Picking” Problem: Default on one HUD facility owned/operated by individuals whose affiliates own/operate other HUD facilities. State/Federal Noncompliance: Operational problems of the parent company that place licenses and provider contracts at risk. When Required? All Midsize and Large Portfolios; Small Portfolios with > 3 projects with similar ownership or aggregate mrtg > $15 Million 36

37. Loan Committee All Lean projects have a loan committee (internal to HUD) – Separate 223a7, NC/SR/241a vs. all others 100% agreement required to issue Firm Commitment Focuses on overall risk of Project Loan Committee Memorandum: Summary of project from OHP Underwriter Strengths and Weaknesses OHP Underwriter recommendation 37

38. Loan Committee, Continued Participants: Leadership Policy Asset Management Workload Manager (2 or 3) OHP Underwriter – presents the project OHP Appraiser OGC Closing Attorney (optional) Regularly Scheduled: Wednesday – a7’s; Tuesday – NC, SR, 241a Monday and Thursday – Scheduled via Sharepoint signup sheets: limit to # that can be presented on each Documents available 48 hours in advance of loan committee 38

40. Lender Requests FHA #: See Sharepoint and DAP Updating Protocol FHA # issued in DAP Project record created in both Sharepoint and DAP Lender assembles and underwrites the Firm Application 40

41. Lender Assembles and Underwrites the Firm Application Use Checklists posted to HUD.GOV Hires 3 rd Party Report Preparers: Arch/Cost Reviewer: only on NC/SR/241a Appraiser: all except 223a7 PCNA: Project Capital Needs Assessment 223f’s and some 223a7’s (see email blast) Emails Lean Thinking with Questions 41

42. Example… Firm Application complete - lender sends Mike in Minneapolis the electronic version (CD or thumb drive) Mike uploads data to SharePoint and project enters queue 42

43. Example… Service Lanes: 1. 223f Non Portfolio Queue 2. 223f Portfolio Queue 3. 223a7 Regular Queue 4. 223a7 Green Queue 5. Other Queue (NC, SR, Blended Rate) 6. 241a Queue 43

44. Example… Work Done While Project in Queue: Contractor projects: Program Specialist obtains OGC reviewer, asks lenders to send docs to them, processes APPS/2530’s, and requests updates (if needed). 223a7’s: runs on iREMS are posted to Sharepoint Other Queue: Diane Rosinski does pre-review and gets categorized (no revisions, minor revision, major revisions). Projects with major revisions are put on long term hold – removed from queue. 44

45. Example… As underwriter capacity becomes available, Workload Manager (WLM) assigns OHP underwriter (UW) to project(s) at the top of the queue 45

46. Example… UW emails lender – 1 hard copy to UW – Select documents to OGC Closing Attorney (if not already requested) UW begins Underwriter Punchlist for Firm OGC Closing Attorney begins Legal Punchlist 46

47. Example… If Appraiser review needed - refer to OHP Appraiser Our appraisers run the Decision Circuit on 223f’s to determine who will review (passes = UW; fails = OHP Appraiser) Coordinated by UW: OGC Review OHP Appraiser Review Environmental Review (OHP New York staff or OHP Appraiser) 47

48. Example… The Underwriter: Completes punchlist Uploads documents to SharePoint Gets loan on the Loan Committee Schedule – signup on Sharepoint. Presents recommendation to Loan Committee 48

49. Example… If Rejected: Potential debriefing held with lender 49

50. Example… If Approved: Results sent to lender Uploaded to SharePoint DAP and Sharepoint to reflect Firm Issued Closing Queue OHP Closer identified 50

51. Example… If Approved: Draft closing documents OHP Closer OGC Closing Attorney OHP Closer – Closing Punchlist Amendment processing Cost Certification Clearing programmatic conditions 51

52. Example… OGC Closing Attorney OGC Closing Punchlist OHP Closer, OGC Closing Attorney and lender agree on closing date Closing docs signed by WLM’s Closing occurs 52

54. Control Risk to FHA Fund Improve Customer Service Empower the Employee Involve the Lender/Servicers Continuous Improvement Section 232 LEAN Servicing/Portfolio Management Strategy: 54

55. CONTROL RISK TO FHA FUND - Identifying Risks New Construction – Initial Rent-up/Operator Risk, especially Assisted Living Refinance - Operator/State Regulatory Issues: Risk more evenly distributed 55

56. Control Risk To FHA Fund – Identifying Risk Claim Postmortem 2002-2009 # Claims Due to Owner Due to MarketDue to UW Due to FraudAct of God Assisted Living NC 4517283523 OpLoss 111 RF 2018792 Board and Care NC 179129 RF 84542 Nursing Home NC 3722181222 OpLoss 534 RF 544221192 Grand Total 1871159689105 56

57. Major Risks in existing Portfolio New Construction Assisted Living Nursing Home Market Risk# of LoansUPB# of LoansUPB 200713 125,501,5746 135,960,435 200815 130,645,3847 132,979,672 200927 348,270,00010 93,620,130 Refinance Portfolio: Operator Risk – Specific Survey issues Market Risk (Assisted Living) - Housing Market Issues Market Risk (Skilled Nursing) – State Budget Issues 57

58. Monitoring Identified Risks Before 12/1/2008: FASS AFS Submissions DEC review of anomalies AE Analysis? Only Owners REAC Physical AE Responsibility After 12/1/2008: Centralized Analysis FASS Macroanalysis + Medicare Cost Reports CMS star ranking Data Centralized PASS and FASS responsibility MOU to rationalize DEC referrals Needed for 2010: Third Party Web based Dashboard based on: State Health Inspections Medicare Cost Reports Quarterly electronic Operator Financial Submissions processed by dashboard provider FASS submissions will continue REAC inspections may be discontinued in return for properties providing quarterly financials. 58

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60. Organization Structured to Address Risks and Provide Exceptional Customer Service  Highly qualified staff from HUD and Healthcare Sector  AE’s assigned by servicer to manage each portfolio  Turnaround Team established to work out projects  Servicing files scanned and digitized for nationwide access by AE’s, DEC, OGC 60

61. Organization Structured to Address Risks and Provide Exceptional Customer Service  FAST (Financial Assessment Specialist)Team formed for centralized financial analysis and customer service.  Emphasis on Claims Reduction and Customer Service, rather than concentration on minor enforcement issues  Increased communication internally, with OGC, with Lenders  Flat Organization, responsive HQ. Permits responsiveness to customers, implement needed changes. 61

62. Section 232 Portfolio Risk Management Elements  Enhanced Monitoring by HUD  Periodic Reports for Servicers and AE’s  Meetings set with servicer throughout year to review portfolio  Macroanalysis based Risk Segmentation  Collaborative Relationship between HUD and Lender/Servicers  Different lenders use different approaches to accomplish Risk Assessment/Management  Dashboard Reports based on survey and financial data will be made available to lenders asap.  OIHCF Proactive approach to loss prevention  Borrower Communication 62

63. Proactive Approach to Averting or Mitigating Loss Passive Approach leading to note Assignment and placing notes in Sale is no longer the first option OIHCF is working to minimize losses on HUD-held loans Using Partial payments of Claim Positioning Notes for Re-Assignment Modifying Mortgages Identifying equity providers/purchasers 63

64. Proactive Approach to Averting or Mitigating Loss Working with Lenders and Mortgagors: Providing in-house and contract expertise for operational and marketing consulting Working with State Agencies to facilitate early notification of potential adverse action Expediting refinances including A7’s, modifications, Operating Loss and 241 Loans Helping Owners and working with Lenders who have identified a potential owner, operator or equity provider Using available options to supplement funds from operations until a property is stabilized. 64

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66. Reports and Metrics Periodic Reports for Servicers/AE’s Bi-weekly, incorporating HUD and lender data on HUD held and Workout properties Monthly, incorporating HUD and Lender data on Troubled Properties Quarterly, incorporating HUD and Lender data on Potentially Troubled Properties Semi-annual, incorporating HUD and Lender data on remaining properties Meaningful Metrics Claims / Losses Customer Satisfaction Operational Efficiency 66

67. Communication Improvements in OHP Borrower Communication: E-Mail to Owners AE assignments Process Improvement Information Increased Communication with Troubled etc. Properties Customer Satisfaction Surveying Email Surveys: Owners/Operators Recent Payoffs Lenders/Servicers Internal HUD staff 67

68. Section 232 Loan Servicing  Hybrid Employees  223(a)7 processing  Knowledge and Data Sharing  Loan Committee Representation How Asset Management partners with Development: 68