[Federal Register Volume 80, Number 136 (Thursday, July 16, 2015)]
[Notices]
[Pages 42105-42108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17464]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-5728-N-02]
Federal Housing Administration (FHA): Small Building Risk Sharing
Initiative Final Notice
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Notice.
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SUMMARY: This Final Notice announces HUD's implementation of an
Initiative under the Risk Sharing Program (the ``Initiative''),
authorized by Section 542(b) of the Housing and Community Development
Act of 1992, to facilitate the financing of small multifamily
properties. Through this Final Notice, HUD invites applications for the
Initiative described in this Notice from high capacity Community
Development Finance Institutions (CDFIs), other non-profit lenders, and
public and quasi-public agencies (collectively referred to as Mission
Based Lenders), and private, for-profit lenders approved as FHA
Multifamily Accelerated Processing (MAP) lenders (referred to as
Private Lenders), to participate in HUD's Risk Sharing Program as
Qualified Participating Entities (QPEs).
DATES: Effective Date of Initiative: July 16, 2015.
Application Date for Mission Based Lenders: Applications will be
completed in a two-stage process: Pre-Qualification and Final
Application. Pre-Qualification Applications from Mission Based Lenders
will be accepted starting on the effective date of this Notice. If the
Pre-Qualification Application is approved by HUD the applicant will
have 90 days from receipt of HUD's approval to complete its FHA Lender
application online and deliver a Final Application to HUD.
Application Date for Private Lenders: Applications will be
completed in a two-stage process: Pre-Qualification and Final
Application. Pre-Qualification Applications from Private Lenders will
be accepted starting six (6) months from the effective date of this
Notice. If the Pre-Qualification Application is approved by HUD the
applicant will have 90 days from receipt of HUD's approval to deliver a
complete Final Application to HUD. (Note Private Lenders must be FHA
MAP Lenders in good standing in order to apply; therefore separate FHA
Lender applications are not required.)
ADDRESSES: Interested parties are invited to submit applications
including information outlined below, within the time frames described
above.
FOR FURTHER INFORMATION CONTACT: Diana Talios, Office of Multifamily
Housing Programs, Office of Production, Department of Housing and Urban
Development, 451 7th Street SW., Room 6148, Washington, DC 20410; email
address [email protected] and telephone number (202) 402-7125
(this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the toll-free
Federal Relay Service at 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Purpose
Under the Initiative, applicants qualified as QPEs will rely on a
50 percent risk sharing arrangement with HUD to underwrite, originate,
and service loans that (1) are secured with properties of 5 or more
rental dwelling units, and (2) do not exceed the amount of $3,000,000,
or, in the case of projects located in ``High Cost Areas'' annually
designated by HUD, (most recently in Mortgagee Letter 2014-14 \1\), the
amount of $5,000,000.
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\1\ See http://portal.hud.gov/hudportal/documents/huddoc?id=14-14ml.pdf.
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B. Proposed Statutory Changes
HUD intends to pursue statutory changes to Section 542(b) of the
Housing and Community Development Act of 1992 that would, through loans
originated by lenders that have demonstrated experience in affordable
housing lending, remove affordability restrictions currently required
under Section 542(b). The change is intended to reduce the burden on
owners who access this capital in order to provide affordable housing
in their communities. The language would also authorize Ginnie Mae to
securitize loans on small buildings made under Section 542(b), which
could significantly enhance the impact and utility of the Initiative.
If granted this authority by the Congress, HUD would invite applicants
that participate under the authority of this Final Notice to modify
their agreements to take advantage of such new authority. Until such
statutory changes are made, lenders participating in this Initiative
may have access to low-cost long-term financing through the Federal
Financing Bank (FFB). The FFB Risk Sharing Initiative announced June
26, 2014, now provides capital for multifamily loans insured under
Section 542(c) of the Risk Sharing Program. HUD and the Treasury
Department are currently formalizing an agreement to expand this
capital source to lenders
[[Page 42106]]
participating in the Small Buildings Initiative. Additional application
criteria and program standards may be required by HUD and the Treasury
Department in order to qualify for FFB financing under this Initiative.
C. Initiative Description
Lenders approved to participate in the Initiative will be
authorized to originate, underwrite, and service loans for HUD
multifamily mortgage insurance for project acquisition, refinancing,
rehabilitation (up to and including substantial rehabilitation) and/or
equity take outs, but excluding new construction. The amount of the
equity take-out, or ``cash out'', cannot exceed the scope of work that
is paid for by the Risk Sharing loan proceeds. Further, the
rehabilitation must address all of the capital needs in the Capital
Needs Assessment (CNA) and satisfy the reserve requirements for the
life of the loan. The cornerstone of the Risk Sharing Program is that
the lender shares the insurance risk with FHA. Since lenders will cover
50 percent of the risk of loss under this Initiative, FHA offers
participants significantly more flexibility with respect to
underwriting terms, and ongoing compliance than is found in Risk
Sharing Program elements with higher risk allocations to FHA, and in
other FHA Multifamily insurance programs.
Upon presentation of appropriate project information and
certifications, HUD will endorse such loans for full mortgage
insurance. QPEs will be responsible for the full range of loan
management, servicing, and property disposition activities.
Through a Risk Sharing Agreement (RSA) QPEs will contract to assume
50 percent of the risk on each loan they underwrite. In turn, upon a
default, HUD will commit to pay an initial claim amount based on 100
percent of the unpaid principal balance of an insured mortgage note
plus interest at the mortgage note rate from the date of default to the
date of an initial claim payment upon default of the loan and filing of
a claim. The loss, if any, will be determined at a later date and HUD
and the QPE will share such loss in accordance with the fifty-fifty
share of risk assumed by each under the RSA.
D. Contents
This document contains information on applicant eligibility,
application requirements, application process, the timeframe for
decisions on applications, and other program features and requirements.
II. Background
HUD's 2012 Rental Housing Finance Survey (RHFS) data indicates
there are approximately 495,574 small (5-49 units) multifamily rental
properties in the United States, constituting more than a quarter of
rental units across the nation (2012 Rental Housing Finance Survey).
Small multifamily properties tend to be older, located in low-income
neighborhoods, and to have lower median rents and higher shares of
affordable units than larger multifamily rental properties. The 2012
RHFS also suggests that 87 percent of the owners of this stock are
individuals, households and estates, compared to 8 percent of larger
properties with 50 or more units. Similarly, according to the RHFS,
just 52 percent of small multifamily properties are mortgaged compared
to 87 percent of the larger multifamily properties.
Worst case housing needs are defined as renters with very low
incomes (below half the median in their area) who do not receive
government housing assistance and who either paid more than half their
monthly income for rent, lived in severely substandard conditions, or
both. Worst case housing needs were 7.7 million in 2013, down from a
historic high of 8.5 million in 2011, ending a sustained period of
large increases. This represents a 9 percent decline since 2011 yet
remains 9 percent greater than in 2009 and 49 percent greater than
2003. Worst case needs affect very low-income renters across racial and
ethnic groups, and all types of households.\2\
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\2\ See http://www.huduser.org/portal/Publications/pdf/WorstCase2015_summary.pdf.
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Long-term fixed rate mortgages made through this Initiative will be
especially valuable because smaller properties tend to command modest
rents and owners are often unable to raise rents to cover upward
interest rate adjustments without causing vacancies. Additionally, the
``mom and pop'' ownership of this inventory faces more constraints in
accessing financing in recent years due to increasingly high credit
standards and diminished lending, following a significant loss of many
community and regional banks in the wake of the 2008 recession.
HUD has chosen to include both Mission Based Lenders (defined to
include CDFIs, other nonprofits and quasi-public and public agency
lenders) as well as for-profit, private lenders (Private Lenders).
Mission Based Lenders will be eligible for the first application round,
beginning on the effective date of this Final Notice, while Private
Lenders may apply 6 months later. Although the Initial Notice allowed
for the admission of consortia or joint ventures comprised of Private
Lenders under the control of a Mission Based Lender, HUD determined
this would complicate program operations and introduce unnecessary
complexity into the program. However, a newly formed organization could
be created. The new entity will have to meet all the requirements of
this Final Notice including qualifying as an approved FHA non-
supervised mortgagee.
The Initiative implemented by this Final Notice is intended to
encourage eligible Mission Based and Private Lenders to move into this
market or to serve it more fully with an additional source of capital.
One common problem facing non-depository CDFIs and other Mission Based
Lenders is access to long-term capital, which may limit their ability
to provide housing finance to their communities. These organizations
can qualify as QPEs by demonstrating that they meet minimum criteria
including designation as non-profit entities or as public or quasi-
public benefit corporations under the laws of their States of
formation, and exemption from Federal income taxation pursuant to the
Internal Revenue Code of 1986. These Mission Based Lenders, as well as
Private Lenders, must demonstrate that they meet various financial
standards, and that a minimum amount of their recent loan activity has
been dedicated to the financing of affordable housing.
III. Authority
Section 542(b) of the Housing and Community Development Act of
1992, as amended by Section 307 of the Multifamily Housing Property
Disposition Reform Act of 1994, authorizes HUD to enter into RSAs with
QPEs. QPE is broadly defined in Section 542(b) to allow HUD to enter
into agreements with a range of lenders. Following full consideration
of the comments submitted in response to the Initial Notice, HUD is
hereby issuing this Final Notice to provide details of the
implementation of the Initiative along with descriptions of changes
made to the Initiative in response to public comment and/or further
consideration of HUD as to how the Initiative should be structured or
implemented.
IV. Key Changes Made to Initial Notice
HUD announced a request for comments through a notice published in
the Federal Register on November 4, 2013, at 78 FR 66043, which
solicited public comment for a period of 60 days. The November 4, 2013,
notice is referred to as the ``Initial Notice.''
[[Page 42107]]
The following highlights key changes made to the Initial Notice.
HUD received 41 public comments from approximately 28 different sources
of interest. Respondents included CDFIs and FHA/MAP lenders, but the
most prominent respondent group was comprised of nonprofit
organizations, mainly membership organizations engaged in affordable
housing preservation activities. All public comments may be viewed in
their entirety online under docket number FR-5728-N-01 at http://www.regulations.gov/#!docketDetail;D=HUD-2013-0102. Also posted on
HUD's Multifamily Web site at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b is a summary of the
public comments and HUD's responses to the comments received to the
Initial Notice.
A. General Comments
Virtually all commenters recognized a pervasive need for programs
to deliver capital to small scale lenders, and to promote the
preservation of unassisted, affordable, small rental buildings, and
they were largely supportive of the Initiative concept and program
purposes as described by HUD in the Initial Notice. Some specifically
supported the use of HUD's Risk Sharing Program for this purpose as
well. Comments made with respect to inclusion of coop housing were
consistently positive. Virtually all of the commenters that mentioned
HUD's parallel legislative efforts to enhance the program (described in
Section I.B. of this Final Notice) were supportive of them.
Although largely supportive of the Initiative, commenters
recommended modifications to virtually all elements of the design of
the proposed Initiative. Their recommendations addressed the types of
lenders and consortia allowed to participate, the standards with which
participating lenders should be selected, and the borrowers' ongoing
financial and reporting requirements. Even the most fundamental
parameters of the Risk Sharing Program drew comments. These included
the affordability requirements, loan standards, loan application
requirements, and various federal review requirements such as
environmental reviews, etc. In some cases recommendations were
contradictory, for example some recommended more restrictive
affordability requirements while others recommended less restrictive
requirements. This section summarizes the key changes made by HUD to
the Initial Notice. Complete application requirements and program
details can be found at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b.
Specific Changes are highlighted below.
1. Lender Eligibility: Expansion of lender eligibility to invite
FHA MAP lenders to participate. Their participation will be deferred by
6 months from the initiation of the program, so that CDFIs and other
nonprofit, public, or quasi-public organizations can start first and
provide HUD with an opportunity to fine tune the program before having
to manage larger numbers of participants.
2. Applicant/Lender Qualification Requirements
a. Demonstrable experience in affordable housing finance:
Applicants are required to provide recent experience in lending for the
production and/or preservation of ``affordable housing'' which for this
purpose meets the minimum requirements of the Risk Sharing Program.
During the past 2 years, no less than 20 percent or 20 of the
applicant's multifamily housing loans originated, must have been made
for affordable housing as their primary purpose. The Initial Notice
required 33 percent of the applicant's loans over the past 2 years or
33 percent of dollars loaned to be dedicated to affordable housing
purposes.
b. Financial Capacity: Minimum financial capacity requirements were
added since the Initial Notice. Applicants must either have a 20
percent net asset ratio and a minimum net worth of $7.5 million, or a
CAMELS composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System (UFIRS) \3\ or equivalent nationally
recognized rating system, and a minimum net worth of $7.5 million. No
additional reserves are required so long as this standard is
maintained. If the QPE can no longer meet this standard, a dedicated
reserve must be established in a financial institution acceptable to
HUD.
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\3\ See http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/bsp-2.PDF.
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c. Lender Staff Experience: The Initial Notice required lender's
staff to demonstrate 3 years of originating FHA insured loans. This
requirement was changed to permit alternative multifamily housing
finance experience so long as it is substantial and fully described in
the application.
d. Lender's Net Income: Applicants will demonstrate financial
solvency by disclosing annual income, as well as expenses and net
income for each of the past 5 calendar years, and provide a computation
of positive net income from the best 3 of those 5 years.
e. Lender Staff Capacity: Applicants must demonstrate experience
with multifamily housing mortgage servicing, and asset management,
provide written procedures for work-outs, and describe management
responsibilities.
f. Certification of Compliance with Fair Housing and Civil Rights
Requirements: An applicant must certify that it is the not subject of a
suit filed by the Department of Justice or has an outstanding finding
of noncompliance with a civil rights statute.
3. Eligible Projects and Loan Size Limits: Projects must consist of
5 or more rental dwelling units (including cooperative dwelling units)
on one site. Scattered sites can be considered so long as each site has
a minimum of 5 units, and can demonstrate it is one marketable and
manageable real estate asset. Loan amounts have been increased from $3
million to $5 million in certain high cost areas. Areas will be
designated in HUD's ``Annual Base City High Cost Areas'' Mortgagee
Letter. In the Initial Notice, eligible projects consisted of either 5-
49 units, or if the project consisted of more than 49 units, the loan
amount could not exceed $3,000,000.
4. Building Owner Requirements: Audited financial statement
requirements may be waived by the QPE when it can be justified by the
nature of the project and that the borrower has sufficient capacity to
successfully manage the property.
5. Loan Terms: Loan terms are changed to allow for balloon payments
at the end of year 15 or thereafter, with an amortization term of no
more than 30 years. Alternatively, loans may fully amortize over a term
of up to 40 years.
V. HUD's Decisions on Applications
HUD will act on Pre-Qualification submissions based on the criteria
provided in the Application Requirements posted on the Web at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b, within approximately 30 days of the date HUD deems the
application to be complete, either by denying the request or by
inviting the applicant to submit a Final Application. HUD will act on
Final Applications within approximately 60 days from the date of
receipt of the Final Application. This will include notifying
applicants determined to be eligible as QPEs, and delivering a RSA. It
is important to note that Mission Based Lenders must be approved as FHA
Non-supervised Mortgagees in advance of their approval as a QPE. An FHA
Lender
[[Page 42108]]
Approval Application, Form 92001-A, can be downloaded from HUD's Web
site at: http://portal.hud.gov/hudportal/documents/huddoc?id=92001-a.pdf.
VI. Evaluation of the Initiative
One of the principal purposes of the Initiative is to determine
whether, by providing Federal credit enhancement for refinancing and
rehabilitation of small multifamily housing, the Initiative is
successful in increasing the flow of credit to small multifamily
properties. HUD will, therefore, undertake an evaluation of the
Initiative to determine the success of the Initiative and will expect
participation by selected lenders.
VII. Findings and Certifications
A. Paperwork Reduction Act
The information collection requirements contained in this document
have been approved by the Office of Management and Budget (OMB) under
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned
OMB control number 2502-0500 and 2502-0541. In accordance with the
Paperwork Reduction Act, HUD may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless the
collection displays a currently valid OMB control number.
B. Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment has been made for this notice in accordance with HUD
regulations at 24 CFR part 50, which implement Section 102(2)(C) of the
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The
FONSI is available for public inspection between 8 a.m. and 5 p.m.
weekdays in the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 4517th Street SW., Room
10276, Washington, DC 20410-0500. Due to security measures at this HUD
Headquarters Building, an advance appointment to review the FONSI must
be scheduled by calling the Regulations Division at 202-708-3055 (not a
toll free number).
Dated: June 30, 2015.
Edward L. Golding,
Principal Deputy Assistant Secretary for Housing.
[FR Doc. 2015-17464 Filed 7-15-15; 8:45 am]
BILLING CODE 4210-67-P