Changes at HUD and an Quick Overview of Cooperative Financing

Hugh Jeffershjeffers@centennialmortgage.com202-415-1862

What is the HUD? HUD is short for the Department of Housing and Urban Development

It was created as part of Lyndon Johnson’s “Great Society” program that was intended to eliminate poverty and racial injustice.

HUD operates to provide housing assistance to very low income Americans, bans discrimination in housing and works to create policies and programs to promote rental housing, home ownership and improve communities.

HUD operates and manages many program, but the two most prominent programs are the Section 8 program and FHA.

What is the FHA?

The Federal Housing Administration was created by the National Housing Act of 1934

It was created in response to the housing and banking crisis that arose out of the Great Depression

At the time, it was very difficult to buy a home or to get a loan to build housing.

The FHA created mortgage insurance programs to help stabilize the market

HUD Mortgage Insurance programs for Coops

HUD Mortgage Insurance programs for Coops

What is going on at HUD?

Some changes are negatively impacting HUD’s mission

Old Mission Statement:

“HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination, and transform the way HUD does business”

What is going on at HUD?

Proposed New Mission Statement

“HUD’s Mission is to ensure Americans have access to fair, affordable housing and opportunities to achieve self-sufficiency, thereby strengthening our communities and nation”

What is going on at HUD?

First Trump budget in 2018 cut $6.2 billion in funding from HUD’s budget, or roughly 14% of the total previous budget.

This has caused a significant cut backs and changes to a number of programs at HUD include CDBG, the capital fund for public housing, and Meals on Wheels.

Typical – 2019 Budget is increased by $2.1 billion primarily to fight homelessness.

The two most significant changes…

HUD has greatly scaled back Fair Housing Enforcement

Have frozen a large number of Fair Housing Investigations indefinitely

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The two most significant changes…

HUD has proposed significant changes to Section 8 which will adversely impact the consumer

HUD wants to increase the percentage consumers pay of the fair market rent from 30% to 35%

For the lowest income Section 8 recipients, this would triple the amount they have to pay.

Most Section 8 recipients would see an increase of $125 to $175 a month in rent.

In addition, HUD will require Section 8 recipients to work to qualify for Section 8.

Agency Loan Programs for Cooperatives

HUD/FHA Section 223(a)(7)Refinance of an Existing FHA Insured Loan

Overview: Streamlined FHA program designed to allow borrowers with existing FHA insured loans to lower the interest rate, extend the term, fund project repairs and increase the replacement reserve. For-profit and not-for-profit borrowers may apply for FHA mortgage insurance under this program. May borrow up to the original mortgage amount

HUD/FHA Section 223(f) Cooperative Refinance Loan

Overview: This loan provides non-recourse, assumable financing for the refinance of existing cooperative properties. Program allows for minor repairs and rehabilitation of approximately $40,000 per unit.

HUD/FHA Section 213 or 221(d)(4)Cooperative New Construction or Substantial Rehabilitation Loan

Overview: This program provides non-recourse, assumable construction and permanent financing for new cooperative or substantial rehabilitation of existing cooperative.

Fannie Mae Loan Program Cooperative Refinance Loan

Overview: This loan provides non-recourse, assumable financing for the refinance of existing cooperative properties.

Other Programs for Cooperatives

• National Cooperative Bank

• Freddie Mac

• FHA 241 Program

• FHA 223 (a) (7) program

• Local lenders and banks

Summary of Loan Terms for FHA and Fannie Mae

Underwriting

Parameters FHA 223 (a) (7) FHA 223 (f)

FHA 221 (d) (4)

or 213 Fannie Mae

Term Current term

plus 12 years

35 years 40 years 10 years (1)

Amortization Current term

plus 12 years

35 years 40 years 30

Pre-Payment

Penalty

2 year lock-out,

declining %

2 year lock-out,

declining %

2 year lock-out,

declining %

Yield

Maintenance for

9.5 years

Minimum owner

occupied units 90% 75% 90% 90% (1)

Loan to sell-out

value N/A 55% (4) N/A N/A

DSCR 1.11x 1.00x 1.00x - 1.11x (3) 1.15x (1)

Loan to Value N/A 65% (2) 83.5% - 97% (3) 80% (1) (2)

1) Fannie terms and pricing may vary somewhat based on specific circumstances. For instance if you have an actual loan to value of 65% or better and DSCR of 1.35x or better, your interest rate will be better. At those amounts, minimum owner-occupied units is 60%.

2) Loan to value calculation is based on value as a market rate rental property

3) LTV is not applicable, this represent loan to cost. 97% loan to cost is for the 213 program. DSCR on 213 is 1.00x.

4) Waivable for limited equity and affordable properties

Summary of Loan Terms for FHA and Fannie Mae – Loan Costs

Loan Costs FHA 223 (a) (7) FHA 223 (f)

FHA 221 (d) (4)

or 213 Fannie Mae

Financing Fees 1% to 3.5% 1% to 3.5% 1% to 3.5% 1% to 3%

Engagement Fee

$5,000 $5,000 $5,000-$15,000 $5,000 - $10,000

Appraisal N/A $6,000-$9,000 $6,000-$9,000 $6,000-$9,000

Market Study N/A N/A $8,000 N/A

Phase I N/A $3,500 $3,500 $3,500

Engineering $3,000-$12,000 $3,000-$12,000 $15M-$30M $3,000-$7,000

Survey N/A $5,000-$8,000 $5,000-$8,000 $5,000-$8,000

HUD App Fee 0.15% of loan 0.30% of loan 0.30% of loan N/A

HUD Inspection Min $1,500 (1) Min $1,500 (1) 0.5% of loan N/A

MIP 0.45% of loan 1% of loan 1% of loan (2) N/A

Lender Legal $15,000 $15M-$25M $25M-$35M $7M

1) There is a minimum $1,500 inspection fee if repairs are less than $100M. If repairs are over $100M, than the inspection fee is the greater of $30 per unit or 1% of the total repairs.

2) Cost can range from 0.45% to 1.40% of loan amount depending on the length of construction and whether the property is considered affordable or market rate.

223 (f) – the significant changes in the programSignificant changes: Increase in allowable repairs – Prior to last year the

maximum level repairs was approximately $17,550 per unit. That has now increased to approximately $40,500 per unit. This allows for more repairs and allows the cooperative to avoid paying Davis Bacon Wages to contractors that are required under the FHA 213 and 221(d) (4) Program

The Davis Bacon Act of 1931 required the payment of prevailing wages (union wages) on public works projects and other project funded through the federal government. This also applies to construction deals financed through FHA.

Davis Bacon could potentially increase project costs 10 to 20 percent for repairs and rehab of multifamily projects.

223 (f) – the significant changes in the programSignificant changes:HUD is allowing for a waiver of the 55% loan to gross

sell out requirement for affordable and limited equity cooperatives.

This was a major hurdle for cooperatives that were affordable as it was very difficult to derive enough value in many instances to allow for loans high enough to cover all transaction costs.

FHA Loans

Pros• Longest terms in the market• Lowest Interest rates in the market• Easy and negotiable prepayment penalties• More Flexible underwriting for IncomeCons• Higher up front costs than other loan programs• Longer processing times• HUD oversite

Fannie Loans – Pros and Cons

Pros• Less expensive up front costs than FHA• Ease of execution• Variable termsCons• Higher interest rates• Very complicated and pricey prepayment penalty – yield maintenance• Have to underwrite trailing 12 months of income

Reasons you may want to refinance

• Increase the bottom line• Replenish Replacement Reserves• Bring down units back on line• Enhance curb appeal• Make needed repairs• Green Retrofit/Efficiency Enhancements• Rehabilitate the property