In an effort to summarize the highlights of the U.S. Department of Housing and Urban Development (HUD) LEAN E-mail Blasts that we receive, and rarely have time to review in a timely fashion, we at Pepper are providing this quick synopsis of the latest LEAN update. Our aim is to provide pertinent information succinctly as a roadmap to the LEAN E-mail Blasts, not to replace the LEAN E-mail Blasts. We hope you find these summaries helpful. A link to the complete February 27, 2014 LEAN Blast can be found here.
New Intercreditor Agreement Is Published
Proposed revisions to the Intercreditor Agreement (Form HUD-92322 ORCF) were published on February 27, 2014 in the Federal Register. A link to the Notice is available here and a link to the Intercreditor Agreement form is available here. Comments on the form and the proposed optional electronic submission of documents are due by March 31.
Multifamily Delinquency and Default Reporting System (MDDR)
The Office of Multifamily Housing Programs released a memo on December 19, 2013, entitled “Guidance for Servicer Watchlist Process.”
Once the update to the MDDR system becomes operational, the system will require that loans entered into MDDR be rated as Doubtful, Substandard, Special Mention, or Pass/Watch. The memo outlines characteristics that lenders should consider when determining a project’s rating. ORCF intends to revise this language to fit the unique characteristics of Section 232 loans in the future. In the meantime, ORCF requests that lenders use the broad ratings and characteristics outlined in the December 19, 2013 memo and work with the project’s Account Executive if there are any questions.
An e-mail was sent by the Office of Multifamily Housing Programs, Asset Management Division on February 26, 2014 to all registered users in MDDR with more details.
Please also note that as a loan approaches the time to assign, it is very important that the default has been timely entered into the MDDR system. Moreover, if the loan is in default (with the lender actively pursuing a workout) and the lender intends to obtain an extension on an election to assign, an e-mail requesting the extension must be sent to the project’s Account Executive and Tim Coon (email@example.com).
Global 30-Day Extension to Submit Annual Financial Statements (AFS) for All Owners Whose Fiscal Years Ended 12/31/13
The Office of Housing has authorized a global 30-day extension to all owners whose fiscal years ended December 31, 2013. This extension is being offered to allow owners and auditors additional time to adapt to the requirements of Housing Notice H 2013-23, and the FASSUB system release on December 6, 2013, that implemented revisions to the HUD Consolidated Audit Guide, Handbook 2000.04. Submissions for fiscal years that ended December 31, 2013 will now be due April 30, 2014.
Submission of Borrower Financials to HUD and Lender
HUD regulation 24 CFR § 5.801, published on September 7, 2012, requires Section 232 borrowers and operators to submit financials not only to HUD but also to the lender. This provision became effective for existing loans as of October 2012. Although HUD has not yet published the guidance on a new submission format for quarterly operator financial submissions, the requirements for borrower financial statements has not changed. Currently, borrowers submit their financials to HUD via an online (FASS) system, which does not currently facilitate submission to lenders. As a result, borrowers and operators may submit either paper or electronic copies of the financials to their lenders.
Valuation Tool for Solar Arrays
Solar Power Electric and Sandia National Laboratories have developed a new tool that assists appraisers in establishing the value of a property’s solar-powered features. The tool, called PV Value® (photovoltaic value), works in a Microsoft Excel spreadsheet and is endorsed by the Appraisal Institute. A link to the spreadsheet, instructions, and video can be found here. The tool estimates the value of all the income from power generation, not just the expense offset or surplus power. Lenders who use this tool should remember to include typical market expenses for electricity in the NOI development so as not to double-count the benefit. Since the appraiser will have accounted for normal electrical expenses in their value, the value from the PV Value spreadsheet can be added to the overall value when calculating the maximum loan size by loan to value. Similarly, because normal electrical expenses will be used in developing the NOI, the annual income from the solar array can be added to the NOI in your Debt Coverage Ratio test.
Change of Revision Dates in Footer of Some ORCF Documents
In the September 26, 2013 E-mail Blast, ORCF announced the correction of minor errors to a number of the ORCF forms. In a logical move, ORCF also updated the footers of those documents so that the revision date was changed to “(Rev. 08/13)” making it clear that the previous version had been revised. However, for reasons that surely make sense to someone, HUD is not permitted to change the revision date. Therefore, all of the document footers have now been reverted back to their original dates “(Rev. 03/13)” – even if that is not accurate. No other language changes were made to any of the documents other than this footer revision.
Clarification on Interest Rate Reduction Submission Process
Exhibits with guidance on ORCF’s Loan Modification/Interest Rate Reductions are housed on the Loan Servicing Guidance page of HUD’s ORCF program Web site. As noted on the Web page, the Loan Modification submission should follow the Loan Modification Checklist and include the information from the Lender Analysis exhibit. The entire submission must be sent electronically to ORCFLoanModification@hud.gov.
Additionally, lenders and/or lender counsel should e-mail ORCFLoanModification@hud.gov at least 48 hours in advance of any “drop-dead” date for final documents to be executed. ORCF will work with lenders to get modification documents executed by HUD in a timely manner; however, ORCF requests advance notice to ensure a signatory is available.
FROM THE CLOSING CORNER
Death to HUD Approval of Closing Statements?
Effective immediately, Closers will accept the Sources and Uses page from the form HUD-92264a-ORCF (Rev 03/13) as the loan closing statement required for 223(f) and 223(a)(7) closings. A draft Sources and Uses page will be accepted in the draft closing package, and Closers will ask for a final draft with final supporting documentation, to be due no later than the day before submission/mailing of the Note and Regulatory Agreements to HUD for signature. The executed Sources and Uses will be due no less than two business days before closing.
As previously set forth in the February 19, 2010 E-mail Blast, and as required in the firm commitments, please remember:
The form must be signed by the Lender and the Borrower.
Supporting documentation – current payoff letter(s) and invoices must be provided and all costs entered on the statement must be final.
Lender escrows must be listed in Non-Eligible Costs.
Failure to provide such information may result in a delayed closing.
ORCF no longer collects litigation searches (except where required by the Attorney’s Opinion as an Exhibit). Please note that the Attorney’s Opinion form requires the attorney to opine that there is no litigation or other claim pending before any court or administrative or other governmental body against the Borrower or General Partner/Managing Member, Operator or the Project, except as has been disclosed in Exhibit F to the Opinion.
When there is “newly” discovered litigation (“newly” meaning not previously disclosed to ORCF in the application process), ORCF will ask that the lender immediately address the following:
the name and discussion of each newly discovered lawsuit, including estimated potential liability
whether each newly discovered lawsuit is of the type covered by insurance or whether the lawsuit is for a claim not covered by insurance
the amount of liability insurance available to cover each newly discovered lawsuit and other pending claims and judgments and the estimated potential liability for such other lawsuits/judgments, and
identification of who bears the cost of defense of each newly discovered lawsuit and whether the insurance company is participating in the defense.
As required by the Attorney’s Opinion, litigation searches must be run within 30 days of endorsement. While HUD will endeavor to quickly evaluate litigation, disclosure of litigation promptly to HUD will minimize the risks of delays in closing.