FHA – Multifamily Servicer Roundtable
FHA – Senior Housing and Healthcare Panelists
Moderator:
Will Lamey, Senior Managing Director
Red Mortgage Capital, LLC
Panelists:
Marilyn Edge, Acting Director, Office of Asset Management
Multifamily Programs, U.S. Department of HUD
Jose A. (Tony) Perez, Senior Vice President
Berkadia Commercial Mortgage, LLC
John E. Vihstadt, Esq., Partner
Krooth & Altman
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HUD’S NEW AND “IMPROVED”
MULTIFAMILY CLOSING
DOCUMENTS:
THE GOOD, THE BAD AND THE....
by John Vihstadt, Esq.
KROOTH & ALTMAN LLP
1850 M Street, N.W., Suite 400
Washington, DC 20036
202.293.8200
www.krooth.com
May 2011
[email protected]
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• Culmination of HUD effort dating to 1999 and over three Administrations to,
in HUD’s words, “modernize and update” various forms dating to the days of
Robert Weaver, George Romney, Carla Hills and Moon Landrieu.
• In fact, while many needed and welcome changes were made, the new
documents impose greater obligations and burdens on HUD, lenders and
borrowers alike, and may require lenders to rethink loan origination,
underwriting, servicing and asset management processes to accommodate
these changes. “By reflecting current terminology and current lending laws
and practices, updated multifamily rental project closing documents will
better protect and benefit all parties involved…” says HUD.
• Current formal notice and comment rulemaking process had genesis in 2004.
• The new documents and accompanying regulatory changes are not applicable
to HUD’s healthcare programs under Section 232 or hospital programs under
Section 242 – yet. We expect heavy migration of multifamily changes to the
232 and perhaps the 242 documents, though HUD has pledged a similar
rulemaking process.
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• The Notice announcing the final HUD Multifamily Rental Project
Closing Documents was published Monday, May 2, 2011 at Federal
Register Vol. 76, No. 84 (Docket FR-5354-N-03).
• The 34 new or revised documents are on HUD’s website at:
http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm
• Effective date: Projects with Firm Commitments issued September 1,
2011 and later, with exception of narrow “escape clause.”
• The accompanying Final Rule for Regulatory Revisions was also
published May 2, 2011 at Federal Register Vol. 76, No. 84 (Docket FR5393-F-02; RIN 2502-A195), 24 CFR Parts 200 and 207, in order to
“update… remove outdated regulatory language and policies and to
reflect proposed changes in… the rental project closing documents.”
Effective date: September 1, 2011 with exception of narrow “escape
clause.”
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• According to the publication, “HUD intends to
provide updated guidance and schedule training
in advance of new closings that require the use
of the new closing documents… [But] “to the
extent that any administrative requirements in
HUD handbooks, guidance, housing notices, or
mortgagee letters are inconsistent with any
provisions in the revised closing documents, the
provisions in the revised closing documents will
prevail.”
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Paramount Concerns:
1—“PROGRAM OBLIGATIONS:” Parties’ conduct, rights and responsibilities subject
to ongoing current “Program Obligations.” Definition incorporated in most new closing
documents and modified from earlier HUD proposal but not to extent sought by
MBA. “HUD has included language in the revised definition clarifying that notice and
comment rulemaking procedures be used for significant substantive requirements and that
changes to HUD Handbooks, guides, notices and mortgagee letters shall be applicable to
the Project only to the extent that they interpret, clarify and implement terms in the relevant
loan document as opposed to adding or deleting provisions from such document.”
While the MBA asked that a materiality standard for changes to a Program Obligation be
applied for closed transactions, “HUD did not include a materiality standard because, if
adopted, it would invite individual disputes about the application of certain provisions in
the documents that may have a material effect on one borrower but not on the other.”
Despite this added language to the definition of Program Obligations, lenders and
borrowers alike have a right to be apprehensive about what future
“interpretation, clarification and implementation” could mean.
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Paramount Concerns:
2—LENDER’S CERTIFICATE: Major adjustments made but standards for lender
action leave room for interpretation. “HUD has modified the Lender’s Certificate to make
its requirements [with respect to certain representations and warranties and covenants]
“based upon reasonable due diligence,” that the lender “has made reasonable inquiry” or is
certifying “to the best of lender’s knowledge.” HUD has relaxed the requirements in
Section 30 to provide that the lender will simply confirm in writing [versus certify] before
final endorsement of the Note that the borrower has obtained necessary permits and met the
listed requirements. HUD will also include in its multifamily handbooks expanded
guidance on what constitutes a prohibited ‘identity of interest’ as may exist among the
parties to the loan at initial endorsement or that may arise during the loan term.”
Elsewhere, HUD notes that “these changes are made with the expectation that lenders will
undertake increased due diligence to assure sound underwriting in insured multifamily
projects.”
Even under these modified standards, lenders will have to determine how they
may need to alter current loan application, processing and underwriting
practices to safely conform.
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Paramount Concerns:
3—TREATMENT OF RESERVES AND ESCROWS: Modified to be
closer to MBA comments. “If funds deposited in a reserve or escrow account
exceed the maximum insurance level, such as the current $250,000 maximum
for FDIC-insured accounts, funds in those accounts may exceed the insurance
level if they are deposited in Ginnie Mae-rated institutions.” Also, “HUD
will include deposit requirements [similar to Ginnie Mae’s] in its revised
multifamily program guidance.”
In addition, “HUD has included authority for the lender to charge the
borrower a fee, in accordance with Program Obligations, to cover the lender’s
increased responsibilities in managing reserve and escrow accounts…and
anticipates that, in the future, the lender and borrower will negotiate
appropriate fees for administration of reserves and escrows.”
Lenders must craft appropriate systems and fee structures.
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Paramount Concerns:
4—REQUIREMENT OF PRINCIPALS TO SIGN THE REGULATORY
AGREEMENT: Still required but somewhat narrowed. “HUD has included a
definition of principals based on the regulations—24 CFR
200.215. Additionally, HUD is providing further specificity in the revised
documents—and in its multifamily guidebooks—so the “signing principals,” both
on behalf of the borrower and those principals who must accept personal liability
for the “bad boy” acts, will be identified by HUD in the firm commitment and at
the time of closing. In addition, principals are, in general, attesting only “to the
best of their knowledge,” and primarily to their own statements and
representations.”
Even this modified requirement will likely create anxiety many borrowers, though
HUD says orally this won’t be applicable to non-profits or LIHTC investors.
Post-closing changes to “principals” will require a Regulatory Agreement
Amendment to be signed by the new principal(s) and HUD, leading
to additional legal, title and recording costs.
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Paramount Concerns:
5—TRANSITION: Modified, but remains problematic. The new forms and
accompanying regulatory changes “shall be mandatory with respect to multifamily project
mortgages for which HUD issued a firm commitment for mortgage insurance on or after
September 1, 2011.” However, “the regulations provide that if the mortgagor demonstrates
to the satisfaction of the Commissioner that financial hardship to the mortgagor would
result from application of the revised regulations and updated closing documents due to the
reasonable expectations of the mortgagor that the transaction would close under the
regulations and closing documents in effect prior to September 1, 2011, the regulations and
closing documents in effect prior to September 1, 2011 will apply.”
September 1 is less than four months away, and surely there are many applications for firm
commitments that have already been submitted to HUD—or will be shortly—that will not
be issued by that date. Depending on deal dynamics, lenders may want to consider
availing some borrowers of this escape hatch if “financial hardship” and “reasonable
expectations” can be interpreted to make a plausible case. Of course, who knows
what HUD will consider in this regard.
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Note
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Note
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Note
• Section 7: Late Charge provides that the late charge grace days are changed
from 15 to 10. Late charges are now assessed beginning on the 11th calendar
day instead of the 16th, as with Fannie Mae and Freddie Mac.
• The Note does not have a sample of the proposed prepayment rider but
Section 9 (Voluntary and Involuntary Prepayments) incorporates many
required provisions.
• The Note (Section 9) provides clarity that for 207/223(f) financings there is
an absolute HUD 5 year prepayment lockout notwithstanding the prepayment
terms, unless there is a HUD-approved Borrower/HUD use agreement to
maintain the Mortgaged Property as rental housing for the remainder of the
five years. Known as the “anti-condo conversion” provision, this provision is
easy to overlook and lender and HUD itself may miss it.
• State-specific injections still needed. How will Borrower counsel
provide an enforceability opinion without them?
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Mortgage
•
Section 4 (Assignment of Leases; Leases Affecting Mortgaged Property)
provides that lender must provide prior written approval for all non-residential
leases, including telecommunication leases, and the actual lease agreement itself
plus all modifications, extensions or cancellations thereof. Yet, Regulatory
Agreement Section 29 (Commercial (Non-Residential) Leases) provides that
HUD must OK any commercial lease as to terms, form and amount, except that
lease renewals, extensions or amendments involving no change in terms or use
are permitted without HUD approval. HUD prior written approval is also
required for any commercial use “greater” (e.g., increased square footage) than
that originally approved by HUD.
•
Who has responsibility for securing HUD’s consent? Surprise! The lender does.
(Lender’s Certificate ¶ 15, Request for Endorsement ¶ 5)
•
Section 21 (Transfers of the Mortgaged Property or Interests in Borrower) states
that the lender may charge a “fee” for processing a TPA. Fees are regulated at
Program Obligations. There is no clarity for such fees (is the Fannie/Freddie
standard appropriate?) and HUD could impose additional underwriting
requirements to the lender without adequate compensation and/or
reimbursement for actual out-of-pocket costs.
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Mortgage
• It appears that Section 7(a)(3) (Deposits for Taxes, Insurance &
Other charges) contemplates escrow analyses will be done on an
aggregate basis in lieu of individual escrows.
• The mortgage Section 8(d) (Imposition Deposits) references the
residential standard of maintaining escrow balances at one-sixth
of the required payment obligation.
• State-specific injections still missing. How will Borrower’s
counsel provide an enforceability option without them? Lender
foreclosure power (but not HUD’s due to Federal AntiForeclosure Act) could also be compromised.
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Regulatory Agreement
•
Section 10 (Reserves for Replacement) provides for the lender to invest RFR monies
in accounts “insured or guaranteed by a federal agency in accordance with Program
Obligations.”
•
Section 10 creates an obligation of the borrower to submit a written analysis to HUD
following the 10 year anniversary of initial/final endorsement of the loan with respect
to the projected use of the RFR fund, thus eliminating need for current PCNA Rider.
• Section 11 (Residual Receipts) creates an affirmative obligation on lender/servicer to
deposit residual receipt funds in an interest-bearing account.
• Section 18 (Annual Financial Statement) provides for Borrower submission to HUD
and lender an audited financial report within 90 days of FY-end. (MBA asked for 120
days as more realistic and to conform with Fannie Mae and Freddie Mac.)
• Yet, Mortgage Section 15(d) (Books & Records; Financial Reporting) imposes a 120
day deadline on Borrower to furnish lender “a statement of income and expenses,”
(with no automatic requirement that they be audited, though that may be requested)
which obligation may be met by borrower delivery of an annual audited
financial statement to lender simultaneously with its delivery to
HUD.
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Regulatory Agreement
• Section 30 retains the current prohibition against the borrower’s ability to “remodel,
add to, subtract from, construct, reconstruct or demolish any part of the Mortgaged
Property,” except with respect to restoration or repairs, disposal of obsolete or
deteriorated fixtures or personalty if same are replaced with like items of the same or
greater quality or volume, or to make “minor alterations” that do not impair the
security.
• The Agreement (Section 50-Nonrecourse Debt) will now specifically identify and
require signature of the specific Principals (individuals and/or entities) subject to
personal liability to HUD for bad boy acts, as identified in the Firm Commitment.
• Principals are defined at 24 C.F.R.200.215 (Previous Participation Standards – all
general partners, limited partners of 25 % or more interest; corporate officers and other
executive officers directly responsible to the Board of Directors and each shareholder
having 10% or more interest; all LLC managers or managing members and members
with interests of 25% or more pursuant to B. Miller Notice of 11-23-04.)
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Lender’s Certificate
•
No requirement to disclose Ginnie Mae trade premium as attempted in the March 2010
documents.
•
Creates an obligation of the Lender to provide copies of the Lender’s Certificate to all
successor mortgagees and servicers and such successors are bound by the terms of such
original Lender Certificate.
•
Recites and repeats the obligation of the lender to deposit Residual Receipt Deposits into an
interest-bearing account. (¶ 15)
•
Lender may assess “reasonable and customary administrative fees and charges (including but
not limited to, reimbursements for out-of-pocket expenses)” for investment of RFR and
Residual Receipt Deposits and any other interest-bearing escrows related to the Project and
for “processing, reviewing and approving other matters (“Administrative Fees”) as more
fully set forth in the Program Obligations.”
While not expressly stated, this would presumably include such “other matters” as
post-closing easements, lease reviews, casualty and condemnation matters, pending
litigation, partial releases of collateral, etc. Lender should consider adding a Rider
enumerating services that will be subject to additional fees and
out-of-pocket costs. [¶ 20(j)]
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Lender’s Certificate
•
Creates a continuous obligation of the lender to research and disclose to HUD during the construction
period to final endorsement all identifies of interest between the borrower, any principal of the borrower,
contractor, subcontractor or seller of the land. (¶ 25). Lenders will need to establish a process to
complete this research and develop disclosure protocols for documenting its activities to assure
compliance.
• Creates an obligation of the lender to research and certify that there is no identity of interest between the
lender and borrower’s counsel. (¶ 26)
• ¶ 30: “Lender acknowledges, based upon its reasonable due diligence, (a) that as of the date hereof, the
licenses and permits in effect are sufficient to allow the construction of the Project to proceed to
completion in the ordinary course, and (b) that it will confirm in writing before final endorsement of the
Note that Borrower has obtained the necessary governmental certificates, permits, licenses,
qualifications and approvals of Governmental Authorities, that would customarily be obtained at a later
date, to own and operate the Mortgaged Property and to carry out all of the transactions required by the
Loan Documents and to comply with applicable federal statutes and regulations of HUD in effect on the
date of the Firm Commitment. Lender also acknowledges that appropriate actions have been taken by
and necessary filings have been made with those Governmental Authorities all as disclosed by Borrower
in Exhibit __, attached hereto.”
Though borrowers covenant in regulatory Agreement that they have done so, lenders
will need to establish a process to complete this research and develop protocols for
documents its activities to assure compliance.
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Lender’s Certificate
•
Creates an obligation of the lender to notify HUD “in writing immediately upon learning of any Violation
of the HUD Regulatory Agreement by Borrower.” (¶ 33)
•
What’s a Violation? See Section 37 (Enforcement) of Regulatory Agreement, which includes (a) “any
failure by Borrower to comply with any provisions” of the Regulatory Agreement and (b) “any fraud or
material misrepresentation or material omission by Borrowers, any of its officers, directors, trustees,
general partners, members, managers or managing agent in connection with (1) any financial statement,
rent roll or other report or information provided to HUD… or (2) any request for HUD’s consent to any
proposed action including a request for disbursement of funds…”
•
Creates an obligation of the lender to “promptly” review and “not unreasonably withhold” approval of a
TPA (¶ 34). This insertion may cause a dispute between the lender and the borrower where the borrower
has failed to pay the lender’s review and out of pocket fees for processing a TPA. Alternatively, a lender
may choose to withhold approval or decline to approve a TPA because of a credit or underwriting issue
with a prospective borrower principal. Further, HUD could impose additional underwriting obligations
on the lender that may increase its costs or liabilities under Program Obligations without proper
remuneration.
•
Lender must certify that the loan does not violate Property Jurisdiction usury laws. (¶ 36)
•
Creates an obligation of the lender to ensure that a borrower is given notice of a sale or transfer of a full
or partial interest in the Note (other than a sale or transfer of a participation or other beneficial interest
through a Ginnie Mae MBS or the creation of a security interest) or a change in loan servicer. (¶ 39)
•
Lender must notify HUD of any “known” payments made by an insurer, with no
threshold. This also duplicates Borrower’s obligation under the Regulatory
Agreement. (¶ 35)
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Request for Endorsement of Credit Instrument &
Certificate of Lender, Borrower & General Contractor
• Recites and incorporates many of the obligations of
Lender’s Certificate (HUD-92434M) in this document.
• As also stated in the Lender’s Certificate, if lender invests
any escrow account monies, interest earned must be added
to the relevant escrow account and net income (after
deduction of any Servicing Fees and Administrative Fees)
must be paid or credited to the account of borrower. This
marks another significant change in HUD policy.
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Escrow Agreements
• This comment applies to all three agreements. HUD
introduced a third party depository (i.e. FDIC insured
institution). This insert is not necessary for transactions
where the lender is contemplating packaging the loan
into a GNMA MBS. The lender must comply with
GNMA Guide requirements for all custodial deposits
including these restricted escrows. HUD must provide
guidance to clarify whether a lender can delete the
reference to a third party depository for such
transactions. For example, The Agreement of Sponsor
to Furnish Additional Funds (HUD-92476M) does not
provide for a third party depository.
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Subordination Agreement
(for HUD-approved Subordinate Financing)
• Takes place of HUD Secondary Financing Rider.
• Modeled after similar Fannie Mae/Freddie Mac document, so should be welcomed
by most subordinate lenders.
• Section 7(a) (Default Under Senior Loan Documents; Notice of Default and Cure
Rights), provides that Senior Lender shall deliver to Subordinate Lender a default
notice within 5 Business Days in each case where Senior Lender has not given a
default notice to Borrower. But, Senior Lender shall have no liability to Borrower,
Subordinate Lender or to any other Entity for failure to give timely notice and such
failure won’t prevent Senior lender’s rights and remedies under the Senior Loan
Documents.
• Senior Lender and Junior Lender have limited rights to cure each other’s mortgage
defaults.
• Separate Subordination Non-Disturbance and Attornment Agreement
(SNDA) governs commercial leases.
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Regulatory Changes
The Final Rule makes the following key changes:
1--Adds regulatory prohibition of natural person borrowers. (MBA opposed this change to
preserve transaction flexibility and instead argued for administrative protocol.)
2--Adds regulatory prohibition of tenancy in common borrowers. (MBA opposed this change
and urged HUD to adopt strict requirements à la Fannie Mae and Freddie Mac.)
3--Adds regulatory requirement for single asset borrowers. (Current requirement is
administrative only; MBA opposed this change as being too inflexible as there are times when
this cannot be done,)
4--Changes application for "late" fee trigger under Note to ten days in arrears from current 15
days. (MBA supports this adjustment to mirror Fannie and Freddie standards.)
5--Provides regulatory scheme for the two-tiered default structure added to the Mortgage.
(Class A/Monetary Default; Class B/Covenant Default; not controversial per se, but devil in
details.)
6--Adjusts certain lender obligations re mortgage insurance claims filing
requirements. (Not controversial per se, but devil in details.)
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