March 09, 2016
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On March 8, HUD published a proposed rule in the Federal Register amending existing regulations for the Section 542(c) Housing Finance Agency (HFA) Risk-Sharing Program. HUD explains in the proposed rule that the existing regulations were last updated in 2000 and some aspects have since become outdated. The proposed rule, largely informed by dialogue with NCSHA and a working group of HFAs, is intended to better align the regulations with current industry and HUD policies and practices and provide greater flexibility for program participants.

The proposed rule seeks to align the Risk-Sharing program with other HUD program requirements, thereby streamlining and facilitating program administration by HFAs and HUD oversight. First, HUD proposes that certain loans made by Level I HFAs (those that assume 50 percent or more of the risk of the loans) do not need to be regularly amortizing, provided that the loans have a minimum term of 17 years and HUD approves the HFA’s underwriting standards, loan terms and conditions, and asset management and servicing procedures. In its explanation of the proposed rule, HUD says non-fully amortizing loans are not unusual in multifamily lending and this change would align the Risk-Sharing program with conventional industry practices, particularly for Housing Credit transactions. HUD also proposes to amend the program so that supportive housing developments financed by Level I HFAs would be subject to the same underwriting standard as Section 202 developments for the elderly, thereby allowing the use of contract rents in the loan underwriting process.

In the proposed rule, HUD also lays out two proposed changes that would align the program with other HUD programs, but may be unnecessary given HFAs’ strong underwriting standards. These include a proposal to require HUD to recertify every five years the underwriting standards, loan terms and conditions, and asset management and servicing procedures for Level II HFAs (those that assume less than 50 percent of the risk of loss on mortgages insured under this program). The purpose of this review is to periodically benchmark Level II HFA underwriting standards against current FHA standards. In previous written comment to HUD, NCSHA explained that this change was unnecessary except in cases where an HFA has experienced significant claims.

HUD is also proposing to require the FHA Commissioner’s approval for any “large loan” made by Level II HFA, which is the same policy used under the Multifamily Accelerated Processing (MAP) program. The definition of large loan would be consistent with the MAP program. NCSHA expressed concern earlier that this additional HUD review step is unnecessary and may delay the processing of some loans.

The proposed rule also seeks to remove current hurdles HFAs face in using the program for preservation deals. For Level I HFAs, the proposed rule would expand the ability to insure equity take-out loans to refinance and acquisition deals. This provision is consistent with similar FHA programs and industry practice. The proposed rule would also amend the definition of “substantial rehabilitation,” which is currently defined as work that exceeds 15 percent of the project’s value. This definition has resulted in a disproportionate impact on developments in high-cost areas, particularly for preservation efforts involving only moderate rehabilitation. Under the proposed rule, “substantial rehabilitation” would be defined as situations in which the scope of the rehabilitation work exceeds in aggregate cost a sum equal to the FHA base per-dwelling-unit-limit times the applicable high-cost factor, or when the scope of work involves the replacement of two or more building systems.

Finally, the proposed rule includes several technical amendments supported by NCSHA, including removing references to the program being a pilot; updating application requirements to a rolling basis to reflect current practice; amending the definition of “affordable housing” to meet the requirements in Section 42(g) of the Internal Revenue Code; clarifying that the existing requirement that mortgages must be fully amortizing does not apply to construction loans; adding language to provide that one of sanctions HUD can take with a noncompliant HFA is to require the HFA to revise any or all of its underwriting, processing, or asset management policies as directed by the FHA Commissioner; and resolving current inconsistencies about closing document requirements.

HUD will accept comments on the proposed rule until April 7, 2016, 30 days after its publication in the Federal Register. HUD justifies this abbreviated comment period because many of the changes are technical and non-substantive. Further, the proposed policy changes have already been discussed “and are supported by stakeholders”. Please send comments you would like NCSHA to consider including in its comments to HUD to NCSHA's Althea Arnold by April 1.