www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 November 24, 1993 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 93-39 TO: ALL APPROVED MORTGAGEES SUBJECT: Refinancing of Existing Insured Mortgages Pursuant to Section 223(a)(7) of the National Housing Act The Department of Housing and Urban Development's (HUD's) portfolio of insured mortgage loans includes over 10,000 projects with interest rates in excess of 8 percent. Many projects do not have prepayment restrictions or are beyond their lockout provisions and could take advantage of current, favorable market conditions if refinanced pursuant to Section 223(a)(7) or through modification of the existing mortgage documents. A major component of HUD's multifamily Asset Management Strategy for the protection of our existing insured portfolio is the use of the Section 223(a)(7) refinancing program and mortgage modifications as critical default prevention tools. As part of this strategy, we are contacting mortgagors with high interest rate loans to encourage them to take advantage of these tools. This letter serves to notify all HUD-approved multifamily mortgagees of the Department's direction and encourages your active participation. Significant changes have been made which streamline and expedite Section 223(a)(7) program processing requirements. A fact sheet summarizing the features of the expedited processing procedures is enclosed for your information. _____________________________________________________________________ 2 Please contact the Field Office with jurisdiction where your projects are located for assistance. The Housing Management Division can provide information on mortgage modification procedures and the Housing Development Division can assist with application submission requirements. We appreciate your continued interest in HUD's multifamily housing programs. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner Enclosure _____________________________________________________________________ U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FACT SHEET REFINANCING OF EXISTING FHA INSURED MORTGAGES 223(a)(7) EXPEDITED PROCESSING PROCEDURES PURPOSE: Section( ) 223(a)(7) of the National Housing Act permits refinancing of mortgages on multifamily projects already insured under the National Housing Act. o Results in prepayment of the existing insured mortgage and endorsement of a new, refinanced insured mortgage under the same Section of the Act. o NOTE: Mortgagors may not violate prepayment restrictions and lock out provisions in the existing mortgage documents to refinance under 223(a)(7). SCOPE: 223(a)(7) provides an opportunity for owners to take advantage of current low interest rates, reduce debt service requirements, take advantage of freed up capital to accomplish needed repairs and reduce the Department's overall risk. o NOTE: Reduction in interest rate alone, agreed upon between the mortgagor and mortgagee, may be handled by a modification of the mortgage documents rather than using 223(a)(7). Contact the Loan Management Branch in the local HUD Office for assistance. SIGNIFICANT CHANGES FROM PREVIOUS INSTRUCTIONS 1: o 90% of value eliminated as criterion in determining the maximum insurable mortgage. o No appraisal required (Net Operating Income will be developed from project's audited financial statements). o Refinancing of existing 223(f) mortgages can use 90% of Net Operating Income in computing the debt service loan amount (formerly limited to 85%). ________________________________ /1 An Interim Rule was published 10/26/93 (copy attached). The Interim Rule and Expedited Processing Procedures will expire 10/26/94. The Department intends to finalize this rule prior to its expiration. 1 _____________________________________________________________________ OTHER CHANGES: o HUD's Loan Management Branch Physical Inspection Report accepted in lieu of HUD's Architectural and Engineering Branch inspection o Limited applicability of Environmental Analysis o Modified Mortgage Credit Analysis o Partial refund of application fee o No inspection fee ELIGIBLE PROJECTS: o Projects that are fully insured at the time of application. This includes formerly coinsured loans that were converted to full insurance. o Projects with project based Section 8 rental assistance may be processed under the expedited procedures; HOWEVER, no commitments may be issued until guidance is issued from Headquarters addressing renegotiation of rents in those project based Section 8 contracts. INELIGIBLE PROJECTS: o HUD-held or currently coinsured loans are ineligible. o Although eligible under § 223(a)(7), hospital loans insured pursuant to 242 or supplemental loans for hospitals pursuant to 241 MAY NOT be processed under these expedited procedures. Contact the Headquarters' Hospital Mortgage Insurance Staff at (202) 708-0599 for assistance. MAXIMUM MORTGAGE AMOUNT: May not exceed the lowest of the following: o the original principal amount of the existing insured mortgage, o the unpaid principal amount of the existing insured mortgage to which certain HUD-approved items (e.g., repairs, cost of refinance) may be added or, o the amount that can be amortized by 90% of net operating income. 2 _____________________________________________________________________ MORTGAGE TERM: The term of the new mortgage may not exceed the remaining term of the existing mortgage except when the Field Office determines an extension is needed for project feasibility, not to exceed 12 years beyond the remaining term of the existing mortgage. INTEREST RATE: The interest rate on the insured loan shall be as agreed upon between the mortgagor and the mortgagee. FIELD OFFICE PROCESSING PRIORITIES: Field Offices will give priority to projects: o with existing debt service coverage which is less than 1.10 OR o where refinancing will provide a means for completion of needed repairs OR o to increase payments to the reserve for replacements APPLICATION SUBMISSION: Applications must be submitted by a HUD approved mortgagee to the HUD Office with jurisdiction where the project is located. o Beginning 11/26/93 and for the period 60 days thereafter (through 1/24/94), HUD will only accept applications with current interest rates that are 9% or higher. o Beginning 2/23/94, HUD will accept applications in connection with any eligible project. HOW TO PROCEED: Contact the local HUD office for information on application exhibits and requirements. 3 _____________________________________________________________________ 223(a)(7) QUESTIONS AND ANSWERS 1. Q: What is the purpose of the 223(a)(7) refinancing program? A: Allows HUD to insure mortgages to refinance existing insured mortgages. The goal is to lower the interest rate and strengthen project viability. 2. Q: Who should apply for refinancing using 223(a)(7)? A: Any project owner with an existing insured mortgage note which is: o not coinsured or HUD-held, o not subject to lock out provisions or prepayment restrictions which prevent refinancing, and o has an interest rate higher than current market rates which cannot be reduced through a modification of the existing mortgage documents (e.g., securitized by GNMA or bond financed). 3. Q: Is 223(a)(7) a new program? A: No, 223(a)(7) has been around for years, but has not been broadly used due to certain program features that diminished its usefulness as a viable refinancing tool. Changes have been recently made to improve the program. Now, it is being actively used as a result of the low interest rates in today's market. 4. Q: What has changed to make 223(a)(7) a more attractive vehicle for refinancing? A: Our attitude and an improved system for loan review! HUD recognizes the importance of protecting our existing portfolio and has identified refinance using 223(a)(7) as a critical tool in our asset management strategy for the insured multifamily portfolio. o By encouraging owners to take advantage of current low interest rates, we can reduce debt service requirements, take advantage of freed up capital to accomplish needed repairs and reduce the Department's overall risk. o We've made substantive changes to improve the program's viability. 5. Q: What changes have been made in 223(a)(7) processing? A: o Elimination of the 90% of value criterion in determining the maximum insurable mortgage amount. >> Enables HUD to provide a means to refinance projects which are not in default but at risk due to changes in market conditions (overbuilt markets) or poor initial underwriting. >> An appraisal is no longer required, greatly reducing processing time. o Expedited processing procedures for 223(a)(7). 4 _____________________________________________________________________ 6. Q: How does the rule change eliminating 90% of value affect pipeline projects? A: Commitments issued prior to 11/26/93 must meet the 90% of value criterion. The mortgagee may request reprocessing, for issuance on or after 11/26/93. 7. Q: How does the Notice providing expedited procedures affect applications already in the pipeline? A: o If some or all processing has been completed, but a commitment has not been issued, the mortgagee may request reprocessing or conversion to the new procedures. The commitment may not be issued prior to 11/26/93. o If the field work for the appraisal has been completed, the application fee will not be partially refunded although other features of expedited processing are available. o Field Offices must modify project numbers for applications converted to the expedited procedures to reflect Production Code 10 in the MNS database. 8. Q: How will the influx of work precipitated by encouraging owners to submit 223(a)(7) applications be managed by Field Offices? A: The Interim Rule establishes priorities for processing 223(a)(7) applications. o Each Office must then establish Office-wide priorities. o 223(a)(7) applications are to be placed in a ranking order with other processing in the development pipeline (e.g., other insured processing, public housing development, 202/811, Title II or VI preservation), concentrating on 223(a)(7) to the greatest extent possible while interest rates are low. 9. Q: How do the priorities in the preamble to the interim rule affect 223(a)(7) applications already in the pipeline? A: While our goal is to process and close all viable 223(a)(7) applications before interest rates increase, the rule establishes priorities so that among those applications accepted for processing after the effective date, those most "at risk" are processed first. o Applications accepted prior to the effective date shall retain their position in the pipeline, based on date order. 5 _____________________________________________________________________ 10. Q: Can an owner with an application for refinancing (of an existing insured mortgage) pursuant to 223(f) convert the application to refinancing under 223(a)(7) to take advantage of the anticipated shorter processing time? A: o Yes, although owners would not be able to "cash-out" under 223(a)(7), they may choose to convert if they feel the timing of refinancing under 223(a)(7) provides an advantage. o The fiscal aspects of a request to transfer between sections of the Act would be handled in accordance with instructions in Handbook 4410.1 REV-2, paragraph 1-9.A. 11. Q: Will the Delegated Processing (DP) Contracts be modified to include 223(a)(7) expedited processing instructions? A: No. HUD Development staff will rely on advice and assistance from the Loan Management staff in expedited processing and this coordinated effort can best be performed in house. Both Housing Management and Development have management goals which measure completion of 223(a)(7) refinancings. 12. Q: Can the expedited procedures be used in processing applications involving projects with project based Section 8 contracts? A: o Yes, however, no commitments may be issued for projects with project based assistance under the expedited procedures until Headquarters issues guidance addressing renegotiation of rents in Section 8 contracts. o Projects with less than 100% project based assistance shall use the market rental data available on the unassisted units in developing Net Operating Income. o Subsequent instructions will address developing Net Operating Income for projects with 100% project based assistance. * U.S. G.P.O.:1993-301-054:80234 6