www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 94-17 APR - 6 1994 TO: ALL APPROVED MORTGAGEES SUBJECT: Refinancing of Insured Mortgages Pursuant to Section 223(a)(7) of the National Housing Act - Questions and Answers On November 24, 1993, the Department of Housing and Urban Development (HUD) issued Notice H 93-89, announcing streamlined processing procedures for the refinancing of existing insured mortgages pursuant to Section 223(a)(7). At that time HUD also issued Mortgagee Letter 93-39 which provided a summary of the changes, a fact sheet and Questions and Answers relating to the streamlined procedures. HUD staff, mortgagees and owners have identified several issues which were unclear and for which further guidance was required. This letter transmits to you additional Questions and Answers, addressing these and other issues, which were provided to HUD staff on February 25, 1994. (The enclosed document begins with question number 13, as Mortgagee Letter 93-39 provided Questions and Answers 1 through 12.) We appreciate your continued interest in HUD's multifamily housing programs and particularly Section 223(a)(7). Sincerely yours, Nicolas P. Retsina Assistant Secretary for Housing - Federal Housing Commissioner Enclosure _____________________________________________________________________ U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT REFINANCING OF EXISTING FHA-INSURED MORTGAGES SECTION 223(a)(7) EXPEDITED PROCESSING PROCEDURES ADDITIONAL QUESTIONS & ANSWERS - March 24, 1994 13. Q: The interim rule deleted the value criterion in determining the maximum insurable mortgage amount for loans insured pursuant to Section(s) 223(a)(7). Is there any plan to delete the debt service criterion? A: This question has generated lots of discussion and debate. For now, the debt service criterion remains applicable. If, however, you encounter applications in processing, where the maximum insurable loan amount is limited by the debt service criterion even after following the procedures in paragraph VI.G.2. and VII.E., determine what percent of net income would be necessary to support the higher loan amount and contact Headquarters for project-specific guidance. 14. Q: If a loan is in default but has not been assigned, is the project eligible for refinancing under 223(a)(7)? At what point is a loan considered to be "assigned"? A: Yes, an application which is in default but not yet assigned may be accepted and processed under 223(a)(7). o The circumstances affecting the default should be considered in underwriting the 223(a)(7) loan and whether refinancing will cure the default. o Housing Development (HD) should request acknowledgement from Housing Management (HM) that they have been in contact with the mortgagee of record and the mortgagor and that refinancing pursuant to 223(a)(7) is the most viable option for the project to cure the default. (Projects may be able to avoid costs of refinancing if they are eligible to do a refunding by virtue of the default.) o To accept the application for processing, if a different mortgagee is submitting the 223(a)(7) application, the mortgagee of record must agree to withhold assignment during processing of the 223(a)(7) loan. _____________________________________________________________________ 2 o The current status of the loan must be verified prior to issuance of a commitment - no commitment may be issued if the loan has been "assigned." o The mortgagor should be cautioned against creating a default to circumvent prepayment penalties or lockout provisions which could leave them in an untenable position in the event of suit by bondholders or other investors. 15. Q: Notice H 93-89 (paragraph II.M.) requires use of Production Code 10 in the MNS database to distinguish 223(a)(7) loans processed under the expedited procedures; however, the database will not accept a two digit code. What do we do instead? A: Use Production Code 6 (Refinance 223(a)(7)) for now and send a CC:Mail message to Eva J. Lantz on FHCPost 5, advising her of the project number and name so she can make the edits once the system is updated. 16. Q: Can Field Offices contract for technical processing under the expedited procedures using Technical Disciplines Contracts (TDC's) or Small Purchase Contracts? A: No. HUD Development staff will rely on advice and assistance from the Loan Management (LM) staff in expedited processing and this coordinated effort can best be performed in-house. 17. Q: The introductory paragraph to Notice H 93-89 states the instructions therein supersede HUD Handbook 4567.1 for applications that are eligible for expedited processing. It then says all applications not eligible for expedited processing will be processed in accordance with Handbook 4567.1. Which applications are eligible under 223(a)(7) and covered by Handbook 4567.1, but not eligible for the expedited procedures? Can an owner request processing under the "old" procedures? A: Oops, none! The expedited procedures in H 93-89 supersede Handbook 4567.1 for all loans covered by the handbook. Hospital loans insured pursuant to 242 or supplemental hospital loans pursuant to 241 are eligible under 223(a)(7) but not covered under Handbook 4567.1. The expedited procedures supersede the handbook and applications may not be processed under the old procedures. _____________________________________________________________________ 3 18. Q: We have been told by mortgagees that the instructions for processing 232 nursing homes will take longer under the expedited procedures. If the mortgagee requests it, can we process applications using the old handbook instructions? A: No. The additional requirements for nursing homes in the expedited procedures are necessary and will be included in future 223(a)(7) and 232 handbook revisions. The Notice supersedes the handbook instructions. 19. Q: We have seen letters to owners from Headquarters LM approving mortgage modifications reinstating the principal amount of the loans up to the amount of the original insured mortgages to cover the cost of repairs, cost to refinance, etc. Is this available to all mortgagors? Why do owners need to do 223(a)(7) if they can increase the mortgage amount through a mortgage modification? A: At this time, mortgage modifications for insured loans are limited to the outstanding loan balance. Mortgage modifications reinstating the principal amount have only been approved, on a case-by-case basis, by Headquarters' Coinsurance Division on currently coinsured loans deemed necessary for the projects' economic viability. A mortgage modification requires that the mortgagee of record and the mortgagor mutually agree to the changes. Refinancing pursuant to 223(a)(7) is needed if this agreement cannot be obtained or if a different mortgagee is involved. 20. Q: We keep hearing from mortgagees that 223(a)(7) is now available for projects with coinsured mortgages. Is there any truth to this rumor? A: There are ongoing discussions about expanding eligibility of 223(a)(7) to coinsured mortgages. At this time, however, coinsured mortgages are ineligible. 21. Q: Do we mean to allow owners 12 months to perform lead-based paint (LBP) abatement? A: Unless the scope of work is very extensive and it is a very large project, work should be completed in far less than 12 months time. Architecture and Engineering (A&E) should review the LBP report and provide an _____________________________________________________________________ 4 estimated time for completion of abatement. If less time is warranted, the appropriate period for completion should be included as a condition of the commitment. o Paragraph IV.E.4 (page 11) allows completion of all repairs not considered as critical repairs involving ingress and egress to be deferred until after final endorsement. o Paragraph IV.E.5. goes on to say all deferred critical repairs (defined in IV.E.1. and E.2. and which include but are not limited to lead-based paint abatement) must begin immediately after endorsement. o Paragraph IV.G 1. states that all deferred repairs must be completed within 12 months of endorsement "(or such shorter time as HUD and the mortgagee may specify)." 22. Q: Do funds left in the repair escrow after completion of repairs go to the owner, or must they be used to reduce the mortgage? Language in paragraphs IV.G.1. (page 12) and paragraph IV.J.1.a. and b. (page 13) is contradictory. A: Funds remaining from the 100 percent portion of the repair escrow are to be applied to the mortgage or replacement reserve account in accordance with IV.J. Funds remaining from the additional 10 percent cash or letter of credit required by IV.F.3.b. may be released to the mortgagor upon satisfactory completion and provision of latent defects assurances (IV.J.2.). The following changes must be made to correct the contradictory language: o The last sentence of paragraph IV.G.1 of the Notice should be revised to read: >> "All funds remaining in the repair escrow after completion of all required repairs will be applied in accordance with paragraph J. below. . . ." >> The last sentence of Special Condition 16 of the sample firm commitment format should be revised to read: "Upon completion and acceptance of all repairs by HUD and _____________________________________________________________________ 5 provision of latent defects warranties, any funds remaining in the Repair Escrow Account shall be applied as follows: a. As a prepayment to the mortgage only to the extent that the savings permit payment of one or more full scheduled monthly principal payments. b. Any remainder is to be placed in the replacement reserve account." 23. Q: In the Section VI Valuation Processing Instructions, it is unclear why we need to do a market comparison of rents if income is stabilized. Why do a rental analysis if we have demonstrated there is sufficient income to support the mortgage? Some feel paragraphs VI.F and G.2.a.1. are contradictory. A: The objective in doing a market comparison if income is stabilized is to take a closer look and consider any increase in income, decrease in expenses (attributable to the required repairs), or changes in market conditions which might affect the mortgage amount under criterion 5, when criterion 5 limits the maximum insurable mortgage to less than the amount requested. o If income is stabilized, a market comparison of rents is not required if the stabilized rents support the requested mortgage amount. Paragraph VI.G.1. tells Valuation to provide a memo to the Director of HD. o Paragraphs VI.F. and VI. G.2.a.1. pose two different scenarios and are not contradictory. >> Paragraph VI.F. states if income is stabilized, complete criterion 5 (debt service criterion) of the Form HUD-92264A. >> Paragraph VI.G.2. then says look at that criterion 5, and if it limits the maximum insurable mortgage amount to less than the amount requested by the mortgagee, take another look at the rents. >> Completion of the Form HUD-92264A is a preliminary step which is done to determine whether criterion 5 limits the mortgage amount and whether the requirements of Paragraph VI.G.2 are necessary. _____________________________________________________________________ 6 24. Q: Why is there a requirement for assurance against latent defects in 223(a)(7)? What about situations where repairs are minor or deferred maintenance type items that will be completed by maintenance personnel instead of a contractor? A: A latent defects escrow is required when repairs are funded from mortgage proceeds and those repairs are of such a nature to require assurance that they are acceptably completed. The Director of HD shall determine if any of the identified repairs requires assurance against latent defects, after considering the recommendation of the A&E Chief. o Handbook 4567.1 addresses latent defects warranties in paragraph 6-4C. It prefaces the requirement by stating, "When required, . . . . ." The intent of that language and of the Notice is to allow Offices to identify on a project-by-project basis, which repairs require assurance against latent defects. Offices should use discretion in determining which repair items require assurance against latent defects, considering such things as the nature and cost of the specific repairs, the overall scope of repairs and the status of the replacement reserve account. >> For example, if an item of equipment or a building system (i.e., boiler, roof) is repaired or replaced and fails again in less than a year, will the project face expenses not anticipated in evaluating the adequacy of the replacement reserve account? o In determining the escrow amount or surety bond amount required for assurance against latent defects, the percentages identified in paragraphs IV.H.1. and 2. are applied to HUD's estimated repair cost for only those items requiring assurance against latent defects. o Who completes the repairs (in-house staff or contract work) is not a factor in determining whether assurance against latent defects is required. An escrow in cash or letter of credit must be used to meet the requirement if a surety bond cannot be obtained. _____________________________________________________________________ 7 25. Q: Can a second mortgage utilizing HOME funds be used to fund repairs in a low income project in conjunction with refinancing pursuant to 223(a)(7)? Does the 15 percent limit on secondary debt under 223(f) apply? A: HOME funds may be used provided the repayment requirements of the loan comply with the instructions in Chapter 16 of Handbook 4470.1 REV-2. In addition, any rent restrictions and targeting requirements of the HOME program must be considered in our underwriting. The 15 percent secondary financing limitation of the 223(f) program does not apply to 223(a)(7). Offices must decide the acceptability of secondary financing on a case-by-case basis. 26. Q: Can the mortgagee's annual physical inspection be used in lieu of the HM inspection called for in the Notice? A: Yes, provided the mortgagee's annual physical inspection is current and has been reviewed and accepted by HM and HM certifies to the information required in IV.A. of the Notice. If HM determines the inspection report is inadequate and an on-site review is required, HD must be notified and provided a target date for completion of the site visit/inspection. 27. Q: Can a recent physical inspection of a nursing home, performed for the purpose of determining acceptability for State licensing, be used in lieu of a HUD inspection? A: Yes, provided LM has an outstanding policy of accepting these inspections in lieu of the required annual physical inspections and from that inspection is able to provide all information and certifications required by paragraph IV.A. of the Notice. 28. Q: Occupancy reports are not identified as an application exhibit in Paragraph III, page 6, however, they are identified as a required processing exhibit in the Valuation instructions in Paragraph VI.E., page 14. Where do we get them? A: The omission of the occupancy report for the 6 months prior to application as an application exhibit was an oversight. Submission of a current rent roll and rent rolls for the preceding 6 months will satisfy the requirement for occupancy reports. Owners must also provide information on employee units and rents in arrears in Column F "Remarks" of the Rent Roll provided as Attachment 3 to Notice H 93-89. _____________________________________________________________________ 8 Paragraph III.G. on page 7 must be modified as follows: "Current rent roll and rent rolls for the preceding 6 months, in the general format identified in Attachment 3, disclosing the following information:" In addition modify, Paragraph III.G.6., as follows: "Remarks. Indicate "U" to denote an unfurnished apartment or "F" to denote furnished apartment. This Section should also be used to provide information relative to employee units and rents in arrears." 29. Q: The language in the firm commitment format states what, if any, initial deposit is required to the replacement reserve account. As it stands, the owner could make a draw on the reserve after issuance of the commitment, and the deposit in the commitment would not be sufficient to fund the reserve to the desired level. Should the commitment condition establish the balance we want in the reserve fund at closing? A: No. This is not needed. LM makes an analysis of the needs in the replacement reserve account and provides that estimate to HD during our processing. If release of funds from the escrow account is approved by LM after that time, i.e., after issuance of a firm commitment, it does not change the initial assessment by Loan Management of what was needed in the account at that point in time. However, since the initial deposit would be a condition of the firm commitment, verification would have to be provided at initial endorsement that the condition had been satisfied. 30. Q: Page 3, paragraph I.D. states the upfront MIP is .5 percent of the mortgage amount. Is that for all projects, or are refinancing of existing 223(f) mortgages still 1 percent? A: The upfront MIP for all refinancing (including 223(f)) pursuant to 223(a)(7) is .5 percent. This is a change from previous policy, based on an OGC opinion. Any project which has not gone to Initial Endorsement and has a commitment outstanding utilizing the old 1 percent upfront MIP may request reprocessing to reduce the upfront MIP. _____________________________________________________________________ 9 31. Q: What incentive is there for owners to refinance a project with section 8 rents? How do we handle rent reductions in projects with less than 100 percent of units with project-based assistance? What's the status of instructions for projects with 100 percent project-based rental assistance? A: o The issue of incentives for owners to refinance is under discussion as part of the Headquarters' Section 8 Working Group comprised of HD and HM staff. The outstanding policy being reviewed is a 90 percent/10 percent split in the rent savings between HUD and the mortgagor. >> If you are contacted by mortgagors of projects with project-based assistance indicating an interest in refinancing, determine what incentives would need to be offered to influence them to proceed with the refinancing and relay that information to us for consideration by the Working Group. >> If a mortgagor wants consideration of a project-specific proposal for incentives, an application for refinancing pursuant to Section 223(a)(7) must be submitted to the Field Office, along with a written proposal identifying the requested incentives. Contact Headquarters for consideration of the incentives after you have reached the point in processing where the anticipated savings has been determined. o Projects with less than 50 percent of the units with project-based assistance will not be required to reduce the rents in their Housing Assistance Payments (HAP) Contract. You may process using the expedited procedures and issue commitments on those projects without further guidance. o Projects with 50 percent or more of the units with project-based assistance will be required to reduce the rents in their HAP Contract. >> Instructions for determining rents for projects with 50 percent or more but less than 100 percent of units with project-based assistance are no different than for market rate projects. Rents for projects with 100 percent project-based assistance must be _____________________________________________________________________ 10 calculated by formula. Instructions for the formula rent calculation are being developed and will be provided upon request. Contact Headquarters for project-specific guidance. >> Instructions for implementing rent reductions for all projects with 50 percent or more of the units with project-based assistance are also being developed. In the interim, initiate processing and contact us for project-specific guidance on implementing rent reductions and shared savings. 32. Q: In paragraph II.C. of the Notice we state the term of the new mortgage may not exceed the remaining term of the existing mortgage, however, the Director of HD may approve a term up to 12 years beyond the remaining term if it is determined necessary for economic viability and will make less likely an insurance claim. Does this mean we can exceed the maximum term under the original mortgage program? If you had a 223(f) loan with a remaining term of 30 years, could it be refinanced for a 42-year term or would it be limited to 35? A. The regulations allow the maximum term to be up to 12 years beyond the remaining term, under the conditions identified in the Notice. The following language should be added to paragraph II.C. to further limit the loan term to the maximum term under the original mortgage program: "In no event may the loan term extend beyond the maximum term under the section of the act the original mortgage was insured." 33. Q: Why charge the .3 percent application fee upfront when we are going to refund half of it at the owner's request? A: Outstanding regulations (which cannot be waived) require the Department to collect a .3 percent application fee. Therefore, the full fee has to be collected. To entice owners to refinance, it was decided that the Department would refund up to half of the fee at the owner's request. Use an application fee of .15 percent when processing the application. _____________________________________________________________________ 11 34. Q: Can we apply the amount of MIP to be refunded under the original mortgage as a credit to the MIP due at closing? A: No. Unfortunately these are in two different computer systems and netting the MIP would cause utter chaos. The mortgagor is entitled to retain the refund of prepaid MIP under the original insured mortgage, unless a financing plan was used to reduce the mortgagor's cash requirement at closing, or permission was given to exceed the Debt Service Loan Amount (maximum loan amount supportable by 90 percent of net income). In those instances, an additional condition of the commitment shall be made for the mortgagor to deposit any refunded MIP to the Replacement Reserve Account. 35. Q: For projects with residual receipts, can the residual receipts account be used to reduce the principal amount of the loan and/or reduce the loan term? A: Residual receipts may be used to reduce the principal amount of the loan; however, project-specific guidance and approval from Headquarters is required. Residual Receipts may not be used to reduce the term of the mortgage. 36. Q: It is difficult for an appraiser to develop stabilized income and expense estimates without seeing the property. In addition, sometimes it will be necessary to review comparable properties, rents and expenses. To confirm their similarity to the subject they would generally require a site visit to both. We assume that the Valuation processor has the option of requesting a site visit even if HM has inspected the property within the last year. If not, please advise us. A: While the intent of the expedited instructions is to quickly process and close the new loan, Valuation staff must still conscientiously process the application. By reviewing the HM inspection report, the appraiser should have a good idea of the condition of the property. This should allow the appraiser to make REASONABLE deductions and to develop a stabilized income and expense estimate. If expense and income information fluctuates or there are indications that the information is not reliable or reflective of the market, the appraiser may make the estimates by comparison. When estimating by comparison, a site _____________________________________________________________________ 12 inspection should be performed. The extent of the inspection, whether external only or internal and external, is at the discretion of the appraiser and supervisors. 37. Q: Should a copy of the mortgage note and/or amortization schedule (to ascertain the exact remaining term and pay-off date) and a clear and specific statement identifying project financial obligations and clarifying whether funds were used (or debts incurred) to support project expenses be required application exhibits or obtained by Mortgage Credit as part of their review? A: No. Paragraph III.B requires that verification of all debt be provided as an application exhibit. It is the responsibility of the mortgagee to obtain this verification. The information submitted should be compared with the information in the project financial statements and title search report. If any discrepancies are noted, the owner should be required to provide a written explanation. The owner is prohibited by Paragraph 6(a) of the Regulatory Agreement from encumbering the project without HUD's written approval. If the Mortgage Credit Examiner notes in its review of the 223(a)(7) application the owner is violating this requirement, it should be brought to the attention of the Director of HM and resolved prior to proceeding with the application. 38. Q: What if the mortgagor has debt, i.e., advances by partners to fund repairs or operating shortfalls, that is not evidenced on a HUD-approved promissory note? Should we require the debt to be on a HUD-approved form before closing? A: First a determination must be made that the debt is acceptable to LM. If the debt is to be repaid as part of the 223(a)(7) transaction, it is not necessary to require the debt to be on a HUD-approved form prior to closing. However, if the debt is to remain in place subsequent to closing to reduce the cash requirements (refer to paragraph VII.E.3), the owner must evidence the debt on a HUD-approved form. 39. Q: Is it acceptable for Series B bonds, which are secured by the project and payable from surplus cash, to be issued to provide the owner with funds to meet the cash requirements for closing? What loans may remain outstanding at closing? _____________________________________________________________________ 13 A: No. It has been a longstanding position of HD that at closing the project should be free and clear of all liens except the HUD-insured mortgage. 1. The only exceptions to this rule are for loans provided from a Federal, State or local government agency. 2. For Existing loans in which, pursuant to a financing plan, the lien holders for other secured loans agree to take a subordinate position to the HUD-insured mortgage, refer to Paragraph VII.E.2. 3. If the owner has advanced funds for project operations, these surplus cash notes, (evidenced by promissory notes) can remain outstanding at closing, as part of a financing plan. 4. The mortgagor entity is not permitted to obtain a loan to meet the cash requirements for closing. In those cases where the cash requirement cannot be reduced (refer to paragraph VII.E) and the mortgagor entity does not evidence the financial capacity to meet the total estimated cash requirements for closing, it will be necessary for a principal(s) to provide the funds to close the project. Outstanding instructions in Chapter 3 of Handbook 4470.1 REV-2 permit individual principals of the mortgagor entity to borrow against their own fixed assets, if necessary, to assist the owner in meeting its cash requirement. However, the repayment of this debt must be an obligation of the principal and not the mortgagor entity. 40. Q: Paragraph VII.A.1. discusses review of the Form HUD-92013-Supplement form submitted by a mortgagor entity that is required to pay Federal income taxes (i.e., a profit-motivated corporation). For such mortgagors with delinquent Federal debt for which satisfactory arrangements have not been made, it establishes a special condition of the commitment regarding use of surplus funds to satisfy the debt. How is Mortgage Credit to determine the amount to be used to satisfy the debt? Or does this section mean that an agreement has been reached between the owner and affected agency? How does this translate into closing documents? Is it to be reflected as an amendment to the partnership/corporate documents? _____________________________________________________________________ 14 A: We have reconsidered paragraph VII.A.1. In accordance with OMB Circular-129, "Managing Federal Credit Programs," the Department may not process an application unless satisfactory arrangements have been made for the repayment of any delinquent Federal debt. Paragraphs VII.A.1. must be deleted and replaced with the following: "1. In those cases where the mortgagor is required to submit a Form HUD-92013 Supp (Refer to III.F.): a. Review the Form HUD-92013 Supp and the information required in paragraph III.F. to ensure that satisfactory arrangements have been made for the repayment of any identified delinquent Federal debt. b. If satisfactory arrangements have not been made for the repayment of any identified delinquent Federal debt, the application must be rejected." 41. Q: Paragraph VII.D refers to Attachment VI for the operating deficit. Should it be Attachment 5? A: Yes, the correct reference should be Attachment 5. 42. Q: Paragraph VII.E.1. In cases where the Director may elect to permit deferred noncritical repairs or the additional deposit to the replacement reserve to be funded from the savings, are the cost of those repairs included in the loan computation? A: Paragraph VII.E.1 authorizes the Director of HD to permit deferred noncritical repairs or the additional deposit to the replacement reserve to be funded from the savings only to the extent necessary to reduce or eliminate the cash requirements for closing, as part of a financing plan. Accordingly, it is not necessary to reprocess to eliminate the repairs or the amount of the deposit from the loan computation since it will not affect the mortgage amount. 43. Q: Paragraph VII.G.2.d. In preparing Criterion 5 on Form HUD-92264A it is indicated that the net income is to be reduced by the annual debt service requirements for those mortgages that will not be refinanced. Is this amount to be reduced by the debt service requirement for uninsured loans as well as insured loans? _____________________________________________________________________ 15 A: The net income should be reduced by the annual debt service requirements of any insured loans and any uninsured loans that were approved by HM that will not be refinanced. Refer to Questions 37 and 39 above, if you find there are uninsured loans that were not approved by HM. 44. Q: Paragraph IV.I. Is HM responsible for repair inspections and the release of escrow funds? A: Yes. It was decided to give this responsibility to HM since the HM inspection report is being relied upon to determine the required repairs. 45. Q: Must a new property insurance schedule be prepared? A: If the insured mortgage amount differs from the original insured mortgage amount, a new schedule should be prepared. 46. Q: Can organizational and audit expenses be included in the 223(a)(7) loan amount? A: No. There should be no need for organizational expenses as these are already existing insured mortgagors, and there is no audit requirement. 47. Q: What if the mortgagor wants to do upgrades and improvements in addition to the required repairs? A: The objective of the 223(a)(7) program is to stabilize the HUD-insured portfolio through refinancing existing debt and doing necessary repairs, lowering debt service and improving the mortgaged security. It is not intended as a vehicle for mortgagors to refinance and tap into equity to do rehabilitation or upgrading to the project. While we are not categorically excluding all upgrades or improvements from inclusion in the 223(a)(7) loan, Offices should use discretion in determining the appropriateness of the scope of repairs under 223(a)(7). If inclusion of "optional" repairs and improvements changes the nature of the refinance such that more extensive underwriting analysis than provided for in the expedited procedures is needed, other mortgage insurance programs may be more appropriate, i.e., Sections 223(f), 221, 232, or 241. _____________________________________________________________________ 16 Another consideration is that the Notice says we can go beyond the remaining term of the existing insured mortgage only if necessary to ensure economic viability of the property and make less likely an insurance claim (at the discretion of the Commissioner). If the repairs and rehab proposed by the owner are not "necessary repairs" it would be hard to make the argument that extending the term is necessary for project viability. Extending the term and increasing the loan amount for non-necessary repairs and rehab could increase rather than reduce the likelihood of an insurance claim. Certainly, the inclusion of such improvements would not be a basis for exceeding the maximum insurable loan amount if limited by the debt service criterion. 48. Q: What if LBP testing discloses the need for abatement but the cost to abate, (or any other required repair) when added to the outstanding debt exceeds the maximum insurable mortgage amount? A: The basic issue is no different if the repairs are LBP abatement or other items. First process the case and determine the mortgagor's cash requirement. Paragraph VII.E. on page 19 of the Notice addresses what to do if the firm processing results in a cash requirement to the owner. Follow these steps to determine if it is possible to reduce the cash requirement. If the requirement cannot be reduced, a commitment or rejection letter must be issued, depending on the mortgagor's demonstrated ability to meet the cash requirement. If the debt service criterion is the limiting factor, and the mortgagor requests a waiver to exceed that amount, determine what percent of net income would be necessary to support the higher loan amount and how much the mortgagor is willing and/or able to contribute to meet the cash requirement and contact Headquarters for project-specific guidance. If the original mortgage amount is the limiting factor, and not the debt service loan amount, a supplemental loan pursuant to Section 241 for the repair costs, may be recommended if the mortgagor is unable to satisfy the cash requirement. The Section 241 loan would have to be closed prior to or simultaneously with the Section 223(a)(7) loan. _____________________________________________________________________ 17 49. Q: What assurance do we have that the owner will reduce the rents for projects with project-based assistance contracts? A: When the refinancing involves a project with 50 percent or more of the units with project-based assistance, a condition of the commitment shall be added stating that the mortgagor shall enter into a revised assistance contract (e.g., Section 8 HAP Contract) reducing the rents to the agreed upon rents used in processing prior to endorsement. 50. Q: In what format and what documentation are we to submit when we request "project-specific guidance" as indicated above? A: Forward requests in writing (FAX) or via CC:MAIL to Jo Anne Garrison at FHCPOST7. The request should include a summary of the relevant data on both the existing and the proposed loans. Do not forward copies of the Form HUD-92264 or other processing documents unless specifically requested to do so. 51. Q: When does amortization commence? Paragraph VIII.D. of the Notice says the first day of the second month, the sample firm commitment says the first day of the first month. A: Paragraph VIII.D. is correct. The last paragraph on page 1 of the sample firm commitment should be modified accordingly. 52. Q: As interest rates rise, we are processing applications which result in minimal savings in debt service without resulting in other benefits to the Department (such as repairs). In these instances, benefits may inure to the mortgagee and others involved in the refinancing, and not to the project and HUD. Is there a minimum savings which should result from the refinancing in order to warrant issuance of a commitment under Section 223(a)(7)? Can we refuse to issue a commitment if it is not cost effective or limit the insurable mortgage amount to the outstanding debt? A: The point is well taken; however, a decision has been made that otherwise approvable applications, already in the pipeline (accepted for processing prior to 2/25/94), are neither subject to a minimum debt service _____________________________________________________________________ 18 savings threshold, nor restricted to the outstanding debt amount. We are currently evaluating whether to establish a threshold or otherwise limit the maximum insurable mortgage amount for applications accepted for processing after 2/25/94. Mortgagees should be advised prior to acceptance of their application fee that such a threshold is being considered and could result in rejection of their application. A decision on this issue should be made within the next week.