April 12, 1996 PRESERVATION LETTER No. 2 MEMORANDUM FOR: Directors of Housing Multifamily Housing Directors Multifamily Production Chiefs Multifamily Asset Management Chiefs Preservation Coordinators /s/ FROM: Chris Greer, Acting Deputy Assistant Secretary for Multifamily Housing Programs, HM SUBJECT: Implementation of H. R. 2099 The President signed the Housing Opportunity Program Extension Act (the Act) of 1996 on March 28, 1996, with a retroactive effective date of October 1, 1995. We have not received our Advice of Allotment to cover this extension. The purpose of these questions and answers is to notify all Directors of Multifamily Housing on how the Act affects the Preservation Program. You should share this information with the owners of Preservation eligible projects. For purposes of this memorandum, the project must have reached its 20th anniversary from final endorsement. You will receive additional questions and answers as we progress. The Shallow Rental Subsidy calculation is no longer a requirement as it was effective for Fiscal Year 1995 only. Based on projected Fiscal Year 1996 appropriations, recaptures and carryover funds from previous Fiscal Years, there could be approximately $862,356,342 available for the Preservation Program. To date, we have received $224,752,542 and we have used $211,158,955 of that amount. The projected needs based on eligible projects that have at least filed a Notice of Intent (NOI) or otherwise indicated to the Department an intention to file for incentives total $4,587,932,326 -- creating a shortfall of $3,725,625,984. It is the intention of the Department to carry out the Preservation Program to protect the tenants and fund as many sales projects to priority purchasers with approved Plans of Action (POA) with the resources provided by the Congress. At this time, with priority funding categories identified in the Act and with the limited amount of funds, this is how we intend to use available funds: -- tenant protections in the event of prepayments -- sales to priority purchasers (as defined in Section 248.101 of the regulations) in the queue There are several projects that are preservation eligible that are not in these top priority categories, i.e., conversions to sales projects with approved POAs, projects with approved POAs subject to repayment/settlement agreements, projects delayed due to natural disasters, projects delayed due to differing interpretations, sales in the processing pipeline, conversions in the processing pipeline, stay-ins in the queue, and stay-ins in the pipeline. We realize that there are many unknowns in this process, including the number of owners with approved POAs that will actually convert to sales, the number of tenants for whom protections will have to be provided and the number of owners who will elect to prepay among those who are in the Preservation pipeline (POA approved or in processing) and those who are eligible for Preservation incentives, but have not filed a NOI. The attached questions and answers will provide guidance to you as we begin to implement the new program. So that we may share common questions with the other State/Area Offices, please fax your questions to the Preservation Branch at (202) 708-1300 in order for us to have one common base for reference. Attachments IMPLEMENTATION OF HOUSING OPPORTUNITY PROGRAM EXTENSION ACT OF 1996 PRESERVATION QUESTIONS AND ANSWERS I. PREPAYMENT AND TENANT PROTECTION. Q1. Who is eligible to prepay? A1. The Housing Opportunity Program Extension Act of 1996 reinstated the rights of all Preservation eligible owners to prepay their mortgages or terminate the mortgage insurance, if they are otherwise eligible by the terms of the mortgage and the regulations under which the mortgage was insured (i.e., a limited dividend mortgagor at the 20th year). Note that a mortgagor between the 18th and 20th year is not eligible until the 20th year. Q2. What are tenants' rights when owner prepays/terminates mortgage insurance? A2. a. A previously unassisted low- or very low- income family residing in the project on the date of prepayment or termination and whose rent, (as a result of a rent increase occurring no later than one year after the date of prepayment or termination), exceeds 30 percent of adjusted income, will receive a voucher. The tenant will pay no more or less for rent than it paid on the date of prepayment or termination. The tenant may elect to remain in the unit or may chose to move. b. Tenants in the project that are currently receiving Section 8 funds under an existing Housing Assistance Payments (HAP) contract may continue to reside in the project and will continue to receive Section 8 funds until the contract expires. Tenants will receive vouchers when the HAP contract expires, subject to the availability of funds. c. Tenants in low-vacancy areas and special needs tenants will be addressed in the near future. d. Owner's responsibilities relative to relocation expense will be addressed in the near future. Q3. Will owners be permitted to opt out of an existing Section 8 contract? A3. As a part of the prepayment approval, the owner will not be permitted to opt out of an existing contract. II. INFORMATION REQUIRED OF OWNER WISHING TO PREPAY OR TERMINATE THE MORTGAGE INSURANCE CONTRACT Q1. What information does the owner supply to HUD at time of its initial written request for permission to prepay? A1. a. Property Name and Number b. Complete tenant profile. Follow outstanding instructions found in Paragraph 10-3.A.4 of HUD Handbook 4350.6 except that subparagraph e. should refer to low-income tenants as well as very low. c. Average monthly adjusted income or average monthly total tenant payment of families living in the development by family size (using project profile fact sheet including worksheet). d. Copies of current Form HUD-50059 for families receiving Section 8 assistance and certifications from residents stating if there have been any changes in income since the last annual recertification. e. Expiration date of each Lease at the project. f. Rent Information -- does owner intend to increase the rents. If so, what is the timing of the increase and the amount of such increase? g. Tenant information: -- Name and address of each tenant. -- Current family size. -- The unit/bedroom size the tenant is currently dwelling in; the number of resident families that are low- and very low-income and needing assistance by bedroom size. -- Average monthly total tenant payment by bedroom size. -- Identify each low- and very low-income tenant not receiving Section 8. -- Individual income verification consent forms, to verify relevant information in determining tenants eligibility and level of benefits. For a list of the forms, refer to Handbook 4350.3, Chg. 26. Q2. What, if any, notice is required to the tenants, State or local government agencies or HUD for a prepayment? A2. An owner wishing to prepay or terminate the mortgage insurance contract may do so provided that the rent charged for the impacted unit is not raised for 60 days after the effective date of prepayment in full. The owner may simultaneously notify HUD, State or local government, and each tenant of the owner's intention to prepay or terminate the mortgage insurance contract and the level of assistance HUD will provide to the tenants. Q3. What information does HUD need to authorize prepayment? A3. The first thing that an owner must do is to request, in writing, permission to prepay or terminate the mortgage insurance contract, from the local State/Area office. The local HUD office will respond to the owner granting or denying permission to prepay or terminate. After the owner receives permission from HUD, the owner may approach the mortgagee for approval. No mortgagee should accept prepayment/termination requests from an owner without an approval letter from HUD. MIAS receives Form HUD-9807 from the mortgagee executed by both the mortgagee and mortgagor. Prepayment is effective on date of prepayment in full. Normally, the mortgage holder pre-addresses these issues before submitting the request to HUD. Q4. Must owner request HUD approval prior to prepayment or termination? A4. Yes. HUD needs to be assured that very low-income and low-income tenants are protected. Q5. If a project has been through the Preservation process and is receiving incentives, can it prepay? A5. Yes. An owner can prepay, but the Use Agreement will remain in effect for the term set forth in the Title II Use Agreement, and the Remaining Useful Life of the Project in Title VI. Q6. What are the steps to process a prepayment or termination of mortgage insurance? A6. A contract of mortgage insurance may be terminated either by prepayment in full of the insured mortgage or by acceptance of a request for voluntary termination of the mortgage insurance contract made jointly by the mortgagor and mortgagee. Prior to the official request on the Form HUD-9807 jointly from the mortgagee and mortgagor, the owner must request permission to prepay/terminate from the local HUD Asset Management Branch. a. The mortgagor notifies the mortgagee, consistent with the terms and conditions of the mortgage insurance, that the mortgagor wishes to prepay the mortgage in full or seek voluntary termination of the insurance. b. In the case of a Preservation eligible project, the mortgagor must also notify the Asset Management Branch (AMB) of the appropriate State/Area Office. The loan documents include time frames for mortgagor notification to the mortgagee (generally, at least 30 days) and any additional charges to be assessed by the mortgagee if the mortgagor chooses to prepay. c. The Owner must also provide to the Preservation Coordinator in Asset Management: 1. A certification that tenant notification has occurred. The owner must post in each building and must also provide each tenant with a copy of the notice. Very low-income and low-income may receive some rental assistance. 2. A review of tenant profiles to determine those tenants who are eligible for assistance. 3. Tenant information: a. Name and address of each tenant; the number of residents for which assistance is being requested. b. Current family size. c. The unit/bedroom size the tenant is currently dwelling in. d. Average monthly total tenant payment by bedroom size. e. Identify each low- and very low- income tenant not receiving Section 8. f. Individual income verification consent forms, to verify relevant information in determining tenants eligibility and level of benefits. For a list of the forms refer to Handbook 4350.3, Chg. 26. 4. Owner must certify that all of the information that was submitted to AMB relating to tenants' status was accurate and correct. Condition permissible prepayment upon the owner's certification. 5. If after permissible prepayment, it is found that the certification was not accurate, the owner will be responsible for correcting any actions relative to the affected tenants. d. The Preservation Coordinator working with the RIS: 1. Will check for accuracy and completeness of the list submitted by the owner which identifies the tenants expected to need assistance. 2. Contact the PHA/State Agency to let them know about the particular project and find out if PHA is willing to administer vouchers for tenants. 3. Assure that the owner notified each tenant by a letter in the form discussed above which described to tenants their rights and protections. Appendix 10-1 of the Preservation Handbook is being revised and will be shared with you soon. 4. More detailed instructions will follow. e. The Office of Housing is working with the Office of Public and Indian Housing to assure the availability of vouchers in a timely manner. More detailed instructions will follow in the near future. Q7. The authorizing language states that the Secretary may determine priorities for distributing available funds including giving priority funding to tenants displaced due to mortgage prepayment. It is silent as to priority funding to tenants displaced due to voluntary termination of the mortgage insurance contract. Does this class of tenants receive priority? A7. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the authorizing language permits the Secretary to determine priorities for distributing available funds, including giving priority funding to tenants displaced by mortgage prepayment or by termination of the mortgage insurance contract. Q8. The authorizing language provides that an owner of eligible low-income housing may prepay the mortgage or request voluntary termination of the mortgage insurance contract, so long as said owner agrees not to raise rents for 60 days after prepayment. Does this mean that in the case of termination of the mortgage insurance contract the owner could immediately raise rents? A8. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the owner must agree not to raise rents for 60 days after termination of the mortgage insurance contract. III. FUNDING PROJECTS. Sales projects with approved POAs may now submit the necessary forms for Capital Grants or revised funding requests for the Section 241(f) program. The Section 8 needed to support the Section 241(f) will be capped at 100 percent of the FMR. Because of the new accounting numbering system, we can no longer enter Gap grants or Equity grants in the system. The new name for those two grants will be "Carry Grants." In determining the amount of new/amended Section 8 required, the rent is to be set at 100 percent of the FMR and the extra money needed for this loan is to be part of the Carry Grant. There will no longer be a separate equity or gap grant, they are now both part of the Carry Grant. Attached are the Section 241(f) Loan/Carry Grant Worksheet and the Distribution of Capital Grant Funds Worksheet. The Section 241(f) Worksheet is in WordPerfect and the Distribution of Capital Grant Funds Worksheet is in LOTUS. Title II projects involving a sale to a priority purchaser may use the Capital Grant Program.