Lean Asset Management
(Section 232)
SMAC
May 15, 2014
11:00 AM
May 6, 2014
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Section 232 Portfolio
As of 4/21/14
• 2892 Projects - $21.5 Billion Outstanding
Principal Balance
– 153 Categorized as “Troubled” in HUD’s system
• Concentration in servicing:
– 50 total lenders servicing Section 232’s.
– $18.5 Billion (86%) is being serviced by 13 lenders
• Portfolio Interest Rate:
– Currently = 4.20%; 2 Years Ago = 5.35%
May 6, 2014
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Full Claims (by FY)
Number of Claims (by FY)
18
16
14
12
10
Number of Claims
8
6
4
2
0
2009
2010
2011
2012
2013
2014 (FYTD)
Section 232 Claims
Partial Payment of Claim(s)
• Last Resort
• 4 PPC’s Completed in FY 2013
– 1 in 2012 and 1 in 2011
– 1 in FY 2014 and another 3 Being Contemplated
• Average Structure on PPC:
– 65% of Claim - Restructured 1st Mortgage
– 35% of Claim – Soft 2nd Mortgage
Primary Reasons For Claim
Last 5 Years of Data
Market or Rate Issues: 54%
Operator or Survey Issues: 27%
Money Follows the Person: 19%
Takeaways
• 8 of 14 Claims Since 2012: MI Population
– Money Follows the Person
– Initiative to move tenants to less institutionalized
homes.
• New Construction Remains Highest Risk:
– 52% of Projects on Priority Watch List
vs.
– 24% of Portfolio are/were NC
Asset Management Specialization
• Loan Modifications – done – success!
• Next up……
– TPA’s
– R4R Reviews
– Non-Critical Repair Escrow Reviews
May 6, 2014
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Asset Mgmt Process Re-Engineering
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Checklist and Punchlists
Starting with High Volume
Standardization and Transparency
Partner Involvement
Electronic
Asset Management Portal
May 6, 2014
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Section 232 Healthcare Portal
May 6, 2014
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Proposed Components
• Operator Financials: See Other Slides
• Asset Management Transaction/Requests
Portal and Tracking:
– Just Began Development
– All Asset Mgmt Processes and Requests
– Electronic – Better Tracking
• Development Application Portal and Tracking:
– Slated to begin development after 1st 2 phases
complete.
11
Phase I: Operator Financials
Background
• Accountability Rule Change: 10/9/12
– 24 CFR Part 5.801
• Required Quarterly Operator Financials
– FY’s Beginning 60 Days After HUD Publishes CFR
Notice Announcing Our System
• Applies to All Section 232’s
– No Lease: Mortgagor = Operator
May 6, 2014
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Background, Continued
• Quarterly: Must be submitted to HUD within
30 Days of the End of the Quarter
• FYE: Must be submitted to HUD within 60
Days of the End of the FY
• Pursuing Reg. Waiver – 60/90 – also flexibility
• Operator Certified Financials OK.
• Mortgagor Annual Audited Financials Still
Required.
May 6, 2014
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Logistics
• Operators will submit quarterly financial
reports to their servicing lender.
– HUD is not dictating format
• The lender will populate a standard excel
template with key financial information on the
Section 232’s they service.
May 6, 2014
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Draft Entry Items for Lenders on
Spreadsheet
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Operating Cash
Investments
R4R Balance
AR
Current Liabilities
Amortization Expense
Net Income
FHA Interest Expense
May 6, 2014
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Rent/Lease Expense
Depreciation Expense
Current Assets
Total Expenses
FHA Principal Pymt.
MIP
Logistics, Continued
• Lender uploads spreadsheet to a portal.
– Can upload spreadsheet in batches.
• Lender will be able to view and run reports on
ratios:
– DSCR
– Several Liquidity Measures
– AR and AP Measures
May 6, 2014
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Logistics, Continued
• Work in Progress:
– HUD generates an overall financial risk score for
each project.
– Determine how to follow-up on perceived weaker
financial projects.
• Lender on front lines
May 6, 2014
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CURRENT DESIGNS OF
PORTAL - LENDER
VIEWS
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May 6, 2014
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Beta Testing with
Several Volunteer Lenders
• In June 2014 - Duration one hour on a specific date
• Testing will include:
Log In to Test Site
Retrieving and populating an Excel Template
Uploading Files
Reviewing uploaded files for data integrity.
Lenders that want to participate send email to:
LeanThinking@HUD.gov
Subject line: 232 Healthcare Portal – Pilot (by 5/20/14)
May 6, 2014
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Timeline Goals
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Beta Test w/several Lenders: 6/14
All Lender Training: 7/14
Deployment: Voluntary Reporting: 8/14
CFR Notice: No Later Than 10/31/14
Mandatory Use: Fiscal Years Beginning after
12/31/14
May 6, 2014
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Loan Modifications
May 6, 2014
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ORCF – Interest Rate
Reductions (IRRs)
• IRRs are Loan Modifications proposing to simply lower the existing
interest rate on performing loans (vs. Default Loan Mods)
• Lender Checklist and Lender Analysis are posted on HUD.gov:
http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/he
althcare_facilities/residential_care/loan_servicing
May 6, 2014
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IRR Loan Modifications
• Dedicated Email Box for Electronic
Submissions:
ORCFLoanModification@hud.gov
• Specialized Team in Asset Management
• Quick accurate Preliminary Reviews (generally
within 2 weeks)
• COMMUNICATION IS KEY- applies to lenders
and lender counsel!
May 6, 2014
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IRR Loan Modifications
Lender includes a Letter from GNMA if loan in GNMA
pool to address investor consent.
Project must be out of prepay lockout
Project must pay any required prepayment
penalties
GNMA recognizes the Issuer of Record and
provides letter to that entity
New prepayment premium schedule is acceptable
in modification document
May 6, 2014
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IRR Loan Modifications (cont’d)
Other Considerations:
 RfR Balance: If below $1000/per unit – address
 Sprinklers: If SNF check that it is Fully Sprinklered per
CMS Requirements
 Troubled: If loan is still below 1.11 DSCR after IRR –
address (Plan of Action)
 CMS Star Ratings: If SNF and poor history or quality
of care – address
 Whether a PCNA is due
May 6, 2014
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IRR Loan Modifications (cont’d)
PCNAs
Submit if >10 years since last PCNA
Note in Lender Analysis if change in RfR
Payments
Describe sources of funds and timeline for any
required repairs.
Propose Special Conditions if applicable
May 6, 2014
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IRR Loan Modifications
Trade Premiums
Cannot cover:
• Borrower Counsel
• Organizational Costs
• 3rd Party Reports (e.g. PCNA)
May 6, 2014
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IRR Loan Modifications
Trade Premiums can cover:
• Any portion not retained by Lender can be
applied to Lender Costs (Lender Counsel,
GNMA commitment fee),Title/Recording or
defray prepayment premium.
• Remaining can be applied to RfR Balance
• Please indicate use of Trade Premium in
Sources and Uses and Lender Analysis
Narrative
May 6, 2014
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General Ideal Process Flow of Interest Rate Reductions in ORCF
Finalize Mod Docs
and Submit
Prelim
Review
Submit IRR
Package
(30 Days)
Close IRR, Submit
Recorded Docs
Final
Review
Execute
(45 Days)
May 6, 2014
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IRR Loan Modifications
Common Issues Slowing Down IRRs:
• Incorrect calculations (check: DSCR, Sources &
Uses)
• Quality Control (Exhibits must be internally
consistent)
• Letter from GNMA not included
• Lack of Communication
May 6, 2014
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IRR Loan Modifications
• As of February 21, 2014, we have received 37
requests for IRRs
• Fully Processed approximately 25 to date
projected to realize over $3 million annual
savings
• Streamlined Process; Specialized Team; OGC
on board.
May 6, 2014
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Section 232 Draft Handbook
May 6, 2014
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Handbook Timeline
• OIG Audits: Considerable Pressure to
Issue
• Latest on Timeline for Issuance
• Grandfathering Period?
• Necessary revisions will be made after
issuance – similar to 242 handbook.
May 6, 2014
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Details Operator and Lender
Responsibilities, Including……
May 6, 2014
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Dealing With Issues on Section 232’s
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Failure to make Lease Payment
Serious issues with State Inspections/Licensing
Substantial Legal Judgments/Penalties/Fines
Large PLI Claims
Bankruptcy
May 6, 2014
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Continued….
• Delinquent Mortgage Payments
• Default of Master Lease
• Significant HUD Compliance Issues:
– Poor REAC Scores
– Department Enforcement Center Actions
May 6, 2014
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HUD Intends to Provide an Optional
Standardized Format for Reporting
These:
–What the Issue Entails
–Actions Being Taken to Address
May 6, 2014
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Lender Responsibilities
• Quarterly, proactively Monitor CMS’s Special
Focus List.
• Annually, proactively Monitor PLI and Fidelity
Bond Coverage.
• Quarterly Operator Financials
– Discussed in more detail later.
• Review and submission of Asset Mgmt
Actions/Transactions
May 6, 2014
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Other Draft Handbook Changes
Proposed for Asset
Management…….
May 6, 2014
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Lender Review and Approval of R4R
Requests:
• Option of Lender
• Lender approval:
– Automatically approved if MF approves
– If not, can request approval from ORCF
• Only R4R Releases
• Minimum of $1,500 per Unit in R4R After
Release
• All Section 232 Loan Types Eligible
May 6, 2014
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Lender Non-Critical Repair Escrow
Administration
• Option of Lender
• Lender approval:
– Automatically approved if MF approves
– If not, can request approval from ORCF
• Must be set up on each loan when in
Development – no HUD Inspection Fee
May 6, 2014
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Lender Non-Critical Repair Escrow
Administration
• Before closeout of account, inspection by
PCNA provider (mortgagable cost)
• HUD must approve of closeout of account.
• HUD must approve of any revisions to scope.
May 6, 2014
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Handbook Draft Also Addresses…..
Environmental Review Required per CFR
when:
• Remodeling, Adding to, Subtracting from,
Reconstructing, or Demolishing
– Language in Reg. Agreements
• Defines Remodeling as Substantial Rehab.
• Will be built into checklist and punchlist for
processes.
May 6, 2014
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Other Hot Topics
May 6, 2014
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Flood Insurance
• On projects requiring flood insurance,
Security Agreement requires coverage at
lesser of:
– The maximum amount available under NFIP,
– Replacement cost minus land, or
– The existing loan balance.
May 6, 2014
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Flood Insurance
• On 6/1/14, the maximum amount available
under NFIP is increasing for “Residential
Buildings with 5 or More Units”
– Going from $250k to $500k
• Maximum amount available on “NonResidential Buildings” is not impacted (nursing
homes).
• ORCF working with Multi-Family to come out
with joint guidance
May 6, 2014
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Financials: Recent Email Blast
• Mortgagor: Notice H 2013-23
– Audited still required unless original amount of
mortgages < $500,000
May 6, 2014
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Financials: Lessee/Operator
• Many Regulatory Agreements require:
– Notice in 1996 required
– OHP has had Lean Rider since December 2008
• New email address:
232OperatorFinancialsFY2013@hud.gov
• Or via mail to:
Jacob K. Javitz Federal Building
Attn: Simon Kleinman
26 Federal Plaza, Room 32-116
New York, NY 10278
May 6, 2014
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MDDR System
• 2/27/14 Email Blast Addresses
• Important to follow rules regarding entering
delinquent projects into MDDR and properly
submit requests for extensions of election to
assign.
May 6, 2014
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Office of Healthcare Programs
Office of Residential Care Facilities Section 232
Primary Organization Chart
(Unofficial)
Deputy Assistant Secretary
For Healthcare Programs
Roger Miller
Associate Deputy
Assistant Secretary
Roger Lukoff
Director, Office of Residential Care Facilities
Closing Team
Carol Jun
Roger Lewis, Acting *
Director, Production
Patrick Berry, Acting*
Production Branch
Tom McMillan
Director, Policy and
Risk Analysis Division
John Hartung*
Credit Risk
Jen Buhlman*
Director, Asset Management and
Lender Relations Division
Lender Relations
Mary Walsh*
Tim Gruenes*
Risk Management Branch
Tim Coon
Loan Management Branch
Production Branch
Ed Chlystek
Rita Dockery
Production Branch
Susan Gosselin
Loan Management Branch
Catherine Worley
Loan Management Branch
Angela Collier
* Denotes Loan Committee Voting Member
May 6, 2014
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Tim Gruenes
tim.gruenes@hud.gov