‹#›

Lean Asset Management(Section 232)

SMACMay 15, 2014

11:00 AM

May 6, 2014

‹#›

Section 232 PortfolioAs 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

Full Claims (by FY)

2009 2010 2011 2012 2013 2014 (FYTD)0

2

4

6

8

10

12

14

16

18

Number of Claims (by FY)

Number of Claims

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

‹#›

Asset Mgmt Process Re-Engineering

• Checklist and Punchlists• Starting with High Volume• Standardization and Transparency• Partner Involvement • Electronic • Asset Management Portal

May 6, 2014

‹#›

Section 232 Healthcare Portal

May 6, 2014

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

‹#›

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

‹#›

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

‹#›

Draft Entry Items for Lenders on Spreadsheet

• Operating Cash• Investments• R4R Balance• AR• Current Liabilities• Amortization Expense• Net Income• FHA Interest Expense

• Rent/Lease Expense• Depreciation Expense• Current Assets• Total Expenses• FHA Principal Pymt.• MIP

May 6, 2014

‹#›

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

‹#›

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

‹#›

CURRENT DESIGNS OF PORTAL - LENDER VIEWS

May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›May 6, 2014

‹#›

Beta Testing with Several Volunteer Lenders

• In June 2014 - Duration one hour on a specific date• Testing will include:

Log In to Test SiteRetrieving and populating an Excel TemplateUploading FilesReviewing 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

‹#›

Timeline Goals

• 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

‹#›

Loan Modifications

May 6, 2014

‹#›

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/

healthcare_facilities/residential_care/loan_servicing

May 6, 2014

‹#›

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

‹#›May 6, 2014

‹#›May 6, 2014

‹#›

IRR Loan Modifications

Lender includes a Letter from GNMA if loan in GNMA pool to address investor consent.

Project must be out of prepay lockoutProject must pay any required prepayment

penalties GNMA recognizes the Issuer of Record and

provides letter to that entityNew prepayment premium schedule is acceptable

in modification document

May 6, 2014

‹#›

IRR Loan Modifications (cont’d)

Other Considerations:RfR Balance: If below $1000/per unit – addressSprinklers: If SNF check that it is Fully Sprinklered per

CMS RequirementsTroubled: 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 – addressWhether a PCNA is due

May 6, 2014

‹#›

IRR Loan Modifications (cont’d)

PCNAsSubmit if >10 years since last PCNANote in Lender Analysis if change in RfR

PaymentsDescribe sources of funds and timeline for any

required repairs.Propose Special Conditions if applicable

May 6, 2014

‹#›

IRR Loan Modifications

Trade PremiumsCannot cover: • Borrower Counsel• Organizational Costs• 3rd Party Reports (e.g. PCNA)

May 6, 2014

‹#›

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

‹#›

Submit IRR Package

Prelim Review

Finalize Mod Docs and Submit

(30 Days)

Final Review Execute

Close IRR, Submit Recorded Docs

(45 Days)

General Ideal Process Flow of Interest Rate Reductions in ORCF

May 6, 2014

‹#›

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

‹#›

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

‹#›

Section 232 Draft Handbook

May 6, 2014

‹#›

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

‹#›

Details Operator and Lender Responsibilities, Including……

May 6, 2014

‹#›

Dealing With Issues on Section 232’s

• Failure to make Lease Payment• Serious issues with State Inspections/Licensing• Substantial Legal Judgments/Penalties/Fines• Large PLI Claims• Bankruptcy

May 6, 2014

‹#›

Continued….

• Delinquent Mortgage Payments• Default of Master Lease• Significant HUD Compliance Issues:– Poor REAC Scores– Department Enforcement Center Actions

May 6, 2014

‹#›

HUD Intends to Provide an Optional Standardized Format for Reporting These:–What the Issue Entails–Actions Being Taken to Address

May 6, 2014

‹#›

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

‹#›

Other Draft Handbook Changes Proposed for Asset Management…….

May 6, 2014

‹#›

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

‹#›

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

‹#›

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

‹#›

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

‹#›

Other Hot Topics

May 6, 2014

‹#›

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

‹#›

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 “Non-Residential Buildings” is not impacted (nursing homes).

• ORCF working with Multi-Family to come out with joint guidance

May 6, 2014

‹#›

Financials: Recent Email Blast

• Mortgagor: Notice H 2013-23 – Audited still required unless original amount of

mortgages < $500,000

May 6, 2014

‹#›

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 BuildingAttn: Simon Kleinman 26 Federal Plaza, Room 32-116New York, NY 10278

May 6, 2014

‹#›

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

Production BranchTom McMillan

Deputy Assistant Secretary For Healthcare Programs

Roger Miller

Director, Office of Residential Care Facilities

Roger Lewis, Acting *

Office of Healthcare ProgramsOffice of Residential Care Facilities Section 232Primary Organization Chart(Unofficial)

Director, ProductionPatrick Berry, Acting*

Director, Asset Management and Lender Relations Division

Tim Gruenes*

Associate Deputy Assistant Secretary

Roger Lukoff

Production Branch Susan Gosselin

Production Branch Rita Dockery

Loan Management BranchEd Chlystek

Loan Management Branch Catherine Worley

Loan Management BranchAngela Collier

Director, Policy and Risk Analysis Division

John Hartung*Risk Management Branch

Tim Coon

Lender RelationsMary Walsh*

Credit RiskJen Buhlman*

Closing TeamCarol Jun

* Denotes Loan Committee Voting Member

‹#›May 6, 2014

Tim Gruenestim.gruenes@hud.gov