NALHFA Conference Federal Financing Bank-HUD

Risk Sharing Program Financing

May 1, 2015

Risk Sharing Program Overview

Background: Section 542 of the Housing and Community Development Act of 1992

established the two pilot risk sharing programs:

1. 542(c) Housing Finance Agency (HFA) Risk Sharing Program

2. 542(b) Qualified Participating Entity (QPE) Risk Sharing Program

Section 235 of HUD’s FY 2001 Appropriations Act, Public Law 106-377, converted the pilot program into a permanent multifamily insurance program. Unit allocations and reservation of credit subsidy are no longer in effect.

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542(c) HFA Risk Sharing Program

Provides Credit enhancement to state and local housing finance agencies’

(HFA) bond and debt issuances through FHA mortgage insurance.

• The HFA and HUD share risk on a transaction level. Underwriting and asset

management responsibilities are delegated to the HFA.

• HFA benefits: higher bond ratings resulting in lower borrowing costs and

savings passed on to borrowers and tenants

• HUD benefits: reduced risk at the transaction level, increased affordable

housing production and significantly reduced staff resources.

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Traditional FHA Programs vs. Risk Sharing

The Risk Sharing program differs from FHA’s traditional mortgage insurance programs in that in the Risk Share programs:

• FHA assumes only a portion of risk, rather than all;

• FHA delegates loan processing and asset management functions to the HFA;

• FHA has more stringent eligibility standards for lender participation and sets larger reserve requirements that reduce counterparty risk

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The 542(c) Risk Sharing Program– How the

Program Works • Qualified HFAs are authorized to underwrite, process, and service loans

and to manage and dispose of properties.

• HFAs enter into Risk Sharing Agreements with HUD, the HFA contracts to reimburse HUD for a portion of loss on any claims.

• Over the life of the program no HFA has failed to meet its reimbursement obligation.

• There have been 38 claims on over 1000 transactions.

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542(c) Program Accomplishments

Top Producing HFAs:

HFA # of loans endorsed $ amount of endorsements

MassHousing 211 $1.70 billion

Rhode Island 93 $355 million

California 86 $395 million

Minnesota 68 $165 million

Missouri 64 $174 million

Colorado 58 $196 million

Illinois 54 $265 million

Kentucky 48 $ 35 million

New Mexico 48 $121 million

Oregon 43 $150 million

New Hampshire 43 $131 million

Maryland 34 $223 million

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542(c) Risk Sharing Portfolio Performance

Fiscal Year

Active Loans Beginning of Year

Full Claims

Counts Dollars

Count UPB (millions)

Count Rate Total (millions)

Rate Average (millions)

All FHA Multifamily Programs

2011 9,966 $45,489 51 0.23% $159 0.35% $ 7

2012 10,221 $51,498 19 0.19% $189 0.37% $10

2013 10,556 $60,113 11 0.11% $ 94 0.16% $ 9

Section 542(c ) HFA Performance

2011 962 $4,979 1 0.10% $1 0.02% $1

2012 1012 $5,249 0 0.00% $0 0% $0

2013 1038 $5,410 1 0.10% $0.55 0.01% $1

• The Risk Sharing program performance compares favorably with the overall

performance of All FHA Multifamily Programs for the period FY 2011-FY 2013.

Performance in this period supports the value of the risk sharing approach with

its reliance on delegated decision-making based on shared risk.

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HFA Approval Levels

HFAs may be approved at the following risk level percentages:

• Level I – 50/50 shared risk: HFA uses it own underwriting standards; or

• Level II – 90/10 or 75/25 shared risk – HFA uses underwriting standards, loan terms, and conditions approved by HUD, or HUD may require changes to HFAs standards as a condition for approval, or require HFA to use standards for HUD’s FHA loan programs (223f or 221d4). In this case only the general framework of the program requirements are used. HUD forms are not required if the HFA has similar documents; or

• Combined levels of I & II – HFA approved to use both levels. About 2/3 of the portfolio are Level I transactions and 1/3 are Level II. Claim rates do not vary significantly between Level I and Level II.

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542(c) Program Requirements

• The Risk Share Program is entirely affordable production.

• All projects insured under the Risk Sharing Program must qualify as affordable housing as defined in the Tax Credit Program:

• 20 percent or more of units occupied by families whose income is 50 percent or less of the area median income; or

• 40 percent (25 percent in New York City) or more of units are occupied by families whose income is 60 percent or less of the area median income

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The WHY of the Federal Financing Bank-HUD

Financing Initiative

• Due to the financing collapse in 2008 HFA tax exempt rates and Ginnie Mae rates inverted.

• Risk Share business volume dropped precipitously

• Risk Share business volume recovered briefly with the New Issue Bond Program

• Business volume continues its decline in 2014-2015

• In the same period FHA MAP Lending LIHTC volume has increased dramatically

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HFA Tax Exempt Rates vs. Ginnie Mae Security Rates

In late 2008 multifamily tax exempt bond rates and Ginnie Mae multifamily certificate rates inverted with HFA tax exempt rates higher than comparable Ginnies. The greatest disparity was in late 2012 when HFA rates were 130bps above Ginnies. In December 2013 a typical multifamily Ginnie certificate was 76bps above a typical multifamily 30-year tax exempt bond offering.

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Tax Exempt vs. Ginnie Mae Security Rates

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4.18

3.71

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7/1

/20

07

11

/1/2

00

7

3/1

/20

08

7/1

/20

08

11

/1/2

00

8

3/1

/20

09

7/1

/20

09

11

/1/2

00

9

3/1

/20

10

7/1

/20

10

11

/1/2

01

0

3/1

/20

11

7/1

/20

11

11

/1/2

01

1

3/1

/20

12

7/1

/20

12

11

/1/2

01

2

3/1

/20

13

7/1

/20

13

11

/1/2

01

3

3/1

/20

14

7/1

/20

14

MF tax exempt rates / IndicativeAa 30-year multifamily housingrates

GNMA Multifamily SecuritiesRate

HFA Risk Share Initial Endorsements FY 2007 to FY 2014

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0

50

100

150

200

250

300

350

400

450

500

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

HFA Risk Share Initial Endorsements (Volume in $MM) (FY14 Annualized)

Criteria for HFA Participation

• The FFB program will be limited to Level I HFAs. Level I HFAs have a rating of “A” or better. Twenty-eight of the thirty-three approved risk share HFAs participate at Level I.

• Program will be implemented under existing 542(c) regulatory framework – HFA’s will use current risk share underwriting standards

– HFA’s will process environmental reviews

– Program will be implemented through new risk sharing agreements

• In lieu of existing insurance termination provision – HFAs will commit to reimburse FHA for 100% of claim for fraud or material representation as outlined in risk share regulation.

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Criteria for HFA Participation

• HFAs who are not currently Level I may apply to be upgraded to Level I status

• Risk Share Agreements will define terms of business for mortgage side of FFB Programs

• FHA understands that HFAs have periodically requested program waivers and that process will continue under the FFB program.

• FHA will consider regulation waivers on a case by case basis and interested HFAs should initiate the process as early as possible.

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What is the FFB?

Congress established the FFB in 1973 as a “body corporate” and “an instrumentality of the United States.”

The FFB is “subject to the general supervision and direction of the Secretary of the Treasury.”

The FFB became the central vehicle through which Federal agencies financed programs involving the sale or placement of credit market instruments, whereby only the FFB/Treasury borrowed in the market for the rest of the Government.

The FFB provides funding to help Federal agencies efficiently finance their borrowing and lending authorities, and to help the Treasury implement unitary financing of the public debt.

Congress gave the FFB the authority to purchase and sell any obligation “issued, sold, or guaranteed by a federal agency.”

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What value does the FFB provide?

At present, the primary value provided by the FFB is to reduce the cost to the taxpayer of financing Federal and federally-assisted borrowing programs.

The FFB finances Federal agencies at rates based on the Treasury’s cost of funds, rather than at commercial rates.

The FFB captures income for the taxpayer when the taxpayer bears the risk of loss.

For example, if a commercial lender makes a loan that is 100 percent guaranteed by a Federal agency, the taxpayer bears all the risk but captures no direct value from the loan. The commercial lender generates the profit without the cost of underwriting and without the risk of loss. If the FFB makes the loan, the taxpayer captures the profit, or if the loan defaults the cost to the taxpayer is lower due to the Treasury’s cost of funds.

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How Does the FFB Price Loans?

The FFB sets lending rates using the comparable rates from the Treasury yield curve, considering the maturity of the loan, the repayment schedule of the loan, and other factors.

In accordance with the lending policy established by the FFB Board, the FFB also charges an additional spread over the Treasury rate to capture the liquidity premium between Treasury securities and the fully federally-guaranteed private sector lending rate. This spread may be included in the lending rate or charged as a separate fee.

The method to set rates is applied uniformly to all borrowers under a given program.

Borrowers of the FFB are limited to drawing funds incrementally to meet actual, immediate needs. Each drawdown under a loan commitment is individually priced based on current rates.

Borrowers are not permitted to draw from the FFB in order to invest the funds.

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Pilot Transactions-NYCHDC

In October 2014, HUD/FFB closed a transaction with NYCHDC The project, Arverne View Apartments (a.k.a. Ocean Village) is a

1,093 unit complex originally constructed in 1972 and located in Queens.

Arverne View was virtually destroyed during Hurricane Sandy and

reconstructed by L+M Development Partners Construction financing was provided by NYCHDC, New York State,

and CitiCorp. HUD/FFB provided permanent take-out financing.

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Pilot Transactions-NYCHDC Con’t

Issuer: HDC

Project Owner: L+M Development Partners

Purchase Price: $72,020,000

Principal Amount of Certificate: $72,020,000

Certificate Closing date: October 30, 2014

Mortgage Loan Interest Rate: 6.00%

Mortgage Loan Maturity Date: October 31, 2049

Mortgage Insurer: HUD

Certificate Owner: Federal Financing Bank

Certificate Pass-Through Rate: 3.322%

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Pilot Transactions-MassHousing

• HUD/FFB is working with MassHousing on a development we expect to close in the 1st week of June, 2015.

• Pheasant Hill Village is a 200 unit elderly and family residential complex located in Agawam, MA.

• Pheasant Hill Village is a subsidized HUD Section 8 development.

• Pheasant Hill Village is owned by SHP Acquisitions, LLC

• The acquisition cost is expected to be approximately $18 million.

• This transaction will feature a 60-day rate lock.

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Program Documents Target Distribution to HFA Focus Group Mid-May

• Form HFA Risk Share Agreement for FFB Program

• Form Master Purchase and Sale Agreement

• Form Master Escrow and Custody Agreement

• Form Supplemental Escrow and Custody Agreement

• Form of HFA Opinions of Counsel – Transaction Documents, Risk Share Agreement etc.

• Form of Opinion of Custodian’s Counsel re: Transaction Documents

• Form HFA/HUD Designation and Pricing Request

• Form of Rate Commitment Offer

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FFB Pricing Criteria - Existing Properties

• The FFB Initiative is a bridge allowing HFAs to access capital at favorable rates until the statutory prohibition on the use of Ginnie securitization in the risk share program is eliminated.

• FFB Pricing will be benchmarked to comparable Ginnie Mae Securities for program type i.e. NC/SR (221D4) or Existing Properties (223(f).

• Current benchmark indication for Existing Properties is 100bps over 10 year Treasuries.

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NC/SR Pricing Criteria

• 40 Year term is fine if allowed by FHA insurance.

• FFB is evaluating cash collateralized transaction as well as funding upon completion.

• We are also evaluating a forward–starting swap product.

• Extensions of the construction phase beyond the scheduled date may trigger a repricing.

• FFB will distribute weekly rate advisory sheets so that HFAs and project owners can track FFB rates.

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Other Financing Terms

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• Each Certificate evidences a 100% beneficial ownership interest in the underlying multifamily project loan. Principal is passed through to the Certificate Owner on the 15th of the month in which a scheduled principal payment on the underlying project loan is due. Interest is passed through at the Certificate Pass-Through Rate. Interest received from the Project Owner in excess of the Certificate Pass-Through Rate belongs to the HFA.

FHA Insurance:

• The project loan is insured by HUD under Section 542(c) of the Housing and Community development Act of 1992, as amended. Under 542(c), HUD is obligated to pay 100% of any claim within 3 business days of receipt. HFAs must then reimburse HUD for 50% of any loss which may occur while the insurance is in force.

Additional Security:

• HFAs are required to deposit a sum equal to the maximum two consecutive months debt service into a Mortgage Reserve Account to ensure timely payment to the Certificate Owner.

Next Steps

• Complete Risk Share Agreement Addenda

• Circulate FFB Agreements

• Process Regulatory Waivers

• Development of cash collateralized, or forward commitment program.

• Initially we will focus on HFAs with transactions ready to fund in June-September.

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New Initiatives: 542(b) Small Buildings Risk Sharing Initiative (SBRS)

OBJECTIVES: • Increase the supply and preservation of affordable small properties that face

significant obstacles accessing fixed rate, long term financing.

• Attract new lenders with inclusion of high capacity CDFIs, or non-profit, or public or quasi-public agencies (Mission-Based Lenders) and for-profit Private Lenders to the Risk Sharing Program. Note: Approved MAP lenders eligible to apply 6 months after the Federal Register Notice is published.

• Utilize existing Risk Sharing program platform with shared risk between lender and FHA 50/50 and delegated processing, decision making, and closing procedures to enhance the delivery of affordable housing in local markets.

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542(b) Small Buildings Risk Sharing Initiative (SBRS)

Program Overview

• Lenders share risk 50/50 with HUD

• Projects must qualify as affordable housing, consistent with Section 42 LIHTC Program: 20% of the units restricted to households at 50% AMI, or 40% of the units restricted to households at 60% AMI.

• Eligible properties are 5 or more units

• Loan amounts are limited to $3,000,000 or $5,000,000 in High Cost Areas as designated by HUD.

• Lender’s first year in the program: limited to 20 loans or $50 million in closed loans.

• SBRS is a preservation initiative: new construction is not permitted. Substantial rehabilitation and refinance only. Loans may be ‘insured upon completion’ or ‘insured advances’.

• MIP will be published in the Federal Register.

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542(b) Small Buildings Risk Sharing Initiative (SBRS) Program Overview (cont):

• Compliance with Davis Bacon is not required for 542b.

• Lenders use their own underwriting standards, loan terms and conditions; asset management and servicing policies as disclosed and approved by HUD in its application to the Risk Sharing Program.

• Property management and servicing is the responsibility of the lender.

• Project applications for firm approval are processed in HUD’s Regional/Satellite office in the geographical area where the property is located.

• In the event of a claim, HUD pays 100% of the unpaid principal balance upfront. The lender issues a 5-year debenture to HUD, and has up to 5 years to reach final settlement and share 50/50 in the profit or loss with HUD.

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542(b) Small Buildings Risk Sharing Initiative (SBRS)

Significant Changes since 2013 Initial Notice:

• Pool of eligible lenders expanded from the original “CDFIs, Nonprofit, Public, or Quasi-Public loan funds” to include FHA MAP-qualified lenders.

• Added a $50MM/20 Loan Limit per lender for year 1; upon evaluation and assessment of risk, HUD may remove this limit.

• Equity Take-Outs or “cash out” permitted - cannot exceed scope of work paid for from the Risk Sharing loan. Capital needs in a capital needs assessment must be addressed through scope or work and/or adequate reserves for the life of the loan.

• Loan amount is limited to $3MM, or $5MM in high cost areas as designated by HUD.

• Eligible projects are 5 or more units. In Initial Notice, eligible projects were either 5-49 units (no loan size limit), or for projects with more than 49 units, the loan amount could not exceed $3MM.

Target date to publish is early May. Complete information about the application process and program operation details will be posted on HUD’s Multifamily website with the link in the Final Notice.

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