One of the many positive features of HUD-insured loans is that they have attractive interest rates, driven largely by the Federal Government backing and the ability to securitize the debt through the Government National Mortgage Association (“GNMA”). And now with interest rates continuing to head south, so to speak, and the prospect of further rate cuts by the Federal Reserve possible, borrowers who already have HUD-insured loans with low rates in place have an opportunity to do even better – if they can access the market quickly and efficiently.
While some believe the terms HUD financing and quick should seldom – if ever – occupy the same space, improvements in the delivery of mortgage insurance in the multifamily and healthcare/senior housing platforms over the past several years have dramatically reduced the time it takes to complete a HUD deal to the point where 60 to 90 day turnarounds are more the rule than the exception. However, if you already have a HUD-insured loan in place at a rate higher than current market conditions, then HUD has even more expedited options available to refinance that debt.
The Section 223(a)(7) program insures refinancing loans for projects that already have an insured loan in place. It offers an expedited, limited application and underwriting review that does not require an appraisal or Phase I environmental site assessment. HUD’s underwriting and review are minimal, and the targeted debt service coverage requirement after the refinancing is 1.11 times. The term of the 223(a)(7) loan can extend 12 years beyond the remaining term of the loan being refinanced, not to exceed 40 years. However, 223(a)(7) loans can’t exceed the original principal balance of the loan being refinanced, so if the cost to refinance exceeds the original loan amount, then an equity contribution or the generation of a premium on the new loan pricing will be required. Keep in mind that a 223(a)(7) loan is a new debt instrument, so the borrower will be governed by a new set of loan documents. This program is fast – HUD typically targets a review and approval period of 30 days. We recently obtained approval of a 223(a)(7) loan for a multifamily project in 16 days. This is not a typo!
Another fast refinancing option, albeit with some more limitations than Section 223(a)(7), is a note modification/interest rate reduction. Under a “note mod” or “IRR” the lender buys back the existing GNMA mortgage backed security that was sold to fund the existing HUD-insured loan; once the security is cancelled (terminated) the existing HUD-insured mortgage note is used to collateralize a new issue of GNMA securities which then are sold based on current interest rates and with new lockout and prepayment penalty structures. The typical limitations to note mods are that the modified loan can’t exceed the unpaid principal balance of the loan being refinanced, requiring premium pricing and equity to cover costs, and the term can’t be extended beyond the maturity date of the current loan. Offsetting these are the outright simplicity of the note mod application and underwriting (a 1.11 debt service coverage is typically required), the reduced transaction and closing costs, and the minimal amount of new loan documents needed for closing. Unlike 223(a)(7) loans, there are no new application fees or mortgage insurance premiums required.
There are several factors besides debt service savings that HUD-insured loan borrowers need to consider when looking at refinancing, such as the impact of a new lockout and prepayment penalties on a prospective sale, the increase in debt/loss of equity if the project is refinanced, and the payback period from debt service savings of transaction costs. Moreover, the 223(a)(7) and note mod options each impact these considerations, as they impose different structures on a refinancing. We provide our clients and prospective clients with financial modeling under both options and objective recommendations to help them make informed, sensible decisions.
We would be pleased to provide this service to you.
