Senior Living Business: HUD 232 Streamlined To Reduce Bottlenecks--
Program Changes Expected To Result In Double Loan Volume
The HUD 232 mortgage insurance program has been a popular financing option for some time — particularly since major changes made in the 1990s allowed borrowers to use the low-cost, long-term amortization program for refinancing or acquisitions as well as for new construction or substantial rehabilitation.
But the 2008 changes are "the most comprehensive and precise revamping of a HUD program in 20 years," according to T. Brian Pollard, president and senior managing director of Lancaster Pollard. Even though the program has evolved a lot over the years, HUD is eliminating some of the biggest concerns that people have had with the program.
"The 232 program has been very successful," added Jeff Davis, president of Cambridge Realty Capital Companies in Chicago. "A lot of our business goes through the program – certainly more than half — and every transaction has its own unique elements and dimensions. While lenders obviously had issues with the program, the HUD process always required a different communication style and a different way of underwriting the transaction compared to the generally accepted methodology familiar to borrowers in the rest of the financing world."
Even though the basic outline of the program isn’t changing, HUD is making the program more transparent and more intuitive with less paperwork. When fully implemented, lenders, clients, customers, and HUD employees alike will better understand the 232 program.
From housing to health care
A common question about the 232 program over the years was why it resided in the Office of Multifamily Housing Development (OMHD), which specializes in underwriting and administering multifamily housing loans. The specialized nature and operating intensity of long-term care facilities require much more complex loans, along with specialized knowledge and expertise about issues such as Medicare/Medicaid reimbursement, operating a 24/7 health care facility, staffing, nursing, cost control, purchasing supplies, etc. Because the underwriting and project-management expertise of the OMHD was established for and centered around multifamily housing, it lacks the specific expertise needed to effectively administer the complexities of the 232 program.
Over the years, recommendations were made to OMHD — including in a report made by the HUD Inspector General in 2002 — to collaborate with the Office of Insured Health Care Facilities (OIHCF) — a HUD group that had been successfully underwriting loans for hospitals for decades. "Everyone felt that the OIHCF group understood the complexities and operational intensity of health care," said Pollard, "and a closer collaboration would establish health care underwriting and management protocols and ultimately benefit the program."
Commissioner Brian Montgomery, who became assistant secretary of HUD in 2005, was key in getting the 232 program modified and changed — but a May 2006 General Accounting Office (GAO) study, critical of the way the OMHD had been administering the 232 program, became the catalyst for change. HUD set a timetable to completely revise the 232 program — tackling timing and consistency issues in addition to moving administrative responsibility from multifamily housing (OMHD) to health care (OIHCF) — by early 2008. "The 232 program wasn’t getting the attention it needed at the OMHD," said William J. Lammers, health systems advisor at OIHCF. "It wasn’t by design or neglect but simply because the nature of the program required a more technical background."
The processing time for a 232 loan — from application to commitment to loan closing — has always been challenging and frustrating for everyone involved. As OIHCF became involved, Lean processing also became a topic of discussion. The "Lean" process, which emanates from Toyota’s successful process to improve manufacturing operations, is a concept of synthesizing current procedures into a much leaner set of procedures. Driven from the bottom up, everyone involved in a Lean operation looks at the process and tears apart every activity to see how even the smallest element can be improved. Many Fortune 500 companies have implemented a Lean office initiative.
HUD hired a Lean-trained consultant to analyze and improve the 232 application process. A group of people literally took apart an application, walking it through each and every aspect of processing and documenting the findings in intricate detail. For example, several copies of a typical application (several hundred pages) were made and distributed, even if certain staff people needed only a single page. And some people put the document in a stack, where it remained for 10-15 days before they pulled out the few pages they needed.
By applying the Lean process, HUD eliminated redundant exhibits and streamlined or consolidated others, substantially reducing the application’s sheer volume. Also, a 57-step process was trimmed to 16 steps. The goal for processing a properly prepared and submitted application is now 15 days, compared to the 211 days it previously took to process a typical 232/223(f) application.
Right now, the Lean protocol is available only to 232/223f (refinancing and acquisition) applications. On October 1, it should be available for all 232 applications. In the meantime, the asset management function — the post closing responsibilities — will move from OMHD to OIHCF on September 1.
Once these changes are fully implemented, the 232 program will become 100% automated. Lenders will submit information electronically into the OIHCF’s secure Oracle database. In the past, an application would have been entered into the database six or seven times. Simple typos or differences in an organization’s name as it was entered into the database was causing 23 days of delay just to redo the forms, according to HUD’s research.
Still, the Lean process will place a much greater burden on the lender when conducting due diligence and loan underwriting. Going forward, applications will include a comprehensive credit narrative, prepared by the lender, which will articulate and assess the unique characteristics of the project and make a case as to why it’s an acceptable credit risk to HUD.
"That will be a 30- to 40-page comprehensive narrative," said Pollard. "In the past, the narrative that HUD required was a fraction of that size, so it will take lenders a little longer to pull a 232 application together."
"Industry stakeholders — lenders, trade associations, etc. — lobbied HUD for years to improve the consistency of the 232 program," said Pollard, "both the application and post-closing processes."
Under the OMHD, each of the 50 field offices throughout the country had slightly different ways of interpreting the regulations and administering elements of the program. The offices also had varying levels of expertise and appetite for long-term care projects.
"You could go to one office and have a great outcome," he added, "and take the same project to another office and have a poor outcome. That lack of consistency was troublesome during the application process but also after you closed. The lender and borrower have to deal with HUD asset management staff for 30-40 years, if the loan is kept in place for the full term. Issues arise, and you just didn’t know how HUD would respond. So you didn’t know what outcome to expect and how difficult HUD would be post-closing. That uncertainty was a huge barrier to many organizations who otherwise would use the program."
"It’s hard enough to handle activities consistently in just a few offices," added Lammers. "But spreading them out among 50 offices really complicates and multiplies the potential problems that can occur. Plus, you dissipate the expertise of the staff. So we determined that two things needed to happen: (1) a more standardized process; and (2), a limited number of virtual processing teams."
Under OIHCF administration, the number of regional field offices will be reduced to a half-dozen or so. HUD has a trained virtual processing team in place in Seattle and is in the process of training a second group focused on the Midwest and East.
"Underlying all these improvements is central access to data through the Web," said Lammers. "We can have people at their desks in Seattle, Chicago, Minneapolis, and Washington, DC – all working on the same application simultaneously and addressing issues that need to be addressed by different people without having to pass it physically from one office to the other. An extensive tracking system lets us know exactly what’s happening at any given time." Some basic underwriting milestones will let applicants know where they stand. As the application hits those points, it continues through the system; if it doesn’t, it’s subject to a higher level of scrutiny.
A single HUD employee, specifically trained in health care underwriting, will be responsible for managing the movement of the application through the entire process Delays will become the exception rather than the rule.
"As long as you have a clean, well-underwritten loan, one HUD staffer should be able to handle the entire process and then present a review to a HUD loan committee — which is also new," said Pollard. "And if approved, the HUD loan committee will sign the commitment that day." Previously, just the preparation and signing of the approval took a week or more.
"At the moment, this is a pilot program run out of Seattle," Lammers reiterated. "The pilot team is working very closely with the folks from permanent staff from the OMHD, who are still working on a number of applications that are in the 232 pipeline. It might take six months to a year to transfer all 232 activity to full-time OIHCF staff."
August 1, 2008