EXPERT OPINION: A Conversation with Michael Vaughn

March 18, 2014

In this "Expert Opinion" interview, Michael Vaughn, Senior Vice President and Head of the FHA Healthcare Group at Walker & Dunlop, discusses acquisition financing, HUD debt, construction, changes, portfolios and more..........

Michael VaughnWatch the video      Read the transcript

With more than 25 years of industry experience, Michael Vaughn, senior vice president, manages origination, underwriting, and quality control of all healthcare loans.

Prior to joining Walker & Dunlop, Mr. Vaughn held numerous positions at the U.S. Department of Housing and Urban Development (HUD). Most recently he was director of the Office of Residential Care Facilities, part of the Office of Healthcare Programs in the Office of Housing in the Department of Housing and Urban Development. While at HUD, Mr. Vaughn was directly responsible for origination and asset management activities related to the $17.5 billion portfolio of Section 232 Insured Mortgages on Skilled Nursing and Assisted Living Facilities. He was involved in the LEAN process re-engineering effort, which enabled the program to reach higher levels of responsiveness, customer service and risk mitigation, both in development (underwriting) and servicing/asset management. Mr. Vaughn also chaired the healthcare loan committee and represented HUD at industry events and before Congress. Previously, in the private sector, Mr. Vaughn was a senior vice president of the Bank of New York’s Fannie Mae/Freddie Mac Multifamily lender, ARCS Mortgage. He was also a vice president of Republic Realty Mortgage Corp., one of Berkadia’s predecessors. In previous government service, he has worked in the Office of Affordable Housing Preservation and the Office of Public Housing Investment at HUD, and as chief asset officer of the Public Buildings Service at GSA.

Mr. Vaughn earned his MBA from Yale University’s School of Public and Private Management and his bachelor’s degree from Georgetown University.
 

 

Contact Information:
Michael B. Vaughn
Senior Vice President
Walker & Dunlop LLC
7501 Wisconsin Avenue Suite 1200E
Bethesda, MD 20814
301-202-3221 (o)
301-461-8983 (m)
mvaughn@walkerdunlop.com

 
Watch the video of the interview: 
 

 

Read the interview transcript:

Steve Monroe
The lending market has been growing since the Great Recession. There’s a fair amount of money out there. A lot of people really like HUD lending. I’m sitting here with Michael Vaughn. He is the Senior Vice President and Head of the FHA Healthcare Group at Walker & Dunlop.  Michael, you’ve been back in the private sector now for almost two years, a year and a half. What’s changed the most in the private sector since your years at HUD?

Michael Vaughn
Well, it’s a different discipline in the private sector from HUD. At HUD my customers were the lenders. Now, at Walker & Dunlop my customers are the owners and people who are borrowing.  In the private sector, when I was at HUD we put together the LEAN program. There was a big flurry of activity to begin with. We had a very long queue. We managed to get enough help to get that down.

It’s been a little more normal since then, but it’s always changing. There is more bank money in the market now than there was a couple of the years I was at HUD. HUD was almost the only thing for a while. So, it changes, but the important thing is, again, they tend to borrow what they need.

Steve Monroe
At your time at HUD, you were very instrumental in developing the HUD LEAN program. What was the hardest part of that process?

Michael Vaughn
The hardest part was getting the resources we needed. The best part is there’s so much talent in HUD and people, and I think this is true across industry everywhere, that if you give them meaningful work to do, a lot of responsibility and make them feel wanted and appreciated, people can perform at 150% and that’s what we found with the LEAN program. The other thing is we had a lot of luck when we were putting it together. 

A lot of the people that could have thrown obstacles in the way were kind of looking in the other direction. So, we were able to put together a concept. We had contract money available to us that just happened to be there, just lots of luck. And you know what they say about being lucky.

Steve Monroe
Better lucky than not.

Michael Vaughn
Yeah.

Steve Monroe
So, let’s talk about Walker & Dunlop and what you’ve been doing since leaving HUD. When you joined them did you have a certain mandate?

Michael Vaughn
Well, it was to continue the expansion of the healthcare practice. Walker & Dunlop is one of the preeminent firms in apartment house finance and we’re the largest Fannie Mae lender and have done our share of healthcare financing, both in the HUD and Fannie/Freddie platforms.

So, it was to put all of that together. And one of the needs, of course, for HUD in healthcare financing is for bridge financing, which we’ve been able to put together as well.

Steve Monroe
You’ve been doing the bridge to HUD?  So, Walker & Dunlop is doing that funding by itself?

Michael Vaughn
There’s always more you can do and there are different prices of financing, but we’re expanding our abilities in that area and Walker & Dunlop is expanding, generally. We’ve started a CMBS platform with one of our investor companies, Fortress. So, there’s a lot going on there and it’s all in the means of serving the borrower.

Steve Monroe
How much has your HUD business been growing?

Michael Vaughn
The HUD business went from about $400 million five years ago to, it’s been a little above and a little below $1.2 billion for the last three years.

Steve Monroe
Is that everything?

Michael Vaughn
That’s everything. The seniors and healthcare is approximately, it’s a range of between 25% and 33%, so it’s a good chunk.

Steve Monroe
And growing the senior side?

Michael Vaughn
Well, we had one very large portfolio in the  2011, 2012 range, so that was a kind of a pig in a pie, but we’re keeping it ramping up.

Steve Monroe
Are you focusing more on refinancing existing HUD debt, acquisition financing, or construction?  There’s been a lot of construction going on now, new construction. Where are you seeing the business?

Michael Vaughn
It’s really mostly, and most of HUD’s business on the healthcare side, the 232 program, was over half A7s, which is financing of existing HUD loans over the last two years because rates were so low. That’s tailed off markedly. It’s now more just straight purchase refinance, the 223F program. That’s where we’ve been mostly active or I’ve been mostly active since we got there.

And, of course, HUD’s new construction is attractive. They’ve tightened up a little bit in terms of having really qualified borrowers with some equity in the transactions, but it’s still there. They never went out of the market. They never red lined any of the states. They’ve done deals in Arizona and Florida, which of course, comes back now, so it continues to be a good program. But the volume is always going to be on the refinance, purchase, new HUD loans.

And we’ll, of course, look to refinance existing HUD loans, but there was so much of that done in the last two years when rates were super low that it kind of stole from the market going forward.

Steve Monroe
When you look at the market when you started at HUD and then you fast forward to today, are you dealing with a much more sophisticated, not only sophisticated borrower, but a sophisticated originator?

Michael Vaughn
Well, the lenders have definitely gotten more sophisticated. Well, it’s, again, back to the LEAN program, if you set out a coherent set of rules for everybody and the rules are the same. Again, talk about having luck, we had a national platform with one loan committee, one set of rules and what had happened with HUD and it will happen at any big institution, it happens in the government, anywhere; your Los Angeles office gets a little different from your Boston office and they do things one way here and one way there, whereas when we had a national platform, the lenders knew what the rules were and how the interpretations were going to be, so it helps them.

You could see really there was a steep learning curve the first year or so. The lenders didn’t really know what to do, so they asked for a little more than they thought they could get.  Whereas we made it pretty clear, you know, don’t color outside the box too much. Most HUD applications are successful. HUD has a very low turndown rate in the 232 program.

They don’t kick too many out. They may shave the loan down a little bit, but it’s been good. So, the lenders caught on fast and they processed efficiently. We did see large, sophisticated borrowers even back when I first took over, but I think the quality of the borrowers has gotten better. HUD has a better reputation now so their delivery is better. I think you can see in the industry that there’s more of a migration to real professional ownership.

I think it’s still kind of a fragmented industry both for assisted living and skilled, but the super large owners own 20%, 24%, if that. But I think you see fewer mom and pops and more of the 10, 12 facility owner/operator. And your economies of scale, they probably tail off around 20 or 30 facilities.

Steve Monroe
That’s a subject of debate. We won’t go into that.

Michael Vaughn
Right. But anyway, it’s above mom and pop, it’s above one or two.

Steve Monroe
You know, what’s always surprised me, and I’m going to ask you about whether this conversation ever would come up during your years at HUD. HUD, there’s a lot of the A7 refinancing of existing HUD debt and I would think institutionally from a government perspective there would be more interest in providing new debt, not just helping borrowers save money, other than it makes the loan better because the debt service is less. 

Has there ever been any discussion to kind of try to get more towards the construction financing, new financing as opposed to refinancing?

Michael Vaughn
To give you a straight answer, not so much.

Steve Monroe
And I want a straight answer.

Michael Vaughn
In HUD we felt that we were doing ourselves good by having the lower rate and the demand from the lenders was there, the demand from the borrowers was there. So, you know, sometimes people at HUD say, well, HUD is trying to do this or trying to do that and a lot of times HUD is just trying to be responsive to what’s being presented to them and also stay out of trouble.

So, there are certainly pressures from Congress for HUD not to be in areas where the private sector can supply capital and I think the 232 program is one area where you certainly can see that it’s a good place for the government to be in because a lot of the risk, especially skilled nursing, is in reimbursement risk.

The private sector very appropriately puts a risk premium on lending to that industry whereas if the government insures the mortgages, the government is basically insuring against their own risk. So, it makes sense. I would say that if I had Grover Norquist here I could convince him that this was a great program for the federal government to begin with.

Steve Monroe
Well, let’s talk about government or quasi-government programs. There has been a lot of talk about Fannie Mae, Freddie Mac possibly being legislated out of business and no one really wants us taking that step yet. Politicians are reluctant to go that far right now. But I assume regardless of what happens with Fannie and Freddie, HUD LEAN is going to be safe for a while, right?

Michael Vaughn
That’s what I believe because of what I just told you. It’s very profitable for the government and so much of the risk is the government reimbursement risk and also the clients, the people in nursing homes and assisted living facilities, for that matter, are people who need affordable residential care. What is it, 80% to 85% of people in nursing homes are on Medicaid or could be.  And the number is high for assisted, too. It’s not people with a lot of income.

So, it’s a very sensible place for the FHA to be involved.

Steve Monroe
Well, I know your customers certainly don’t want to see you go away because it’s a great non-recourse long-term debt at great rates. So, even good rates today, even people are complaining about your recent spike.

Michael Vaughn
Indirectly it saves money for the government because to the extent that your cost to capital is lower your charges that you have to put through to either Medicaid or Medicare are lower.

Steve Monroe
But it also, I mean the HUD program right now, at least on the HUD LEAN, makes money for the government. It’s a profit center.

Michael Vaughn
The default losses have been around 10 basis points on the total portfolio. For years now it hasn’t spiked up any recently and so the mortgage insurance premiums are 55 basis points. It doesn’t cost that much to run the program.

Steve Monroe
No, it’s a good program all around.

Michael Vaughn
I think it’s almost $20 billion now in mortgages outstanding so that’s a sizable piece.

Steve Monroe
And presumably growing. Well, I hope you continue to grow and welcome back to the private sector.

Michael Vaughn
Thanks very much. Great to be here.
 


 


 

 

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