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HUD Notice 2012-10: Guidelines for Assumption, Subordination, or Assignment of M2M Loans in Transfer of Physical Assets and Refinance Transactions

Monday, May 21, 2012

The below is a summary of HUD Notice 12-10.  Please note that the changes discussed in this notice do not result in an impact to PBCA protocol.  This is for informational purposes only.

Guidelines for Assumption, Subordination, or Assignment of Mark-to-Market (M2M) Loans in Transfer of Physical Assets (TPA) and Refinance Transactions

This Notice updates and restates HUD’s guidelines dated September 30, 2010, issued through Housing Notice 10-22, “Guidelines for Assumption, Subordination, or Assignment of Mark-to-Market (M2M) Program Loans in Transfer of Physical Assets (TPA) and Refinance Transactions” (Guidelines).

  • The Guidelines apply to any request (Request) to assume and/or subordinate a loan evidenced by a Note originated under M2M, or its predecessor program, the Portfolio Reengineering Demonstration Program (Demonstration or Demo Program), and to waive the due on sale or refinance clause contained therein.
  • The Guidelines also apply to any Request to provide Debt Relief (assignment, modification or forgiveness) with respect to a Note originated under the M2M program. The Guidelines contained in this Notice are effective immediately for all such transactions.

This Notice outlines a request process and review criteria for owners who seek to refinance or sell a property (Property) that has received the benefits of a debt restructuring under M2M or the Demonstration Program. Loans originated under those programs are evidenced by a Mortgage Restructuring Note (MRN), a Contingent Repayment Note (CRN), or a Demo Note, that will be assumed and/or subordinated in the proposed transaction.

  • The Notice also applies when HUD evaluates requests for debt assignment, modification or forgiveness (Debt Relief) with respect to an MRN or CRN for a qualifying nonprofit purchaser. All requests may be approved, rejected or modified by HUD.
  • This Notice only applies if the MRN, CRN, or Demo Notes will not be paid in full at the consummation of the sale or refinance of the Property, and if HUD is the holder of the MRN, CRN, or Demo Note(s). Capitalized terms may be further defined below.

 This Notice makes the following updates to Housing Notice 10-22:

1)    Removes the so-called “three-year policy” for qualified non-profit purchasers to request Debt Relief upon acquisition of M2M restructured properties.

2)    Specifies the review criteria for determination of preservation needed for the Office of Affordable Housing Preservation’s (OAHP) approval for Debt Relief.

3)    Adds additional considerations for preservation projects meeting certain criteria, including treatment of developer fees in preservation transactions, and treatment of incentive fees in green rehabilitation transactions.

4)    Removes the use of Makeup Payments: Transactions will not be approved if they will result in the reduction of the net present value of the MRNs, CRNs, and Demo Notes; and

5)    Refines and adds defined terms.

General Requirements

All applicants must fully disclose all Proceeds. As part of the Request, the owner and purchaser, if there is a TPA, should certify to this disclosure, and renew and update such certified disclosure through the date of closing of the TPA or refinancing.

  • In transactions where there are no Proceeds and there will be no Modification other than to memorialize a change in responsible parties, OAHP will consider the Requests without a Pay-down of the Note(s).
  • In transactions where there are Proceeds and/or a proposed Modification, OAHP will review and either approve, modify, or deny the Request. OAHP will determine the amount of the Pay-down required as a condition of such approval. If approval is conditioned upon a Pay-down, the remaining balance due on the Note(s) remains due and payable in accordance with its terms.
  • OAHP will review and approve, modify or deny all QNP Requests for Debt Relief. If the TPA to a QNP is approved and Proceeds will be paid to the seller and/or QNP purchaser, the transaction will be reviewed and approved in accordance with this Notice prior to providing the Debt Relief.
  • All TPAs involving a Property with an encumbrance securing a Note are subject to approval under this Notice and remain subject to all other statutory, regulatory, and administrative requirements.

Evaluation and Approval Criteria

In most instances, OAHP will apply the following three evaluation criteria when reviewing and evaluating Requests for all of the Notes, but may apply different, additional or fewer criteria

when OAHP determines such action is justified by the particular circumstances of individual transactions.

1)    Maintain Property Viability: In reviewing Requests, OAHP will use applicable underwriting standards from the originating program to test the ongoing viability of the Property, and to determine whether or not the proposed transaction negatively impacts the physical or financial viability of the Property for the term of the existing Use Agreement, or in cases of Debt Relief, for the extended term of the Use Agreement.

NOTE: In most instances HUD retains control over the Reserve for Replacement account.

2)    Maintain Value of the Note(s) (Valuation Analysis): The proposed transaction should not result in a negative financial impact to the value of the MRN, CRN or Demo Note(s), measured by the present value of the expected payments on the Note(s) as originally underwritten compared to the payments anticipated under the proposed transaction.

3)    Determine Net Proceeds: If there are Net Proceeds available from the proposed transaction after satisfying the criteria described in 1) and 2) above, OAHP may condition approval on a Pay-down of the Note(s) based on Proceeds. A Pay-down enables HUD to recover a portion of the value created through the M2M or Demo debt restructuring.

Consideration for Preservation Transactions

HUD’s review of Requests provides an opportunity for HUD to favorably consider a Request for a Property that HUD considers to be particularly important to preserve, and Properties that will be made “green” as a result of extensive retrofitting to be completed in the proposed transaction. Additional considerations include:

1)    Strategic Community Properties. Certain Requests involve Properties that meet a pronounced affordable housing preservation need within the subject community.

2)    Green Properties. Requests involving Properties that will undergo significant rehabilitation and meet established green standards may also request an increase in the amount of the Property’s Incentive Performance Fee or “IPF” for the remainder of the IPF term under the terms detailed in the M2M restructuring.

QNP Debt Relief Criteria and Approvals

Non-profit purchasers qualified by HUD as “Qualified Non-Profits” or “QNPs” may request Debt Relief in the course of the acquisition of an M2M restructured Property. This Notice removes the “three-year policy” for qualified non-profit purchasers to receive Debt Relief upon acquisition of M2M restructured Properties, making all properties restructured under M2M eligible for such acquisitions, regardless of restructuring date.

However, such purchasers and Properties must continue to meet certain criteria described in Appendix C of the Mark-to-Market Operating Procedures Guide. Such purchasers and Properties must also meet the preservation criteria exemplified below, and enable HUD to make a determination that:

1)    Such a transfer will benefit the long term preservation and affordability of the subject Property, and

2)    the value of the Note(s) and any FHA-insured notes on the Property is maintained, as determined through HUD’s valuation analysis.

Evaluation and Approval Authorizations

All Requests must be sent to the respective Multifamily Hub/Program Center, including those involving Debt Relief. Certain transactions will be reviewed and approved by the Multifamily Hub/Program Center, while others will be forwarded to OAHP for review and approval.

NOTE: HUD’s objective is to complete the review and approval process within 60 days of OAHP’s receipt of a complete Request.

Contact Center: 800 982-5221, TTY-800-735-2929, Spanish TTY-800-855-3000
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