Lean funding

At a glance…

HUD already has begun to tweak the process of loan disposition in order to enhance its efficiency and improve response time. The newest innovation is a “Green Lane” that was created earlier this year to place “low-risk” loans on a faster processing track.

The Department of Housing and Urban Development (HUD) is making a herculean effort to keep pace with rising demand for its popular Section 232 senior housing/healthcare loans. That effort shows up in the numbers released by the federal agency. In the final quarter of last year, with the economy on the mend, HUD closed 95 Section 232 healthcare loans totaling $875 million, or almost double the 50 Section 232 loans totaling $419 million that closed during the same quarter a year earlier.

With money from conventional sources still in short supply, it’s not a reach to suggest that the number of deals-and the dollar volume for HUD 232 loans-will be up even more dramatically in the months ahead. A banner year is anticipated even if the economy continues to limp along at the same lethargic pace we’re observing now, which is what most economists are telling us is the most likely outcome.

Good news

The good news for healthcare borrowers is that, in 2010, all HUD 232 loans will be processed using the agency’s revolutionary new Lean funding process. And all loans will be underwritten at a new central location in the nation’s capital.

When the Federal Housing Authority (FHA) introduced the new HUD Lean funding product in September 2008, the timing was especially auspicious. Although no one imagined it that way, the introduction was essentially simultaneous with the global financial meltdown and changes in worldwide capital markets. Fortuitously, HUD Lean came into existence at a time when the industry needed it most.

When the product was launched, FHA described a funding vehicle it believed would be more efficient, competitive, fair, and fast. In a significant shift, responsibility for processing HUD 232 loans moved from HUD field offices around the country to FHA’s Office of Insured Health Care Facilities (OIHCF) in Washington, D.C. The “fit” appeared to make sense because, historically, the OIHCF group has underwritten HUD Section 242 loans for hospitals and special use medical facilities on a national scale.

The developers of HUD’s new Lean program stressed the desirability of having a central source for program and policy development. They also pushed for a more consistent and user-friendly platform for borrowers and lenders. And in an effort to streamline the loan application and approval processes, they adopted new automated concepts and Lean management techniques borrowed from the auto industry. From the start, the idea has been to have the processing time for a HUD loan compare more favorably with conventional funding products.

Regrettably, improving delivery time has proven to be a formidable challenge in the current economic environment. When plans for the new HUD Lean program were in the formative stages, no one in the financial industry anticipated the severity of the credit crisis that was brewing. When the subprime bubble burst, the agency found itself dealing with soaring demand for product while efforts to put important new administrative pieces in place progressed.

Luckily, HUD’s game plan was for the transition to proceed in measured steps; lenders continued to close healthcare loans using existing funding programs. For the 2009 fiscal year that ended (for HUD) on September 30, more loans were actually closed in the field using the MAP (Multifamily Accelerated Processing) and TAP (Traditional Application Processing) programs. During this 12-month period there were 121 MAP, 88 Lean, and 48 TAP transactions closed. However, these pre-Lean programs have now been phased out and the future completely belongs to the new centralized system.

Faster processing

HUD already has begun to tweak the process in order to enhance its efficiency and improve response time. The newest innovation is a “Green Lane” that was created earlier this year to place “low-risk” loans on a faster processing track.

During the first half of 2009, HUD closed 64 loans using the new Lean process, but the agency matched this number in the fourth quarter alone as transition to the new system progressed and loan volume soared. In the first half of last year, when an application arrived at HUD’s central processing office, it was placed in a queue and remained there, on average, for about 31 days before being assigned to an underwriter. However, by the fourth quarter, the number of applications received was up dramatically and new applications were languishing in the queue for an average of 100 days.

That’s when HUD determined that certain “high-risk” applications moving through the process were slowing things down. Creating a separate queue for “low-risk” applications was the agency’s solution for the problem.

Initially, only applications for HUD Section 223(a)7 loans, which are used to refinance existing HUD loans, were placed in the low risk queue. Then, earlier this year, HUD came up with the complex risk assessment point system it now uses to determine which applications get to ride in the Green Lane. The risk assessment system evaluates such things as cash flow, appraised value, loan-to-value, debt service coverage ratio, occupancy, competitive considerations, among other factors. Either positive or negative scores are assigned to these factors with points awarded accordingly.

Depending upon how swiftly borrowers and suppliers respond to requests for needed information, an experienced FHA-approved HUD lender will be able to prepare and submit a loan application to HUD in 45 to 60 days. Once an application has been assigned to an underwriter it usually flows through the system in about two weeks. So the most important thing from the borrower’s perspective is his or her risk assessment score, which dictates whether an application will be approved, or the amount of time it will spend residing in one of the queues.

In this cautious lending era, new construction projects or projects requiring major capital improvements will not be traveling in the Green Lane.

It is widely assumed that HUD will continue to be a major player in senior housing/healthcare finance for the foreseeable future. Historically, the terms and conditions for HUD 232 loans have been exceptionally competitive, but borrowers are finding that the underwriting criteria for these loans have tightened over the past year. For example, the expected loan-to-value ratio for assisted living and skilled nursing home loans is now at 80%. And the debt service coverage ratio is higher than before. Nevertheless, with interest rates near historic lows, borrowers are always well advised to see if they can qualify for attractive HUD financing or for temporary bridge financing that moves them persistently in this direction.

When responsibility for processing HUD 232 loans shifted from HUD field offices to the OIHCF in Washington, D.C., a new set of rules was introduced that effectively leveled the playing field for FHA-approved HUD lenders. In the past, proprietary relationships between some local lenders and local HUD field offices made it impossible for national HUD lenders to compete in these markets. Now that these arrangements no longer exist, borrowers are free to audition more experienced national lenders to guide them through the funding process or provide them with a realistic assessment of what their chances for obtaining desirable HUD Lean financing might be.

Jeffrey A. Davis is Chairman of Chicago-based Cambridge Realty Capital Companies, one of the nation’s leading senior housing/healthcare lenders with more than 300 closed transactions totaling more than $3 billion since the early 1990s. The company consistently ranks among the nation’s most productive HUD 232 lenders. For more information, visit

www.cambridgecap.com or phone (312) 357-1601.

To send your comments to the editor, please e-mail mhrehocik@iadvanceseniorcare.com.

Long-Term Living 2010 June;59(6):46-47