Since March 2009, when HUD’s Lean program became fully operational, there has been a steady increase in the volume of applications for Section 232 mortgage insurance. In order to accommodate the increased volume with a limited amount of staff, HUD now places applications in a queue, or “holding area” before they assign them to an underwriting team for review. Currently, applications that do not qualify for one of HUD’s priority processing options described below can expect to remain in the queue for approximately five months before being assigned to an underwriting team.

While HUD continues to add underwriters to its Lean staff, which is their long-term solution to shortening the queue, they have recently taken two positive steps to more efficiently process those applications which, by their nature, present less risk and therefore can be reviewed in a shorter time frame.

The first step was the establishment of a separate queue for Section 232/223(a) 7 applications; under this program, borrowers refinance their existing HUD-insured mortgages and HUD conducts a limited underwriting review. This is has worked out well, as the processing times for Section 232/223(a) 7 applications now stand at approximately 60 days from application submission to Firm Commitment.

The second step was the establishment of a “Green Lane” for Section 232/223(f) applications, which involve the acquisition or refinancing of existing properties that do not have HUD-insured mortgages. If a proposed Section 232/223(f) transaction meets certain financial and program criteria that indicates a less risky financing, it is placed in the “Green Lane” queue. So far, the Green Lane has been a success: eligible applications can expect to remain in the queue for about 80 days before being assigned to an underwriting team, cutting the wait time almost in half. Further, HUD’s underwriting review time under the Green Lane can take as little as 21 - 30 days before an approval is issued. There are three primary criteria for Green Lane qualification:

1. The application should not request any waivers.
2. All participants, including the mortgagor, principals of the mortgagor, operator, principals of the operator and management agent should have completed 2530 Previous Participation submissions, submitted electronically through HUD’s online Active Partners Performance System (APPS).
3. The application must produce a positive score Risk Assessment score. The HUD Lean Risk Assessment Worksheet assigns positive and negative point values to key financial measures and assumptions made in the appraisal. The Risk Assessment also measures two key pass/fail items, based on the most recent trailing 12 months Net Operating Income (NOI). First, the trailing 12 months NOI, divided by the appraiser’s selected Capitalization Rate, must yield a valuation equal to less than an 87.55% Loan to Value (LTV). Second, the trailing 12 months NOI must produce a Debt Service Coverage Ratio of at least 1.3841.

Let’s consider two similar applications. For purposes of this example, assume that the historical operations and the appraiser’s assumptions reflect the experience of comparable facilities in the market, therefore producing a positive Risk Assessment score:

Applicant A does not qualify for Green Lane processing because its LTV, based on Trailing 12 Months’ NOI, exceeds 87.55%, even though its LTV, based on Appraised Value, equals 80.00%. There can be many reasons for this differential: there may have been non-recurring expenses incurred during the previous 12 months, such as liability claim settlements; occupancy levels might have experienced a temporary slump below the facility’s historic experience; or, the facility pays a higher management fee than the appraiser assumed in their valuation analysis.

When considering HUD-insured financing to refinance or acquire a skilled nursing or assisted living facility, it is critical for your mortgage banker to determine the transaction’s eligibility for mortgage insurance, the appropriate program for your project, and the likely loan amount. Given the crowded conditions in HUD’s “regular” application queue and the attendant delays in processing those applications for mortgage insurance, it has become critical for your banker to assess whether your deal will qualify for the shorter Green Lane queue.  Sims Mortgage Funding, Inc. regularly performs that function for its clients and prospective clients