Four Initial Reactions to HUD's Mortgagee Letter 2022-16September 16, 2022 – Articles
HUD issued Mortgagee Letter 2022-16 (“the Letter”) on September 7, changing a Departmental policy on surplus cash distribution that had been in place for roughly half a century. Multifamily borrowers with loans that close after September 7 may, subject to certain preconditions, take distributions of surplus cash monthly instead of annually or semi-annually. Here are Dinsmore’s initial reactions to the Letter:
The Letter will make life easier for FHA-insured loan originators
There’s a lot to like about the HUD loan programs for borrowers: 35 – 40 year mortgage terms, below market interest rates, non-recourse debt, etc. By contrast, HUD’s traditional requirement that borrowers limit themselves to one or two surplus cash distributions a year has been a drawback for property owners who are used to taking profits more frequently. By giving certain borrowers monthly access to profits, the Letter makes the HUD-insured financing option more marketable.
Enhancing HUD-insured financing’s appeal seems to have been top of mind when the Department drafted the Letter, which notes that allowing more frequent distributions “increases its [HUD’s] competitive standing in the lending industry.” This emphasis on HUD’s standing in relation to other funding sources is noteworthy; HUD mortgagee letters more often justify policies in terms of how they protect the agency’s insurance fund than by citing the desire to compete with Fannie, Freddie and conventional lenders.
Language from the Letter is versatile and can be added to all Multifamily Regulatory Agreements going forward
The Letter provides a “permitted modification” to the HUD Regulatory Agreement that implements the new policy on distributions. At first blush, it might appear that the modification should only be made to the Regulatory Agreements of borrowers who elect to take, and are eligible for, monthly distributions. However, HUD wisely drafted the new language in a way that it can be used regardless of whether borrowers take monthly, annual or semi-annual distributions. Accordingly, lenders and lender’s counsel should consider inserting the language into all Multifamily Regulatory Agreements as a matter of course.
Borrowers can’t rely on the Regulatory Agreement alone to guide them on distributions
For borrowers who don’t regularly opt for HUD-insured loans, getting accustomed to the governmental oversight associated with those loans can be a learning experience. While studying the Regulatory Agreement is usually a safe way for borrowers to ensure compliance with HUD’s rules, the Regulatory Agreement, read in isolation, won’t tell borrowers everything they need to know about distributions.
The Letter’s permitted modification to the Regulatory Agreement makes frequent reference to “Program Obligations” (the terms appears five times), a flexible term that allows HUD to update its requirements without rewriting its loan documents. That flexibility comes at a cost to borrowers, who are expected not only to know what their loan documents say, but also to keep abreast of whatever Program Obligations may affect their projects. In the context of distributions, that means knowing about the conditions precedent described in the Letter.
Borrowers need to read the fine print when it comes to monthly distributions
Although the Letter is an unequivocally positive development for borrowers, they are well-advised to carefully read the rules of the road on monthly distributions before their loans close. Here are a few examples:
- Monthly distributions are not available to project-based Section 8 properties.
- A Section 223(f) borrower closing its first HUD loan needs “one fiscal year of seasoning” before distributing profits every month.
- Every monthly calculation of surplus cash must contain a certification acknowledging the consequences of making false statements to HUD.
- Monthly distributions need to be repaid if, at the end of the fiscal year, the owner can’t demonstrate positive surplus cash.
Suffice it to say that, when it comes to monthly distributions, the devil is in the details. Borrowers should contact their lenders with questions about distributions to prevent misunderstandings and stay in HUD’s good graces.