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HUD's mystery program.

HUD's Mystery Program

Tucked away on a shelf for nearly 29 years, the HUD 203 (k) program now is being dusted off and readied to serve today's multi-family marketplace.

"What is the 203 (k) program? Do you mean 203 (b)?"

In a nutshell, the 203 (k) is a mortgage financing plan that provides acquisition, rehabilitation and permanent financing all in one neat package. The borrower can be a homeowner or an investor. The property must be a one-to-four family dwelling at least one-year old.

Single-family housing may be converted into as many as four units and non-residential buildings may be converted to one-to-four-unit dwellings. The limits is seven buildings within an area of roughly two blocks. Condominiums and cooperatives are not eligible.

Borrowers may even more an existing building from one site to another, although the loan doesn't fund until the new foundation has been inspected and approved and the structure is securely in place. Additionally, buildings may be moved off the site and other buildings moved on.

The property disposition (PD) and the 203 (k) programs are the only investor programs available at HUD and it is possible for the two to work hand in glove. The 203 (k) program can be used to rehabilitate or improve existing buildings in one or four ways: * To purchase land and a dwelling

and rehabilitate it. * To purchase a dwelling, move it to a

new site and rehabilitate it. * To refinance existing debt and rehabilitate

a dwelling. * To rehabilitate a dwelling.

Borrowers get one, long-term fixed-or adjustable rate loan for the acquisition and rehabilitation of the property. The mortgage amount is based on the projected value of the rehabilitated property, including the cost of the work to be done.

Mortgage loans are eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. The lender is protected immediately with a fully insured loan.

In calculating the mortgage maximum, the value is based on the lesser of the as-is value of the property, plus the cost of the rehabilitation, or 110 percent of the expected market value of the property after the rehabilitation.

Borrowers must spend at least $5,000 on improvements on the property although most cost much more. Repairs may include structural additions, modernization of baths and kitchens, repair of replacement of the major systems, new roofing, siding, flooring, energy improvements, handicapped accessibility. Cosmetic repairs are not eligible. Construction repairs meet HUD minimum property standards (MPS).

HUD requires two appraisals on all non-PD property: the as-is value and the value after rehabilitation and/or improvements.

Every HUD property in inventory meeting the structural and age criteria is eligible and the bid price is accepted as the appraisal price, eliminating the first of the two appraisals required on other programs of this nature. VA inventory must still be appraised, however.

Moving forward

HUD's Chief Architect of Single-Family Development Kenneth Crandall spearheads the program and expects to close 2,500 loans in 1990, a quantum leap forward in terms of volume. Since its inception in 1961, there have been only 5,382 mortgage loans for a total of $139,610,152. The average mortgage amount in 1989 was $50,476.

Non-profit investors, including government agencies, can pick and choose from the HUD auction list and buy at 90 percent of the listed price prior to the auction.

Community Development Corporations (CDCs) can obtain 95 percent financing. Even better, state and municipal governments can receive 97.5 percent financing for rental properties.

"We're talking about selling HUD properties to local government agencies. If they would like to put houses in their's a sweet thing to them. They can buy at 10 percent reduction in price from the [pre-auction listed price shown in] advertising. [Then] we put a 203 (k) loan on them and they can put their lower income people in these and use their Section 8 rents," explained Crandall.

As an example, Crandall points to Indianapolis, where investors are buying big houses, converting the properties and renting them to Section 8 tenants. "There's a lot of profit motivation; it's not a negative cash flow," he points out. "Lenders can charge any interest rate they want, typically 1/2 percent higher than a 203 (b) and can charge points, which are included in the mortgage," he says.

Harold J. Fisher, president of the Theodore Roosevelt National Bank in Washington, D.C. and guru of the 203 (k) business, says they are far more profitable than regular loans. He makes his profits on the float. For example, on a $100,000 loan, approximately $50,000 is used for acquisition, and $50,000 goes into the bank. The loan is sold shortly thereafter.

"I make points when I place the loan, [and] points when I sell it. Meanwhile, I have that $50,000 still in the bank," he says. "It's the escrow that drives this," Fisher adds.

Fischer is putting his expertise to good use. In January, he opened the Theodore Roosevelt National Bank for the express purpose of devoting 50 percent of its business to inner-city development loans.

Slow start

If the program is so profitable, why are there problems? First, the program has been hampered by having only a few originators, only one buyer and a lack of understanding of the 203 (k) program on the part of HUD field office staff, lenders and investors.

In 1989, there were just 474 203 (k) loans approved with 627 units in them. The total amount was $23,925,653. Of that amount, about 50 percent went through the enterprising hands of Statewide Funding Corporation in Albany, New York. Statewide originates and services the loans, pooling the mortgages for sale to GNMA.

Statewide's President Paul Scherer, says Fischer got them involved. Statewide has built its business by creating special niches for itself. Part of its success has been due to the multi-family 203 (k) program. The company has opened branches in Indianapolis and Landover, Maryland, located outside Washington, D.C. A Richmond, Virginia branch is also being opened.

All has not been roses with Statewide's expansion, however. Citing difficulties with local HUD office red tape, Scherer says their Landover office was able to put together only 27 loans during its first 18 months.

"No one wanted to take responsibility," he says. "But [203 (k)s are] really no big deal. They fit nicely into a regular FHA pool." Statewide packages 203 (k)s with other loans and sometimes sells the servicing on a release basis.

Turning point

Credit for reactivating the slumbering program, however, probably belongs to the Redevelopment Authority of the City of Philadelphia, a non-profit, private entity. The agency began working with 203 (k)s in 1986, but because they ran into several self-made and FHA obstacles, they managed to process only 19 homes - when the potential was for several thousand.

Frustrated, Redevelopment Authority Chairman Richard Bazelon met in the Spring of last year with HUD Secretary Jack Kemp to discuss the problems with the program. Regulations were rewritten and published in June 1989. HUD also began a training program for its field offices last March. Regulations on the PD program's merchandise were to be included in a rule revision released in Spring 1990.

Bazelon and Scherer are not alone in their frustrations with the program's operation. In the past 18 months, John Katsafanas, with Independence One Mortgage Corporation in Baltimore, has put together 50 203 (k) loans averaging $80,000 each. But, he says, he could process many more if the city bureaucracy would cooperate.

"The program is great for young couples," he says. "Get two units, live in one, and rent the other."

Fisher agrees. "This is affordable housing for first-time homebuyers," he says. "It's not just low-income, it's moderate-income housing. Regulators and journalists are saying real estate is going [downhill]. Here's a way to take the boards off and rehab.

"We see senior citizens taking advantage of this. Why not convert a basement to a rental apartment, for instance? Rentals can be added to qualifications in approving applicants," Fischer points out.

The program has other advantages that may appeal to lending institutions. "I'm convinced this is a good tool for dealing with Community Reinvestment Act (CRA) requirements," adds Statewide's Scherer. "I have frustrations with the red tape, but it's very advantageous for investors." Scherer cautions that there could be problems if the program is not monitored well, but so far, Statewide hasn't had any [203(k)] defaults.

Philadelphia's Redevelopment Authority may be paving the way for other non-profits to use the program. According to Joseph Ramsay, the director of home mortgage and improvement they made a deal to indemnify HUD. They will assume the loss on any loan that goes into default over the current HUD national average.

In return, HUD gave the Redevelopment Authority direct endorsement (D.E.) authority. The Redevelopment Authority processes the entire loan and then sends the loan package to HUD. HUD signs the insurance endorsement certificate, skipping the process of sending documents back and forth entailed typically with non-D.E. processed loans (i.e., appraisals, plan review and processing.)

Loans are held until insured and then sold through a special program the Redevelopment Authority set up with Fannie Mae.

Direct endorsement lenders like the Philadelphia Redevelopment Authority are also working in the Caribbean, Pittsburgh, Indianapolis, Atlanta, California and Texas. HUD is encouraging other jurisdictions to follow suit.

HUD's real problem is finding primary buyers, however. Simmons First Mortgage Company in Little Rock has been the sole taker, according to Crandall. He is confident that there are going to be many more getting in the act as lenders become involved. He cautions, however, that this is a business for lenders who want to specialize, not for someone to temporarily take up.

Simmons' Executive Vice President Dennis Mills says they originally looked into the program as an investor. Now, he says, "We like the program. It's the best loan you can get, basically a brand-new house."

Simmons initially had a bad experience with the program due to some originators who held the escrow funds. According to Mills, the company now holds the escrow in their parent bank, Simmons First National Bank and disperses the escrows through their mortgage company.

Mills would like to see others get involved with the program. It is not enough business for one full-time staff person currently. "I prefer to buy, not make these loans," he says. If someone calls him with a $25,000 proposition, he discourages it because he says the economy is not there. "I say `sure' if it's $50,000 or $60,000.

He also wishes that GNMA would loosen up a bit on the investor loans under the builder operative plan. At present, they refuse to purchase nonowner-occupied 85 percent loans. If this were changed, Mills says, "I can see where builders would come in and fix houses up and move people in on an assumption basis and get people approved in the regular FHA program."

He also hopes that HUD can speed up its endorsements, which currently take two to three weeks. Further, Mills likes the idea of facilitating the process with direct endorsement authority.

Finding properties that meet the structural and age criteria can be difficult. However, some cities are trying to help. Richmond, for one, has identified eligible housing. HUD offices in Denver and Coral Gables, Florida are publishing extensive lists of properties up for disposition along with ads for 203(k)s. Fischer would like to see HUD's Washington, D.C. office furnish similar lists to lenders, investors and others. Ramsay says this would have helped in Philadelphia.

Future hurdles

One major reason that this program has not taken off is the time lag in getting appraisals done and meeting document requirements. The span often stretches out four to five months. During this time, interest rates can change drastically, as can zoning and other factors.

This needn't be the case says HUD's Crandall, and it's his aim to cut the time down to 45 to 60 days. Others in the industry are ahead of him. Katsafanas says he has already done just that by devising a system to take the mystique out of the program. He has converted the arcane four-page FHA instructions into an easily understandable 10-page document. "Applicants complete it correctly the first time," he says with pride, explaining that it eliminates the usual "redos" that consumed months of time prior to his innovation.

In addition, Katsafanas takes no applications without plans and specs and delivers on a three-day review process. If the loan is not approved in that time, he says, it's cancelled. He says common sense tells them whether or not it's in the ballpark for FHA acceptance.

Fischer agrees and says he doesn't accept applications without plans and specs. He also requires an architect or professional designer to go over all but minor repairs and allows for no sweat equity in assessing the loan.

Ideas for the program are sprouting in marketing departments across the country. Universal Lending in Denver is considering marketing 203(k)s as home equity loans and is homesteading them.

Note also - since 203(k)s can be used as a second lien on property in excess of the Title I limit of $17,500, this may be the next wave.

Many in the industry say it looks as though the time has come for the 203(k): it has gained the backing of top HUD officials, it helps comply with CRA requirements and it is accessible to non-profits and investors. With heightened interest and enlightened participants, the 203(k)s are one way to revive fading homes, get first-time homebuyers into housing and allow older citizens to remain in refurbished quarters.

Jane Moss Snow is a Washington, D.C.-based freelance writer who frequently covers housing and finance issues.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:mortgage financing plan
Author:Snow, Jane Moss
Publication:Mortgage Banking
Date:Jul 1, 1990
Previous Article:Discovering commercial mortgage statistics.
Next Article:Fitting the pieces together.

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