1. Asset Management Update ‹#›

2. Section 232 Portfolio Section 232 Portfolio As of 4/21/14 2,892 Projects - $21.5 Billion Outstanding Principal Balance – 153 Categorized as “Troubled” in HUD’s system Concentration in servicing: – 50 total lenders servicing Section 232’s – $18.5 Billion (86%) is being serviced by 13 lenders Portfolio Interest Rate: – Currently = 4.20%; 2 Years Ago = 5.35%

3. Full Claims (by FY)

4. Section 232 Claims

5. Primary Reasons For Claim Last 5 Years of Data  Market or Rate Issues: 54%  Operator or Survey Issues: 27%  Money Follows the Person: 19% ‹#›

6. Takeaways 8 of 14 Claims Since 2012: MI Population – Olmstead Decision – Initiative to move tenants to less institutionalized homes. New Construction Remains Highest Risk: – 52% of Projects on Priority Watch List vs. – 24% of Portfolio are/were NC ‹#›

7. Asset Management Specialization Loan Modifications – done – Success! Next up…… – TPA’s – R4R Reviews – Non-Critical Repair Escrow Reviews ‹#›

8. Asset Management – Process Re-Engineering  Checklist and Punchlists  Starting with High Volume  Standardization and Transparency  Partner Involvement - possible Kaizen 9/2014?  Electronic  Asset Management Portal ‹#›

9. Section 232 Healthcare Portal ‹#›

10. Proposed Components Operator Financials: See Slides below Asset Management Transaction/Requests Portal and Tracking: – Just Began Development – All Asset Mgmt Processes and Requests – Electronic – Better Tracking

11. Phase I: Operator Financials ‹#›

12. Background Accountability Rule Change: 10/9/12 – 24 CFR Part 5.801 Required Quarterly Operator Financials – FY’s Beginning 60 Days After HUD Publishes CFR Notice Announcing Our System Applies to All Section 232’s – No Lease: Mortgagor = Operator ‹#›

13. Background, Continued Quarterly: Must be submitted to HUD within 30 Days of the End of the Quarter FYE: Must be submitted to HUD within 60 Days of the End of the FY Pursuing Reg. Change – 60/90 – also flexibility Operator Certified Financials OK. Borrower Annual Audited Financials Still Required. ‹#›

14. Logistics  Operators will submit quarterly financial reports to their servicing lender.  HUD is not dictating format  The lender will populate a standard excel template with key financial information on the Section 232’s they service. ‹#›

15. Draft Entry Items – Lender Spreadsheet Operating Cash Investments R4R Balance AR Current Liabilities Amortization Expense Net Income FHA Interest Expense Rent/Lease Expense Depreciation Expense Current Assets Total Expenses FHA Principal Pymt. MIP ‹#›

16. Logistics, Continued Lender uploads spreadsheet to a portal. ―Can upload spreadsheet in batches. Lender will be able to view and run reports on ratios: – DSCR – Several Liquidity Measures – AR and AP Measures ‹#›

17. Logistics, Continued Work in Progress:  HUD generates an overall financial risk score for each project.  Determine how to follow-up on perceived weaker financial projects. Lender on front lines ‹#›

18. Timeline Goals  Beta Test w/several Lenders: 7/14  All Lender Training: 8/14  Deployment: Voluntary Reporting: 9/14  CFR Notice: No Later Than 10/31/14  Mandatory Use: Fiscal Years Beginning after 12/31/14 ‹#›

19. Section 232 Handbook ‹#›

20. Handbook Logistics 9/1/14 Effective Date: – Applies to Asset Management transactions/requests submitted on/after this date Insurance Chapter: applies only to new loans (applications received on/after 9/1/14). Comments: Leanthinking@hud.govLeanthinking@hud.gov ‹#›

21. Details Operator & Lender Responsibilities, Including…… ‹#›

22. Dealing With Issues on Section 232’s  Failure to make Lease Payment  Serious issues with State Inspections/Licensing  Substantial Legal Judgments/Penalties/Fines  Large PLI Claims  Bankruptcy ‹#›

23. Issues Continued…. Delinquent Mortgage Payments Default of Master Lease Significant HUD Compliance Issues: – Poor REAC Scores – Departmental Enforcement Center Actions ‹#›

24. Issues Continued….  HUD Intends to Provide an Optional Standardized Format for Reporting: – What the Issue Entails – Actions Being Taken to Address – Goal will ultimately be to submit through Asset Mgmt portal (phase II)  In development ‹#›

25. Lender Responsibilities Quarterly – proactively monitor CMS’s Special Focus List. Annually – proactively monitor PLI and Fidelity Bond Coverage. Quarterly Operator Financials Review and submission of Asset Management Actions/Transactions ‹#›

26. Other Handbook Changes for Asset Management……. ‹#›

27. Lender Review & Approval of R4R Requests: Option of Lender Lender approval: – Automatically approved if MF approves – If not, can request approval from ORCF Only R4R Releases Minimum of $1,500 per Unit in R4R After Release All Section 232 Loan Types Eligible ‹#›

28. Lender Non-Critical Repair Escrow Administration Option of Lender Lender approval: – Automatically approved if MF approves – If not, can request approval from ORCF Must be set up on each loan when in Development – no HUD Inspection Fee! ‹#›

29. Lender Non-Critical Repair Escrow Administration Before closeout of account, inspection by PCNA provider (mortgageable cost) HUD must approve of closeout of account HUD must approve of any revisions to scope ‹#›

30. Handbook Also Addresses….. Environmental Review Required per CFR when: Remodeling, Adding to, Subtracting from, Reconstructing, or Demolishing – Language in Reg. Agreements Defines Remodeling as Substantial Rehab Will be built into checklist and punchlist for processes ‹#›

31. Other Hot Topics ‹#›

32. Flood Insurance on Existing Projects On projects requiring flood insurance, Security Agreement requires coverage at lesser of: – Maximum amount available under NFIP, – Replacement cost minus land, or – Existing loan balance ‹#›

33. Flood Insurance, continued 6/1/14: Maximum amount available under NFIP increased for “Residential Buildings with 5 or More Units” – $250k to $500k Maximum amount available on “Non- Residential Buildings” is not impacted (nursing homes) ‹#›

34. Flood Insurance, Continued  ORCF and Multi-Family joint guidance: – Consistent approach – Memo from Asset Management Directors to MF and ORCF staff ORCF AE’s followed up with Servicing Lenders – Address level of flood insurance upon policy renewals on/after 6/1/14. ‹#›

35. Financials: 5/7/14 Email Blast Mortgagor: Notice H 2013-23 – Audited still required unless original amount of mortgages < $500,000 ‹#›

36. Financials: Lessee/Operator Many Regulatory Agreements require: – 1996 Notice required – OHP Lean Rider since December 2008 New email address: 232OperatorFinancialsFY2013@hud.gov 232OperatorFinancialsFY2013@hud.gov Or via mail to: Jacob K. Javitz Federal Building Attn: Simon Kleinman 26 Federal Plaza, Room 32-116 New York, NY 10278 ‹#›

37. Financials: Portfolio Master Lease documents require submittal of quarterly financial statements on portfolios. ORCF is having a team review these. Submit via email to: – 232PortfolioFinancials@hud.gov 232PortfolioFinancials@hud.gov Future Email Blast to address ‹#›