U.S. Department of Housing and Urban Development

H O U S I N G

Special Attention of: Notice: H 95-64 (HUD)

State Coordinators; Directors

of Housing; Directors, Issued: July 18, 1995

Multifamily Housing Division; Expires: July 31, 1996

Branch Chiefs, Multifamily

Asset Management; Contract Cross References:

Administrators; Owners and Handbook 4350.1 REV-1 CHG-8

Management Agents of HUD-Insured and

HUD-Assisted Properties

Subject: Loss Mitigation Job Aid: Educational Supplement to Outstanding

Handbook Procedures

PURPOSE. Attached is the final Notice on Loss Mitigation which has been

developed in a \"Job Aid\" format. The Job Aid is intended to be used as
a

desk guide for building technical competency in this area by providing

valuable information on diagnosis skills (i.e., how to review the
portfolio

to identify troubled properties), how to prioritize projects for
concentrated

loss mitigation/asset management activity based on the reasonable
expectation

of success (defined as the avoidance of a default/assignment) and an

understanding of how to leverage the most of limited resources, and how
to

engage in a constructive dialogue with owners to negotiate sound
workouts.

The Appendices provide valuable educational materials and tips and
supplement

the main document. These skills become all the more important when
deciding

which projects to target for concentrated loss mitigation activity when
there

are any number of candidates vying for the Asset Manager\'s attention
and

resources.

It is hoped that the Job Aid will prove extremely useful to Asset

Management staff and will provide a valuable tool for preventing future
HUD

asset losses.

The attached Job Aid is the end result of a loss mitigation contract,

and the Department is very pleased with the final product. The document
was

developed under the auspices of a contractor with active involvement and

input from HUD Asset Management staff at Headquarters and HUD\'s offices
in

the field.

The procurement of this contract and the completion of this product is

an important measure in HUD\'s continuing effort to mitigate losses.
Other

important initiatives in this regard include planning for and
implementation

of Comprehensive Needs Assessments; pursuing the Annual Financial
Statement

contract to assist in identifying indicators which would signal a
distressed

property so that corrective action can be taken early on; the \"SWAT\"
program

stressing early intervention and specialized asset management activity
and

HMHP : Distribution: W-3-1, W-3(A)(OGC)(ZAS), W-4(H), R-1 ,R-2,R-3-1,

R-3-2,R-3-3,R-6,R-6-2,R-7,R-7-2,R-8

2

focus on designated projects in order to restore the financial and
physical

health of troubled real estate; and the on-going note sales program to

relieve field Asset Managers of the time-consuming task of servicing
HUD-held

loans so they can turn their attention to aggressive asset management

activities on the still insured portfolio.

There are bound to be questions regarding the relationship between this

Job Aid and outstanding handbook instructions on this subject. This Job
Aid

is meant as an educational enhancement to existing handbook procedures,
and

in particular should be viewed in tandem with newly issued CHG-8 to the

Workout Chapter in HB 4350.1 REV-1, Chapter 11. Both this Job Aid and
the

accompanying Handbook Change are being released simultaneously. The Job
Aid

examines educational types of issues which are not comfortably handled
within

the context of a handbook abstract but are nonetheless important to
address.

Hence, the reason for issuing this additional guidance in a \"Job Aid\"
format.

The most significant development in this new Job Aid is the application

of workout-type techniques (action plans) to insured assets. With the

publication of this Job Aid, the workout program is expanded to cover
insured

properties that are troubled or potentially troubled in the effort to
avoid

default/assignment in the first place. Field Asset Managers are
aggressively

encouraged to pursue new workout opportunities on still insured but
troubled

properties. This is in addition to the traditional method of employing

workouts on HUD-held projects (i.e., post-assignment after an insurance
claim

has been paid and HUD becomes the mortgagee) which is already covered
under

existing handbook guidance.

For detailed announcement of technical changes in the accompanying

handbook revision and changes in HUD policy, see the Transmittal Memo

introducing CHG-8 to HB 4350.1 REV-1, Chapter 11 on \"Workouts.\" In
summary,

now that an active note sales program exists, and HUD is selling rather
than

holding onto and servicing HUD-held notes, workout agreements should
once

again be construed as short term arrangements, for instance 36 months or

sooner depending on when the next applicable note sale is planned, and
should

not contemplate future actions like extensions of the workout or

modifications to the loan documents.

EFFECTIVE DATE. Immediately.

INFORMATION CONTACT. For the next 60 days, questions from State or area

office staff pertaining to this Job Aid or the accompanying Handbook
Change

may be directed to James S. Cruickshank, Multifamily Housing Management

Planning and Procedures Division at (202) 708-4162, ext. 2641. Specific

3

questions about the financial spreadsheets attached as Appendix \"E\"
and the

software being developed should be addressed to Mr. William W. Hill,

Director, Operations Division, at (202) 708-0547, ext. 2585. Both

individuals may also be reached on cc mail through FHCPOST3. Thereafter,

questions should be directed to the designated Desk Officer in the
Operations

Division. Owners and managers should direct their questions to HUD\'s
local

office having jurisdiction over the project (who in turn should call on
their

behalf to Headquarters should further guidance be necessary).

Assistant Secretary for Housing-

Federal Housing Commissioner

Loss Mitigation Job Aid

Educational Supplement to Outstanding Handbook Procedures

Loss Mitigation Job Aid

Table of Contents

I Overview 1

A. Background and Commitment to Loss Mitigation 1

B. Purpose of this Job Aid 7

C. Relationship to Workouts and Other Activities 3

D. Relationship to Existing Guidance 4

II The Loss Mitigation Assignment 5

A. Responsibility for Loss Mitigation Activities 5

B. Success and Failure in a Loss Mitigation Context 5

C. Principles of Loss Mitigation 6

III Loss Mitigation: A 10-Step Approach 7

A. The Diagnosis Group 7

B. The Triage Group 19

C. The Action Group 26

IV Appendices 40

Loss Mitigation and Risk Analysis: a 10-Step Approach

Educational Supplement to Outstanding Handbook Procedures

I Overview

A. Background and Commitment to Loss Mitigation

Loss Mitigation is the Department\'s term for the process of taking

preventive measures on distressed properties in the insured inventory in

order to avoid default/assignment. Loss Mitigation is of paramount
importance

to the Department; successful loss mitigation by Field Staff improves
the

performance of the insured assets while simultaneously protecting the
FHA

insurance fund and enhancing the quality of life for residents of
affected

properties.

Loss Mitigation applies to properties at risk of default/assignment but

which have not yet been assigned. Although staff must periodically
review all

properties in the portfolio for signs of default/assignment risk, Asset

Management will not need to apply vigorous Loss Mitigation practices to

healthy properties. Secondly, although Loss Mitigation activities are

relevant for those properties which have already been assigned (i.e.,
those

in Workout status), additional tools not covered in this Job Aid become

available to the Asset Manager post-assignment. Workouts are the subject
of

a separate Job Aid being developed by the Department. The target
portfolio

for Loss Mitigation activities consists of those properties at risk of

default/assignment.

The Department\'s commitment to Loss Mitigation activities is evidenced

by its Multifamily Housing Goals. In Fiscal Year 1994, the Department
was

charged with developing action plans to begin to cure troubled and

potentially troubled properties. This commitment remains a priority in
Fiscal

Year 1995, when in addition to continuing to develop such plans we will
begin

to implement, track, and modify the Fiscal 1994 Plans.

These activities are complemented by a commitment to obtain

Comprehensive Needs Assessments for properties in the portfolio as a
means of

accurately gauging physical needs, as well as a continuing effort to
better

predict future claims against the insurance fund. Over the course of the

coming year, the Department will also move forward with the SWAT team
effort

designed to prevent losses on the insured inventory and provide
specialized

Asset Management training emphasizing early intervention on properties
in

danger of default/assignment.

B. Purpose of this Job Aid

Although the above initiatives are national in scope, the success of the

Department\'s Loss Mitigation effort will depend upon the Field\'s
ability to

prevent default/assignment. The circumstances surrounding every
distressed

property are unique; there are no stock solutions which will work in
every

instance. Conversely, there are some distressed properties which def
solution

at any reasonable cost. The Field is uniquely positioned to intervene
and

restore the viability of troubled real estate by exercising a
combination of

common sense, good business judgment, and proficiency in Asset
Management

techniques.

The purpose of this Job Aid is to introduce one approach to successful

Loss Mitigation, one which the Department believes will be particularly

useful to Field Staff in managing the insured portfolio. This model
involves

reviewing the portfolio for signs of distress, allocating resources to
the

most solvable problems, and developing Loss Mitigation Plans for each

property which the Field believes can be restored to performing status.
This

process can be broken into the ten steps outlined below, and also in
Appendix

A:

I The Diagnosis Group:

A. Review the portfolio for problem properties.

B. Take control of the problems.

C. Preliminary analysis and conclusions.

II The Triage Group:

D. Create an active list of problem properties.

E. Prioritize properties on the active list.

III The Action Group:

F. Build a Team.

G. Construct a Loss Mitigation Plan.

H. Develop an implementation strategy.

I. Implement the Plan.

J. End the problems.

Veteran Asset Managers will recognize many of the concepts shown above

and discussed in the body of the Job Aid. However, previous guidance on
these

topics did not stress the importance of approaching the portfolio within
a

comprehensive Loss Mitigation framework. The Diagnosis and Triage groups
will

be of particular interest. In the Diagnosis stage, substantial attention
is

given to the identification of the causes of properties\' problems. The

importance of this objective cannot be over-emphasized; if Asset
Management

does not understand what is causing a problem or set of problems,

2

efforts to fashion a workable Action Plan will likely end in failure.
Triage

squarely addresses the problematic possibility that some properties
cannot be

kept out of default/assignment given the resources available. The final
group

(the Action steps) covers the development and implementation of
successful

Loss Mitigation Plans.

The Job Aid is intended to be an educational supplement to existing

guidance. Asset Managers are encouraged to read the Job Aid in its
entirety,

and then refer back to specific sections as appropriate to their
day-to-day

Loss Mitigation activities. Although the model lists a series of steps
as

part of an overall protocol, there may be times when skipping steps is

desirable. The Job Aid\'s sequential nature is designed to assure that

important facets of the process are not overlooked in the rush to find a

solution \--however, the protocol should not be taken as an inflexible
set of

requirements which must be followed to the letter in every case.

Much of this Job Aid pertains to property and problem analysis. Such

analysis is a means to the end of determining which actions should be
taken

for a particular property. Many of the decision areas are gray rather
than

black and white. Throughout, the point of the process is for Asset
Management

to make decisions based on informed judgment. Taking an action based on
a

best guess is superior to taking no action at all.

Also, although the following discussion emphasizes that Asset Management

must take control of the Loss Mitigation process, readers are reminded
that

the owner must play an important role for success to be attained; the
owner

must be accountable for its actions in the effort to restore the health
of

the troubled property.

Throughout this document, a number of tools and principles of decision-

making helpful to Asset Managers in their performance of Loss Mitigation

activities will be discussed. Additionally, a companion computer disk

containing some of the analytical templates discussed in this Job Aid
will be

made available to the Field.

C. Relationship to Workouts and Other Asset Management Activities

Loss Mitigation activities can be distinguished from Workouts insofar as

the Department defines Workouts as being specific to insured loans
already in

default/assignment. For such properties, HUD has in effect become the

mortgagee, and in that capacity is seeking to restore the project\'s
health so

as to prevent foreclosure and avoid additional losses. The difference
between

Workouts and Loss Mitigation is that in a Workout, Asset Management is
trying

to prevent foreclosure and restore the loan to performing status so that
it

may be reassigned, rather than restoring the loan to performing status
in

hopes of preventing assignment. Either way, the end state is the same:
(1)

performing loans which (2) are not HUD-held.

Accordingly, Asset Managers should and will use many of the Loss

Mitigation skills and techniques described in this Job Aid in their
efforts

3

to work out HUD-held notes. Similarly, a number of techniques associated
with

Workouts are pertinent in a Loss Mitigation context. A number of
techniques

and considerations particularly relevant to both Loss Mitigation and
Workouts

are catalogued in the appendices to this Job Aid. The first of these

(Appendix B) addresses Pre-Assignment issues. It covers considerations
that

change once a decision is made to assign and why, as well as the impact
of

these changes upon the overall approach taken by Asset Management.
Appendix

C addresses these same considerations within a post-Assignment context.

In reality, virtually every Field Office portfolio will contain a

mixture of healthy properties (on which little action will be required),

marginally performing properties (on which Loss Mitigation activities
will be

performed), HUD-held properties (for which Workout and disposition
planning

activities will be required) and PD properties to be sold by the
Department.

Many of the considerations and decision-making processes described
herein

will be useful in managing assets across this continuum. This Job Aid is

intended to be a resource for Asset Managers in their efforts to
minimize

losses to the FHA fund and fulfill the Department\'s mission to provide

decent, safe, and sanitary housing (and accessible to persons with

disabilities) for all residents residing in properties in its portfolio.

D. Relationship to Existing Guidance

This discussion is intended to supplement outstanding guidance for

insured properties including Handbook 4350.1 Revision 1. If there is a

conflict between this Job Aid and existing Handbook(s) or directives,
the

Asset Manager should pursue the course of action most likely to result
in a

successful project. This involves ensuring that decent, safe, and
sanitary

housing (and accessible to persons with disabilities) is provided to

residents, but also entails protecting the insurance fund against claims

whenever feasible.

Remedial measures may require a combination of actions. Neither this Job

Aid nor existing Handbook provisions should be viewed as absolutes,
unless

the provision is based upon a regulation or statute. Common sense, sound

business judgment, and economic feasibility should be the driving forces

behind any Loss Mitigation strategy. Failure to consider the unique
elements

which comprise each problem will lead to weak, ineffective solutions
which

will fail in the long run. Therefore, in meeting Loss Mitigation
objectives,

the Field should waive Handbooks or other directives whenever a waiver
is

economically prudent and/or furthers the goal of providing acceptable

housing, provided the requirement to be waived is not statutory or

regulatory. Asset Managers are reminded that any and all such handbook

waivers must include the bases or justification for taking such action
along

with concurrences by area counsel, to ensure that the request for waiver
of

handbook directive does not conflict with any statutory or regulatory

provision, and the Manager/Housing Director to ensure supervisory
review,

4

proper coordination and sound management control practices. Specially

designed form HUD-2 may be used for this purpose.

II The Loss Mitigation Assignment

A. Responsibility for Loss Mitigation Activities

As noted above, Loss Mitigation refers to the taking of preventive

measures in order to avoid the default/assignment of distressed
properties in

the insured inventory. Loss Mitigation is the responsibility of Field
Staff.

Field Staff are best equipped to understand the market-wide and/or
property-

specific forces jeopardizing the viability of insured real estate. The
Office

of Multifamily Housing Management in Headquarters is available to
discuss

Loss Mitigation guidelines and the feasibility of particular
alternatives

with Field Staff, but the success of the Department\'s nationwide
efforts at

Loss Mitigation is clearly dependent upon informed decision-making by
the

Field.

Consequently, Loss Mitigation should be considered a priority by

supervisory Asset Management staff. Asset Managers should allocate a
suitable

degree of attention to Loss Mitigation activities, and supervisory staff

should ensure that lesser program priorities do not interfere with
ongoing

Loss Mitigation responsibilities.

B. Success and Failure in the Loss Mitigation Context

Success, in the context of Loss Mitigation, is defined as restoring the

troubled real estate to a stable physical and financial condition, or
what

might be referred to as \"performing status\", on a long-term basis.
This must

include the provision of decent, safe, and sanitary housing (and
accessible

to persons with disabilities). Affordable housing need not be below par

housing. Yet, as further discussed throughout this Job Aid, achievement
of

this goal must be accomplished in a cost-effective manner; it must be
worth

the price paid. Throwing expensive resources at a property will fall if
the

resources are not directed at the root cause of the property\'s
problems.

Alternatively, underfunding a property is no solution. Withholding
Section 8

funds or reserve releases to an owner in an effort to \"get tough\" may
simply

exacerbate problems and make any solution much more expensive in the
long

run.

Therefore, in the interest of Loss Mitigation, the Department is

encouraging Field Staff to be proactive and take all reasonable actions

necessary to restore these properties to performing status. This may or
may

not involve additional subsidy or concessions by the Department. It is
more

important to solve a troubled property\'s problems and avoid

default/assignment than to insist on terms which the Field Office
believes,

cannot reasonably be met. A property strapped to a set of performance

requirements that it cannot achieve will be driven to
default/assignment.

However, short-term solutions which will require additional fixing m a
few

years time are usually not constructive, and should be avoided in most

instances.

5

Failure, in the context of Loss Mitigation, is defined as not acting

when action could have been expected to prevent default/assignment. This
will

culminate in the mortgagee\'s election to assign. Failure to take action
where

Asset Management believes assignment may reasonably be avoided is an

abdication of responsibility and is unacceptable. Any reasonable action
to

avoid assignment is better than no action at all.

The Office of Multifamily Housing Management acknowledges that some

troubled properties cannot be returned to performing status by the
taking of

reasonable or cost effective actions. Unfortunately, some number of

defaults/assignments are unavoidable. In cases such as these, Asset

Management should seek to ensure that habitability standards are
maintained.

If a claim results in the process, that is not unacceptable to the

Department; in some instances, the additional tools available
post-assignment

will lead to a quicker resolution of a property\'s problems.

The art of successful Loss Mitigation is in identifying which losses can

be avoided and then taking the actions necessary to ensure that these

properties are restored to physical and financial health, while avoiding

wasting resources (time, money, personnel, contractors, subsidies, etc.)
on

the others.

C. Principles of Loss Mitigation

Although the tools and skills brought to bear in any given Loss

Mitigation situation will vary with the circumstances of the troubled

property in question, any systematic portfolio-wide approach to Loss

Mitigation should have the following elements:

1\. Diagnosis. Asset Managers should review their portfolio of

insured properties on a regular basis and diagnose problems and risks.

Present or future problems may be evidenced by financial or physical

indicators, or by the action or inaction of the owner, management agent,

mortgagee, or other participant. The Diagnosis stage ends with

preliminary conclusions regarding potential solutions to restore the

properties to performing status on a long-term basis.

2\. Triage. Of all the properties surveyed within a given

portfolio, a large percentage will be healthy; only some will require

the development of Loss Mitigation plans. Asset Managers must first

determine which insured properties require Loss Mitigation actions;

then, the task is to determine which of these properties are the most

feasible candidates for restoration to long-term performing status. This

process is referred to as \"Triage\".

Importantly, Triage implies a conscious decision not to work

on some tasks so as to conserve resources for other, more pressing or

6

solvable needs - not simply because some properties will require no

action but also because there may be insufficient time or resources to

address all properties simultaneously.

Asset Managers should allocate resources carefully, giving

first priority to those properties which can be made viable again and

which are in danger of assignment if no action is taken.

3\. Action. Asset Managers should then act in accordance with the

results of the Triage analysis. This entails implementing Loss

Mitigation plans on troubled properties in order of priority, and then

following up with a monitoring program to ensure that the problems are

solved. During the implementation stage, strategies may need to be

modified in response to changing conditions or unexpected events.

The principles set forth above should be integrated into the Loss

Mitigation strategies adopted by the Field. The remainder of this Job
Aid

will describe a model for Loss Mitigation which the Department believes
will

greatly improve success in preventing assignment. This approach breaks
the

Diagnosis, Triage, and Action framework into a total of 10 comprehensive

steps.

III Loss Mitigation: a 10-Step Approach

A. The Diagnosis Group

Asset Managers must regularly review the performance of insured

properties to identity those in danger of assignment or those which are

otherwise performing unsatisfactorily. In the context of Loss
Mitigation,

diagnosis starts with the recognition of a problem, a set of symptoms or

causes, or a negative performance trend which may indicate a property is
at

risk. It ends with the drawing of preliminary conclusions as to possible

solutions for such troubled properties. Each of the three steps in the

Diagnosis group are described in detail below.

Step 1: Review the portfolio to identify troubled properties.

As noted above, Asset Managers must regularly review the performance of

insured properties. For each property, Asset Managers should ask
themselves

the following questions:

o Is default or assignment likely?

o If so, what can Asset Management do to prevent this from occurring?

7

During this review, Asset Managers should look for trouble signs which

indicate a possibility or likelihood that a particular property is in
danger

of default/assignment. Sometimes, the signs of trouble will be obvious.
Other

times, however, the problems may be dormant and only apparent by
studying the

property\'s financial and physical history. Asset Managers should make a
list

of all properties included among their portfolio which exhibit signs of

potential default/assignment.

Some common warning signs are listed in Table 1 on the following page.

Table 1: Common Warning Signs

o A delinquency alert is received.

o A default notice is received.

o The mortgagee submits an election to assign.

o Owner submits a \'red flag\' request such as:

\- a request to suspend replacement reserve payments.

\- a request for deferral of principal.

\- a request for new subsidy (LMSA, Flex Sub, etc).

\- continual requests for rent increases to fund repairs.

\- repeated or abnormal use of repair escrows.

\- use of residual receipts for property purposes.

o The property\'s physical condition is unacceptable or

marginally unacceptable.

o Resident complaints begin or increase.

o Vacancies are steadily increasing.

o Property is not meeting HUD\'s financial performance standards

(audited financial statements, excess income reports, annual

budgets, etc.)

o Absence of financial control.

o Evidence of unacceptable property management.

o Evidence of mistreatment of residents.

o Property fails Early Warning System tests.

o Calls from vendors regarding late or non-payment.

o Owner or agent is slow to respond to normal HUD requests.

o Evidence of material financial difficulty of the owner

(bankruptcy or analogous events).

o Local, state, or other Federal inquiries begin or increase.

o Property receives negative media coverage.

In most cases, such warning signs will cause Asset Management to

conclude that an insured property is in danger of default/assignment. In
some

cases, however, properties may not exhibit these signs, yet Asset
Management

may still suspect that problems exist at a property. This may be due to
a

general dissatisfaction with the performance of the asset or the project

8

owner, such that there is a risk that default/assignment may occur in
the

future.

Asset Managers should not ignore such indicators of potential problems

simply because these properties may not exhibit any of the more common

warning signs. If there is evidence of trouble but the cause cannot be

pinpointed, Asset Managers should err on the side of caution and include
such

properties on the list of non-performing properties. In such cases,
Asset

Managers should be careful to document the basis for their concerns.

At the conclusion of this step, Asset Managers will have a list of the

non-performing or marginal properties included in their portfolio,
together

with a rough list of ideas as to how to prevent default/assignment.

With this list, Asset Managers can move on to Step 2. Although staff

must periodically review every property for signs of non-performance (an

automated tool such as the early warning component of the Multifamily

National System, if fully operational, would greatly aid in this process
by

flagging properties which exhibit one or more warning signs), Asset
Managers

need only move forward to additional steps in the Loss Mitigation model
for

those properties identified as a result of the above analysis.

Asset Managers should also try to remain aware of the other troubled

properties being addressed by their colleagues; oftentimes helpful
insight

can be gained by comparing problems and solution strategies with other

members of the staff. The suggestion that field Asset Management staff

consult with each other to take advantage of solutions to similar
portfolio

problems is a sound practice. Another important reason for doing so is
that

projects serviced by separate staff or offices may have common project

ownership or management that is contributing to the non-performance of
the

project(s). It is vital that HUD\'s asset management practices are

consistently performed among asset managers.

Step 2: Take control of the problems.

Having completed Step 1, Asset Managers will have a list of non-

performing or marginal properties requiring further attention. Although
the

owner is principally responsible for restoring a property to performing

status, it is in the Department\'s interest for Asset Management to act
as

quickly as possible to take control of the situation at hand. This will

prevent further deterioration and ensure adequate time for substantive

analysis. Throughout this process, accountability is extremely important
\--

the Field must take control of problems rather than be controlled by
them. In

large part taking control entails (1) creating adequate time to complete
the

Diagnosis process, (2) setting the agenda regarding how a solution will
be

pursued, and (3) bringing the stakeholders together to work towards a

solution.

9

How does the Asset Manager take control of the problem? A list of tips

is shown in Table 2 below.

Table 2: Tips for Taking Control of Problems

o Advise the owner/manager that there is a problem.

o Take ownership of the problem.

o Establish your timetable as \"the timetable\": set the agenda.

o Make the owner/manager accountable for participating in the

solution.

o Take stop-gap actions to slow development of the problem.

o Adopt a helpful attitude; don\'t start from the position that

the owner is the enemy.

o Define the goals of the owner\'s an HUD\'s actions.

o Visit the site to gain a better understanding of the problems.

o Make your findings known and invite comment.

2.A. Set the stage and the timetable

A good first step in taking control is to contact the owner/management

agent and share Asset Management\'s concerns. Interested parties should
be put

on notice that curative actions will be needed and that the Department
has

begun to study the property\'s problems. Although this should generally
be

done in writing, don\'t overlook the efficiency of oral communication.

Telephone calls can save substantial time for the Asset Manager and will
have

the added benefit of initiating a dialogue; in general, handling some
aspects

of this process over the telephone will facilitate negotiation.

Evaluating the owner is crucial to the analysis of any prospective Loss

Mitigation plan. Asset Managers should not view the owner as the enemy.
Some

owners are capable, proactive, and dedicated; these owners will develop

viable plans and will take the responsibility of implementing them. Such

owners are looking principally for cooperation from the Department and

authority to take action.

Unfortunately, some owners (or managers) are either incapable or

unwilling to address their problems. Delivering further resources to
such

owners will be ineffective and may even encourage them to continue

unacceptable behavior. Vigorous enforcement is necessary in such cases.

Many owners, if not most, are somewhere in between the two ends of the

spectrum described above; their behavior and willingness to take

responsibility reflect the Department\'s actions. In these cases, it is

usually important to encourage the owner at the beginning of the Loss

Mitigation effort with a combination of positive and negative
incentives:

financial or other assistance to be provided in support of a good plan,

10

enforcement or foreclosure actions to be taken if the problems are not

corrected.

After assessing the owner, Asset Management should establish a timetable

for further actions designed to solve the property\'s problems. This
applies

to actions to be taken by Asset Management (list of deficiencies,
delivery of

preliminary conclusions, etc.) as well as those to be taken by the owner
or

other participants. Asset Managers should be certain to create mutually-

agreeable deadlines regarding the latter. A cooperative attitude is

encouraged. However, Asset Management should keep firm control over the

process by establishing Asset Management\'s timetable as \"the
timetable\" for

all involved in the problem and solution. Once timetables are
established,

Asset Managers should be certain to meet their own deadlines.
Credibility

will be important later in the process.

2.B. Consider the results of your actions

If Asset Management needs to defer action on an owner request (for

example, a reserve for replacement release) until after subsequent
analysis

has been completed, Asset Management should promptly advise the owner or

other affected party of this decision. However, Asset Management should
not

employ this strategy unnecessarily \--problems should not be compounded
by

delaying action on a reasonable request just because further study is

required. Even if a property has large problems, some small actions
often

make sense and have no downside. These should be implemented promptly.

In the above example, if the project has physical needs that can be

mitigated with a release of reserves, then approval should not be
delayed

until unrelated analysis has been completed simply as a matter of
principle.

Asset Managers need to find ways to accomplish objectives without
causing

further project deterioration, and must be aware of the consequences of
their

own actions. Withholding funds from operations due to delays in rent

increases or reserve withdrawals in an unmerited effort to \"get tough\"
will

almost always cost more money to fix the problems in the long run. Do
not let

the housing deteriorate unnecessarily.

Further, in some cases, Asset Managers may be able to take the lead in

identifying and taking actions which will prevent the problems from
worsening

for a reasonable period (say six months), during which time something

constructive may happen. The effect of taking such actions is to buy
time for

the property (slowing further deterioration) and for the Asset Manager

(buying time for more substantive analysis). In the interim, the
situation

may actually improve depending upon the nature of the problem; some
problems

are caused by market downturns or other economic considerations rather
than

property particulars.

Although Asset Managers should take constructive intermediate steps

whenever possible, they must remain aware of the fact that time can also
be

11

an enemy. Asset Managers should not exacerbate a property\'s problems by

delaying the inevitable or hoping that the problems will solve
themselves

without evidence that this is a realistic possibility.

Asset Managers should be certain to document all timetables and

performance requirements related to taking control of a property\'s
problems.

As part of this process, Asset Managers should begin to build a file

containing observations regarding the troubled property and its problems
and

consider creating a status report which may be shared with supervisory
staff.

Step 3: Preliminary Analysis and Conclusions.

At the conclusion of Step 2, Asset Management will have taken control of

the problems first identified in Step 1, and (to the best of its
ability)

created time to address these issues. Upon completion of these steps,
Asset

Management should begin Step 3, Preliminary Analysis and Conclusions.
During

this step, Asset Management will perform a more detailed analysis of
each of

the non-performing or marginal properties identified at the conclusion
of

Step 1.

Whenever possible, Asset Management should share opinions and

conclusions with the owner and manager and invite feedback and
participation.

Asset Managers should encourage capable, responsible owners and managers
to

take charge of the situation at hand.

At this stage of the Diagnosis, Asset Management\'s goal should be
simply

to identify possible solutions and determine their relative merits. As

discussed in the Action stage beginning in Section C below, additional

substantive analysis will be performed only after the Triage function
has

been completed.

Key aspects of this preliminary analysis process include (1) information

collection, (2) identification of symptoms and causes, and (3) the
drawing of

preliminary conclusions as to actions and costs associated with
restoring the

property to physical and financial viability. Each is discussed below.

3.A. Information collection

No simple formula exists for identifying all of the reasons why an asset

is not performing. Therefore, all facts and circumstances are relevant
in the

attempt to determine what is causing the property\'s problems. Asset
Managers

should collect all of the information that might possibly be helpful.

Telephone calls to the owner, the manager, or other interested party
will

often allow the Asset Manager to gather data quickly. Don\'t overlook
the

residents as a source of information.

12

Some of the most common pieces of relevant information are displayed in

Table 3 on the following page. Much of the information referenced in
this

table is readily available. For example, the project file should contain

several years of audited financial statements, physical inspections,

management reviews, and many other documents.

Other pertinent information can be obtained with some additional effort

on the part of the Asset Manager. For example, the mortgagee should be
able

to provide a payment history covering the last twelve months The Asset

Manager can prepare an operational pro forma, an analysis of the
property\'s

performance as compared to similar properties, or even a comprehensive

property profile based on the data that has been gathered. The HUD 9815
form

provides a framework to begin to consolidate project data.

Table 3: Relevant Information for Diagnosis

o Property financial statements.

o Physical inspection and management review reports.

o Mortgagee inspection reports.

o Rent schedule; current and past operating budgets.

o IG audits, 2530 forms, and LDP paperwork.

o Property payment history.

o Financing documents.

o Documentation of code violations.

o Owner\'s assessment of problems.

o Tenant profile.

o Monthly accounting reports.

o Resident letters or phone messages.

o Early Warning System results.

o HUD Form 9815.

During this information-gathering process, Asset Managers should also

utilize the owner as a source of data. The owner should be able to
provide a

current budget, a tenant profile, an explanation of the property\'s
financing

structure, information regarding code violations or other physical
problems,

and copies of relevant correspondence such as prior requests and

notifications. In most cases, it\'s a good idea to obtain the owner\'s
view of

the situation at hand, or a summary of what the owner perceives to be
the

problem along with alternative potential solutions. Learn what the owner
is

doing to correct the problem and when results are expected. Finally,
Asset

Managers should consider asking other interested parties (management
agent,

13

municipalities, tenant representatives, etc.) for their views on current

problems as appropriate. Helpful insight may be available here.

After gathering all pertinent information, Asset Managers are ready to

begin preliminary analysis of the property\'s problems.

3.B. Symptoms vs. causes

Preliminary analysis should begin with an attempt to identity symptoms

and causes of the problem, and differentiate the two. Only after
identifying

the root causes can Asset Management determine the most appropriate
actions

to take to return a property to performing status. Action plans which
address

only symptoms, or which solve a few of the problems but leave others

undisturbed, usually fail slowly and painfully, leaving the property and
the

problems worse than before. Both symptoms and causes are discussed in
detail

below.

1\. Identifying symptoms. The symptoms of a property\'s problems

should be fairly straightforward to identity. As part of Step 1 in this
10-

Step Loss Mitigation process, Asset Managers will have taken note of any

warning signs associated with a particular property. Most of these can
be

considered symptoms in that these are manifestations of problems rather
than

causes. When looking for symptoms, Asset Managers should consider the
warning

signs displayed in Table 1.

Symptoms can be differentiated from causes insofar as treating a symptom

does not solve a property\'s underlying problems; rather than restoring
the

property to performing status, it simply leads an Asset Manager to
another

problem with which to contend. Asset Management cannot afford to utilize
its

limited resources to treat symptoms; the goal must be to identify and
treat

causes.

Consider a property which is continually submitting requests for new

Section 8 Loan Management Set Aside and/or project-wide rent increases.
As a

result, residents are displeased and often provide negative comments
under

the notification procedures; generally, the residents are critical of
the

owner and management company and blame the operating problems on bad

management. The owner contends that the property\'s problems will be
solved if

the Department would provide new Section 8 assistance and increase the
rents

on all units. Only by taking these action, says the owner, will the
property

be able to pay its operating expenses.

This may be the case. Or, upon investigation, Asset Management may

determine that the cause of the high operating expenses relates to

inefficient energy systems (to cite one example). A solution to the
problem

may be to grant the owner Flexible Subsidy, or for the owner to receive
a

loan from a municipality or utility provider, in order to convert

14

the utilities to a more efficient system. The rents must be increased to
pay

debt service on this loan, but the need to do this may be largely offset
by

sharp decreases in utility costs and usage.

Of course, other causes are possible. The owner may not be effectively

controlling costs, or perhaps has no capital plan. Crucially, the proper

solution depends not on the symptoms but on the causes.

In the example above, symptoms include perpetual requests for rent

increases or new subsidy, angry residents, and accusations of
mismanagement.

Treating any of these symptoms would be pointless. Removing the owner or

management agent would not be constructive. Similarly, simply approving
the

owner\'s requests for new subsidy or higher rents is no solution; this
only

perpetuates the problem by failing to address its root cause. The owners

would almost certainly make similar requests again the following year.
Only

by addressing the root causes can the problems be solved.

One approach towards separating symptoms from causes is to keep asking

the question \"Why?\" until the causes are identified. For example,
consider a

property where tenant accounts receivable are unacceptably high. Why?
Because

the tenants do not pay rent on time. Why? Because nobody makes them pay
on

time. Why? Because the site staff never talk to them about prompt
payment.

Why? Because the site staff say they\'ve never been told to be
aggressive in

collections. Why? Because the district manager for the property
management

company only comes by every two months, and the manager does not care
about

tenant accounts receivable. Why? The answer is unknown until you speak
with

the district manager, but the Asset Manager will recognize that the
district

manager should care about these receivables, and cannot offer any
acceptable

rationale for not pursuing prompt payment of rent.

In this example, the district manager is not doing the job for which he

or she has been hired. Treating the cause \-- by communicating the

Department\'s policy on tenant accounts receivable to the district
manager and

demanding that this policy is adhered to\-- should resolve the problem.

Symptoms are so varied from case to case that it is not possible to

assemble an exhaustive list. However, some common symptoms are shown in
Table

4 below.

Table 4: Common Symptoms

o Unacceptable physical condition or property is inaccessible to

persons with disabilities.

o Late or non-payment of obligations, especially debt service

payments.

o Owner request for new subsidy.

o Insufficient replacement reserve balance.

15

o Owner request for rent increase to fund expected physical

improvements.

o Election to assign or default notice is received.

o Vacancies are steadily increasing.

o Non-responsive owner despite trouble at the property.

o Early Warning System suggests a problem.

o Resident complaints about condition, security, or management.

o Complaints from neighboring developments or single family

homeowners.

o Code or other negative citations from state or local

authorities.

Symptoms can be physical (e.g. the property is in unacceptable physical

condition or is inaccessible to persons with disabilities), financial
(the

owner is requesting new Section 8 subsidies), or even regulatory (the
owner

is unresponsive or fails 2530 clearance). Collateral symptoms (general

decline, increase in crime or social problems in the area) should also
be

noted \-- in some cases, problems are caused by the market or other non-

property forces, rather than by poor ownership or management. Asset
Managers

should be certain to keep a written record of symptoms for all Loss

Mitigation candidates in their portfolios. later, this list will be a
helpful

reference in evaluating potential solutions.

2\. Identifying causes. As described above, the best way for Asset

Managers to identify causes is to keep asking questions until symptoms
are

eliminated and only causes remain. Using a method such as \"the Who
Test\" can

be very effective. During Diagnosis, Asset Managers should ask as many

questions, to as many people, as is believed to be constructive. Some

suggestions for questions to ask during the Diagnosis stage can be found
in

Appendix D. This list is by no means exhaustive; Asset Managers should
not

limit themselves to these specific questions, and will need to develop

additional questions to suit the unique circumstances at each property.

Essential to the identification of causes is the evaluation of the

critical areas described below.

o The owner. Is the owner part of the solution or part of the

problem? What are the owner\'s strengths and weaknesses? Can

the owner\'s weaknesses be cured or protected against, or is

the owner a fundamental obstacle to the success of the

property?

o The property management company. Is the property being managed

effectively? Is the agent proactive? Cooperative? Non-

responsive? Is the property manager capable of implementing an

improvement program or other Loss Mitigation-related plan?

o The on-site property management team. Is the on-site property

16

management team up to the job that faces them? Are they

motivated to help solve the problems?

o The physical condition. What physical conditions prevent the

property from achieving its maximum earning power? Is the

property physically unsafe? Can the problems be fixed at an

acceptable cost? Is the property physically accessible to

persons with disabilities?

o The financial situation. What does the property owe and how

urgent are these obligations? Has lack of capital prevented

the property from operating effectively in the past? Will it

in the future?

o The property\'s financing structure. Does the property\'s

financing add or subtract value? If it subtracts value, can it

be changed? How?

o Environment. What is happening in the property\'s rental

market in terms of economics and demographics? Its immediate

neighborhood? How do these factors affect the property?

o Residents. Are the residents living in decent, safe, and

sanitary housing (and accessible to persons with

disabilities)? Are complaints increasing or decreasing? What

is the nature of the most chronic complaint? Are residents

supportive of the owner or the managing agent?

o Motivations of all participants. Are all the participants

motivated to solve the problem? If not, how can the incentives

be aligned so that a solution becomes more feasible? What

disincentives exist for each participant? Can these be

removed?

Although it is not always easy to respond to such questions, it is

critical that the Asset Manager make up his or her mind about the
answers and

make decisions based on the best information available. When asking
these

types of questions, and taking note of the responses, Asset Managers
should

consider discussing their findings with fellow HUD staff, both inside
and

outside of Asset Management. These colleagues may have additional ideas,

feedback, or experience to share. Additionally, brainstorming can often

generate additional questions or ideas that the Asset Manager may not
have

thought of previously.

3\. C. Preliminary conclusions

Once Asset Management has determined the causes of a property\'s

problems as best it can, the next step in the process is to draw
preliminary

17

conclusions as to possible solutions. In all cases, the Asset Manager\'s
goal

should be to restore the property to performing status on a long-term
basis

while ensuring that the housing is decent, safe, and sanitary. Possible

solutions should also address secondary goals such as improving
management

practices, reducing crime, and so on.

The secondary goals will vary from property to property. If Asset

Management is confident that the ownership is not a cause of the
property\'s

problems, attention should be focused on the physical plant, reserves,

replacement needs, and financial health. If the ownership is
contributing to

the property\'s problems by its actions or inactions, Asset Management
should

consider removing the owner as a secondary goal, if necessary to sustain

performing status once that is achieved.

The solutions will also vary with the circumstances of the

particular case. General strategies problem-solving strategies are
listed in

Table 5.

Table 5: General Problem-Solving Strategies

o Increase in project income/decrease in expenses.

o Restructuring of project debt.

o Operating loss loan.

o Secondary financing (HUD or other source).

o Extensive rehabilitation to address capital needs.

o Infusion of new equity.

o Change in project ownership or general partner.

o Change in project density.

o Infusion of additional subsidies.

o Short-term cash flow relief through use of restricted cash

(reserves, residual receipts, overfunded escrows).

In considering possible solutions, Asset Managers must have a sense of

the rate of each property\'s deterioration, as well as a grasp of
available

resources. At this stage of the process, Asset Management\'s goal should
be

simply to identify possible solutions and determine their relative
merits.

In-depth cost-benefit analysis and the development and implementation of
Loss

Mitigation Plans should be undertaken only after the Triage steps
discussed

below have been completed and the Action steps have begun. Acting before
the

Diagnosis is completed risks wasting resources on the wrong properties,
or

using resources in isolation when they may be more effectively combined
as

part of a more comprehensive strategy.

In light of all of the information gathered during Steps 1, 2, and 3 in

this preliminary stage, Asset Managers should make their best guesses as
to

possible solutions to the problems they perceive, and rank these
solutions

according to (1) desirability and (2) feasibility. Once the potential

18

solutions have been ranked in this fashion, the Diagnosis steps in this
Loss

Mitigation model will have been completed and the Triage process can
begin.

B. The Triage Group

Upon completion of the three steps in the Diagnosis group, Asset

Managers will have surveyed their entire portfolio and identified the
insured

properties in danger of default/assignment. Unfortunately, the reality
is

that there may be too many troubled properties for any one Asset Manager
to

constructively address at one time. The Asset Manager must then make

difficult judgments about which properties merit the available attention
and

resources.

In a Loss Mitigation context, Triage is the process of allocating

resources to troubled properties according to a system of priorities
designed

to maximize the number of properties which are restored to long-term

performing status. The Triage group of steps in this Loss Mitigation
Model

starts with the identification of those properties which are almost
certain

to go into default/assignment. It ends with the ranking of all of the

remaining candidates (e.g., those which have a reasonable chance of
avoiding

assignment), prioritized with respect to urgency and feasibility of
solving.

The essence of Triage is separating those properties which can be

restored to performing status (or which will restore themselves given a

reasonable amount of time) from those which cannot. In the Action stage

(described in Section C below), Asset Managers will devote time and
resources

to the former rather than the latter.

Triage is a portfolio concept \-- it applies only when Asset Management

(whether individual staff or an entire Field Office) has too many
problems

confronting it and must choose which ones to allocate resources to. The

Triage function itself takes time; Asset Management is required to step
back

from individual cases at hand and compare the severity of problems among

properties in the inventory. Because of this, Triage is hard to
practice,

especially when properties seem to be in crisis. Nevertheless, Triage is

essential to the Department\'s Loss Mitigation efforts because it
maximizes

the effective use of limited resources.

In evaluating the possibility that some properties cannot be prioritized

or kept out of assignment, Asset Managers must be cognizant of the fact
that

properties which cannot be kept out of assignment will move to HUD-held

status in the future. This in turn will create a need for disposition

strategy planning. Since Asset Managers have additional tools available
when

properties become HUD-held, allowing properties to go into assignment
will be

desirable in some circumstances. For example, if a property has serious

uncorrected physical defects such that the housing is not decent, safe,
and

sanitary, the proper decision may be to force an assignment so that the
Asset

Manager can utilize the additional tools to more effectively cure the
chronic

19

physical problems. Such a disposition is in the best interest of the

Department, the residents, and the community. Although the Asset Manager
may

not be called upon to immediately act on such properties following the
Triage

analysis, Asset Managers should recognize that subsequent
post-assignment

action and disposition planning will be necessary.

The Triage function can be readily divided into two steps: (1) creating

an active list of those properties which are most deserving of future

attention, and then (2) apportioning resources as productively as
possible

within this group. These processes are described in Steps 4 and 5 below.

Step 4: Create an active list of problem properties.

At the beginning of the Triage process, Asset Management will have a

list of all properties in danger of default/assignment. The task now is
to

reduce this group to an \"active list\" of those properties most
deserving of

scarce resources.

In reducing the initial list to an active list of problem properties,

Asset Managers should first review the results of step 3 (Preliminary

Analysis and Conclusions). Then, Asset Managers should review what has
been

learned, if anything, about the nature of a property\'s problems since
Step 3

was completed. All preliminary conclusions should be revisited in light
of

any new information. As part of this updating process, Asset Managers
should

consider contacting other interested parties, such as representatives of

local government or the project residents, to obtain other perspectives
on

any recent developments. This early contact will assist in action
planning,

where it is suggested that allies be identified and recruited (see
Section C,

Step 6).

Preliminary conclusions regarding possible solutions should be revised

as appropriate. Asset Managers should avoid the trap of pursuing only
the

\"ideal\" solution; it may be that what once was ideal is now
ineffective.

Under these circumstances, Asset Management must be prepared to abandon
the

previous strategy for a completely new one if the situation calls for
it. In

many cases, endless incremental changes to an old strategy will
guarantee

defeat rather than assure success.

Next, Asset Management should formally begin the Triage process by

creating an active list of properties most deserving of time and
attention.

Some useful tips for Asset Managers include:

o Decide which properties have problems so great that they are

unlikely to respond to available resources. In some situations, the

problems may be inherent in the financing program. For example,

consider a Section 8 AAF property where expenses regularly outpace

rent adjustments. If special adjustments for taxes, insurance,

20

security, and utilities cannot bring the property to performing

status, then it is possible that no amount of effort on the part of

the Asset Manager will solve the underlying problem associated with

the subsidy program; in such cases, attention should be focused on

other properties with problems which can be cured, even if these

efforts come at the expense of the properties with unsolvable

problems.

Another example would be a property with an unresponsive owner.

Avoiding assignment is an extremely important goal, but no Loss

Mitigation program can succeed without the owner\'s cooperation and

fulfillment of the basic responsibilities that come with ownership.

If the owner is unlikely to be responsive in implementing a Loss

Mitigation Plan, or worse is likely to obfuscate matters, Asset

Management should eliminate the property from further consideration

under this round of Triage. There are some cases where assignment

is not avoidable.

All such properties should be removed from the list of properties

deserving of further consideration.

o Decide which properties will solve their own problems with little

or no intervention by Asset Management. With some properties, the

problems may be temporary. Or, if the owner is committed to working

with Asset Management to solve the agreed-upon problems, the owner

may propose a self-implementing plan to address the issues. In such

cases, Asset Managers should consider deferring to the owner\'s

action plan.

Given limited time and resources, Asset Managers should pursue

owner-driven action plans whenever it is believed that this

strategy will deliver the right result. A good owner can be

expected to propose realistic and well-balanced solutions which

meet the needs of the owner as well as those of the Department and

other participants.

Many times, the owner can carry the burden of curing a property\'s

problems if Asset Management simply invites the owner\'s input and

ongoing involvement in the solution. In these cases, it is still

important for the Asset Manager to understand the owner\'s plan and

the timetable for completion. A basic plan from the owner may be

simple, but needs to provide sufficient detail so that the Asset

Manager can judge performance and progress. The Asset Manager

remains responsible for the property and must follow up to be sure

21

of the property\'s physical condition.

NOTE: In addition to the owner\'s efforts and that of the local

Asset Management staff, HUD continues to focus priority on resident

organizations playing an instrumental role in multifamily project

problem solving. Resident involvement is an additional resource

that needs to be utilized to the fullest potential. This Job Aid

reiterates the critical role such groups can play in restoring the

project to fiscal and operating health. Tenant associations are

considered a potential ally in Loss Mitigation. See Table 8.

At the conclusion of this step, Asset Managers should eliminate

from their list of problem properties competing for attention and

resources those properties which can avoid assignment by (1) the

owner\'s actions, or (2) the simple passage of time.

The remaining properties not eliminated as either unsalvageable or

likely to correct themselves make up the active list of properties most

deserving of further attention. These are the properties where timely

intervention will make the most difference. Asset Managers should share
the

results of this analysis with supervisory staff, and achieve consensus
as to

the properties eliminated from the active list.

As a result of the above analysis, and in view of limited resources,

Asset Management may decide to do nothing on a number of properties.
However,

the Asset Manager needs to remember that doing nothing constitutes a
decision

and has a resulting outcome. Doing nothing is a relative term insofar as

there will still be some level of activity on the project, but it will
not be

sufficient to prevent assignment. \"Doing nothing\" now will require

disposition planning later.

Although assignments may be undesirable, they are acceptable from a

policy standpoint if the Triage analysis dictates this result; if Asset

Management does not have the ability to constructively address all
problem

properties simultaneously, then time and other resources should be
focused on

those properties which have the best effort-to-results payback. As
discussed

above, some problems are highly unlikely to get better even with help
from

the Asset Manager. Others may solve themselves, or be solved by the
owner

with minimal participation by the Asset Manager.

Also, although some properties have been eliminated from the active

list, Asset Managers should always be prepared to re-evaluate this
grouping.

Over time, changes may occur which enhance the possibility of avoiding

default/assignment. There may be properties which should be moved to the

active list due to high visibility or other factors. Physical condition

should always be a primary consideration - housing that is no longer

22

decent, safe, and sanitary is unacceptable. A plan to cure the physical

problems must be developed to protect the residents in such cases.

It is likely that Asset Management will be contacted by an owner or

other interested party regarding a property not yet on the active list.

Rather than informing this party that nothing can be done, Asset
Management

should explain its decision-making process. Then, Asset Management
should

indicate a willingness to spend time working on the property in question
but

that, given time and resource constraints, Asset Management will look to
the

owner to submit a responsive proposal to cure all major problems at the

property.

In such cases, the owner will be expected to take the lead in

implementing a mutually-acceptable plan to restore the project to
performing

status, and the owner will be responsible for documenting progress and

compliance with the plan. This type of solution is an effective use of
Asset

Management\'s limited resources, and will likely generate improvement in
the

overall situation at the property. Some proposals require little more
than

the Department\'s approval, provided that someone else has developed
them and

will be accountable for implementing the solution.

Step 5: Prioritize properties on the active list.

At the completion of Step 4, Asset Management will have eliminated poor

candidates for return to performing status (as well as properties with

problems which may solve themselves) from further consideration, and
compiled

its active list of remaining troubled properties. This active list is
made up

of properties which analysis suggests can be returned to performing
status.

In all likelihood, however, the problem of resource allocation remains.
Asset

Management must further prioritize among these properties and make
difficult

decisions concerning which properties are most deserving of attention
and

resources.

Prioritizing requires good judgement. Although there are no firm

guidelines for this process, some questions are particularly useful. In

general these relate to the urgency of the problems. Useful questions to
ask

in determining urgency are set forth in Table 6 on the following page.

Table 6: Useful Questions in Prioritizing Problem Projects

o Are there easy partial actions which will foster significant

progress, short of immediate implementation of a full Loss

Mitigation Plan?

o Does the housing fail to meet the decent, safe, and sanitary test?

Can stop-gap physical measures be taken?

23

o How urgent are the problems? What happens if no action is taken?

How much worse does the situation get for the next three months?

Six months? One year?

o How quickly must a Loss Mitigation program be implemented if it is

to do any good?

o For how long can Asset Management do nothing before irreparable

harm is done?

5.A. The ranking process

After evaluating the properties in light of questions like those shown

above, Asset Management should rank all remaining properties
subjectively

from most to least (1) urgent and (2) solvable. The object of the
ranking

exercise is to target resources to problems which are both urgent and

solvable. Therefore, Asset Management must make a determination of the

relative value of action on any one property versus action on the
others.

As a first step in accomplishing this, Asset Management will need to

determine whether additional information is required for any given
property.

If so, Asset Management should begin the process of getting this data
while

ranking the remaining properties. For example, if a structural
engineering

report is needed before the best method of solving a property\'s
physical

problems can be determined, Asset Management should arrange for this
report

to be commissioned and de-emphasize this property while moving forward
with

the ranking process. Upon receipt of the necessary information, the

priorities should be reordered.

Lack of information should not be used as an excuse for participants to

do nothing or to defer thinking about a troubled property. Further,
sometimes

a problem is urgent enough that doing nothing is unacceptable. (For
example,

the building may be unsafe for residents or inaccessible to persons with

disabilities.) In such cases, Asset Managers should take action based
upon

their best estimates and then be prepared to revisit such tentative

conclusions when better information becomes available.

How does Asset Management make a determination of the relative value of

action on any one property versus action on the others? Clearly, Asset

Managers must have a command of analytical techniques pertinent to the

evaluation of real estate and a realistic idea of the types of resources
that

may be available.

5.B. Apply analytical techniques

Asset Managers should revisit their preliminary conclusions in light of

analytical techniques germane to insured multifamily housing. Many of
these

techniques are described in Table 7 below. Software to assist in the

24

application of such techniques is provided with this Job Aid;
descriptions of

the software utilities are provided in Appendix E.

Additionally, Asset Managers should inventory available Asset Management

tools, some of which are described in Appendix. F to this Job Aid. As a

general strategy, Asset Managers should always start with the simplest
tools

and techniques available, being careful not to overlook the obvious.

Sometimes a simple tool (e.g. a rent increase to fund repair needs) can
solve

a problem more effectively than a complicated plan (Section 241

rehabilitation loan to solve the same problems, plus a rent increase and
new

Loan Management Set Aside). Also, simplicity is a virtue because simple
plans

are more likely to be approved, implemented, and complied with.

The central idea during the Triage stage is to get a rough idea of the

feasibility of different solutions so as to determine which properties
should

be focused on first. Analysis is not an end it itself. During the
subsequent

group of steps (Action, discussed in Section C below), Asset Managers
will

complete a more substantive analysis of the most feasible solutions.

Nevertheless, reviewing techniques and tools during the Triage group of

steps may suggest new solutions for a given property. At the very least,

Asset Managers will gain a good grasp of the relative cost and
feasibility of

a number of different types of possible solutions.

Table 7: Useful Analytical Techniques

o Conversion of rehabilitation costs into estimated Section 241

supplemental loan requirement.

o Simplified payback analysis of energy conversion and related

capital improvements.

o Calculation of breakeven rent based on adjustments to historical

operations.

o Conversion of projected new loan amounts into required monthly rent

increases to repay debt service, and vice versa.

o Conversion of assumed changes in underlying financing (e.g.,

interest rate adjustments) into impact on cash flow, required

rents, and so on.

o Simplified Sources and Uses of Funds.

o Simplified costs of mortgage assignment.

o Estimate of loan recovery after reassignment, assuming the loan

returns to performing status.

o Comparison of historical operations with post-workout operations.

5.C. Inventory available resources

25

Next, Asset Management should identify the resources available for each

property. This includes consideration of additional funding from both
Federal

and non-Federal sources. To the extent that loans or grants for
operations or

capital improvements are needed, owners should be encouraged to seek
funds

from state or local entities. In cases involving energy conservation,
utility

providers should be also be approached. Other suggestions regarding
sources

are contained in Appendix F. Here again, a few telephone calls may allow
the

Asset Manager to identify available funding more quickly than a series
of

written inquiries.

Asset Management should keep in mind that access to most financial

resources are scarce, and make contingency plans in the event that
necessary

funding is unavailable. For example, if the ideal solution to a
property\'s

problems is dependent upon funding of a Flexible Subsidy loan, Asset
Managers

should consider secondary strategies which may be employed if the owners

application is not selected for funding. Relying exclusively on a
resource

unlikely to materialize is a disguised means of doing nothing.

In ranking the active list properties, Asset Managers should also

consider the Field Office\'s and the Department\'s overall strategy and
other

priorities. While completing the ranking process, it may be appropriate
for

an Asset Manager to rate a property more highly than he or she otherwise

would because restoring the asset to performing status will also be part
of

a concerted Field Office effort to meet another goal. For example, a
Field

Office priority may be to reduce crime in insured properties. If crime
can be

reduced at a property by implementing a Loss Mitigation plan, then the
Asset

Manager should rank the project more highly.

As a final step in the ranking process, Asset Management should refine

its judgments as to the feasibility of solving each property\'s problems
and

avoiding default/assignment in light of conclusions regarding techniques
and

tools, available resources, and other Field Office priorities. Following
this

step, the active list properties should be ranked from most to least (1)

urgent and (2) solvable.

Upon completion of the ranking, Asset Management should then move on to

the Action Group of steps for each property on the active list. Asset

Managers should keep in mind that a number of properties may have been

eliminated from this list entirely in light of unfavorable
effort-to-payback

considerations. If contacted regarding a property not on the active list
and

asked to make such properties a priority, Asset Managers should only do
so in

accordance with the strategies described in Step 4, or in the event that
the

situation has materially changed and requires increased attention.

C. The Action Group

After ranking the properties on the active list, Asset Management can

move forward to the Action Group of steps in this Loss Mitigation model.
It

cannot be overemphasized that the end product of the Diagnosis and
Triage

26

steps should be a decision regarding which properties to include in the

Action Group. Although careful analysis is important, it is only a means
to

the end of implementing a well-designed Loss Mitigation Plan.

Through the preceding ranking process, Asset Management has determined

which problem properties to attack first. Although each property should
be

addressed roughly in the order in which it is ranked (as this ranking
may be

revised from time to time), Asset Managers should simultaneously move
forward

with the five steps in the Action group for as many properties as is

practical without jeopardizing the success of the plans on the
properties

most urgently in need.

The Action Group begins with building a team, includes the development

and implementation of a Plan, and ends when the problems have been
solved and

the property has been returned to long-term performing status. Each of
the

five Action steps is described below.

Step 6: Build a team.

The first step in the Action Group is to build a team. In most cases, it

will be desirable for Asset Management to recruit team members from both

inside and outside the Department.

6.A. Recruit support within HUD

Building a HUD team involves the following steps:

o Identify other HUD staff with needed expertise and enlist such

staff to assist in constructing a Loss Mitigation plan. Logical

candidates include supervisory staff with knowledge of what has

worked in similar situations elsewhere as well as non-Asset

Management staff whose input may be helpful in planning a solution

(for example, Valuation staff with command of Section 241

underwriting criteria in cases where 241 financing may be sought).

Asset Managers are also encouraged to contact their colleagues in

other Field Offices for input and advice.

o Establish contact with decision-makers regarding HUD resources that

may be needed to solve the problem (such as Flexible Subsidy, loan

Management Set Aside, or other funding). Asset Managers should make

these decision-makers aware of the property, its problems, and the

likely need for such assistance.

27

o Identify a reality-checker who can provide feedback regarding the

feasibility of the Loss Mitigation Plan. The reality checker should

be someone who is (1) actively Asset Managing other troubled

properties and who thus is aware of current conditions generally,

\(2\) physically nearby and thus available for frequent contact, (3)

motivated to help rather than being a reluctant participant, (4)

willing to share candid reactions, and (5) distant enough from the

specific property to be dispassionate rather than emotional about

particular options.

o Pick a leader among the HUD staff. In most cases, this role will be

played by the Asset Manager; however, in atypical situations, it

may be more appropriate for senior staff to fulfill this function.

In any event, the leader must motivate other team members and

always remain focused on achieving the goal of returning the

property to long-term performing status.

6.B. Recruit outside help

Asset Managers should also recruit allies from outside of the Department

as appropriate. In general, Asset Managers should seek to maximize the

initiative and commitment brought to the table by sources outside the

Department. This will allow the Asset Manager more time to address other

problems and may increase the chances of non-Federal funds being
utilized to

address the troubled property. Given scarce Federal resources, this is
an

important goal.

A useful first step in recruiting allies is to make a list of potential

sources of assistance. Suggestions may be found in Table 8 below.

Table 8: Potential Allies in Loss Mitigation

o The operating general partner.

o The administrative general partner.

o Investor limited partners.

o The management company.

o The tenant association.

o The state housing finance agency.

o Other state government officials.

o Local government officials.

o Local police.

o Community leaders/activists.

o The mortgagee.

o Utility companies.

28

o Funding providers (second mortgagees, redevelopment officials,

foundations, other).

o Local Public Housing Authority.

Asset Managers should note that some allies in a Loss Mitigation context

may very well be former adversaries. If potential allies are acting in
good

faith in the present context, Asset Managers should work with such

individuals as proactively as possible. Blame should not be assigned for

events in the property\'s past, as this defeats the goal of overall

cooperation in finding a solution to the problems at hand. Constructing
and

implementing a Loss Mitigation plan will be harder if HUD staff or
others

involved in the process focus on the emotional aspects of what went
wrong

rather than the technical question of what must now go right. For
similar

reasons, Asset Managers should also seek to neutralize ill will among
team

members, the owner, and the Department. Generally, solving a property\'s

current problems will need to be a cooperative enterprise, with very
little

room for animosity among team members.

The above policy regarding cooperation should not cause Asset Management

to overlook evidence of fraud, waste, or abuse in HUD programs. In such

cases, enforcement action is required, and should be used as a tool in

restoring the property to viability, if possible. In any case where

enforcement is an issue, Asset Managers may need to draw upon audit and

investigative and legal staff resources (through HUD\'s Office of
Inspector

General and Area Counsel respectively) to assess the desirability of

proceeding to Step 7 which is to construct a Loss Mitigation Plan. For
Asset

Management staff to proceed with a plan under such circumstances would
be a

waste of their resources and could jeopardize any Departmental
enforcement

actions.

After preparing a list of potential team members, Asset Managers should

review it and eliminate anyone whose support cannot be counted upon in
the

months ahead. In this fashion, a core group of individuals with whom to
work

may be developed. These people may be inside the Department or outsiders
such

as owner representatives, the property manager, resident representative,
city

and state officials, and so on. In general, it is a good idea for Asset

Management to meet in person with potential allies to discuss goals for
the

troubled property; typically, a better sense of the strength of an

individual\'s commitment to solving a problem can be gained in person
rather

than through telephone calls or written correspondence.

Each potential ally\'s motivations and goals must be determined.

Sometimes these will be obvious; other times, Asset Management will need
to

draw these out over a number of conversations or meetings. In most
cases, the

goals of potential allies will be similar or identical to those of Asset

Management. Sometimes, they will be different but compatible. It is
critical

for Asset Management to understand such goals and motivations so that
Asset

Management can fully appreciate what potential allies want out of a
solution.

Also, Asset Managers should seek to understand potential allies\'

29

disincentives and constraints, and endeavor to remove the disincentives
and

work within the constraints. Negotiating may be required. Tips for
successful

negotiation are included in Appendix G.

To the greatest extent possible without sacrificing the Department\'s

goals, Asset Management should make it easy and attractive for
interested

parties to participate in the solution. This group includes the owner.
Common

owner incentives involve maximizing the aspects of the property listed
below.

Conversely, disincentives for the owner involve erosion of these
components

of value. In general, owners will make concessions in order to maximize
the

following:

o Cash Flow. If the property is restored to financial health, there

may be distributable cash flow. This distribution is of value to

the owner, who will want a return on its original investment. The

distribution will also be desired as a source of funds to pay taxes

on the property\'s taxable income (including phantom income).

o Tax Benefits. Since the passage of the Tax Reform Act of 1986, the

value of tax benefits to owners has greatly diminished. However,

the negative tax implications for the owner should never be

overlooked. If a property is foreclosed, the owner generally will

have a large tax liability. This should motivate the owner to seek

ways to avoid foreclosure as well as assignment, its predecessor.

In cases where the property can be syndicated through the low

Income Housing Tax Credit program, there will be tax benefits

associated with the ownership. Unfortunately, tax credit

syndication is a complicated proposition which would require the

current limited partners to agree to sell the property. Tax credits

should only be encouraged where this strategy will produce a

materially better result than other proposed solutions.

o Residual Value. A key long term incentive for the owner is

maximizing the property\'s residual value to be realized upon sale

or refinance. In the short term, this will involve stabilizing the

property\'s income stream at an attractive level, minimizing the

amount of project debt beyond the first mortgage, and maintaining

the physical condition of the property.

Residual value will not be a meaningful consideration for (1)

properties with long-term use restrictions (e.g., the owner

accepted Flexible Subsidy or has otherwise covenanted to maintain

the housing as affordable) or (2) those properties with a heavy

dependence upon rent subsidies, which dependence is expected to

continue for the long term.

30

o Property Management. For properties with an identity-of-interest

management agent, the owner will almost always be motivated to

retain the contract. Property management is a profit center which

the owner will seek to protect on a long-term basis.

o Affiliated Services. Similarly, many owners have affiliated

companies which provide ancillary services. Control of these

services (such as groundskeeping, painting, security, etc.) is an

element of value.

Once the motivations and disincentives of the core group of allies are

known, Asset Managers should go one step further and formally align
their

objectives with those of all team members (both within HUD and outside
the

Department) as closely as possible. Asset Managers should consider

accomplishing this formally by setting out in writing the goals of all

participants, noting the importance of each goal, and distributing this

correspondence to all team members.

Ultimately, Asset Management may need to tailor its Loss Mitigation plan

so that it accomplishes some of the goals of other team members in
addition

to Asset Management\'s goals. Plans that include disincentives for any
of

Asset Management\'s core group of supporters should be avoided. Under
these

circumstances, support will rapidly evaporate, and the Department\'s

credibility will be brought into question.

At the conclusion of this step, Asset Management will have a team of

like-minded individuals with known motivations and goals. As Asset
Management

moves forward with the next step in the process and actually constructs
a

Loss Mitigation Plan, the leader of the team should be certain to keep
all

other team members informed of developments relating to the property in

question, and extract a commitment from all allies to do the same.

Step 7: Construct a Loss Mitigation Plan.

Once the team is established, Asset Management can begin to construct a

Loss Mitigation Plan to restore the property to long-term performing
status.

This step involves a number of sub-tasks, including studying possible

solutions, determining which are most effective, and selecting the
optimal

solution. Alter completing these tasks, a formal Loss Mitigation Plan
can be

drafted.

7.A. (Re)examine the alternatives

The formulation of a Plan is a particularly important step in the Loss

Mitigation process. At this point, Asset Management should thoroughly

consider all possible solutions to the problems that a property is
facing in

the attempt to restore it to long-term performing status. However,
rather

31

than starting anew, Asset Managers should review the analyses conducted

during the Diagnosis and Triage stages. Although these analyses were

preliminary in nature, reviewing these findings should serve as a first
step

in refining the options at this later stage.

In revisiting these previous analyses, Asset Managers should update the

conclusions in light of any new information or changes in the
property\'s

situation once the last review. Asset Management should also seek
perspective

on the problems and possible solutions from other members of the team

assembled in Step 6. Asset Management should focus on the following key
areas

of evaluation:

o Physical Improvements. What physical improvements need to be done,

including physical improvements to reduce violent crime or drug

activity in and around the premises of the project? What is the

extent of deferred maintenance? Do operational inefficiencies exist

because the property or owner cannot generate cash to correct them?

What are the reserve needs? Is there functional obsolescence which

affects marketability? What accessibility features need to be added

to accommodate persons with disabilities?

o Operational Issues. Is the property being well run financially in

light of the cash available? Is it being well-managed by the

management company on a day-to-day basis? Are the owner and manager

capable of implementing a Loss Mitigation Plan? Will replacing the

owner and/or manager help restore the property to long-term

performing status?

o Financial Environment. What is the current net operating income? If

physical problems were solved and the property was operated by a

capable owner and manager, how much net operating income would it

produce? Is this new figure sufficient to carry current debt

service? Debt service on a rehabilitation loan? If not, can

existing debt be restructured, or new subsidy brought in? Would

infusion of rehabilitation funds and/or new subsidy help solve the

problem, or simply delay the inevitable?

o Capability of Ownership Entity. Is the owner competent? The

management company? Have they been trying to address the problems

which threaten to cause default/assignment? Is there any evidence

that they have been trying to obtain equity (capital contributions)

or loan funds in an attempt to improve the property\'s situation?

Have they been proactive? Have they aggressively pursued possible

solutions? With respect to the owners and management capacity, any

evidence of equity skimming or fraud must be considered when

deciding on the actions needed.

32

Throughout this process, Asset Management should stay focused on the

primary goals of avoiding default/assignment and ensuring decent, safe,
and

sanitary housing (and accessible to persons with disabilities). Asset

Managers should also be aware of any secondary goals sought by the
Department

and other team members. Secondary goals will vary from property to
property.

If Asset Management is confident that the ownership is not a cause of
the

property\'s problems, attention should be focused on the physical and

operational improvements to the real estate and its financial health. If
the

owner or management agent is contributing to the property\'s problems by
its

actions or inactions, Asset Management should consider removing either
or

both. If the owner and/or manager are incapable of working with the

Department to avoid default/assignment, then the solution may very well

entail finding capable replacements. Owners and managers should be put
on

notice that an assignment will trigger an ownership and management
review and

could conceivably lead to a recommendation to pursue changing the owner
or

the manager.

After updating previous analyses and revisiting proposed solutions in

light of the primary and secondary goals of the Loss Mitigation program,

Asset Management should make a list of all possible solutions to the

property\'s problems and move on to the next step.

7.B. Determine feasibility and cost effectiveness

At this point in the process, Asset Management will have a list of

possible solutions to a given property\'s problems. Now Asset Management
must

evaluate each of these in terms of feasibility and cost.

To complete this task, Asset Managers must have a grasp of real estate

evaluation techniques relevant to insured properties. A number of the
most

common techniques were presented in Table 7 and are further detailed in

Appendix E. Asset Managers should refer to these applications as part of
the

effort to determine (1) the tools necessary for each proposed solutions
(such

as those detailed in Appendix F), and (2) the cost associated with each

proposed solution as compared to the cost of assignment.

Application of such techniques should help Asset Management determine

which of the proposed solutions are most feasible with respect to both

implementation and cost. It is critical for Asset Management to
determine the

sum of all costs involved in a particular solution strategy at this
stage of

review \-- before any steps are taken to actually implement it. This
will

minimize hidden costs of pursuing each of the strategies and allow for
an

informed comparison of the total costs associated with the possible

solutions.

Asset Management should note that a simplified Uses and Sources of Funds

is contained in Appendix E. Nearly every property under consideration
for a

Loss Mitigation Plan will require such a schedule. A necessary first
step in

33

building such a schedule is determining the property\'s necessary Uses
(i.e.,

its funding needs). Only then should the Sources to fund these needs be

identified. It may be difficult to locate sufficient Sources; however,
Uses

should not be eliminated due to lack of Sources. To do this is to deny
some

of the property\'s essential needs. Cutting Uses in this fashion will
result

in an under-Sourced Plan; such plans will generally fail. Similarly,
starting

with Sources rather than Uses creates a danger of underfunding the
property\'s

needs, since participants may simply customize the list of Uses to match

available Sources.

Another technique described in Appendix E provides a framework for

determining the total cost of assignment. When evaluating options, Asset

Management should be certain to compare the cost of assignment to the
cost of

the proposed solutions. Is the cost of any of these solutions greater
than

the cost to assign? If so, eliminate the proposed solution. If all
remaining

alternatives are also more costly than assignment, the Asset Manager\'s
best

option may very well be to allow the loan to be assigned.

As part of the cost and feasibility evaluation, Asset Managers should

research the availability of any funding to be pursued as part of each

alternative. These may be Federal resources, state or local funds, or
energy

conservation/conversion moneys. In each case, the Asset Manager should

personally contact the funding source to ensure that the (1) the
property is

eligible for the contemplated funding, (2) funds are expected to be
available

when the property needs them. Pursuing a solution for which no funds
will be

available wastes valuable time and resources.

Other relevant considerations include time and the political reality.

For each property, estimate the amount of time that is necessary to
solve the

problems at hand. Compare this estimate to the amount of time it will
take to

implement each proposed solution. Eliminate the proposed solutions which

cannot restore the property to performing status within the amount of
time

available. With respect to the political reality, evaluate which
solutions

will be infeasible if necessary support is unavailable, and whether such

support can be relied upon.

Once the cost and feasibility of each possible solution for a given

property\'s problems have been determined, Asset Management in
consultation

with other team members should select the best alternative to pursue:
the

lowest cost option which Asset Management believes will restore the
property

to long-term performing status. This proposed solution will be more

attractive if it meets secondary goals, but the primary considerations
must

be avoid default/assignment and to maintain the housing as decent, safe,
and

sanitary (and accessible to persons with disabilities). Simply selecting
the

lowest cost solution is unacceptable. An inexpensive but ineffective
solution

will waste valuable time and resources, and will cause greater
expenditures

in the long run if the loan is assigned.

Once the best solution is identified, Asset Managers should double-check

that this alternative addresses the causes of the property\'s problems
rather

34

than merely treating symptoms. Asset Management should also have the
proposed

solution critiqued by a skeptic, who may or may not be a team member. If
the

solution does not appear feasible, if something has been overlooked, or
if

this option fails to meet necessary goals, Asset Management should
revise the

solution or select a new one. If the solutions still appears feasible
and

cost effective following the critique, Asset Management should move
forward

with the development of a Loss Mitigation Plan.

Just prior to moving forward, Asset Management should briefly document

the cost and feasibility conclusions regarding each of the various
solutions

to provide for the possibility that these need to be revisited later in
the

Loss Mitigation process.

7\. C. Construct a Loss Mitigation Plan

Once the operative solution has been established, Asset Management must

construct a Loss Mitigation Plan by which to implement this solution and
cure

the property\'s problems. All of the analysis completed prior to this
step

will culminate in the implementation of this Plan.

The Plan should be a simple written document covering those areas listed

in Table 9 on the following page. This format is suggested, not
required. In

any event, a document detailing the Plan needs to be created so that
progress

and results can be evaluated by the Field. If possible, Asset Managers
should

use automated media for ease of preparation and updating. At this stage
of

the process, indeed with all Loss Mitigation activities, the emphasis is

properly on action rather than on report creation or form completion.

Table 9: Elements of a Loss Mitigation Plan

o Summary of problems causing threat of default/assignment.

o Analysis of property\'s current physical, operational, and financial

condition.

o Summary of owner\'s and management agent\'s actions relative to

curing such problems.

o Detailed explanation of proposed solution, with definition of

success made explicit.

o Analysis of property\'s projected physical, operational, an

financial condition following implementation and completion of

Plan.

o Comparison of historical operations with post-Plan operations.

o Schedule of Uses and Sources of funds.

35

o Summary of implementation strategy including schedule of actions to

be taken to achieve success, listed (1) chronologically and (2) by

party charged with responsibility for taking such actions.

o Other schedules as appropriate.

The Plan should be written in draft form, and circulated to other team

members for comment. Most of the time, Asset Management should provide a

draft copy to the property owner and management agent; keep in mind that
the

owner remains principally responsible for the health of the property. It
may

also be beneficial to distribute the Plan to tenant representatives. In

general, the chances of success increase with the number of participants

whose input is reflected in the Plan provided that Asset Management does
not

allow this input to compromise the fundamental goals.

Asset Management should be willing to revise the draft Plan if such

revisions are in the interest of improving the feasibility of the
solution.

Also, to the maximum extent possible, the Plan should be flexible and
allow

for modifications during the implementation stage if unexpected events
occur.

In drafting a Plan, Asset Management should ask the following questions:

o What is likely to go wrong? What is the most serious thing that

could go wrong?

o What can be done to protect the property if these events do occur?

o What supplementary strategies can be included in the Plan to

enhance the chances of success?

In general, it is prudent to create a series of secondary approaches, or

fallbacks, in the event that the main strategy fails or takes longer
than

expected.

Once Asset Management has completed the draft Loss Mitigation Plan, the

next step is to develop a strategy to implement the Plan.

Step 8: Develop an Implementation Strategy.

The most careful and well thought out Plan may fail if not implemented

properly. With the Loss Mitigation Plan drafted, Asset Management must

consider the most effective strategy for implementation. KeG strategy
issues

for.Asset Management to consider include the following:

o Milestones and timetables. Asset Management will have proposed a

series of steps to be taken within the Loss Mitigation Plan.

Milestones and timetables for each key action should be developed.

36

Asset Management should secure reasonable assurances from

participants that these will be met. Asset Management should be

especially certain to meet the timetables for its own actions.

Missing such deadlines sets a poor example, and may send a message

to other participants that timetables are unimportant.

Deadlines should be neither impossible to achieve nor so lax so as

to be meaningless. Generally, setting slightly aggressive

timetables increases the likelihood that the milestones will be

achieved within acceptable time frames. After all, Loss Mitigation

properties are in trouble, and a sense of urgency is important.

Another strategy for increasing the chances of success is creating

a downside for key participants in the event of failure. For

example, removing an identity of Interest management agent for

failure to properly manage the property could be a consequence of

the owner/agent failing to perform as agreed to.

o Prioritize goals. The Loss Mitigation Plan is designed to solve the

root causes of the property\'s problems and perhaps meet other

secondary goals such as decreasing crime or improving management

practices. Asset Management should determine which secondary goals

it will insist upon, if any, and those which can be sacrificed if

necessary. KnowIng this in advance will provide Asset Management

with additional flexibility while the Plan is in operation.

o Monitoring. The Loss Mitigation Plan will have performance

requirements and time frames for accomplishment of same. Monitoring

of these requirements and also progress under the Plan is critical

to the Plan\'s success. Asset Management should determine which

participant in the Plan can best fulfill the monitoring function.

Although it may seem natural for Asset Management to perform this

role, Asset Managers should bear in mind that time spent monitoring

means less time available to devote to other responsibilities under

the Plan and on Loss Mitigation activities for other properties.

Whenever possible, Asset Management should assign the monitoring

function to another team member. Regardless of who plays this role,

Asset Management should be certain that all participants in the

Plan receive regular updates from the monitor. It may also be

beneficial to require the owner to monitor progress, in addition to

an outside monitor. Creating such a two-edged system may enhance

the performance of other participants, including Asset Management.

37

o Site visits. Although travel funds are scarce, the Loss Mitigation

Plan should provide for Asset Management to visit the property as

progress is made. Informal (drive-by) visits should not be

overlooked as a monitoring tool. Similarly, occasional calls to the

property manager or resident representatives should provide helpful

insight regarding progress.

Once Asset Management has developed a strategy in light of the

above factors and any other relevant considerations, the strategy should
be

documented for future reference. Asset Management should move then move

forward to the Implementation step. Implementation of course assumes

supervisory review and approval of the Asset Manager\'s plan in order to
be

effective. The importance of supervisory accountability before
implementing

a proposed plan and effective communication between the Asset Manager(s)
and

the supervisor cannot be emphasized enough.

Step 9: Implement the Plan.

Following revisions to the Plan to reflect comments on the draft and

also the development of an implementation strategy, Asset Management
should

formally issue the Plan to the owner, all members of the Loss Mitigation

team, and any other interested parties as appropriate.

Asset Management should also identify any other documents that must be

drafted or transmitted in order to move forward under the Plan. In
almost all

cases, it will be constructive for Asset Management to sequence these
next

steps to achieve a closing whereby any documents required by the Plan
are

executed. This step will increase understanding of responsibilities, and

therefore accountability, under the Plan. At the same time, the chances
of

accomplishing goals under the Plan will increase.

Typical documents that might be executed at such a closing are shown in

Table 10.

Table 10: Documents for Loss Mitigation Plan Closing

o Acceptance of terms and agreements.

o Performance guarantees evidencing participants\' responsibilities

under the Plan and a commitment to act on a best efforts basis.

o Acknowledgments of timetables by the owner or any other

participants charged with meeting deadlines under the Plan.

o Applications for funding required by the Plan.

o Necessary approval documents from HUD.

o Resource delivery by HUD and others.

o MIO Plan execution, as applicable.

38

o Executed HUD 9250 for release of reserves, as applicable.

o Other documents, as applicable.

Participants will then start taking actions required by the Plan. As the

Plan moves forward, Asset Management must be certain to fulfill its

responsibilities under the Plan, and ensure that others do the same. The

designated monitor will keep track of progress under the Plan and
furnish

reports to interested parties. All results (bad as well as good) should
be

documented and reported accurately. Meanwhile, the leader of the Asset

Management team should pay close attention to developments under the
Plan and

be prepared to correct course or implement contingency plans as the
situation

requires.

Step 10: End the problems.

By monitoring compliance with the Plan as well as results of the

participants\' efforts, Asset Management can keep a close watch on the
success

or failure of the Plan. As time passes and required actions are taken,
Asset

Management must verify that all milestones have been achieved. If some
have

not, the Plan should be formally amended to establish new timetables for
the

accomplishment of these steps. This may involve new negotiations and new

commitments, or even a revisiting of all earlier steps in the Loss
Mitigation

model.

If at any point in the process monitoring indicates that the property

cannot be returned to performing status (regardless of whether or not
the

milestones have been reached), Asset Management should re-evaluate the
Loss

Mitigation Plan. If the problems appear solvable in some fashion other
than

that contemplated by the Plan, Asset Management should swiftly move to

implement the supplementary strategies included in the Plan or suggested
by

the analysis completed in Step 7. If the problems appear unsolvable,
Asset

Management should defer action on the property. During the next round of

Triage analysis for the portfolio, Asset Management should incorporate
the

knowledge gained about this property during the Action group of steps in

determining whether additional resources should be allocated to the
property

in a continuing attempt to avoid assignment.

When all milestones have been met and all other actions required by the

Plan have been taken, Asset Management should verify that the root
causes of

the property\'s problems have been solved and that the property has been

returned to performing status. When monitoring indicates that the Loss

Mitigation Plan. has been successful and the problems have been ended,
Asset

Management should declare victory. The leader of the team should take
care to

congratulate all involved, including the project owner and manager if
their

actions have contributed to the success.

39

Asset Management should reward team members and other participants with

letters acknowledging each individuals input and contribution to the
success

of the Plan. Such acknowledgments should clearly state that the Plan has
been

successful and that the goals written into the Plan have been met.
Further,

Asset Managers are encouraged to publicize the victory, both inside and

outside the Department, to the maximum extent appropriate.

With the problems ended and the Plan a success, Asset Management should

redirect its efforts to other prioritized properties on the active list
for

Loss Mitigation Plans, as that list may be revised from time to time.

IV Appendices

A Outline of 10-step Loss Mitigation Model

B. Pre-Assignment Considerations

C. Post-Assignment Considerations

D. Questions to Ask During Diagnosis

E. Analytical Techniques

F. Catalog of Loss Mitigation Tools

G. Negotiating Tips

H. Attracting and Motivating New Sponsors

in Workouts

40

Loss Mitigation Job Aid

Appendix A

Outline of 10-Step Loss Mitigation Model

Loss Mitigation Job Aid

Appendix A

Outline of 10-Step Loss Mitigation Model

A. The Diagnosis Group:

1\. Review the portfolio for problem properties.

2\. Take control of the problems.

3\. Preliminary analysis and conclusions.

B. The Triage Group:

4\. Create an active list of problem properties.

5\. Prioritize properties on the active list.

C. The Action Group:

6\. Build a team.

7\. Construct a Loss Mitigation Plan.

8\. Develop an implementation strategy.

9\. Implement the Plan.

10\. End the problems.

Loss Mitigation Job Aid

Appendix B

Pre-Assignment Considerations

Loss Mitigation Job Aid

Appendix B

Considerations That Apply Only Before Assignment

(Properties that are HUD-Insured, not HUD-Held)

1\. Introduction

Although this Loss Mitigation Job Aid is specifically concerned with

HUD-insured properties (that is, where the mortgage is held by the
lender

and has not been assigned), most of the principles articulated here
apply

equally well whether a property is preassignment or post-assignment
(that

is, when HUD has accepted the assignment, paid the mortgagee\'s claim,
and

assumed the mortgagee\'s position \-- a HUD-held loan). However,
assignment

creates significant changes in the options and constraints applying to
the

participants; as a result, whether the property is pre- or
post-assignment

influences the Asset Manager\'s choices.

2\. The Asset Manager\'s Objectives in Loss Mitigation

An Asset Manager approaching a troubled property for the first time

should as a very first step determine whether it is HUD-insured or HUD-

held, because assignment status defines the purpose of his or her

activities:

If the property is pre-assignment, the Asset Manager is seeking

to prevent assignment if it is cost-effective to do so. The end point

is either (1) restoration of the property to normal performing status,

or (2) acceptance of the inevitability of assignment and, in fact, the

completion of the lender\'s assignment process.

If the property is post-assignment, the Asset Manager is seeking

simply to maximize HUD\'s results from this point forward. The end

point is (1) restoration of the property to normal performing status

(even if at a lower mandatory debt service) and the mortgage\'s

reassignment, (2) a workout designed to improve the property\'s

condition in the expectation of eventual reassignment, or (3)

consummation of a foreclosure and reacquisition of the property

directly by HUD.

Importantly, pre-assignment Loss Mitigation has a much more restricted

set of objectives and resources than post-assignment workouts. The

objective is simply this:

Prevent assignment if doing so is cost-effective in the long run.

The last phrase is key. Simply deferring assignment is not a solution

\--in fact, oftentimes it is the worst possible thing to do, because it

disguises the property\'s underlying problems and the resulting
inaction,

only allows the problems to get worse. For example, a property that is

sacrificing its physical condition in a desperate effort to keep the

mortgage current is only ruining its future - not only will this
approach

simply defer assignment, it will make the resulting workout much more

expensive because of the buildup of deferred maintenance.

Allowing an owner to defer maintenance or to provide less than decent,

safe, and sanitary housing or housing that is not accessible to persons

with disabilities, is unacceptable even if the mortgage is being paid as
a

result.

Conversely, a conscious decision to cease paying debt service so as to

generate operating cash to restore the property\'s physical condition
may in

some cases be the soundest, most responsible action \-- even if it leads
to

an assignment. See Section 6 below.

3\. Elements That Change on Assignment

Several factors change materially when a property is assigned.

A. Necessity for Keeping the Mortgage Current. When a mortgage

is HUD-insured, it must be kept current or the lender will be able to

assign. Since prevention of assignment is the predominant objective in
Loss

Mitigation, this imposes a cash constraint absent when HUD has paid the

claim and become the mortgage holder.

B. Involvement of a Third-Party Mortgagee. loans that are HUD-

insured are held by third-party lenders, and usually serviced by an

intermediate FHA mortgagee. The mortgage servicer has responsibilities
not

only to the lender but to HUD; conversely, the mortgage servicer should
be

a good source of information on the loan\'s historical performance.

The Asset Manager should identify the mortgagee and mortgage servicer,

make contact with these organizations, and seek to enlist their
perspective

on the property\'s situation, and their support for a Loss Mitigation
plan

(when it is developed).

C. Limitations on Junior Financing. The typical HUD first

mortgage prohibits the owner from placing any junior mortgage on the

property without the first mortgagee\'s consent. In general, HUD has no

authority to compel such mortgagees to grant consent; thus, if
additional

financing is contemplated as part of a Loss Mitigation plan, the Asset

Manager should establish (1) whether the mortgagee will consent to a
junior

mortgage being placed on the property (and if so, whether the mortgagee

will charge a fee for so doing), and (2) if the mortgagee will not
consent

or the proposed approval fee is prohibitively expensive, whether another

form of security (such as a note secured by partnership interests) will

serve the same economic purposes.

Mortgagees also have rights to prevent other impairments of their

security. A material impairment placed without the mortgagee\'s consent

could be a default permitting the mortgagee to assign. An Asset Manager

contemplating agreements which might be construed as such impairments

should consult with appropriate legal counsel before acting, since it
would

be ironic to have a Loss Mitigation program which cured the property\'s

operating problems but allowed a wholly unintended assignment to occur
for

a non-monetary default.

Considerations That Apply Only Before Assignment Page 2

D. Availability of Partial Payments of Claim. Briefly, a

partial payment of claim (PPC) is an assignment of the top portion of
the

first mortgage loan, with the remaining loan continuing unaffected. In

effect, a partial payment of claim (1) separates the loan into two
pieces,

a senior piece which can be serviced on a current basis and a junior
piece

whose debt service is intermittent or unlikely, and then (2) assigns the

newly created junior piece to HUD.

Partial payment of claim is appealing, therefore, as a device to

reduce mandatory debt service without absorbing a full assignment.

Unfortunately, HUD has no ability to compel a mortgagee to participate

in a partial payment of claim, so the Asset Manager must find persuasive

reasons why doing so will be in the mortgagee\'s best interest.

E. Limitations on Recourse Against the Owner. HUD has no

authority to foreclose a HUD-insured loan; that right rests with the

mortgagee. Thus, before HUD can start a foreclosure, it must first
accept

the assignment. (Of course the mortgagee may bring a foreclosure action

directly, without availing itself of its assignment right, but in
practice

few mortgagees elect this action, preferring instead to take their 99%

payment without the logistics and administrative costs that foreclosure

entails.)

When HUD is the mortgage holder, HUD can also take the step of

becoming mortgagee in possession, an interim means of taking control

directly. While mortgagee in possession is a drastic step which should
be

undertaken only after discussions with legal counsel (since it places
HUD

in a fiduciary position to the owner), it is a direct means of asserting

control when time is crucial.

F. Availability of HUD Resources. Some HUD resources (such as

Flexible Subsidy) are explicitly available only before assignment.

A short summary of the pre-assignment and post-assignment issues is

presented as Table 1 attached.

4\. Negotiating to Prevent Assignment

A. Creating a Sense of Urgency. Most parties other than HUD are

only marginally affected by an assignment.

. As noted in Section 3.A above, the mortgagee is cashed out of the

loan and must redeploy its funds at a market rate; thus when the

loan is above-market the mortgagee suffers a financial

diminishment, but (more commonly when it is below-market, the

mortgagee gains a benefit.

. The mortgage servicer loses the mortgage servicing contract, a

modest financial loss, but is relieved of the responsibility on a

troubled property.

. The owner is essentially unaffected; the owner simply has a

payment responsibility to a new mortgagee.

. The manager is wholly unaffected.

Considerations That Apply Only Before Assignment Page 3

In short, the entity most hurt by assignment is HUD. Because other

parties may not feel the same sense of urgency to prevent assignment
that

will motivate the Department, it is incumbent on the Asset Manager to

emphasize to all affected parties that the Department regards assignment
as

a serious setback and that accepting an assignment will immediately
cause

the Department to review:

. The owner\'s capabilities and performance.

. The property manager\'s capabilities and performance.

. Whether foreclosure is a better option for the government than

workout/reinstatement.

Defaults and assignments are, of course, a required disclosure in FHA

Previous Participation Clearance (Form 2530). Owners and property
managers

should be advised that, under Previous Participation, they are held

responsible for defaults or assignments which occur on their properties

unless they can provide persuasive evidence that these defaults or

assignments were beyond their control.

It is also appropriate to indicate to the owner and the property

manager that their conduct in working with HUD to attempt to prevent

assignment will influence HUD\'s perspective on their abilities and
HUD\'s

willingness to work with that owner and manager if an assignment becomes

inevitable. This applies both to the individual property at hand and as
a

matter of adjudicating an overall Previous Participation certificate.

B. Evaluating the Mortgagee\'s Position and Economic Incentives.

In general, most HUD-insured mortgages carry coupon rates that are below

current interest rates. If the loan is assigned, the lender can take the

resulting principal and redeploy in a new loan with a higher interest
rate.

Thus a lender who can assign the loan has a financial incentive to do
so.

In the early stages of a Loss Mitigation effort, the Asset Manager

should determine (1) the mortgage\'s current interest rate, (2) how that

rate compares to the market, and (3) if the rate is below current market

rates, whether the lender will gain the opportunity to assign, and if so

when. If the mortgagee has a financial incentive to assign, it will be

incumbent upon HUD to motivate the owner to cure any potential mm-or

defaults so as to prevent an assignment motivated not by fear of
repayment

but rather as an excuse to call a below-market loan.

5\. When is a Loss Mitigation Plan Good Enough?

Throughout the Loss Mitigation process, the Asset Manager must always

be aware that there is an alternative \-- assignment \-- which may be
better

than the proposed commitment of financial resources. Put schematically,
the

Asset Manager is trying to determine:

Considerations That Apply Only Before Assignment Page 4

(Cost to prevent assignment in the long run)

versus

(Cost of assignment) + (Cost of restoring the property to health after

assignment)

It will seldom be possible to quantify these three elements precisely;

fortunately it is seldom necessary to have extreme precision. Usually
the

choice will become obvious after any formal study.

A. Preventing Assignment in the Long Run. No Loss Mitigation

carries with it a guarantee of eternal success; instead the Asset
Manager

should be seeking to restore the property to as good physical,
operational,

and financial health as a property that has just received its Final

Endorsement (in other words, that has just started operations). Inherent
in

this definition of health are the following elements:

. Operational breakeven. The property is generating enough cash to

cover its annual expenses.

. Sound balance sheet. The property has adequate working capital to

pay its bills as they arise.

. Adequate replacement reserves. The property has a reasonable

balance in its replacement reserves and a sensible annual

replacement reserve deposit.

. Physical condition. The property is in sound physical condition

and is neither suffering from accumulated deferred maintenance

nor is deferring more maintenance. A Loss Mitigation program

which keeps the debt current at the expense of the property\'s

physical condition is unacceptable because it cannot succeed in

the long run.

. Capable owner and property manager. The owner and property

manager are capable of operating the property effectively.

In developing a Loss Mitigation plan, the Asset Manager will often be

tempted to compromise on these standards, either because they are
expensive

(in terms of new financial resources, which may be hard or impossible to

obtain) or because they are difficult to achieve (for instance,
compelling

a change in owner or manager). While there are no hard-and-fast rules,

experience suggests that plans which compromise the least have the best

chance of success and that finding a way to raise the additional
capital,

commit the additional resources, or secure the appropriate performance

guarantees, is a wise idea in the long run.

B. Evaluating the Direct Costs of Assignment. From a purely

financial perspective, the cost of assignment can be represented by the

following schematic equation:

Considerations That Apply Only Before Assignment Page 5

HUD\'s Financial Cost of Assignment

\+ Principal amount of the mortgage claim paid (99% of remaining

balance)

\- Expected principal amount of a reinstated mortgage

\+ HUD\'s costs of holding the mortgage in inventory (HUD-held) or

foreclosing and selling the property through Property Disposition

HUD-owned)

= Net Cost of Assignment

As a utility, this Job Aid provides a spreadsheet routine which will

enable Asset Managers to estimate the Net Cost of Assignment, using the

above formula. Of course the software utility is simply an aid or
assistant

and is no substitute for the informed judgment of a capable executive.

C. Evaluating Costs to Restore a Property After Assignment.

Because assignment is a purely financial event, it usually has little

impact on the costs to restore the property to health. Rather than

reconstruct the Uses of Funds completely from scratch, a useful protocol

for the Asset Manager to use is simply to examine each line item. As a

consequence of assignment (actual or potential), would its cost
increase,

decrease, or not change at all?

Most items will be unchanged. Some costs (such as debt service) could

be lower because HUD has greater flexibility; others (such as real
estate

tax arrearages) may be greater simply because of the passage of time.

If the aggregate costs to cure a property\'s problems are the same or

greater after assignment as they are before assignment, chances are a
Loss

Mitigation workout will be a superior result \-- unless the property has

some fundamental problem (such as a poor owner unwilling to resign from
the

property) that can only be cured by taking the property through a

foreclosure.

D. A Rule of Thumb for Evaluating Loss Mitigation Programs.

Unless the property suffers from some basic impairment in its
operational

condition which only assignment (or foreclosure) will cure, chances are
a

Loss Mitigation workout will be a better result for the Federal
government

than accepting an assignment.

Specific circumstances in which assignment is probably inevitable are

detailed in the following section.

6\. When Is Assignment Acceptable?

For the reasons detailed above, restructurings that avoid assignment

are highly desirable if they are likely to succeed. Situations when

assignment is unavoidable, and thus acceptable, generally include the

following:

Considerations That Apply Only Before Assignment Page 6

. When pre-assignment resources are inadequate to solve the propel\'s

problems. Oftentimes a property\'s problems are linked together \-- its

physical condition makes renting harder, which in turn reduces cash

flow, which causes the owner to skimp on repairs, security, and other

essentials. When this occurs, piecemeal solutions which are inadequate

to solve the whole problem sometimes prove of no value whatsoever

because they attack only one of several root causes of a problem. To

correct this, it may be necessary to assemble a large workout, and

that in turn may simply require accumulating cash in the property \--

and deferring debt service \-- which will trigger an assignment.

. When there is too little time to put the workout together. Although

early warning systems should alert Asset Managers to problems, a few

crises are inevitable. Sometimes the problems the property faces are

so urgent that they cannot be addressed in the few months available

before assignment becomes unstoppable.

. When the property is simply overleveraged and will never be able to

pay its current debt. The essence of underwriting is of course to make

only those loans that can be repaid through normal operations. This

notwithstanding, underwriting mistakes are sometimes made. Other

times, sound underwritings go awry because inflation rises, real

estate markets retreat, or outside circumstances intervene; in all

such cases, the property may reach a point where it is clear that,

even if operated at optimum efficiency and in sound physical

condition, its market simply will not support the current debt. If

this occurs, and the debt cannot be rescheduled, an assignment is

inevitable \-- although the Asset Manager should be alert for partial

payment of claim opportunities or refinancing possibilities.

. When the property desperately needs short-term cash and there is no

source other than cessation of debt service. Some properties are (for

whatever reason) cut off completely from outside cash. They may be

owned by non-profit organizations or ownership entities which

otherwise lack capital. They may be encumbered with use restrictions,

Land Disposition Agreements, or restrictive covenants that preclude

anyone from advancing funds. They may by their operations be

disqualified from receiving various financial incentives. In all such

cases, the property may have only one short-term source of cash \--

failure to pay its bills. When this occurs, either trade payables or

mortgage debt service must be foregone.

. When efforts to prevent assignment are causing the owner and property

manager to defer maintenance and otherwise run down the property. Some

owners and property managers (both for-profit and non-profit) react to

straitened cash circumstances by deferring maintenance. In the short

run this may be sensible \-- and often cash pressure exposes

inefficiencies in property management and thus leads to better use of

cash \-- but any long-term strategy of undermaintaining the property

will inevitably lead to default. This is especially true in affordable

properties, which already operate under the constraints of limited

rent-raising capacity and a tenancy which often generates higher

maintenance costs.

Considerations That Apply Only Before Assignment Page 7

In such cases, the owner or property manager may not realize that its

failure to maintain the property is in the long run harming the

property and HUD; accordingly, HUD must insist that the property\'s

physical integrity be preserved, because without a viable piece of

real estate, there is no hope of repayment in the long run and the

residents will never have the housing to which they are entitled.

. When the owner and property manager are demonstrating no motivation to

solve the property\'s problems. Occasionally an owner or property

manager proves uninterested in addressing the property\'s problems and

reacts to adversity simply by requesting more free Federal incentives

(such as LSA, Flexible Subsidy, or forbearance) which are neither

deserved nor matched by appropriate efforts.

If an owner or property manager is lazy, rewarding them with easy

solutions such as extra subsidy simply encourages them to plead for

more resources. At the same time, HUD should make extra efforts to

distinguish between sponsors who act as if they have no responsibility

whatsoever for solving problems from those who are working creatively

and hard but who are being defeated by an external situation (market,

property configuration, or other problem) beyond their control.

. When the threat of foreclosure is necessary to create urgency.

Occasionally owners or property managers do not take HUD\'s commitment

to Loss Mitigation seriously enough. In such cases, assignment may be

a necessary step in securing their undivided attention and compelling

them to become active participants in the search for a solution.

Considerations That Apply Only Before Assignment Page 8

HUD Loss Mitigation Job Aid

Factors Which Change Upon Assignment

Pre-Assignment Post-Assignment

Loan must be kept current or the Much broader restructuring possible

mortgagee can assign. Any defaults

must be cured within thirty days.

Third-party mortgagee involved. HUD is the mortgagee. No bifur-

Mortgagee may have purely financial cation between mortgagee (financial

motivations which are inconsistent interest) and regulator (public

with Loss Mitigation (e.g. if loan is policy interest).

below-market, financial incentive to

assign).

Impairments require mortgagee consent. HUD can restructure anything it

Potential impairments in security wants.

(such as a junior mortgage) usually

require consent of the mortgagee.

Legal research often warranted.

Partial payment of claim is possible.

Lender must be a willing participant.

HUD cannot foreclose; that right HUD can directly foreclose or

resides solely with the mortgagee become mortgagee in possession.

(which may be reluctant to exercise

it).

Some financial resources are available

only before assignment; for instance,

Flexible Subsidy.

Parties other than HUD are generally Foreclosure directly affects the

unaffected by assignment. They may owner, property manager and inves-

lack the necessary sense of urgency. tors. A serious and credible fore-

closure threat will usually create

some negotiating attentiveness.

Considerations That Apply Only Before Assignment Page 9

Loss Mitigation Job Aid

Appendix C

Post-Assignment Considerations

Loss Mitigation Job Aid

Appendix C

Considerations That Apply Only After Assignment

(Properties that are HUD-Held, not HUD-Insured)

1\. Introduction

Although this Loss Mitigation Job Aid is specifically concerned with

HUD-insured properties (that is, where the mortgage is held by the
lender

and has not been assigned), most of the principles articulated here
apply

equally well whether a property is preassignment or post-assignment
(that

is, when HUD has accepted the assignment, paid the mortgagee\'s claim,
and

assumed the mortgagee\'s position \-- a HUD-held loan). However,
assignment

creates significant changes in the options and constraints applying to
the

participants; as a result, whether the property is pre- or
post-assignment

influences the Asset Manager\'s choices.

Before reading this Appendix, we recommend that you read Appendix 1,

Considerations That Apply Before Assignment, as it covers many important

principles not repeated here.

2\. The Role of Foreclosure in Workout Negotiations

A. The Threat of Foreclosure

The threat of foreclosure is an essential tool in workout

negotiations:

. The threat of foreclosure creates a sense of urgency in the

borrower.

. Completing a foreclosure regains control of the property and

eliminates junior liens.

. Foreclosure is HUD\'s sole unilateral action to protect its asset.

(In this context \"unilateral\" means nonjudicial, i.e., an action

that HUD can take without going to court. Other actions to

protect the asset such as mortgagee-in-possession and

receivership require the permission of a court or the owner.)

Private-sector lenders have long known that a borrower\'s motivation to

find a workout increases as the sale date nears. Many a troubled
property

has been worked out literally on the courthouse steps before the auction
is

otherwise to take place.

The key here is that, whereas foreclosure may not often be in the

government\'s best interest, having a credible threat of foreclosure is

almost invariably helpful in negotiations.

B. Using Foreclosure in a Two-Track Negotiating Approach

In general, direct threats are counterproductive in workout

negotiations. After what has been said in the previous section, this may

seem incongruous, but in fact it is logical, because the periodic

restatement of threats only diminishes their credibility while angering
the

other participants.

A better approach is to present foreclosure as an option from the

outset. The Asset Manager should make crystal clear from the beginning
that

HUD can foreclose and that HUD will foreclose unless HUD is presented
with

a workout or restructuring that is better from HUD than the foreclosure

alternative.

Thereafter the Asset Manager should work as an active participant

seeking to facilitate a viable workout while at the same time taking no

action to defer or suspend the process of bringing the foreclosure
toward

the auction. This two-track approach allows the Asset Manager to seek

solutions while simultaneously strengthening HUD\'s bargaining position.

For the most part HUD conducts its foreclosures under the Multifamily

Mortgage Foreclosure Act, 12 U.S.C. § 3701, which provides a nonjudicial

foreclosure procedure for all HUD-held multifamily mortgages. This means

that HUD attorneys handle HUD foreclosures, and not Justice Department

attorneys, except in the rare case

where the owner seeks an injunction

against the sale. Thus, as long as foreclosure remains an option, Asset

Managers are well advised to maintain close communication with HUD
counsel.

..TX:

3\. The Asset Manager\'s Objectives in Workout

If the property is post-assignment, the Asset Manager is freed from

the preassignment constraint of trying to sustain current debt service

payments. Instead the Asset Manager is seeking simply to maximize HUD\'s

results from this point forward.

A good approach to seeking post-assignment solutions is this:

Pursue the strategy which is best for the property and the residents

in the long run.

The Federal government has made a substantial investment in the

property so that it can be a good home to many families. While effective

management of financial resources is important, there can be no good use
of

Federal funds if the property is not taken care of. Thus an Asset
Manager

should be seeking either of two results:

. A plan to restore the property to sound physical and operational

condition. Once the property stabilizes, restructuring its

mortgage will be a financial exercise. Any reduction or deferral

of debt service to a level that the market will support is simply

the acknowledgment of a financial reality. In these situations, a

Considerations That Apply Only After Assignment Page 2

workout that protects HUD\'s long-term interest \-- the property

and the residents - is the right solution.

. A decision to foreclose and reacquire the property directly by

HUD. Some situations cannot be resolved with the current parties.

Sometimes there are obstacles to achieving a fair solution. In

other situations other parties may be unwilling to make

contributions appropriate to their situation, or to take actions

(such as changing property managers) which may be necessary. When

this occurs, the Asset Manager must be prepared to foreclose and

take the property into the HUD-owned inventory.

4\. When is a Workout Good Enough?

Throughout the workout process, the Asset Manager must always be aware

that there is an alternative \-- foreclosure \-- which may be better
than the

proposed commitment of financial resources. Put schematically, the Asset

Manager is trying to determine:

(Cost to prevent foreclosure in the long run)

versus

(Cost of foreclosing) + (Cost of restoring the property to health after

foreclosure)

A. Preventing Foreclosure in the Long Run. No workout is

guaranteed to succeed; instead the Asset Manager should be seeking to

restore the property to good enough physical, operational, and financial

health so that it is a viable candidate for reinsurance and reassignment
to

a mortgagee.

Inherent in this definition of health are the following elements

(identical to those outlined in Appendix 1):

. Operational breakeven. The property is generating enough cash to

cover its annual expenses.

. Sound balance sheet. The property has adequate working capital to

pay its bills as they arise.

. Adequate replacement reserves. The property has a reasonable

balance in its replacement reserves and a sensible annual

replacement reserve deposit.

. Physical condition. The property is in sound physical condition

and is neither suffering from accumulated deferred maintenance

nor is deferring more maintenance. A workout which pays debt

service at the expense of the property\'s physical condition is

unacceptable because it cannot succeed in the long run.

. Capable owner and property manager. The owner and property

manager are capable of operating the property effectively.

B. Evaluating the Direct Costs of Foreclosure. The act of

foreclosing has two costs: (1) the direct expenses of the attorneys

involved, and (2) the administrative cost of holding the property in the

HUD-owned inventory. Experience shows that since the actual expenses of

foreclosure seldom exceed \$5,000 (in the context of a multimillion

Considerations That Apply Only After Assignment Page 3

dollar loans), seldom do they control the decision. A lender who is
afraid

to foreclose can never expect to negotiate reasonable workout
arrangements.

5\. When Is Foreclosure Appropriate?

Foreclosure is appropriate when there is no realistic chance of

obtaining a better result through workout. This occurs for several

different reasons:

. To oust an unacceptable owner. Although the vast majority of HUD

owners and property managers (both for-profit and non-profit) are

diligent and capable, it is an unfortunate reality that some are

not. In such cases, reacquisition of the property is the only

recourse.

An Asset Manager who reaches the conclusion that the owner is

part of the property\'s problems should at least consider whether

other enforcement actions may be appropriate against this owner.

Although such enforcement will do nothing to solve the problems

of the particular property at hand, it may prevent other

properties controlled by the same owner from deteriorating into a

similar condition, and may have a salutary effect on the

performance of other owners and managers, who improve their

performance when they see HUD taking aggressive, effective action

against those who flout their responsibilities or abuse HUD

resources.

. To change the resources available to the property. Occasionally a

property\'s internal resources are inadequate to solve its

problems. However, before pursuing foreclosure in such a case,

the Asset Manager should establish that the resources available

after a foreclosure will be greater than those available in

workout. (This is seldom the case.)

. To acknowledge that the property can never be made viable. Some

properties are simply non-viable; their construction, location or

operations are so flawed that keeping them open costs more than

shutting down the property and relocating the financial resources

elsewhere. Although this too is a rare situation, it must

occasionally be faced.

Considerations That Apply Only After Assignment Page 4

HUD Loss Mitigation Job Aid

Factors Which Change Upon Assignment

Pre-Assignment Post-Assignment

Loan must be kept current or the Much broader restructuring possible

mortgagee can assign. Any defaults

must be cured within thirty days.

Third-party mortgagee involved. HUD is the mortgagee. No bifur-

Mortgagee may have purely financial cation between mortgagee (finan-

motivations which are inconsistent cial interest) and regulator (pub-

with Loss Mitigation (e.g. if loan lic policy interest).

is below-market, financial incentive

to assign).

Impairments require mortgagee consent. HUD can restructure anything it

Potential impairments in security wants.

(such as a junior mortgage) usually

require consent of the mortgagee.

Legal research often warranted.

Partial payment of claim is possible.

Lender must be a willing participant.

HUD cannot foreclose; that right HUD can directly foreclose or be-

resides solely with the mortgagee come mortgagee in possession.

(which may be reluctant to exercise

it).

Some financial resources are available

only before assignment; for instance,

Flexible Subsidy.

Parties other than HUD are generally Foreclosure directly affects the

unaffected by assignment. They may owner, property manager, and in-

lack the necessary sense of urgency. vestors. A serious and credible

foreclosure threat will usually

create some negotiating

attentiveness.

Considerations That Apply Only After Assignment Page 5

Loss Mitigation Job Aid

Appendix D

Questions to Ask During Diagnosis

Loss Mitigation Job Aid

Appendix D

Questions to Ask During Diagnosis

Properties in HUD loss mitigation face problems which are usually

significant and complex. Before an Asset Manager can develop an
appropriate

Loss mitigation program, he or she must diagnose all aspects of the
problem

and identify the root causes. Loss Mitigation programs which address
only

symptoms, or which solve a few of the problems but leave others

undisturbed, usually fail slowly and painfully and leave the property
and

the problems worse off than before.

Essential to the diagnostic phase is the evaluation of these key

areas:

1\. The owner. Is the owner part of the solution or part of the

problem? What are the owner\'s strengths and weaknesses? Can the

owner\'s weaknesses be cured or protected against, or is the owner

a fundamental obstacle to the success of the property?

2\. The property management company. Is the property manager capable

of implementing the loss mitigation plan or improvement program?

3\. The on-site property management team. Are they up to the job that

faces them?

4\. The physical condition. What physical conditions prevent the

property from achieving its maximum earning power?

5\. The property\'s operations. How far below breakeven is the

property? What can be done to improve it?

6\. The financial situation. What does the property owe and how

urgent are these obligations? Has lack of capital prevented the

property from operating effectively, and if so, how much capital

will the loss mitigation plan need?

7\. The property\'s financing. Does the property\'s financing add or

subtract value? If it subtracts value, can it be changed? How?

8\. Motivations of the participants. Are all the participants

motivated to solve the problem? If not, how can the incentives be

aligned?

9\. The overall structure of the loss mitigation plan. If the plan

works, will it solve all the problems? What is likely to go

wrong? What can be done to protect the property if these events

do occur?

10\. The value of action here versus other properties. The cruel

reality of loss mitigation is that, at any one time, there may be

too many problem properties for any one asset manager to work on.

Thus the asset manager must make judgments about: What happens if

we do nothing? For how long can we do nothing before irreparable

harm is done? Are there easy partial actions which can make a big

difference? Conversely, is the property so troubled that no

reasonable actions now can improve the situation (e.g. prevent

assignment)?

11\. Timetables. How urgent are the problems? How quickly must a loss

mitigation plan be implemented if it is to do any good?

Though these questions are not easy to answer, it is crucial that the

asset manager make up his or her mind about them. Avoiding answering the

questions leaves the Asset Manager trying to structure the Loss
Mitigation

program in the dark, a sure prescription for failure.

No simple formula exists for finding answers; all facts and

circumstances are relevant, and two observers examining the same facts
may

reach different conclusions. Nevertheless, some protocol or checklist of

questions will help the Asset Manager think about each important issue;
it

will also help the Asset Manager confirm his or her judgment, or may

identify specific areas for further research or investigation.

With that in mind, what follows is a list of questions for each topic

which should help the Asset Manager make an informed judgment.

1\. The Owner

1\. Has the owner historically contributed capital to the property

(loans, subordination of fees)?

2\. Is the owner willing to contribute capital to a workout?

3\. Has the owner been forthright in calling HUD\'s attention to

problems?

4\. Has the owner been constructive about pursuing rent increases?

5\. Has the owner pursued outside capital sources (such as local

loans or grants)?

6\. What do the owner\'s limited partners think of this owner?

7\. Does the owner have a long-term capital improvements plan?

8\. Does the owner\'s Previous Participation certificate show other

troubled properties?

9\. If so, is the owner working to solve those problems?

10\. Does the owner do what it promises to (from small things like

returning phone calls up through large matters like securing new

financing or contributing capital)?

11\. Does the owner provide concise and accurate answers to HUD\'s

questions?

12\. Is the owner concentrating on solving the problem or assigning

blame?

Questions to Ask During Diagnosis Page 2

13\. Does the owner\'s diagnosis of the property\'s problems square with

HUD\'s? Why or why not?

14\. Does the owner operate other HUD properties (in this area)? How

are they doing?

15\. Are the properties accessible to persons with disabilities?

16\. When faced with a choice between protecting the property and

doing something else, what has the owner historically done?

17\. What do other relevant people think of this owner?

. HUD Headquarters?

. Other HUD area offices?

. State housing finance agency (HFA)?

. local public housing authority (PHA)?

. local community development corporations (CDC)?

18\. Has the owner been active in trying to bring additional services

to the property (where appropriate)?

19\. Has the owner developed a Title IV \'capital plan\'?

20\. Do you think the owner cares about the residents\' quality of life

at the property?

21\. Is the owner familiar with HUD procedures, Handbooks, and

requirements?

22\. Does the owner provide timely and accurate information regarding

the property? When the owner has claimed things not immediately

verifiable, did they prove true or false?

2\. Property Management Company

1\. Is the management company affiliated with the owner?

2\. Does the management company do any business for owners with which

it is not affiliated? What do those owners think of the company?

3\. Do other affiliated companies (laundry, security, groundskeeping,

painting) provide services to the property? Is their work good?

Are their prices competitive? Do these affiliated companies do

work for any owners with whom they are not affiliated?

4\. How large is the company? How long has it been in business?

5\. How many HUD properties does the company manage? How are they

doing?

6\. Are the properties accessible to persons with disabilities?

7\. Are financial reports accurate? Are they delivered in a timely

fashion?

8\. Is the management company aggressive about energy conservation?

9\. Are the income certifications up to date and accurate?

10\. Are subsidy reimbursement requests up to date and accurate?

11\. How many \'general ledger adjustments\' did the property\'s
auditors

have to make?

12\. On a drive-by visit, is the property well kept? How much litter

and graffiti are present?

13\. What did the property look like five years ago? Does it look

better or worse now? Why?

14\. Evaluate the resident manager (see below). What does this tell

you about the management company?

15\. Does the company produce a resident\'s \'guidebook\'? What

impression does that book give? What else does the company do on

resident move-in?

Questions to Ask During Diagnosis Page 3

16\. Do you think the management company cares about the residents\'

quality of life at the property?

3\. The On-Site Property Manager

1\. Does the resident manager make a good impression?

2\. Is the resident manager proud of his/her property?

3\. Is the resident manager in charge of his/her site staff and

his/her residents?

4\. How long has s/he been at this property? With this company? What

does s/he think of the management company?

5\. Does s/he know how many apartments s/he has of each type? Does

s/he know their rents?

6\. Does s/he know her competition?

7\. Can s/he list strengths and weaknesses of your property compared

with the competition?

8\. When you walk the property, how do the residents react to the

manager? Does s/he know their names? Do they know his/hers?

9\. Does s/he automatically \'tidy\' the property (pick up litter,

straighten items) as you walk around?

4\. Property Physical Condition

1\. When did HUD visit the property last?

2\. What does the most recent physical inspection report show?

3\. Are there any outstanding code violations? What does the local

building department think of the property?

4\. What physical needs have been identified by (a) the owner, (b)

the management company, (c) any resident group?

5\. Is the property accessible to persons with disabilities?

6\. Did the property have a capital needs assessment performed? What

does it show?

7\. Are the property\'s roofs pitched or flat?

8\. Do the roofs leak? How old are the roofs? When were they last

inspected?

9\. Does the property pay for utilities? How are they provided? Is

individual metering

10\. Has the property had an energy audit? What were its findings?

11\. What physical problems currently inhibit the property from

competing to best advantage?

12\. How old is the property? How many of its systems are reaching an

age where they are likely to fail? This includes:

. Boilers

. Roofs

. Electrical systems

. Air conditioning

. In-apartment appliances

Questions to Ask During Diagnosis Page 4

. Bathroom fixtures (toilets, tubs, showers)

13\. Would the property benefit from energy conservation or

retrofitting in any of these areas:

. Utilities?

. Water and sewer?

. Windows?

. Air conditioning?

14\. How much of a funded reserve do you think the property will need

to cater to unexpected developments in the renovation program?

For each physical condition identified, ask these further questions:

1\. How much would it cost to fix the problem?

2\. How long would it take to fix the problem?

3\. If the problem is fixed, does the operating budget go down? By

how much?

4\. Are there any inexpensive sources of funding for this problem

(e.g. weatherization loans from utility companies)?

5\. Property Operations

1\. What percentage of the property is now Section 8? What was it

five years ago? If the percentage has changed, why did it change?

Is the new income mix stable?

2\. What is the current physical vacancy? What is the financial

vacancy (including below-street rents, bad debt, and collection

loss)? What is the trend in vacancy?

3\. If vacancy is increasing, why is it increasing? What can be done

to stop vacancy from rising further?

4\. What is the percentage of accessible units being provided to

persons with disabilities?

5\. Did the property break even or better last year?

6\. Are the rents budget-based or annual adjustment factor (AAF)

driven?

7\. If AAF, what flexibility in obtaining \'special\' rent increases is

possible?

8\. If the property is budget-based, when was the most recent rent

increase? Can the property stand another rent increase? If so,

how much?

9\. What did the owner/management company request? What did HUD

grant? If HUD granted less than the owner requested, why was

that?

10\. Assuming that vacancy did not increase, what percentage rent

increase would be necessary (a) to get the property to current-

basis breakeven? (b) to generate enough cash flow to pay the debt

service on a loan to fund all the physical improvements? (c) to

start amortizing any arrearage?

6\. Property Financial Position

1\. Distill the balance sheet down to a Current Net Position

. Payables

. Receivables

. Replacement reserve

Questions to Ask During Diagnosis Page 5

. Residual receipts

. Arrearages on HUD notes

2\. What current obligations can you reschedule (a) on more favorable

payback terms, (b) into participations in future cash flow?

3\. How much cash does the property have on hand? How much will it

need to do the workout? Where can it get more? (If the property

stopped paying debt service, for how many months would it have to

do so to generate enough cash to fund the immediate items?)

7\. Property\'s Financing Structure

1\. What is the property\'s current debt service?

2\. What is the interest rate on the first mortgage? Is that rate

above market? If so, how much would a refinancing save? What

would that do to change the property\'s economics? Is a

refinancing feasible?

3\. Can the mortgage legally be refinanced? If not, is the mortgagee

likely to cooperate with a refinancing (or advance refunding)

simply to prevent future trouble?

8\. Property Environment

1\. What is happening in the property\'s rental market in terms of

economics and demographics? Is there trends affecting project

rentability?

2\. What is happening in the immediate neighborhood? Are these events

affecting rentability? If so, can these trends be reversed?

3\. What is happening among the residents with respect to economics?

Are there non-subsidized renters who qualify for subsidy but none

is available?

9\. Motivating the Participants

1\. What do the other parties gain from a successful workout?

2\. What do the other parties lose from assignment or foreclosure?

3\. How much capacity do other parties have (a) to do work, (b) to

contribute financial resources, (c) to apply persuasion pressure

on other participants?

4\. Does your workout create downside for each other party? (That is,

does each other party suffer somehow if the workout fails?)

5\. Does your workout create upside for each other controlling party?

(That is, if a party does much better than expected, does that

party benefit?)

6\. Does the workout extract appropriate commitments or contingent

guarantees from other participants?

10\. The Tough Questions to Ask in a Loss Mitigation Context

1\. How much will assignment cost the Federal government? How does

that compare with the Federal cost of doing this workout?

2\. If the property is foreclosed, how much will that cost the

Federal government? What will HUD do with the property If it

Questions to Ask During Diagnosis Page 6

compels a foreclosure sale? Will it bid the debt, or will it let

the marketplace buy the property?

3\. Will a Loss Mitigation Plan work? Will it restore the property to

healthy status?

4\. Realistically, can a properly structured Loss Mitigation Plan

prevent assignment?

5\. If you think the owner is part of the problem, what pressure can

you put on the owner to make the owner step aside?

6\. If you do a Loss Mitigation Plan with this owner, how likely are

they to make it work? Or are you simply rewarding incompetence

and running too high a risk of having to solve the problems all

over again?

Questions to Ask During Diagnosis Page 7

Loss Mitigation Job Aid

Appendix E

Analytical Techniques

Contents of the file READ.ME:

December 5, 1994

This diskette contains the analytical spreadsheet routines identified

in Appendix E of the Loss Mitigation Job Aid. These consist of nine

different spreadsheets with the following purposes:

Spreadsheet 1 Rehab hard costs converted into loan amount

Spreadsheet 2 Payback analysis of capital improvements

Spreadsheet 3 Rents needed to achieve breakeven after workout

Spreadsheet 4 Impact of additional financing on operations

Spreadsheet 5 Impact of changed financing on operations

Spreadsheet 6 Uses and Sources of Funds

Spreadsheet 7 Estimated net cost of assignment

(including recovery)

Spreadsheet 8 Recovery value of loan after assignment and

return to performing status

Spreadsheet 9 Comparison of historical operations and

post-workout operations

Each spreadsheet is designed so that the user fills in the variables

and the spreadsheet calculates everything else.

Three versions of each spreadsheet are included on the diskette:

Sx = The blank template, ready to use.

SxBLANK = A blank template with all boxes shaded EXCEPT the input

boxes, which are left unshaded. This is a useful form

to photocopy and fill in, as it helps the user identify

only the missing variables.

SxSAMPLE = A completed sample spreadsheet, included mainly for

reference so users can see how the formulas work.

All spreadsheets are written in Lotus Version 3 and work with that

version or higher.

If you encounter problems with the spreadsheets, or need technical

questions answered, please call

William W. Hill

U. S. Department of HUD

451 Seventh Street, SW

Room 6160

Washington, DC 20410

Tel: (202) 708-0547

Fax: (202) 401-3270

Loss Mitigation Job Aid

Appendix F

Catalog of Loss Mitigation Tools

Loss Mitigation Job Aid

Appendix F

Catalog of Loss Mitigation Tools

(Page 1 of 2)

Following is a partial list of tools which may be useful to Asset

Management and project owners in a Loss Mitigation context. Additional

tools become available in a post-assignment (workout) setting.

. Use of Restricted Assets:

\- Reserve for Replacements:

Suspend payments to the Replacement Reserve account

Release funds for necessary work

\- Release of Residual Receipts

\- Release of overfunded escrows

. Owner advances (repayable from operations or otherwise)

. Third-party operational loans

. Section 8 Loan Management Set Aside

. Change in management agent

Financing Tools:

. Refinancing of insured debt \[Section 223(a)(7) or other\]

. Insured operating loss loan \[Section 223(d)\]

. Flexible Subsidy loans

. Secondary financing:

\- FHA: Section 241(a) rehabilitation loan

\- Other: State and local rehabilitation funding

Utility conversion financing

Energy conservation financing

Weatherization funding

HOME funds for refinancing

CDBG funds for rehabilitation

Federal Home Loan Bank Affordable Housing Program

Community Reinvestment Act Funding from banks

. Bond refunders

. Federal Drug Elimination Grant

. Forbearance of HUD-insured debt

. Mortgage modifications

. Low Income Housing Tax Credits (in sale context)

. Bargain sale

Loss Mitigation Job Aid

Appendix F

Catalog of Loss Mitigation Tools

(Page 2 of 2)

. Transfer of Physical Assets (TPA) Full

. Transfer of Physical Assets (TPA) - Modified (substitution of

general partner)

. Partial release of security

. Previous Participation sanctions (Form 2530)

. Limited Denial of Participation (LDP)

. Debarment

. Inspector General audit

. Other enforcement (litigation)

. Civil money penalties (if enacted)

Loss Mitigation Job Aid

Appendix G

Negotiating Tips

Loss Mitigation Job Aid

Appendix G

Negotiation in HUD Multifamily Housing

1\. Summary

Negotiation is the means by which parties with issues in common

resolve their differing perspectives and interests. It is the mechanism
by

which relationships continue.

In HUD multifamily asset management, owners and HUD are bound together

by their shared interests in the property: they have to coexist, like it
or

not. Effective negotiation, therefore, makes coexistence constructive

rather than destructive.

Importantly, negotiation encompasses a bundle of skills which anyone

can learn.

In fact, during your life you have learned some negotiation, for the

simple reason that most of life consists of negotiating. (What movie do
you

want to see? Where should we go on our vacation? Who\'s going to do the

dishes? Who\'s going to work on this project?) Recognizing that a
situation

involves negotiation is the first step in becoming a good negotiator.

2\. General Principles in Negotiations

1\. Problems are unique, and so must solutions be. \"All happy

families are alike; each unhappy family is unhappy in its own way.\"
There

is no such thing as a step-by-step, check-the-book recipe for guaranteed

negotiating success. Keep your objectives in mind and don\'t let your
habits

get in the way.

2\. Negotiation is not win-lose. The essence of negotiation involves

finding a plan which gives each of us a better result than either of us

could achieve unilaterally. To do that requires a constant search for

actions which benefit one of us more than they cost the other. When

negotiation grinds down to pure win-lose, it fails. In such situations,

split the difference.

3\. Progress on little things leads to progress on big things. Keep

looking for places where we have shared interests, shared objectives, or

similar views. If you cannot negotiate a macro solution all at once,

negotiate a micro solution as a means of making progress. A property may

need a major workout, one component of which is a rent increase. Perhaps

agreeing to process the rent increase while the rest of the dialog is

ongoing may help build momentum.

4\. When a negotiation is over, everyone has to feel like a winner.

This is absolutely key. Negotiation is about agreement, and people
don\'t

agree to lose. They only agree to win. So the negotiation must give each

participant something that participant values; otherwise that
participant

has no reason to say Yes.

5\. Negotiate transactions that look good later, whether two hours,

two days, or two years later. You may out-trade or deceive someone in a

negotiating session, but sooner or later the victim will realize he\'s
been

had. When that occurs, (a) you will have generated enormous and needless

bad will (people never forget when they feel they\'ve been cheated, and
they

take it personally), and (b) the other party will feel no compunction
about

breaching the agreement if at all possible (\"Heck, they cheated first,
I\'m

just getting even!\")

The only deals that stick are those which make sense when explained to

a tough critic.

6\. Share the misery. You\'re trying to get someone to do something

he/she doesn\'t want to do. To make that happen, you have to do
something

you don\'t want to do. The same holds true for everyone else sitting at
the

negotiating table. Key to negotiation, therefore, is to figure out what

people can do which costs them less than they gain from the solution.

7\. Before you can get to Yes, you have to establish your No. This

holds as true for business people in negotiation as it does for
children. A

long as I can get whatever I want just by asking, I have no reason to

negotiate, I simply demand, louder and louder. Thus, when you are

negotiating, be careful where you pick your ground, but if you say No to

something, mean it.

The only time to change your mind after you\'ve said No is when

presented with new information. That\'s not backing down, it\'s called
being

sensible.

8\. Avoid ultimatums. Ultimatums are dangerous - if you issue one and

it is ignored, you have no choice but to follow through on your threat,

because if you do not, you have zero credibility. Ultimatums are also

dangerous because they challenge other participants\' egos and tend to

rigidify positions. Thus, wherever possible, resist being cornered into
an

ultimatum. Learn to use words like \'consider,\' \'recommend,\'
\'examine\'. (\"II

we cannot work out an arrangement, then we will have to consider our
legal

alternatives.\")

9\. Allies appear in unlikely places; judge participants by their

behavior, not their uniform. Lawyers often say, \"The client is the real

enemy.\" Consultants learn not to take their clients\' pronouncements on

faith. Conversely, not everyone within your own organization, or other

similarly situated organizations, will necessarily be on your team.

Divergent agendas abound, both public and ulterior.

Negotiation in a HUD Multifamily Housing Context Page 2

What can you do? Start from the premise that no one is automatically an

enemy, no one is automatically an ally. Everyone is neutral. Treat them
all

the same way. Then observe which people behave like part of the
solution, and

which like part of the problem.

10\. Organizations are not monolithic. The larger the organization, the

more schizophrenic it is likely to be. Be alert for conflicting signals
from

the organization. Respond to those which further your objective; ignore
those

that obstruct progress, raise the tension, or distract attention from
the

crucial issues.1/

11\. Know when to stop negotiating. At the beginning of your

negotiation, define what Success means. Keep negotiating until you have
a

transaction which is within your definition of Success, but thereafter,
ease

off. Don\'t concede everything that remains, but under no circumstances
should

you blow a deal that meets your criteria for Success in pursuit of a
marginal

but not crucial feature.

Remember, you\'re not trying to score the most points, you\'re trying to

negotiate an agreement to solve a problem. \"A good solution is better
than a

bad solution, but a bad solution is better than no solution.\"

3\. A General Recipe for Negotiating

What follows will sound either trivial or impossible. Still, it is the

best protocol for thinking about negotiation situations.

1\. Figure out what\'s wrong. Identify every aspect about the

current situation which is other than you want. Wherever possible,

distinguish between symptoms (\"The property\'s energy costs are too
high\") and

root causes (\"We have twenty-year-old single-pane windows with cracked

caulking\").

2\. Figure out what you want. This starts with something as easy

as writing down a list of cures to the problems you have identified.
Once you

have done that, rank your priorities and then subdivide them into two

categories:

. Essential

. Desirable but not essential

Most often, priorities should be expressed as results rather than

specific actions (\"I want my headache to go away\" rather than \"I want
two

aspirins\"). The reason is that often, a solution you didn\'t think of
may be

a better means of reaching your goal than the one you identified. For
that

reason, state your priorities as conditions rather than

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

1/ At the height of the Cuban Missile Crisis, the United States received
two

coded messages from the Kremlin, one about twelve hours after the other.
One

offered conciliatory terms, the other was totally hard-line. This threw
the

U. S. negotiating team into confusion until they hit upon their strategy
\--

ignore the hawk, respond to the dove. By doing this, they empowered the

peaceniks within the Soviet Union and eventually forged the deal that

resolved the crisis peacefully.

Negotiation in a HUD Multifamily Housing Context Page 3

specific actions (\"The property\'s deferred maintenance has to be
cured,\"

rather than, \"You have to contribute new capital\").

Wherever possible, combine priorities and simplify your descriptions.

The simpler your statement of objectives, the easier they will be to

communicate and therefore the greater force they will have.

Be wary of overgeneralizing: \"Restoring the property to decent safe and

sanitary housing\" is laudable but, as it is not specific, I have no
idea how

to do this. A good way to do this is to imagine a magic elf who can
carry out

any command, no matter how amazing, so long as it is described
precisely, but

who has no conception of adjectives. Have you instructed the elf to the
point

where it can act?

3\. Figure out everyone\'s \'or-else\', their unilateral alternative.

If no deal is reached, what is the best you can do by yourself? That is
your

\'or-else\'. Everyone has an or-else, and the strength of each
participant\'s

negotiating position is directly proportional to the attractiveness of
its

or-else.

What is your or-else? What\'s the best you can do without anyone\'s

cooperation? This is crucial to know, because you should never accept a

transaction that is worse than this level.

What are the other participants\' or-elses? For the same reason, they

should never accept a settlement which is worse than this. If by some

accident they appear to do so, odds are high that the deal will later
fall

apart (because they will realize they have too poor a result) or that
the

other side will breach the agreement.2/

4\. Establish your \'zone of agreement\' by establishing everyone\'s

or-else. Agreements are possible only when the negotiated solution is
better

for each participant than that participant\'s or-else. The area between

everyone\'s or-else is the potential zone of agreement. Sometimes it is
large,

sometimes small. Also, the zone of agreement changes over time as each

participant\'s negotiating position shifts. Be alert to changes in

circumstances which affect other participants\' or-else because they
will

presage changes in negotiating posture and leverage.

5\. Figure out what you can give. This is every bit as important

as determining what you want. Negotiation is give and take; you are
trying to

induce people to give you things, and to do that, you must offer them
things

they want. Things you can give fall into two types:

. Those which help solve the problem.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

2/ In the early part of the Twentieth Century, the major oil companies

(Anglo-American, Standard Oil) negotiated concession agreements with
Middle

Eastern potentates. After thirty or so years, the agreements had become
so

lopsided in their effect that the potentates were much better off
breaching

them completely; doing so then forced a renegotiation. The same thing
with

professional athletes who have contracts far below the market \-- at
some

point, sitting down is economically sensible.

Negotiation in a HUD Multifamily Housing Context Page 4

. Those which reward others for helping you solve the problem.

In the private sector, \"Do a good job on this property and I\'ll give
you

that one\" is probably the most common form of incentive there is. HUD
cannot

be so straightforward, but it is perfectly permissible, for example, to

propose \"If you act responsibly on this property, I will withdraw my
Previous

Participation flag.\"

6\. Figure out what other people want \-- and what they can give.

The converse of the preceding two steps. You must know what each other

participant wants, and what they can contribute. There are three ways to

determine this:

. Ask the participant. Most people will tell you the truth. If a

direct question is unproductive, reverse it: \"If I were in your

shoes, I\'d want this. Do you want that? Why or why not?\"

. Ask others who either (a) are involved with the property or (b) are

in a similar situation on another property what they would want if

they were in this situation.

. Put yourself in the other person\'s place and try to determine what

you would want.

When the three answers start to be congruent with one another, odds are

you have found the truth.

7\. Open lines of communication to all interested parties. You

can\'t negotiate with a rock. You have to find ways of getting people to
talk

with one another. Much on this topic in Section 5 below.

8\. Turn enemies into allies by focusing on the ultimate solution.

When the lifeboat is sinking, time spent arguing over who made the hole
is

pointless. Set aside your differences and concentrate on bailing.

Recriminations never got anyone to the negotiating table, and they are

the fastest way to get people to leave it.

9\. Keep putting out deniable positions until a solution comes

into view. Negotiating has an element of brainstorming or
problem-solving to

it: the more ideas, the more chance of finding a solution. Thus it\'s
vital to

keep thinking of things. Importantly, to give ideas a chance, they have
to be

presented in contexts when people can assess them without fearing that
any

movement will be seen as a concession and pounced upon. So, if you want
to

negotiate:

. Keep out lawyers who are acting as advocates.3/ Ask for meetings

of principals only.

. Offer confidence by stating, for example, \"Everything here is off

the record,\" or,

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

3/ Please do not take this as libel of an entire profession, but the
reality

of negotiations is that lawyers always have litigation in the back of
their

minds; thus they are concerned that nothing be said which could later be
Bed

against the principal if taken in the worst possible context. Problem-

solving, by contrast, is a search of the best possible context. So keep
out

lawyers. My personal rule is that the more lawyers in a meeting, the
less

progress will be made.

Negotiation in a HUD Multifamily Housing Context Page 5

\"Anything we discuss is just an idea until we each have a chance to

go home and think about it.\"

. Create a natural interrupt, such as \"We know you will have to get

approval for anything we discuss. So all we\'re seeking is your

personal commitment to take the idea back and explain it (or

recommend it).\"

More on deniable proposals in Section 5.9 below.

4\. Analyzing The Negotiation Situation

You are seeking the answers to three crucial questions:

1\. What\'s wrong.

2\. What you want and can give.

3\. What others want and what they can give.

Some principles for pursuing them:

1\. Identify the players. This is vital. Figure out whose

cooperation you need, and then figure out who can say Yes for each
group.

Waste no effort on people who can neither help you nor hinder you.

Conversely, once you have identified an important player, find within
the

organization the person who is empowered to negotiate the deal. For
instance,

an owner is a partnership; who is the general partner? If there are
multiple

general partners, which one controls? If that general partner is a

corporation, who is the controlling person? Or has that controlling
person

delegated decision-making authority?

You are entitled to ask anyone who sits at the negotiating table whether

that person (that human being) can negotiate a deal. Anyone who sits at
the

table with you is entitled to ask you the same thing.

If you have someone sitting at the table who has no authority to

negotiate, chances are you\'re wasting your time. Find it out early.

2\. Build your Uses of Funds first. A hen is only an egg\'s device

for making another egg. Money is important only for what we can buy with
it.

Sources matter only because they make it possible to achieve Uses of
Funds.

Uses are what you need. So always have your Uses of Funds front and

center. Compromise it at your peril. Your job as a negotiator is to beg,

borrow, or scrounge Sources to meet Uses.

If you start with Sources and then build up Uses, you will always aim

too low.

3\. Research the other participants\' situations. Spend the lion\'s

share of your research time analyzing the situation from the other
person\'s

point of view. This is enlightening because it will teach you (a) what
he

needs, (b) what he can give, (c) where his weaknesses are,

Negotiation in a HUD Multifamily Housing Context Page 6

\(d\) what the consequences are to him of various actions (or inactions)
that

you or others may take.

Conversely, other participants often have prohibitions on or barriers to

various aspects of their behavior; thus their refusal is not a failure
of

will but of ability.4/ There is a gigantic difference between \"I won\'t
do

this\" and \"I can\'t do this,\" especially because, in some cases,
other

participants can help remove the obstacle. Often these barriers are not

obvious; you discover them only if you ask.

4\. Ask the other side how they will make their decision. Most

people will tell you. This is enormously valuable, because if you know
how

they will make a decision, you can identify what they will value and not

value. Conversely, be prepared to state how you will make your decision.
This

will help them facilitate their decision.5/

Don\'t assume that other people value everything the way you do.

Remarkably, they often do not, and the solutions proposed can be

remarkable.6/

5\. Always look for \'value-additive\' actions: things which cost

you little but benefit others greatly. Whenever you find a
value-additive

action, make it part of the solution. In effect, you are increasing the

things that others gain from the negotiation, which in turn increases
their

willingness to make concessions that you care about.

Conversely, find out what is painful for the other participants. Often

participants presume that because something is of small value, it must
be

easy to achieve when in fact it is extraordinarily difficult. As with

barriers, pinch points are often not obvious; they are usually best
conveyed

verbally rather than in writing (although sometimes written descriptions
are

necessary and appropriate).

Look for situations where benefits greatly outweigh costs and pains.

Wherever possible, avoid elements with high cost or high pain.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4/ HUD staff are often so aware of the restrictions on their authority
that

they forget these restrictions are not immediately visible to outsiders.

Never presume that others know about these barriers: always remember to

explain why something is impossible, or what conditions have to be
satisfied

to make it possible.

5/ In our company, when we are considering a particular request, we
often

fill out the HUD Evaluative Form just as if we were a HUD loan servicer

evaluating our own proposal. This is a tremendous device for identifying
what

HUD cares about rather than what we care about.

6/ When the United States Navy ship Pueblo was captured by the North
Koreans

abouT twenty years ago, protracted negotiations ensued to get it back.
The

North Koreans wanted the United States to admit that it was a spy ship,
which

the U. S. was not prepared to do if there was any risk that anyone would

believe this. Eventually they settled on the following deal: the United

States would sign a document admitting the Pueblo was a spy ship, but
before

delivering it, the United States negotiator would read a statement that

the document was simply a device to get the men and ship back and that
in no

way did the United States believe what it was signing. This statement
was

duly read, television cameras whirring, and the document handed over.

Everyone went home happy.

Negotiation in a HUD Multifamily Housing Context Page 7

6\. Ask people to imagine success independent of the cost.

Solutions are devices to create results, but until you know what results

you want, you have no real means of identifying a solution even if you

stumble over it. When you first contact a participant, start along these

lines: \"It\'s one year from now and the entire problem has been solved.
Two

questions:

\(A\) What things went into the solution?

\(B\) What would you be willing to contribute if that occurred?

Throughout the process, keep asking yourself (and others), \"What does

Success look like?\"

7\. In the creative phase, never assume anything is impossible.

Always state it as being possible if something else happens. Don\'t say,
\"We

can\'t do that because we\'ve never done it.\" Say instead, \"We\'ve
never done

that before, which means that to do it, we have to show this situation
is

unique enough to require it.\"

Stating the impossible as possible if allows people to concentrate on

removing obstacles which is an essential of problem-solving.

8\. Know your own rules. You have to know what is forbidden,

what is permissible, what is negotiable. Otherwise \"everything not

mandatory is forbidden.\" Know your statutes, regulations, and
handbooks.

Always presume that others know the rules too, but if they behave as if

ignorant, always take time out to explain the rules.

Never put down to evil intentions anything that can be explained by

ignorance or stupidity.

9\. Tap the organizational memory. Know the useful precedents \--

know what you or others have done, and why, and whether it worked or
not.

Walk around your office asking other people, \"I\'ve got a problem of
this

type. Have you ever seen one of these? What\'d you do? What happened?
Why?\"

You should spend 4-5 times as much time preparing as negotiating.

Preparation pays off. \"Luck is what happens when preparation meets

opportunity.\"

5\. Opening Lines of Communication

1\. Remember the five stages of Sales. Concentrate on moving each

participant one stage per encounter. (Sometimes you can move a
participant

more than one stage, but count as a Success any encounter which moves a

participant one stage along.)

. Attention. You must make other participants pay attention To do

this usually requires making clear to the participants that they

will gain from a negotiated solution.

. Interest. The participants have to be interested in hearing what

you have to say. To do this usually requires losing the

posturing, bluster, threats,

Negotiation in a HUD Multifamily Housing Context Page 8

pontifications, or rote recitations. Human beings engage with

other human beings; you have to become one to get their interest.

. Desire. The participant has to want to find the solution. You

achieve this by explaining the benefits of a solution, or the

burdens of having no solution.

. Commitment. The participant has to be intellectually and

emotionally committed to achieving the solution. This cannot be

forced; it follows only when desire has been raised.

. Action. Many participants are committed to a solution but forget

to act as required. Persistence, good humor, and tenacity are

other needed here. So is demonstrating that you are acting out

your part of the agreement.

2\. Tell the truth, the whole truth, and nothing but the truth. Put

the issues out on the table. Explain what you are after, why you want
it,

why a solution is in the best interests of the other parties. State what

you can and cannot do. Be candid and forthcoming.

What do you have to gain by deceit? It\'s the strategy of the weakling:

\"I can\'t tell you the truth because my position would be weaker.\" If
you

are ever caught in a fib, your credibility is damaged, possibly ruined,
and

your negotiating position is seriously undermined, because now
everything

that you say must first be verified to make sure you are not fibbing
here

as well.

A reputation for integrity and honest brokerage is a huge asset in

negotiations. Develop that reputation and never compromise it.

3\. Spill the beans up front. State what you want, not as a threat

but as an objective. When it comes time to put issues on the table, put

them all on the table right away. Holding back a key point like
Lieutenant

Columbo (\"Oh, just one more thing \...\") is a breach of protocol
because the

other parties have already made their mental tradeoffs in arriving at
their

settlement, just as if you carefully weighed the piece of meat and had
the

grocer ring up the price, then asked for a couple more slices.

Essential to a negotiation is the idea of closure \-- that is, reaching

a finish. If you are repeatedly going back for \'just one more thing,\'

others become reluctant to offer concessions because they learn they
have

to keep a reserve against this death by a thousand cuts.

4\. Adopt a constructive tone. Adopting the attitude that another

participant is a thief, a louse, a scoundrel or a menace to society may
be

what you feel but is an obstacle to a negotiated settlement. Much better
is

to behave as if the other participants are your best friends who, for
some

inexplicable reason, have been seed by temporary madness or have been
given

the most egregiously incorrect summary of the situation. Your approach
is

that, if only you can explain things to them, it will be possible to

negotiate.7/

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7/ As Lyndon Johnson said, in his inimitable Texas drawl, \'Come, let us

reason together.\"

Negotiation in a HUD Multifamily Housing Context Page 9

5\. Set a good example by behaving the way you want the others to.

Start by unilaterally- making some commitments \-- and then honor those

commitments. What kinds of commitments can you make?

. To continue the dialog.

. To report any relevant information you learn.

. To return telephone calls promptly.

. To fulfill actions you promised to do, when you promised to do

them.

None of these commitments costs anything, yet by their action they

create a climate in which negotiation is possible. Take the simplest,

returning a phone call. If you promise to call someone in two days with
an

answer, and the two days are about to lapse and for some reason you
still

do not know, make the phone call anyhow. Then say, \"I haven\'t done
what I

said I would do, but I haven\'t forgotten you. Here\'s the obstacle
I\'ve

encountered and here\'s when I hope to be able to get it done.\" You
will be

amazed at the goodwill you build that way.

6\. Listen to the other participants\' ideas and their motivations.

When another participant is explaining, pay close attention. Identify
not

only what is being said but also the premises and objectives, stated or

unstated, which underlie it.

Step 1. Focus on the objective first and the solution second.

(\"If I understand you correctly, you want to solve the property\'s

short-term cash problem. You think that deferring replacement reserve

funding is the best way to achieve it.\")

Step 2. This allows you to take issue with the solution without

taking issue with the objective. (\"I agree that replacement reserve

deferral would let you bring down accounts payable, but we have major

appliance and window replacement coming up in the next six months.\")

Step 3. You are then in a position to explain why you are

reluctant to agree to the proposal in a way which invites the other

participant to solve it. (\"If we waive replacement reserve, what are

we going to do this summer when the air conditioners all start blowing

out?\")

Key to this sequence is that you are agreeing wit)! as much as you can

before you start to disagree.

7\. Summarize what you have heard and get others to summarize what

they have heard. Many disagreements are caused by simple

misunderstanding.8/ Take the time to summarize, especially after the end

of the meeting, what was said, what agreements were reached and what
points

are still not agreed to.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

8/ As the book\'s joking title on male/female communication puts it, \"I
know

you think you understand what I said, but what you heard is not what I

meant.\"

Negotiation in a HUD Multifamily Housing Context Page 10

8\. Stay patient but keep trying to open communications. Persistence

is remarkably effective.

9\. Develop systems to send \'deniable\' signals. This is absolutely

crucial in any multi-party negotiation. No one ever negotiated a

transaction around a twenty-person table; invariably back channels must
be

developed. There are a variety of ways to do this:

. Instruct outside professionals to carry certain messages as if

speaking for themselves.

. Develop a personal relationship with someone outside and have an

ear-to-ear phone conversation.

. Informal corridor chat before or after a meeting.

. Having someone else within your own organization convey the

message.

This is neither game-playing nor deception; it\'s the essential art of

allowing overtures without risking loss of face at their rejection.9/

6\. How To Conduct Yourself

1\. Always tell the truth. Be as clear as you can, as forthright

as you can. If you do not know an answer, say so. If you know but cannot

tell, say so. If you cannot make a decision, say so. If you can only
make a

recommendation, but usually have your recommendations accepted, say so.

2\. Encourage others to talk. When someone presents a proposal,

ask them why they think it\'s in your interest. They know why it\'s in
their

best interest, and they wouldn\'t offer something unless it was. But
make

them explain to you why they think you should take it.

3\. Discourage disingenuity. If you suspect that someone is

making an offer which it not genuine, or which may not be in your
interest,

rather than reject it out of hand, draw it out. (\"I must be having
trouble

understanding, because I can\'t figure out why that is in my best
interest.

Please explain it to me.\")

If a proposal is based on a premise which is either new to you or

inconsistent with your experience, do not simply accept it, even if the

person claiming it is acting as if it\'s self-evident. Express ignorance
and

request education. (Remember, there\'s a huge difference between
ignorance

and stupidity.) (\"Gee, I didn\'t know the limited partnership rules

prevented the general partner from loaning money to the property. Could
you

explain to me why that is?\")

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/ To cite the Cuban Missile crisis again, the essential negotiation was

conducted between an American White House correspondent for NBC News and
a

third-level Russian attache who was known to be politically wired. The
key

meetings were held, as if by chance, at a coffee shop in Manhattan.

Negotiation in a HUD Multifamily Housing Context Page 11

4\. Do not buy a bill of goods. If you are handed a proposition

that you think may be false, but are asked to accept it for the

negotiation, do so \-- but then when you are summarizing your views,
restate

the premise as a precondition of your conclusion. (\"Well, if as you say
the

general partners are prohibited from lending money, we\'ll have to find

another source.\") Often you can then turn the premise around so that,
if it

is refuted, you can compel the other side to rethink its position. (\"Of

course, if it turns out that you legally can lend money, we will expect
you

to change your position.\")

5\. Do not lead with your chin. Every negotiating position has

weaknesses; you are not required to advertise them. Nor should you
presume

that the other side automatically knows where your soft spots are \--
the

other side often plays its cards in less than optimal fashion. Let them

demonstrate their knowledge before you retreat.

6\. Exude confidence. No one can make you say Yes to something

you don\'t want to. People can try to change your cost/benefit analysis
\--

they can try to making say No more painful \-- but that Yes still
belongs to

you.10/ Remember, one negotiates only with equals, so the mere act of

engaging you in a negotiation is a tacit (and in some cases, explicit)

acknowledgment that you have standing and a certain leverage. Spend the

time in your analytical phase figuring out what your leverage is, but
then

conduct yourself as if you have leverage.

7\. Build personal relationships with the other participants\'

negotiators. Just because someone is on the other side of the table does

not change who that person is: jobs are uniforms we put on and take off.

Often people change their job orientation (public to private sector,

principal to advisor, and so on); they bring those memories and

perspectives to any current situation.

Most of the time, other participants are also seeking a \'fair deal\' or

a \'reasonable result\' or a \'sound solution.\' They just have
different

perspective about what that comprises. Building personal relationships
is a

key to making it possible to communicate constructively, without
rigidity

and without anger.

8\. Avoid anger. It almost never furthers your objectives. You

can be outraged or frustrated \-- that is normal in a negotiation. But
do

not let that turn into personal anger, not matter how much you may feel
it.

Blow off steam before or after the meeting, not during it.

9\. Be nicest to the people you like the least. Everyone

responds better to a friendly demeanor than an unfriendly one. While it
is

easy to be friendly with people you like, doing so with others requires
a

conscious effort. Thus, when negotiating with someone whom you dislike,

before doing (or not doing) something, step back and ask yourself, \"How

would I do this if I was negotiating with my best friend?\" Then do it
that

way.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

10/ As Eleanor Roosevelt said, \"No one can make you feel inferior
without

your consent.\"

Negotiation in a HUD Multifamily Housing Context Page 12

10\. Reward behaviors you like. People respond to positive

reinforcement.11/ If you want to motivate someone, give him small
rewards.

(\"Each time you fax me a draft of the document, I\'ll call you back
with my

comments within 24 hours.\") In very short order you\'ll be getting the

responses and behaviors you want - if you do what you say you will.

7\. Negotiating from Inside a Bureaucracy

1\. Know your own rules. Know the statutes, regulations, and relevant

Handbooks. Understand clearly what you have room to do and what not.
Most

of the time, the other participants, especially the owner, will have
spent

more time than you studying the rules, so make sure you know them
clearly.

2\. Make sure your supervisor concurs with your perception of the

limits of your authority. Never crawl out on a limb without checking
first

with the man who holds the saw. If you are planning to negotiate some

issues, or conversely to decline to negotiate some issues, make sure
your

supervisor knows about them ahead of time.

Meet with your supervisor and go over what you think might come up.

Establish the limits of your authority. (\"What will you accept? What
can I

give up?\") A good way to do this is to pretend to be the owner and quiz

your supervisor on various things. (\"If the owner offers to waive
dividends

in exchange for deferral of replacement reserve funding, would we accept

that?\")

Always ask your supervisor, \"If things come up for which we did not

prepare, what can I negotiate? Do you want me to call you into the
meeting

(get you on the call), or do I have authority to handle it?\"

3\. Protect your flank by briefing all possible supervisors. No

position, no matter how strongly held, can survive if it is
outflanked.12/

Never let your supervisor be caught flatfooted in a surprise contact.

Before any important contact (letter transmittal, telephone call,
meeting),

brief your supervisor about:

. The issues

. The positions you are taking

. What you may be compelled to say

. The owner\'s probable counter arguments, and why you think they

should be rejected

. The owner\'s possible flanking actions (calling the supervisor,

the Regional Administrator, or the Congressman; threatening or

filing litigation; refusing to make mortgage payments)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

11/ To prove this, a college psychology professor once instructed his
class

to try an experiment on another teacher. In their subsequent class, when

the math professor stood on the left side of the classroom, they should
act

uninterested (yawning, shuffling papers, closing their eyes), but when
he

stood on the right side, they should manifest interest (bright eyes,
hands

raised, energetic note taking). By the end of the semester they had

nonverbally trained the poor guy practically out the right-hand door.

12/ The Maginot Line never fell; it was rendered irrelevant because the

front moved fifty miles to its rear.

Negotiation in a HUD Multifamily Housing Context Page 13

People will go over your head without your consent13/ for two

reasons:

1\. They think they can exert influence over your supervisor.

2\. They think they can fast-talk your supervisor, who knows only a

small fraction of the issues, into making a commitment without

checking with you first.

Either way, you can protect yourself by making sure your supervisor

knows what might happen, and how to react to it if it does.

4\. Brief your supervisor fully, even the weak points.

Supervisors love to defend staff, except if they are induced into taking
a

position that is proven untenable because the staff failed to do its
job.

Thus, if there are weak points, whether in the record, the fact pattern,
or

otherwise, let your supervisor know before the confrontation.

Brief your boss fully, even down to the embarrassing stuff. (\"Maybe I

shouldn\'t have said this last time, but I did, so now we have to cope
with

it.\")

5\. Exploit your weaknesses. If another participant has much to

gain from a negotiation, and has resources available, use them. For

instance, let the owner draft the documents \-- you review the draft.
Most

owners know full well that HUD staff are under severe resource
constraints;

as a result, most owners are very willing to prepare the documentation
in a

manner that will be effective. (This is another place where good

communications early on are enormously helpful: if you have been candid

about your objectives and your decision process, the owner can write the

analysis showing how the proposal meets your objectives and fulfills
your

criteria.)

But then make the participant accountable for the quality of its work.

(\"If I find that you\'ve written it up other than we agreed upon, then
the

entire deal is off.\" \"If its done improperly, it will go to the bottom
of

my In box until I can devote the time to figuring out how to correct
it.\")

6\. Extend yourself as a person without committing the

organization. Handbook or no, regulations or no, you always have one
right:

your recommendation, for or against. Thus, in any situation which
reaches

beyond the scope of your personal decision-making authority, you can
always

say, \"I have no control over whether this gets approved, but I will

recommend this if you\'ll bring it forward.\" That is all any sensible
owner

will want. Conversely, a statement such as, \"Of course I will submit

anything you propose, but unless it includes this feature, I will have
to

recommend rejection,\" is enormously potent.

But then, if you make such a personal commitment, honor it.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

13/ People who think you are genuinely wrong will usually ask you if
they

can involve your supervisor. This is not a hostile action and should

generally not be treated as such.

Negotiation in a HUD Multifamily Housing Context Page 14

7\. Use your supervisor to underscore important messages. Every

supervisor knows that the same statement carries more weight if said by

someone higher in the organization. Develop a relationship with your

supervisor so that, as appropriate, he/she can call/write/meet with
someone

on the outside for the purpose of re-emphasizing an essential element, a

non-negotiable condition, or some other aspect.

8\. Make sure the record supports your action. No one remembers

the successful negotiations; the record is examined only if something
went

wrong. And then, of course, any thing which has not worked out will be

claimed to have been avoidable. Protect yourself against needless after-

the-fact criticism by having a context for any decision you make.

8\. What To Do When Negotiations Break Down

1\. Other participants are people too; their emotions need time to

adjust. There are five stages of grief:

. Denial. (\"That\'s impossible! There must be some mistake!

This can\'t be happening to me!\')

. Anger. (\"Whose fault is this! Who can I punish for allowing

it to happen?\")

. Bargaining. (\"I\'m sure you mean this applies to someone

else, not me.\")

. Depression. (\"It\'s hopeless, why do anything?\")

. Acceptance. (\"All right, now how do we solve the problem?

What are we going to do?\")

People focus on solutions (Acceptance) only after they have exhausted

the four preceding states, and each one takes time to work through.

Sometimes you will encounter a. participant who is in an earlier
emotional

stage and cannot immediately let go of it. When that occurs, the best
thing

to do is to truncate the contact and arrange to contact again some time

later.

2\. When confronted with an immovable object, go sideways for a

while. Sometimes an obstacle arises which appears insoluble \-- a
position

that seems cast rn concrete, a prohibition that seems to have no

exceptions. When this occurs, rather than let negotiations grind to a
halt,

pick up some other issue on which progress can be made. Sometimes the

simple act of whittling down the list of problems creates more

opportunities to solve the few that remain. It also increases the desire
of

other parties to find solutions.

3\. When confronted with a threat, assume that it is carried out

and evaluate the situation after that occurs. Often a threatener,
convinced

that threats will force retreat, has not thought about the consequences
of

following through on the threat. Test the hypothesis; acknowledge that
the

threat could be acted upon, and ask the threatener to explain what it
will

do then. (\"Yes, you could sue us. But then we would have to defend the

suit, and possibly start foreclosure, and it would take years to
resolve.

In any case, how does that fix the property\'s cash flow problem?\")

Negotiation in a HUD Multifamily Housing Context Page 15

Many things which hurt one participant are of no intrinsic value to

the others. These are value-subtractive; they make things worse for

everyone and, by so doing, make agreement that much harder to reach.
Most

threats involve value-subtractive actions; they are usually expressed
when

the other side is frustrated and feels that there is no constructive

negotiation going on.

Don\'t match threat for threat. Brinkmanship never worked for anyone.

4\. Never let the negotiations break off. The longer silence lasts,

the more it feels like an end to the negotiation. If, for some reason,
the

negotiations have apparently stalled, find some mechanisms to reopen

dialog. Either use a deniable approach, or make contact yourself on a

matter only peripherally related. (\"I know we haven\'t settled the
Previous

Participation issue, but I have this replacement reserve withdrawal
request

which I\'m processing and need some clarification \...\")

5\. Recognize that you are expendable; the solution matters. In some

situations a change of negotiator is a worthwhile sacrifice. If you find

yourself making no progress, arrange for someone else to do a bit of

contacting while you retreat to the background. People will freely
express

their frustration to a newcomer in a way that lets them verbalize it and

put it behind them, and negotiations can often resume.

9\. Conclusion

You can get there from here. It just takes practice.

. Negotiation is not win-lose. Share the misery, share the benefits.

. Analyze as much as you can, especially from the other participants\'

perspectives.

. Figure out your \'or-else\' unilateral alternative.

. Determine the zone of agreement by figuring out everyone\'s \'or
else.\'

. Ask the other participants as many questions as you can, especially

about their motivations arid decision criteria.

. Establish your No before seeking your Yes.

. Tell the truth, the whole truth, and nothing but the truth.

. Honor your commitments.

. Build personal relationships with the other participants\'
negotiators.

. Always keep the lines of communication open.

References:

1\. Getting to Yes, Roger Fisher and William C. Ury.

(Penguin U.S.A, 1982. ISBN \# 0 14 01.5735 2)

2\. \"Working Out Troubled Real Estate Properties: Making

Stone Soup\", David A. Smith.

3\. \"When Bankruptcy is the Best Survival Strategy,\" David

A. Smith

4\. \"Refinancing a Syndicated Property,\" David A. Smith

Negotiation in a HUD Multifamily Housing Context Page 16

Loss Mitigation Job Aid

Appendix H

Attracting and Motivating New Sponsors in Workouts

HUD Multifamily Loss Mitigation

Attracting and Motivating New Sponsors in Workouts

General Principles

The principal objective of any workout is a comprehensive solution

that addresses all of the property\'s problems and returns it to
performing

status. All other considerations should be secondary.

Often (but not always), the workout demands a change in sponsor1/.

When this occurs, the workout must be structured so that it
simultaneously:

. Is financially rewarding enough to attract a capable successor

sponsor.

. Motivates the successor sponsor to solve the problem.

Principles to Use When Structuring Financial Incentives

. \'Profit is the price you pay for competence.\' In workout

situations, the principal objective is solving a complicated

problem. This demands more expertise, effort, and risk than a

comparable untroubled situation. To attract the best sponsors,

the workout must offer above-normal compensation. Never begrudge

the wizard his fee for performing miracles.

. At the same time, profit should be paid principally if the

workout succeeds. (Some fees will have to be paid irrespective of

success.) Workouts should be measured by results, not promises,

because many people made credible promises, but few produce

desirable results.

. Profit should be apportioned over two phases.

1\. Performing the turnaround services intensively (over 12-36

months).

2\. Delivering a solution that works in the long run (3-15

years).

. Ideally, at least half the sponsor\'s compensation should be

dependent on long run operations.

Types of Financial Incentives

Potential successor sponsors can be compensated in a wide variety of

ways:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

1/ For reasons that will become apparent, we use the term \'sponsor\' in

preference to \'owner\'. Owner is a legal concept, sponsor a business

concept. To use a favorite metaphor, if a syndication is a bus, the
sponsor

is the driver. Changing drivers does not imply changing the bus\'s
owners.

1\. Property management. To a sponsor, a property management contract\'s

value is roughly equal to its annual profit times its expected

durability.

. Profit is fee minus cost.

. Durability is measured in years of the management contract.

. The ideal management contract is controlled by an affiliate.

Thus, if a change in management agent is contemplated, almost

invariably the new agent will be affiliated with the sponsor.

Conversely, the best managers will insist on acquiring control of

the property as a component in the workout.

. Workouts require intensive effort during the turnaround period

(therefore higher property management costs). To counterbalance

this, consider approving a supplemental turnaround management fee

solely for the turnaround period.

2\. Affiliated services. Many sponsors have affiliated companies which

provide ancillary services. Control of these contracts is an element

of value. (All such contracts should, of course, be on terms no less

favorable to the property than that which would be obtained by

independent parties bargaining at arm\'s length.)

. Laundry facilities.

. Security.

. Groundskeeping.

. Repainting/redecorating.

3\. Operational benefits. If the property is restored to financial
health,

there may be distributable cash flow. The sponsor will share in this.

If the sponsor\'s share is minimal (5% or less), this will be a

negligible incentive, but with contractual renegotiation among the

partners a greater portion can be allocated to the successful sponsor

(via an incentive management fee payable only from a percentage of

surplus cash).

4\. Residual values. This is often a crucial long-term incentive. See
the

next section.

5\. Tax benefits. These are generally of little value to the sponsor

unless they can be syndicated to equity investors for cash. For that,

see the discussion of Low Income Tax Credits (LITC\'s) below.

Find ways to continue motivating based on (1) making workout work, (2)

good physical condition, (3) operational recoveries to HUD.

Structuring Long-Term Incentives

Workouts succeed if they provide long-term incentives to the sponsor

to achieve HUD\'s objectives. This can be accomplished in a variety of
ways,

but is always necessary.

1\. The principal long-term incentive generally available is, of course,

residual value from sale or refinancing of the property. In some

cases, however, this will not be meaningful:

Attracting and Motivating New Sponsors in Workouts Page 2

. The property may have a statutory or regulatory restriction (e.g.

Flexible Subsidy Use Agreement, urban renewal land disposition

agreement) which prevents conversion.

. The property may have no economic viability without continued

subsidy.

. The property may be encumbered by so much deferred debt that it

cannot possibly repay all the arrearages. (See the next section.)

2\. Often in workouts, the parties are motivated to obtain an extension
of

the affordability lock-in as a workout component. This works directly

against the objective of creating long-term incentives. If it becomes

necessary or desirable for the workout, another form of long-term

incentive should be structured in. Workouts where the sponsor has no

meaningful long-term incentive almost always fail.

3\. Where residual value cannot be created under any circumstances, the

equivalent incentive should be built in to the transaction. Some

examples:

. Capitalize an operating deficit escrow from workout proceeds and

release it a little at a time to the sponsor so long as the

property remains healthy.

. Escrow a cash development fee from workout proceeds and pay it

only when all arrearages are cleared away.

. Negotiate an arrangement whereby, if there is cash remaining from

all workout sources after all required uses are paid and the

turnaround complete (e.g., in 36-48 months), a large fraction of

what remains (e.g. 50%) will be paid to the sponsor as an

incremental workout fee.

. Authorize an incentive management fee (payable as a property

expense) equal to a percentage of net cash flow above an agreed

target. Ratify this as a permanent incentive.

4\. Measurements of continuing operational health should address at
least

the following:

. Completion of the workout program.

. Physical condition

. Positive cash flow.

. Adequately capitalized balance sheet (working cash and reserves)

Considerations in Restructuring Arrearages and Secondary Debt

. If a property might have residual value (above the first

mortgage) but it is cluttered with deferred debt that may exceed

any reasonable residual expectation (pre-workout), try to

restructure the debt so that it is paid only from a portion of

residual proceeds.

. In general, partners of a current partnership will not want the

deferred debt canceled entirely (this gives them taxable income

or a basis adjustment). Instead it is often superior to convert

the note into a cash-flow-only, accruing note with a balloon far

in the future. Theoretically this creates tax risks (is the debt

Attracting and Motivating New Sponsors in Workouts Page 3

true debt? is the property financed beyond its value?) but in

practice we believe the tax risks are low where the debt is the

recapitalization of a historical arrearage and is held by an

independent third party which is an arm of the Federal

government.

. If the property is going to be sold to a new owning partnership,

it may be desirable to preserve the old debt (on a cash-flow-

only, accruing status) so as to create depreciable basis for the

LITC syndication. See below.

Attracting and Motivating New Sponsors in Workouts Page 3

Logistical Considerations

Changing sponsors does not necessarily require selling the property.

Often a transfer of general partner is superior.

1\. Sale of the property:

. Triggers Federal income taxes to the limited partners (often

substantial).

. Often triggers local real estate transfer taxes or

recordation costs.

. Requires a fill Transfer of Physical Assets (TPA).

. Usually requires consent of the selling general partners and

a majority of the selling limited partners.

. Creates a step-up that increases depreciable basis.

. Is often necessary to secure an LITC allocation (see next

section).

2\. Sale of the general partnership interest.

. Leaves the investors unaffected (no Federal tax is

triggered).

. Usually involves no local transfer taxes or recordation

costs.

. Usually requires only a Modified TPA.

. Usually requires consent of the selling general partners and

a majority of the sellinG limited partners1.

. Has no impact on depreciable basis and produces no further

tax benefits.

. Usually makes it difficult if not impossible to secure

meaningful LITC syndication.

Obtaining Contributions from the Participants

In general, every party that benefits from a successful property

should contribute something to the workout. Contributions can be
monetary,

in kind, or via actions or guarantees.

1\. In a workout, the withdrawing sponsor will usually contribute no

cash. Its departure is its contribution3/.

2\. The incoming sponsor will seldom contribute cash, because it:

. Is not mired in the transaction; it has the best leverage.

. Is contributing sweat equity and taking risk.

3\. When the incoming sponsor does advance funds, it will expect them

to earn interest, to be repaid as a property expense, and to be

rapidly repaid.

4\. The incoming sponsor should, however, be called upon for

contingent commitments or guarantees of its performance, such as:

. Committing to complete the capital improvements and to fund

overruns.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

1/ The partnership agreement must be checked. Sometimes unanimity is

required; when it is, it is a serious problem.

3/ When the situation is bleak enough, it is often wise to hold one\'s
nose

and pay the withdrawing general partner a nominal sum to exit.

Attracting and Motivating New Sponsors in Workouts Page 4

. Committing to fund operating deficits beyond the agreed

projections.

. Making its workout development fees contingent on achieving

agreed performance milestones.

5\. The current limited partners have nothing to contribute but their

capital or their departure.

. They should do one or the other. (When the boat is sinking,

either jump out or bail.)

. However, if the investors refuse to do anything, except for

extreme measures4/, the only way to force them out is via

foreclosure. (In practice, this gives them some practical

obstructive leverage.)

Pros and Cons of the Low Income Tax Credit (LITC) as a Workout Device

Low Income Tax Credits (LITC\'s) are the only tax shelter benefit

currently of any value to outside investors. As such, they are one of
the

very few means of bringing in new equity without further burdening the

property with debt service expenses. At the same time, LITC\'s are a
scarce

resource and converting them into cash is cumbersome and expensive.

1\. LITC syndication should be pursued when it produces more net

sources of finds than the alternative.

2\. To achieve an LITC syndication, the current limited partners must

voluntarily agree to sell (unless you are prepared to invest the

time and money to force foreclosure). To obtain their voluntary

consent, they will have to be paid some money (presumably related

to but usually less than their contingent Federal income tax

liability).

3\. Thus the net value of an LITC syndication can be figured as

follows:

\+ Net Syndication Proceeds (gross proceeds minus transaction

costs)

\- Investor Buyout (costs to secure selling partners\'consent)

= Net LITC Value

If this amount is greater than investor contribution proposed if

they stay in, LITC sale is superior.

4\. LITC\'s are not available simply for the asking. They require an

allocation from the appropriate state agency. Thus they are less

controllable, and before anyone invests significant energy in an

LITC-contemplated transaction, steps should be taken to verify

that the state HFA will allocate the credits if the transaction

can be suitably structured.

5\. Equity syndication is also non-trivial and must be evaluated.

. Prices vary according to marketplace factors and also

property desirability.

4/ A cooperative majority of investors can freeze out an obstructive

minority; however this freezeout is highly confrontive and should be
used

only when the situation is desperate.

Attracting and Motivating New Sponsors in Workouts Page 5

. Workouts will generally be undesirable because (1) they are

less well capitalized, (2) their property is often weaker,

\(3\) they usually have no residual value. They thus fetch the

lowest price per dollar of credit.

. The syndicator or investment banker will also have its own

perceptions of the appropriate levels of guarantees to be

extracted from the incoming sponsor.

. The investment banker will often want to stage the capital

contributions so they are paid only as the property achieves

success. This too may be contrary to the overall workout

structure.

6\. For all of these reasons, LITC syndications should be pursued

only when the Net LITC Value is materially greater than could

otherwise be obtained from the current partners.

Attracting and Motivating New Sponsors in Workouts Page 6