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CHAPTER 11. WORKOUTS FOR HUD-HELD PROJECTS

SECTION 1. INTRODUCTION

11-1.\* GENERAL WORKOUT PHILOSOPHY

HUD\'s basic objective for projects with HUD-held mortgages

is to develop a workable plan to stabilize the property,

both financially and physically, and to minimize losses to

the Department. One way in which HUD tries to accomplish

this objective is by providing the borrower with debt

service relief for a limited period of time. This type of

arrangement is referred to as a provisional workout

arrangement (\"Workout\" or \"Workout Agreement\").

Since the sale of HUD-held notes provides an efficient

resolution for the assigned inventory of properties, it is

generally contemplated that a Workout will be a short-term

arrangement, for in.stance 36 months or sooner depending on

when the next applicable note sale is planned. Longer term

Workout Agreements may be permitted upon the receipt of

prior approval of the State Director of Housing or, if the

office has none, then the Director, Multifamily Housing

Division, where sufficient economic rationale exists for

taking such an action. Longer term options, however, are

expected to be used less frequently in the future when

taking into account the effect of longer workout terms on

mortgage values in note sales (see Paragraph 11-3) and the

Department\'s debt collection goals. In most instances

shorter workout terms will make the most economic sense in

light of current market conditions and the new cancellation

language that is required in all Workouts Agreements for

unsubsidized mortgages. Additionally, no Workout should

contemplate or contain agreements regarding future actions

by the Department. Specifically, no Workout should contain

an agreement or imply that the Department will modify a

mortgage or extend the term of the Department\'s forbearances

after the Workout is completed. While a mortgage or note

modification (\"Modification\") might be appropriately agreed

to by the Department after the Workout is successfully

completed, no decision to modify a loan should be made until

the Workout is completed and the required analysis to ensure

the ability of the owner to pay under the Modification is

performed.

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Though workout durations vary, depending on the

circumstances, and may run for a number of years, the

workout should be terminable at the end of each 12 month

increment. At the end of each 12 month increment, the HUD

office should reevaluate the physical and financial

condition and management of the project. Though there is

less likelihood that the loan can be brought fully current

by the end of the workout term, particularly under short-

term arrangements, since the syndication market is not

generating as many proceeds as in years past, progress

toward stabilizing the project is expected to be made from

year to year. This could be measured in any number of ways

including but not limited to: a decrease in account

payables; an increase in occupancy at the project; or needed

repairs being made. The Workout should be terminated if it

is determined that it is not in the best interests of the

Department to continue to forbear from enforcement of the

note and mortgage terms.

Owners, understanding the financial consequences of their

actions, will continue to be motivated to enter into Workout

Agreements with HUD offices. In an event of default under

the loan documents, HUD may seek to foreclose upon the

project. Foreclosure can lead to costly tax consequences

for the owner and partners. In order to prevent that from

happening, owners seek forbearance from HUD in the form of a

Workout Agreement.

The specific relief provided in a Workout must be based on a

thorough analysis of the project, considering the tenant

mix, availability of funds to address the physical and

financial needs of the project, examination of the project\'s

market area, and the possibility of assistance from other

government or private agencies, examination of the current

and anticipated supply and demand conditions in the housing

market area relative to the market demand for the project at

the rents needed for financial viability. Such thorough

project analysis will aid the Asset Manager in determining

whether or not a workout is feasible. In some cases it may

not be in the tenants\' or HUD\'s best interest to enter into

a Workout. Workouts will address all of the following

objectives:

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A. Stabilizing a project\'s physical and financial problems

to ensure that an acceptable living environment is

maintained for the tenants.

B. Obtaining competent, interested owners and managers who

demonstrate a willingness to resolve the project\'s

problems, provide an improved living environment for

the tenants, and keep the mortgage current.

C. Developing a reinstatement plan that will protect the

long term financial interest of HUD and ensure that the

project can continue to be a viable operation.

D. Requiring ownership (when appropriate) to provide

additional capital to address project\'s physical and

financial problems and implement the reinstatement

plan.

Foreclosure may be considered when:

A. the owners refuse to cooperate fully in solving the

project\'s problems;

B. ownership with sufficient resources is not available;

C. unauthorized distributions or diverted project funds

have not been returned to the project; or,

D. it is otherwise in the best interests of the

Department.

11-2.\* NEW TERM LENGTH FLEXIBILITY

A. The old handbook provision which required that all

Workouts have terms of 3, 6 or 9 years is hereby

rescinded. Section 6 to this Chapter, originally

issued 6/93, extended the fixed term for workouts from

the original 3 years to permit longer terms of 6 and 9

years. Experience to date and a reevaluation of

procedures have shown that, while most Workouts will be

short-term arrangements, term length options are needed

which field Asset Hangers can employ on an individual

project basis.

The Office of Multifamily Housing Management has thus

moved away from the idea of only 3, 6 and 9 year

Workout term options. What the Office hopes to foster

is an environment in which creative, individually

designed strategies and solutions are encouraged.

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B. This Chapter focuses on Workouts for HUD-held projects,

i.e., post default/assignment when HUD becomes the

mortgagee. For identifying and addressing the needs of

still insured troubled or potentially troubled

projects, and what can be done to stabilize the

financial and physical condition of troubled real

estate before the event of default/assignment takes

place, while at the same time mitigating future losses

to the FHA Insurance Fund, readers are referred to the

accompanying Job Aid, \"Loss Mitigation Job Aid:

Educational Supplement to Outstanding Handbook

Procedures.\" Applying workout-type arrangements to

still insured assets with the intention of avoiding a

default/assignment in the first place (the practice of

which is commonly referred to as \"loss mitigation\") is

a proactive asset management tool and a fitting

component of sound portfolio management.

C. Under the new Field leadership and front line

empowerment inherent in the Department\'s reorganization

plans, the Field now has the ability to consider and

design more flexible approaches to Workouts by

providing for terms ranging from 1 to 9 years. The

bottom line is to devise a Workout that makes good

economic sense and restores troubled real estate to

sound financial and physical condition while protecting

and enhancing the quality of life for residents. Any

serious proposals, creative financing or sale to

resolve mortgage delinquencies may be considered that

would further the objectives of sound portfolio

management.

D. As a guiding principal, a Workout is not a science but

rather an art form that does not lend itself easily to

a prescribed or normative pattern because each

circumstance is different and must be carefully thought

out. That is why it is imperative that each transaction

be analyzed on its own merits.

E. The concept of flexibility is something that has been

evolving over time. This revision builds upon earlier

efforts and thinking in this area. The old Paragraph

11-25 of the Handbook caused considerable interest,

debate and discussion when first introduced in 1993,

and hopefully raised a new way of thinking with its

call to consider alternative approaches to Workouts

that were deemed acceptable but could not be easily

transposed to fit the strict 3, 6 or 9 year framework.

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The old paragraph 11-25 was Multifamily Housing

Management\'s attempt to remind everyone that there may

be other solutions to a property\'s problems than those

suggested in the Handbook.

F. Readers will note that the longer term Workout options

have not been completely removed from the Handbook and

may continue to be used as appropriate where sufficient

economic rationale exits for taking such an action.

These options, however, are expected to be used less

frequently in the future given the experiences learned

from the on-going multifamily HUD-held note sales being

conducted by the Department around the country.

G. Potential bidders/mortgage purchasers generally prefer

to acquire mortgages that are not encumbered with long-

term Workout Agreements. Note purchasers generally

prefer the flexibility to reach whatever agreement

he/she can negotiate with the owner. Thus, Workout

Agreements, particularly long-term ones, lower the

value and, as a result the sales price, of mortgage

notes held for sale. See Paragraph 11-3 for a

discussion of the effect that Workouts can have on note

sales.

H. As an additional tool in meeting workout/loss

mitigation objectives, HUD Field Asset Management staff

are reminded that they may waive handbook or other

directives whenever a waiver is economically prudent

and/or furthers the goal of providing decent, safe and

sanitary housing, so long as the requirement to be

waived is not statutory or regulatory in nature. 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 Field

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, proper

coordination and sound management control practices.

Specially designed form
[HUD-2](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/2.pdf)
may be used for this

purpose.

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11-3.\* UNDERSTANDING THE IMPACT OF WORKOUTS ON NOTE SALES.

A. The guidelines and requirements contained in this

Paragraph are derived from the experience gleaned and

lessons learned from the various note sales being

conducted by the Department around the country. They

are presented with a eye toward maximizing the return

to HUD in future sales while not discouraging Workout

Agreements and Modifications necessary for the

protection of the health and safety of the residents.

They key is to think through the process and ask the

following questions as Workouts are being negotiated -

\"Is a Workout Agreement necessary to protect the health

or safety of the residents?\" \"How would this term,

provision or condition affect the potential price HUD

would get at a future sale of this note?\"

B. The terms of a Workout Agreement and/or Modification

have a significant impact on the value of a load and

thus on the price the Department receives for that loan

upon its sale. Once a Workout Agreement or

Modification is executed, the mortgage purchaser is

bound by its terms. Prospective purchasers,

particularly those interested in non-performing loans,

want to acquire loans unencumbered by Workout

Agreements, particularly long-term ones. The existence

of any Workout Agreement or Modification obligation

limits the flexibility of the loan purchaser to

negotiate with the property owner. The requirement

that all Workout Agreements for unsubsidized loans

include \"cancellation language\" permitting the loan

purchaser to cancel the Workout Agreement on any

anniversary by providing the borrower with notice

within 60 days prior to such year anniversary mitigates

but does not eliminate this effect. Therefore, the

impact of a Workout Agreement or Modification must be

carefully considered and weighed against its need

before entering into negotiations.

C. Since non-standard language and provisions in a Workout

Agreement can confuse potential purchasers unfamiliar

with them and, therefore, lower the price the

Department could hope to receive, make sure that all

terms, provisions and conditions are consistent with

the sample Workout Agreement in Appendix 4 and with

normal, standard procedures designed to assure that the

loan will be brought current. The following are some

additional requirements which have been established and

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must be followed with respect to Workout Agreements and

Modifications considered or entered into with respect

to loans likely to be offered for sale:

1\. As individual auction sales are conducted around

the country based on geographical locale, the DAS

for Multifamily Housing shall establish by policy

memorandum a date after which no Workout

negotiations may begin and a cut-off date by which

time all negotiations relating to a Workout of a

mortgage must be concluded and the agreement

executed by all parties. If the agreement is not

signed by all parties by the time of the cut-off

date, discussions must cease and no Workout

Agreement may be executed.

2\. HUD local office staff will be asked to review all

projects included in a sale to determine if any

Modification obligations exist. If so, a title

endorsement insuring HUD\'s first priority lien

status for the entire amount of the outstanding

indebtedness (after being increased by the

Modification) must be obtained simultaneously with

recording the Modification. If the Department

cannot obtain first lien status, then a default

should be declared and any Modification (if it has

been prepared) must be marked void and not

recorded.

3\. For projects in which first lien status is assured

to HUD, the HUD Office should have the borrower

for that project execute and return to HUD the

Modification. HUD Office personnel should record

those Modifications (assuming HUD continues to

have a first lien status at the time of

recordation) prior to the cut-off date for the

sale. Otherwise, the Modification executed by the

borrower should be forwarded to Headquarters.

4\. Because HUD may apply funds in replacement

reserves to the indebtedness prior to a loan\'s

sale, outstanding requests for disbursements from

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replacement reserve and similar accounts (i.e.,

[Form
9250](http://www.hud.gov/offices/adm/hudclips/forms/files/9250.doc))
must be processed by the date that is 2

weeks in advance of the sale. If there remain any

unprocessed requests after that time and there is

either a life threatening emergency or a written

agreement requiring HUD to make disbursements,

then such unprocessed requests must be sent to

Headquarters.

5\. Copies of all executed Workout Agreements and

Modifications must be sent to Headquarters prior

to the loan sale so they can be included in the

Project Loan Information Files. \*

11-4. GLOSSARY

For the purposes of this Chapter, terms are used as follows:

A. HUD-Held Mortgage

HUD-held mortgages are assigned mortgages and purchase

money mortgages (PMMs) . These do not include direct

loans under Section 202 or college housing subsidy

grants.

Although authority to execute Workout Agreements has

not been delegated to local HUD offices for Section

202, Housing for the Elderly and Handicapped Direct

Loan Program, the Information Sheet - Section 202

Reinstatement (Appendix 11), outlines the information

field staff should compile when developing Workout

proposals. The completed Information Sheet should

accompany the HUD Office\'s proposal and recommendation

which should be sent to: Director, Assisted Elderly and

Handicapped Housing Division, Headquarters.

B. Capital Contributions

These are funds advanced, contributed or loaned to the

project by the ownership entity to fund operating

deficits that have occurred since the project finally

endorsed. In order for the owner to qualify for relief

under this Chapter the owner\'s capital contributions

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cannot create a lien on the project and may only be

repaid from surplus cash. Such capital contributions

are in addition to those required for initial

endorsement (insured advances) or final endorsement

(insurance upon completion) such as an Initial

Operating Deficit (IOD) Escrow. The contributions must

total at least 5% of the original mortgage amount.

Generally, funds advanced to pay construction costs, to

fulfill TPA requirements or fund an IOD are not

considered to be capital contributions for Workout

purposes. Ownership must provide evidence in a form

acceptable to the HUD Office that the required capital

contributions have been or will be made as required by

the Workout Agreement. They must appear on current or

future annual audited financial statements (Balance

Sheet).

Note: Owner advances to meet short term project

obligations are not to be treated as capital

contributions for Workout purposes if they will be

repaid. Repayment of such advances for non-workout

projects is covered in HUD Handbook 4370.2, Chapter 2,

Paragraph 8.

C. Reinstatement Plan

A reinstatement plan is any course of action agreed to

between HUD as the mortgagee and the mortgagor designed

to reinstate (i.e., bring current) the mortgage and to

stabilize a project both physically and financially. A

reinstatement plan can encompass several steps,sss

\* including a Workout Agreement, a physical repair plan,

etc. A Mortgage Modification may also accomplish

reinstatement but should be evaluated separately and

should not be included in the Workout Agreement. \*

D. Provisional Workout Agreement

A Workout Agreement is a written agreement between the

mortgagor and HUD acknowledging that the mortgagor\'s

\* loan is in default, that the parties have agreed on

steps to be taken to remedy the physical and financial

problems of the property and stabilize the project, and

that HUD will hold the loan in default and will not

begin foreclosure\* proceedings against the project as

long as the owner is complying with the terms

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agreed to in the Workout. Workouts do not change the

sequence in which the funds received for a monthly

payment are applied. A Workout will delineate all

steps to be taken by both the owner and HUD to correct

any physical and other problems of the project as well

as cure the financial default. It is contemplated that

\* Workouts will be short-term, for instance 36 months or

sooner depending on the next applicable note sale. In

addition, Workouts should never obligate HUD to take \*

actions at the end of the Workout\'s term. Therefore,

the Workout must not provide for Modifications or

automatic extensions of the Workout\'s term. In

addition, Workouts must be terminable by the Department

at the end of each 12-month period if, following a

review and analysis of the physical and financial

condition of the project and its management, it is

determined that it is not in the best interests of the

Department to continue to forbear from enforcement of

the note and mortgage terms as set forth in the

Workout. Finally, all Workouts must now be cancellable

by a purchaser of the note. For a more detailed

discussion of workout agreements and a listing of all

current requirements, see Paragraph 11-12(E).

E. Modification of Note and Mortgage

A Modification is a written agreement between HUD and

the mortgagor which permanently modifies the terms of

the mortgage and note secured by the property.

Depending on local law, Modifications may be recorded.

A Modification recasts the principal balance of the

mortgage note and establishes a new amortization

schedule. For a more detailed discussion of Mortgage

Modifications, and current requirements in light of the

note sale policy, see Paragraph 11-9(B) and 11-15. A

Modification is separate from a Workout. Although the

Department may decide that it is in its best interests

to enter into a Modification following a Workout, no

Workout should obligate the Department to do so.

F. Capitalizing Delinquent Interest and/or Recasting Unpaid

Principal Balance

Capitalizing delinquent interest means adding

delinquent mortgage interest to the principal balance

of the mortgage and recasting the new principal balance

over a set term (the remaining term of the mortgage).

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This will create a new amortization schedule. The loan

will be current at commencement of amortization under

the new schedule. This is usually accomplished using a

Mortgage Modification.

Recasting the delinquent principal balance of a

mortgage means amortizing the unpaid principal balance

over a set term (usually the remaining term of the

mortgage). This creates a new amortization schedule

for a mortgage. The loan will be current at

commencement of amortization under the new schedule.

Capitalization of delinquent interest and the recasting

of the unpaid principal balance of the mortgage are

subject to the following limitations:

\(1\) the loan must be amortized over the remaining term

of the mortgage;

\(2\) the remaining term of the mortgage must be at

least 15 years;

\(3\) there must be sufficient net operating income

(NOS) to support the increased debt service at

commencement of amortization under the new

schedule; and,

\* (4) if the property is serving or was designed to

serve low and very low income tenants, then the

rents after the recasting must continue to be

affordable. \*

\* (NOTE: the previous requirement which limited the

amount of delinquent interest that could be capitalized

to no more than 10% of the original mortgage amount has

been rescinded. See paragraph 11-9(B) for additional

guidance and safeguards in lieu of this flat cap

limitation.) \*

G. Call Provision

A call provision is a term included in the

Mortgage/Deed of Trust and Mortgage Note/Deed of Trust

Note that gives the holder of the mortgage and note the

option to declare the entire indebtedness due and

payable on or after a certain future date or upon a set

of circumstances or events.

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H. Through Interest

Looking at form HUD-2771, \"Statement of Multifamily

Mortgage Account,\" and the account items ranked by

priority of payment according to MIAS, this term means

that the loan is to be brought current through

interest. That is, all delinquencies in interest on

advances, advances, service charge (if applicable) ,

taxes, hazard insurance premiums (if applicable), and

mortgage interest must be current.

I. Through Principal

Looking at form HUD-2771, \"Statement of Multifamily

Mortgage Account,\" and the account items ranked by

priority of payment according to MIAS, \"Through

Principal\" means that delinquent principal must be

brought current, in addition to the delinquencies

through interest.

SECTION 2: PREVENTING MORTGAGE ASSIGNMENTS; PROCEDURES UPON

ASSIGNMENT

11-5.\* LOSS MITIGATION

This Chapter focuses on Workouts for HUD-held projects,

i.e., post default/assignment when HUD becomes the

mortgagee. For identifying and addressing the needs of

still insured troubled or potentially troubled

projects, and what can be done to stabilize the

financial and physical condition of troubled real

estate before the event of default/assignment takes

place, while at the same time mitigating future losses

to the FHA Insurance Fund, readers are referred to the

accompanying Job Aid, \"Loss Mitigation Job Aid:

Educational Supplement to Outstanding Handbook

Procedures.\" Applying workout-type arrangements to

still insured assets with the intention of avoiding a

default/assignment in the first place (the practice of

which is commonly referred to as \"loss mitigation\") is

a proactive asset management tool and a fitting

component of sound portfolio management. \*

One of the Department\'s primary goals is to minimize

mortgage assignments due to monetary and covenant

defaults thereby protecting the insurance fund. HUD

encourages cooperation among mortgagors and mortgagees

to do what is necessary to avoid assignments. However,

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HUD will use administrative sanctions (limited denial

of participation, suspension and/or debarment, civil

money penalties,) or initiate affirmative litigation

against mortgagors and management agents where there is

evidence that they contributed to or caused the

assignment. Action required of the HUD Office staff to

detect and avert potential defaults and assignment is

discussed in Section 1., Prevention of Defaults,

Chapter 5 of this Handbook. Enforcement of mortgagor

requirements is outlined in Chapter 8 of this Handbook.

11-6. MORTGAGES IN THE PROCESS OF BEING ASSIGNED

Upon receipt of a mortgagee\'s election to assign an

insured mortgage, the Asset Manager shall use all

insured mortgage servicing procedures in an effort to

obtain loan reinstatement and the mortgagee\'s

withdrawal of the election. If reinstatement does not

result and the loan is assigned, the Asset Manager must

contact the owner, outline HUD requirements as

mortgagee, and request the owner\'s plan for mortgage

reinstatement. If the HUD Office determines that an

owner intentionally defaulted and precipitated

assignment, the Director, Multifamily Housing Division,

must immediately forward a foreclosure recommendation

to the appropriate official and must also initiate

administrative sanctions, civil money penalties, or

affirmative litigation as appropriate.

11-7. OWNER RESPONSIBILITIES AFTER ASSIGNMENT

The owner of a project with a newly assigned mortgage

shall be notified in writing by certified mail of HUD

requirements as mortgagee. The Director of Multifamily

Housing shall ensure that such notifications are sent

timely. A record of the receipt of these letters must

be kept by HUD offices. The letter must state that HUD

expects to have a written reinstatement plan in effect

within 90 days following mortgage assignment if the

loan is in default. The letter must be sent to the

owner within 10 working days from the date the HUD

Office receives notice that the assignment of the

mortgage has been accepted. (See Appendix 3a or 3b, as

appropriate, for a sample letter). The following are

HUD\'s requirements:

A. Owner must nay all costs for reasonable and

necessary improvements to restore and upgrade the

project.

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B. Each month. all remaining funds or net cash must

be remitted to the lock box contracted for by the

Multifamily Notes Servicing Branch of the Office

of Mortgage Insurance Accounting and Servicing

(MIAS) An owner is required to remit net cash by

both the mortgage or deed of trust and the

regulatory agreement. HUD offices may not exempt

owners from this requirement. The project name

and number should be clearly stated and the check

should be sent to the lock box contracted for by

the Multifamily Notes Servicing Branch of MIAS.

C. Owner will submit Monthly Reports for Establishing

Net Income, Forms HUD-93479, HUD-93480, and HUD-

93481\. Copies of these forms should be enclosed

with the letter the HUD Office sends to the owner.

D. Owner will submit to the local HUD Office within

30 days from the date of HUD\'s letter, a

preliminary plan for mortgage reinstatement and

property improvement or arrange a meeting with

field office personnel to discuss reinstating the

mortgage. If the owner does not submit a plan or

request a meeting within 30 days of HUD\'s letter,

the HUD Office may consider foreclosure. If the

owner has a meeting with field staff to discuss

reinstatement criteria, the reinstatement plan

must be submitted 30 days from the date of the

meeting.

E. Owner will submit an executed pre-workout waiver

letter in the form of Appendix 12. The HUD Office

should not negotiate a borrower\'s plan prior to

receipt of the pre-workout waiver letter. If the

owner fails or refuses to execute and return this

letter, the local HUD Office may consider

foreclosure.

11-8. BEGINNING THE FORECLOSURE PROCESS

The owner should be notified of HUD\'s note sale policy

\* and foreclosure policy when HUD receives:

\- a delinquency alert,

\- a default notice, or,

\- a notice of an election to assign a mortgage.

Therefore, upon receipt of one of these notices, HUD

field staff must notify the owner as noted below in

writing of the possibility of foreclosure.

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\- Appendix 1 - Use when HUD receives a delinquency

alert.

\- Appendix 2 - Use when HUD receives a default

notice.

\- Appendix 3a or 3b - Use when HUD receives an

election to assign the mortgage.

Subject to the receipt of the pre-workout waiver letter

executed by the owner, HUD field staff should begin to

work with an owner on a reinstatement plan, if

feasible, immediately upon receipt of a default notice

or, in the case of a partial payment of claim (PPC) ,

an election to assign a mortgage in an attempt to

prevent a full assignment of the mortgage. For a

discussion of PPCs, refer to Chapter 14 of this

Handbook.

SECTION 3: REINSTATING HUD-HELD MORTGAGES

11-9. INTRODUCTION

Before HUD will accept a reinstatement plan, the

mortgagor will have to demonstrate to HUD that the plan

is in the best interests of the tenants, the project,

and the Department. For a plan to be in the best

interests of the Department, it must provide for all of

the following:

\- competent ownership and management to resolve

project problems;

\- resolution of the physical and financial problems

of the project;

\- correction of all regulatory agreement violations;

and,

\* - reinstatement of the mortgage to current status

or, if that is not possible, stabilize the

property\'s physical and financial condition during

the period covered by the reinstatement plan. \*

HUD will evaluate each HUD-held mortgage to determine

whether reinstatement is feasible and appropriate. HUD

will not consider reinstating a loan or withdrawing it

from foreclosure when HUD concludes that the mortgagor

deliberately caused or contributed to the assignment.

If the Department decides to reinstate the loan in lieu

of immediate foreclosure, there are two ways the

reinstatement can be effected:

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A. Workout Agreement

This is a formal written agreement between the project

owner and HUD under which HUD agrees to hold the loan

in default, provided the owner submits to HUD specified

payments each month. A Workout Agreement is designed

to stabilize the physical and financial condition of

the property. Workout durations vary, depending on the

circumstances, but are generally construed as short

term arrangements, for instance 36 months or sooner

depending on when the next applicable note sale is

planned, unless a\* longer period is negotiated

pursuant to Section 6 of this Chapter. While the local

HUD Office has the authority to provide mortgage

relief, the Workout should be terminable at the end of

each 12 month increment. At the end of each 12-month

term, the HUD Office should reevaluate the physical and

financial condition and management of the project. The

Workout should be terminated if it is determined that

it is not in the best interests of the Department to

continue to forbear from enforcement of the note and

mortgage terms. If, at any time, there is a default

under the Workout, the Workout should be immediately

terminated and foreclosure should be initiated. Only at

the end of the Workout should the Department consider

or agree to a Modification. The Workout should not

obligate HUD or imply that the Department will agree to

enter into a Modification in the future. Because a

Workout does not change the loan documents, it is not

recorded. The minimum monthly payments must be stated

in a specific dollar amount and be based on the greater

of:

\(1\) the amount of the net operating income (NOI); or

\(2\) service charge (if applicable), taxes, and at

least 70% of monthly accruing interest. Workouts

calling for interest payments of less than 70% of

monthly accruing interest must be approved by the

State Director of Housing, or if the office has

none, the Director, Multifamily Housing Division.

See Paragraph 11-12(E) (15) for circumstances

under which minimum payments may be less than 70%

of monthly accruing interest.

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4350.1 REV-1

B. Mortgage Modifications

Modifications are instruments which permanently change

the terms of the mortgage and mortgage note. For

example, a Modification might recast delinquent

interest and principal. A Workout should always

precede a Modification in order that the mortgage

delinquencies can be reduced to the lowest amount

possible. Local HUD Offices have authority to approve

Modifications which recast unpaid principal and

delinquent interest subject to the following

conditions:

\(1\) the loan must be amortized over the remaining term

of the mortgage;

\(2\) the remaining term of the mortgage must be at

least 15 years;

\(3\) there must be sufficient net operating income

(NOI) to support the increased debt service at the

end of the Workout period; and,

\(4\) if the property is serving or was designed to

serve low and very low income tenants, then the

rents after the recasting must continue to be

affordable.

NOTE: The previous requirement of this Paragraph which

limited the amount of delinquent interest that could be

capitalized to no more than 10% of the original

mortgage amount has been rescinded. The removal of the

10% limitation assumes that HUD Office staff will

thoroughly analyze the project\'s ability to generate

sufficient cash to pay the increased debt service

agreed to in a Modification. Expanded Handbook

guidance narrative below should aid the Asset Manager

in determining the amount of capitalization of

delinquent interest that may be prudently undertaken.

It is extremely important that, before entering into a

Modification, local HUD personnel evaluate the

project\'s projected rent structure to assure that the

rents required to support the proposed Modification are

projected to be sufficient to maintain the

marketability of the project and that there will be

sufficient projected project income to pay the

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4350.1 REV-1

increased debt service. To avoid overemphasizing

current estates of project income and to achieve the

stated objectives, reviewing the stability and growth

of project actual income over time is also recommended.

Evaluating project owner ability to repay based on

actual as opposed to an inflated future income stream

is less risky. Comprehensive Needs Assessments when

fully implemented would aid in weighing past vacancy

and turnover rates as well as evaluating the project\'s

physical needs. HUD\'s potential loss could be reduced

if consideration of current conditions and past

owner/manager performance of project financial or

operational viability is integrated into part of the

overall analysis and is not postponed until a later

time period.

11-10. OWNER REQUESTS FOR RELIEF

An owner must make a written request for financial

relief and state the basis for the relief sought. The

Director,Multifamily Housing Division, is responsible

for

\* determining the cause of default and that the

reinstatement plan for stabilizing the property\'s

physical and financial condition is viable. HUD \*

personnel must verify the cause of default and include

an explanation with supporting detail in the servicing

file for future reference.

Owners who are subject to any administrative sanction,

including a Limited Denial of Participation, Suspension

or Debarment are ineligible for reinstatement

consideration.

The owner must:

A. Demonstrate that operating deficits have been

funded in cash \"Capital Contributions.\" An owner

requesting financial relief must have advanced,

loaned or contributed funds that have not created

a lien on the project and are repayable only from

surplus cash in an amount not less than 5% of the

original mortgage amount. Only funds to pay

reasonable and necessary operating expenses from

the time of final endorsement or capital

improvements previously approved by HUD that have

enhanced the marketability of the project should

be given credit. See Paragraph 11-4(B).

B. Remit all net cash to HUD as noted in Paragraph

11-7(B). HUD\'s local offices may not negotiate

with owners who are holding net cash. Owners must

be

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4350.1 REV-1

informed that their failure to remit net cash is a

regulatory violation and is cause for HUD to

proceed with foreclosure and to otherwise exercise

its rights with respect to the property.

C. Demonstrate that default is not a result of any

deliberate or voluntary action. Completion of the

Failing Project Checklist (HUD-5815) will assist

the Asset Manager in making this determination.

D. Restore to the project any funds or assets

improperly withdrawn or distributed.

E. Correct any violations of the regulatory agreement

to HUD\'s satisfaction.

F. Resolve any open audit findings.

G. Provide management acceptable to HUD.

H. Correct any physical deficiencies to HUD\'s

satisfaction.

I. Prepare a Management Improvement and Operating

\[MIO) Plan if extensive repair work is needed or

changes in management procedures are required. A

copy of the MIO Plan must be attached to the

Workout Agreement and made a part of it by

incorporation.

J. Prepare an Operating Budget using the standard HUD

chart of accounts.

11-11. DEVELOPING THE WORKOUT

The local HUD Office develops a Workout from a detailed

analysis of the project\'s problems as well as intensive

discussions and negotiations with the project owner and

management agent. The Workout-is approved only when the

owner is responsible and cooperative and provides

satisfactory project management. In developing a Workout,

the following analysis should be prepared:

A. Analyzing the Project

Diagnose and document the project\'s physical,

financial, and management problems and their causes. An

on-site review of project management and physical

condition must be made and recorded on the Management

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Review Report, Form HUD-9834, and the Report of

Physical Condition and Estimate of Repair Costs, Form

HUD-9822. The Project Analysis Work Sheet, Form HUD-

9815, parts A through G should be used to record the

information gathered in this step.

B. Analysis of Market Conditions

Consider the market conditions in the housing market

area where the property is located including: the

current and anticipated supply and demand conditions in

the market for that type of housing, i.e., elderly,

congregate, general occupancy, at the rent levels

necessary for financial feasibility; taking into

consideration the impact of these conditions on the

project\'s present and future occupancy and the

potential for the project to achieve financial

viability within the specified time limit. Aspects of

the project that relate to its financial feasibility

and marketability prospects include: the project\'s

potential annual net absorption and an estimate of the

time necessary to achieve a sustained occupancy taking

into account industry standards and local trends in

similar projects; changes to marketing, management,

operations (or support services in the case of

congregate housing or residential care facilities); and

the project\'s competitive position in the market given

its location and characteristics.

C. Legal Review

Workout Agreements are significant legal documents

setting forth the contractual obligations of both HUD

and the project owner under the Workout. Prior to

execution, Area Counsel must review all Workout

Agreements. All the recorded legal documents secured

by the project should also be reviewed at this time to

assure that the Secretary\'s first lien status is

protected, complete, valid and enforceable so that, in

case there is a default under the Workout Agreement,

foreclosure can be instituted quickly and effectively.

D. Determining Project Needs and Abilities

Based on the information collected in step A. above,

identify the project\'s needs and the project\'s ability

to increase operating income. Review the following in

order to develop an estimate of the

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4350.1 REV-1

time required to stabilize project operations. Then

structure a short-term arrangement that will enable the

note to be sold at the next scheduled auction: \*

\(1\) Estimate maximum permissible rentals which can be

anticipated each year based on past project

operations, market conditions, projected future

market changes, etc. This information may be

available from Economic Market Analysis Division

staff (EMAD), Valuation, or local industry

sources.

\(2\) Using a certified rent roll of the project,

estimate and deduct an economic vacancy rate from

gross rentals. An economic vacancy reflects the

project\'s gross potential rent by allowing for

rent concessions or other items that reduce the

project\'s income. Make judgments regarding the

time required to overcome vacancies caused by

marketing problems, uninhabitable units, general

market conditions, concessions, etc.

\(3\) Estimate and deduct operating expenses. Judgment

must be used with regard to increases in expenses

caused by inflation, rehabilitation, increased

project services, staff changes, etc. Consider

decreases in operating expenses which may be the

result of capital improvements or improved

operations.

\(4\) Deduct owner escrow account payments for real

estate taxes, insurance, mortgage insurance

premium (HIP) or service charge and reserve for

replacement.

\(5\) Determine cash flow available for debt service on

existing mortgage.

\(6\) Determine amount of mortgage payment the current

cash flow can support.

\(7\) During the on-site review, consider the location

and neighborhood to determine the project\'s

competitive position and potential for turnaround.

The results of this analysis are to be recorded in

Section H of Form HUD-9815.

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4350.1 REV-1

E. Reviewing Available Relief Tools

The type of mortgage relief selected must be based on a

thorough analysis of the project. This analysis must

consider:

\- the availability of funds to address the physical

and financial needs of the project at the least

possible cost to HUD;

\- an examination of the various factors within the

project\'s market area which may be influencing its

potential; and,

\- the various types of assistance that may be

available from state and local government

agencies.

The Asset Manager must determine the tools needed to

solve the project\'s problems and to pay the mortgage in

full by its original maturity date. If additional

subsidies are contemplated, the HUD Office must assure

that the owner certifies whether the project will

participate in the Low Income Housing Tax Credit

(LIHTC) program. HUD Headquarters must review all

cases where the current owner or prospective owner

plans to utilize LIHTC. The reinstatement plan and the

budget will give estimates of the funds required to

make the project

\* viable. HUD\'s funds and contributions traditionally

used in the past such as Flexible Subsidy, Section 8

Loan Management Set-Aside (LMSA), and approved Section

8 rent increases, are diminishing resources and cannot

be counted on in the years ahead. Other sources

available \* to fund cash requirements are:

\(1\) Owner contributions include owner advances, loans

and capital contributions. See Paragraph 11-4(B).

\* (2) Other sources may include Community Development

Block Grant funds, HOME funds, syndication

proceeds \* including those from low income

housing tax credits (LIHTC), state assistance

programs, new owners, and supplemental loans

including 241(a) and operating loss loans. One or

more of these tools may be needed in conjunction

with the owner contributions and debt service

relief provided by the Workout Agreement.

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4350.1 REV-1

F. Negotiating A Specific Relief Plan

\(1\) A Workout cannot be implemented without the

consent of both the owner and HUD. Both parties

must agree on the amount of delinquency to be

cured, the changes needed in management

procedures, the repairs needed, and a time frame

for accomplishing the proposed results.

\(2\) Use of Income for Repairs or Delinquencies

No hard and fast rules exist regarding how much

project income should be made available for

repairs. The Asset Manager must put the repair

work cost in context with the overall rein-

statement and give consideration to various

possibilities. For example:

\(a\) Where substantial portions of net income

would be necessary for repairs, the

delinquency might increase to such an amount

that loan reinstatement would be nearly

impossible. In this case, substantial owner

contributions would be required.

(b Because an owner can obtain greater tax

benefits for funds advanced for repairs than

for payment of either current or accrued

principal delinquencies, allocation of owner

contributions might be structured to provide

owner tax benefits, which should lead to

increased owner\'s contributions.

G. Capital Contributions

\(1\) Capital Contributions. An owner is expected to

have made cash contributions to fund operating

deficits. These capital infusions may be in the

form of advances, loans or contributions that have

not created a lien on the project and are

repayable only from surplus cash. They must total

at least 5% of the original mortgage amount. Only

funds to pay reasonable and necessary operating

expenses or HUD approved capital improvements

should be given credit.

\(2\) Additional contributions should be required of

limited dividend and profit-motivated owners when

the Asset Manager determines that:

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4350.1 REV-1

\(a\) Additional funds will he needed to make the

project viable within a reasonable period of

time.

\(b\) There are delinquencies in service charge,

taxes, and late charges and project funds are

not available to cure these delinquencies

during the first month of the Workout.

\(3\) The tax consequences of foreclosure can affect the

amount an owner will be willing to contribute. The

Asset Manager should recognize that the owner\'s

potential loss resulting from foreclosure normally

has a direct bearing on the amount of additional

owner contributions. The income tax consequence

of foreclosure may frequently motivate an owner to

make substantial additional contributions.

\(4\) When there have been unauthorized distributions or

repayments of advances when the project is in

default, the owner must return the monies to the

project before any relief is granted. These funds

must be applied directly to the delinquency or

used to pay for authorized repairs. Deliberate

diversions will be referred to Office of Inspector

General (OIG)

\* for investigation and should also be brought to

the attention of Area Counsel for possible

prosecution under Operation Safe Home. The return

of diverted funds is not to be considered a

capital contribution.\*

H. Escrows for Repairs

The Workout Agreement should not provide for

disbursements from or payments to the Replacement

Reserve. However, if the condition of the project is

life-threatening or presents health or safety risks to

the residents, the Asset Manager may decide that it is

necessary to establish a special repair escrow account

with an appropriate local escrow agent and specify the

deposits to and withdrawals of funds from that account.

If so, an MIO Plan should be prepared and made a part

of the Workout, and the Workout Agreement should be

explicit that the escrow account established under the

Workout is separate from the Replacement Reserve and

not governed by the terms of any other loan documents.

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4350.1 REV-1

The escrow agreement must provide that HUD approval is

received before any funds in escrow are disbursed. The

escrow must be funded by cash or a letter of credit,

approved by HUD, in an amount sufficient to pay for the

\* repairs estimated by HUD. Any funds remaining in the

repair escrow after repairs are completed are to be

applied in accordance with the terms of the mortgage. \*

If a local escrow agent is used, the escrow agreement

should be reviewed by the Asset Manager in consultation

with Area Counsel for compliance with the following

procedures:

\(1\) The owner must notify the local HUD Office when

work has been completed and a HUD representative

must inspect the work.

\(2\) If an inspection reveals that the work has not

been satisfactorily completed, the Asset Manager

will so notify the owner.

\(3\) For that portion of the work that has been

completed satisfactorily, the Asset Manager will

notify the escrow agent holding the repair funds

and request a release from the escrow in the

following manner:

\(a\) If payment is to be made to the owner and/or

the contractor, the HUD Office should

designate the payee and the payee\'s mailing

addresses.

\(b\) If funds are to be applied to the mortgage,

the HUD Office should authorize in writing a

transfer of the amount from the escrow

account. The owner may adjust the following

month\'s mortgage payment accordingly.

I. Pre-Workout Waiver Letter

Before entering into or completing any ongoing

negotiations with respect to a proposed Workout, a

letter in the form attached as Appendix 12 must be sent

to and obtained from the owner. Unless an executed

copy of this letter is obtained from the owner,

negotiations should cease and no Workout should be

executed. If the owner fails to provide the letter,

foreclosure may be considered.

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11-12. PREPARING THE PROVISIONAL WORKOUT ARRANGEMENT

The Workout Agreement is a document requiring the agreement

of parties with diverse interests. It must protect HUD\'s

interests as mortgagee by not exposing the Department to

excessive loss through unjustified leniency, yet it also

must respond to both the needs of the tenants and the

owner\'s situation. The arrangement formalizes what HUD and

the owner agreed to during the negotiation process. It also

serves as the focus for administrative and monitoring

procedures. The Workout is not effective until the Workout

Agreement is signed both by the owner and the authorized HUD

representative. The authorized HUD representative at the

local office level shall be the Director, Multifamily

Housing Division.

A. Format

A sample Workout Agreement appears as Appendix 4.

Appendix 8 also includes suggested language for

additional paragraphs which may be added. Appendix 7

contains language for Call Provisions to be included in

Modifications, but no such language should be

\* included in the Workout Agreement. It is strongly

recommended that all Workout Agreements be in the form

of Appendix 4. Provisions other than the \* optional

provisions in Appendix 8 should not be included.

B. Specific Dollar Amount Due

Workout Agreements must state a specific dollar amount

to be remitted each month. For example, arrangements

calling for \"net cash\" or \"payment to service charge,

taxes, and interest\" are not acceptable because they do

not state a dollar amount. A typical Workout will

state the specific amount the owner must pay, plus any

net cash.

C. MIO Plans

As previously noted, if an MIO Plan is used, it must be

attached to the Workout Agreement and made a part of

the Agreement by incorporation. Where no MSO Plan is

required, the Workout terms should not provide for

funds to be deposited to or withdrawn from the

Replacement Reserve or any special repair escrow.

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4350.1 REV-1

\(3\) Workout Agreements will no longer contain an

equity kicker for the Department.

\(4\) All Workout Agreements must describe both the

specific dollar amount to be paid monthly, and how

the balance of any delinquencies will be

addressed. These payments must be remitted to HUD

by the first of each month in accordance with the

note and mortgage.

\(5\) All Workouts must provide for making all repairs

to the project necessary to remedy life

threatening conditions and situations that present

health or safety risks. When repairs are

required, a MIO Plan must be prepared and a repair

escrow must be established as outlined in

Paragraph 11-11(H). This escrow must be

distinguishable from the Replacement Reserve

Account. The provision for a repair escrow should

be included in the Workout. The MIO Plan

developed to schedule the repairs should be

attached to and made a part of the Workout

Agreement by incorporation.

\(a\) Where the owner agrees to make all

necessary repairs, the HUD Office may

consider waiving the delinquency in the

Reserve for Replacement account.

\(b\) In addition, when the owner agrees to

make all necessary repairs, the HUD

Office may consider waiving deposits to

the Reserve for Replacement account

during the term of the workout. A

provision requiring the owner to resume

or increase deposits to the Reserve for

Replacement account in the future should

be included in the workout.

\(6\) Owner contributions during the term of the Workout

shall be scheduled as follows:

\(a\) Looking at form HUD-2771, \"Statement of

Multifamily Mortgage Account,\" and the account

items ranked by priority of payment according to

MIAS, all delinquencies through tax escrows or

hazard insurance premium escrows (if applicable)

must be paid at Workout approval.

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4350.1 REV-1

\(b\) The balance of the delinquencies may be paid in

equal monthly installments during the Workout or

may be paid in periodic lump sum payments over

the term of the Workout.

\(c\) All owner contributions that are made as lump

sum payments should be sent to the lock box and

a copy of the check should be sent to the local

HUD Office.

\(7\) All Workouts will provide that any net cash

remaining, over a specified amount at the end of the

month, after payment of all operating expenses, will

be remitted to HUD in addition to the minimum monthly

payment.

\(8\) All Workouts will provide that if the monthly payment

is received after the 15th of the month, HUD will

charge the late fee specified in the mortgage or deed

of trust.

\(9\) All Workouts will require the owner to submit monthly

accounting reports to HUD for each month of the

Workout term.

\(10\) All Workouts will contain an effective date and the

forbearance provisions will contain an expiration

date. There will be no open ended forbearances. The

Workout should not have an excessive term unless

special approval for a longer term is obtained as set

forth in Section 6 of this Chapter.

\(11\) Workouts may be terminable by the Department at the

end of each 12-month period. All Workout Agreements

for unsubsidized mortgages must also contain the

language found in the sample Workout Agreement in

Appendix 4 which provides the purchaser of the note

with the option of cancelling the Workout upon any

anniversary of the Workout upon 60-days prior notice

to the borrower.

\(12\) All Workouts will contain language informing the

mortgagor that HUD is holding the mortgage in default

and is allowing the owner an opportunity to cure the

default through this reinstatement plan, and that if

the owner does not perform the obligations agreed to

in the Workout, HUD will

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4350.1 REV-1

immediately terminate the workout and begin

foreclosure proceedings and exercise its other

remedies.

\(13\) All Workouts will contain a provision stating that

failure of the owner to comply with the terms of the

Workout is basis for HUD to take administrative

sanctions against the owner including, but not

limited to, limited denial of participation,

suspension and/or debarment from participation in HUD

programs, and civil or criminal penalties as provided

in the Housing and Community Development Act of 1987.

\(14\) All Workouts will contain language stating that

distributions are prohibited on mortgages or projects

under Workout or in default.

\(15\) Minimum Monthly Payments

\(a\) HUD Offices may approve Workout Agreements with

monthly payments based on the greater of: (1)

the amount of the net operating income (NOI); or

\(2\) service charge (if applicable), taxes, and

at least 70% of monthly accruing interest.

Workout Agreements calling for interest payments

of less than 70% of monthly accruing interest

must be approved by the State Director of

Housing or, if the office has none, the

Director, Multifamily Housing Division. Such

workouts must be based on unusual circumstances,

e.g., if the owner has contributed more than 5%

of the original mortgage amount, the project has

experienced temporary marketing problems, etc.

No Workout Agreement may call for a minimum

payment of less than service charge (if

applicable), taxes, and a minimum of 50% of the

monthly interest payment.

\(b\) HUD Offices must review owners projections of

income and expenses in order to determine the

maximum monthly payment which may be expected.

The amount of net operating income (NOI) must be

analyzed. If possible, the monthly payment must

include additional payments with the objective

of retiring the delinquency as soon as possible.

For Section 236 projects, payments are based on

the owner\'s share of the interest.

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4350.1 REV-1

\(c\) Proposed Workouts for projects with vacancies

due to poor physical condition must also include

rehabilitation plans and provisions for an

escrow that is sufficient to pay for the

estimated cost of the repairs, discussed in

Paragraph 11-11(R).

\(16\) All Workouts will contain language clarifying that

HUD may apply funds in replacement reserve, escrow

and similar accounts as well as residual receipts to

the indebtedness. Therefore, unless the physical

needs of the property are of an emergency or life

threatening nature, no provision should be included

in a Workout which would restrict the ability of HUD

to apply funds in the replacement reserve account to

the indebtedness. Nor should any Workout restrict in

any manner HUD\'s ability to apply to the indebtedness

residual receipts or funds held in any escrow or

similar account. Accordingly, the Department forbears

only from foreclosing on the project during the term

of the Workout (provided the borrower complies with

all of its terms) and not from taking any other

action. If there are questions as to whether a

proposed provision of a Workout would restrict such

an application of funds, they should be addressed to

Area Counsel before finalizing or executing the

Workout Agreement.

\(17\) All Workouts must include language stating that the

mortgage and note remain in full force and effect,

that there are no other agreements, oral or written,

among the parties with respect to the subject matter

thereof, that the Workout Agreement constitutes the

entire agreement between the parties with respect to

the subject matter thereof, and that the Workout

Agreement supersedes all prior agreements and

understandings with respect thereto, if any.

\(18\) All Workouts must contain language stating that HUD

reserves the right to sell the note and assign the

Workout Agreement.

\(19\) All Workouts must require the borrower to notify HUD

forty-five (45) days prior to the expiration of the

forbearance provisions of the Workout.

\(20\) Any default under the mortgage that occurs after the

date of the Workout (other than a default

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4350.1 REV-1

which HUD specifically agrees to forbear from

enforcing in the Workout) will expressly constitute a

default under the Workout. Conversely, any default

under the Workout will be expressly stated to

constitute a default under the mortgage.

\(21\) All Workout Agreements must be prospective and

not retroactive. In other words, no Workout

Agreement can have an effective date prior to the

date on which the Agreement is executed by all

parties. \*

F. Provisional Workout Arrangements\--Optional Terms

In addition to the mandatory provisions discussed above,

HUD staff may want to include other provisions in Workout

Agreements depending upon the particular circumstances of

each project and each mortgagor. Some of these optional

provisions may apply only to very unusual cases, while

others may be more generally applicable. The list that

follows is not designed to be all-inclusive. HUD field

staff may have cases where it would be appropriate to

include provisions other than these in Workouts. Sample

language which may be included in Workout Agreements is

shown in Appendix 8.

HUD may want to require an owner to post an

unconditional, irrevocable letter of credit or another

similar security instrument to secure lump sum payments

under the Workout. This may be particularly appropriate

in those cases where a mortgagor had committed to

providing large lump sum payments toward delinquencies

during the Workout. With a letter of credit, if the

owner does not make the required payments at the

specified time, HUD may draw on the letter of credit for

the payments. If the owner makes the appropriate

payments, the letter of credit may be reduced

accordingly. All letters of credit should be reviewed by

Area Counsel.

11-13. EXECUTING AND DISTRIBUTING WORKOUT AGREEMENTS

A. HUD Office staff should prepare an original and at

least 5 copies of each Workout Agreement.

B. The original and 5 copies of the Workout Agreement

should be forwarded to the owner for signature. The

owner shall be instructed to return the signed

original and all five signed copies to the local HUD

Office within 15 days.

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C. HUD Signs the Workout Agreement.

D. The fully executed original Workout Agreement and the

MARS Input Data Sheet shall be sent to the Office of

Mortgage Insurance Accounting and Servicing, Attention:

Multifamily Notes Servicing Branch. The MARS Workout

Cover Sheet Instructions and Input Data Sheet are in

Appendix 5 of this Chapter. They must be received in the

Multifamily Notes Servicing Branch by the 10th of the

month prior to the effective date.

E. The 5 copies shall be distributed as follows:

\- the project owner.

\- Area Counsel

\- the HUD Office project file,

\- the State Director of Rousing or, if the Office

has none, the Director, Multifamily Housing Division,

\- the Operations Division, Office of Multifamily Housing

Management, Headquarters.

11-14. MONITORING OWNER COMPLIANCE

The Asset Manager has full responsibility for monitoring

an owner\'s performance under the Workout Agreement.

Monitoring activities include:

A. Detailed and timely review of monthly accounting

reports to ensure that project funds are being

properly disbursed and that net income, if any, above

the stipulated minimum mortgage payment and sharing

arrangement, if any, is being remitted.

Procedures for reviewing monthly accounting reports

are set forth in Reviewing Annual and Monthly

Financial Reports, HUD Handbook 4370.1.

B. Periodic on-site inspections, when repairs are

required, to assure that the required work is being

made and is in a manner acceptable to HUD.

C. Forwarding a written plan of action or foreclosure

recommendation to the State Director of Housing or,

if the office has none, the Director, Multifamily

Housing Division when there is a default under a

Workout. A default has occurred when the mortgagor

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4350.1 REV-1

has failed to make the minimum monthly payment

required by the terms of the Workout for 2

consecutive months. The Branch Chief must make this

submission within 10 working day\'s from the second

month\'s default.

D. All projects under Workout Agreements are considered

to be Troubled Projects and must have an annual

physical inspection and management review.

11-15. MODIFICATIONS OF NOTES AND MORTGAGES

A Modification is a permanent change in the terms of the

mortgage and note. The mortgage and note may be modified

to recast the principal balance and/or capitalize

delinquent interest (see Paragraph 11-9(B), or insert a

call provision. Because a Modification changes the terms

of the mortgage and note, it should be recorded in

accordance with State and local law. Modifications to

capitalize interest are only permitted if at least 15

years of amortization remain on the note.

A. The mortgagor must demonstrate that project income

can support the increased debt service on the

modified mortgage or must agree to underwrite any

operating deficit.

B. A Modification may be utilized in conjunction with a

Workout, as the final step in a plan to reinstate the

mortgage provided that the conditions of Paragraph

11-9(B) are satisfied. However, the Workout itself

should not obligate HUD to enter into a Modification;

nor should it or HUD Office staff imply in any way

that a Modification will be agreed to by HUD in the

future. Only at the end of the Workout term should

HUD decide whether and, if so, how to modify a note

and mortgage.

C. No Workout should include a modification obligation.

However, if on any of the following kinds of projects

a Modification is agreed to at the end of the

Workout\'s term, then the Modification must include a

call provision. Call provision language is shown in

Appendix 7.

\(1\) All Workouts on market rate projects where the

project does not receive project based Section 8

assistance shall provide for a Modification to

include a 10-year call provision.

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\(2\) All Workouts on market rate projects not subject

to Title II of the Housing and Community

Development Act of 1987 (Title II) or Title VI of

the Cranston-Gonzalez National Affordable Housing

Act (Title VI) where the project receives project

based Section 8 assistance shall provide for a

Modification to include a call provision which may

be exercised at the option of the holder at any

time on or after the longer of 10 years, or the

remaining term of the Section 8 contract (if not

renewed on expiration).

D. HUD will not require call provisions on the

Modifications for the following types of projects\--

Section 236, Section 221(d) (3) market rate projects

that are or potentially will constitute \"eligible

low-income housing\" projects under Title II or Title

VI, Section 221(d) (3) BMIR, projects that receive

Rent Supplement payments, projects that receive

Rental Assistance Payments (RAP), projects that have

received Flexible Subsidy assistance, or projects

with Use Agreements. HUD does not require call

provisions on these mortgages in order that the low

or moderate-income character of these projects may be

maintained for at least the original term of the

mortgage.

E. If a provision for collecting a late fee is not

included in the mortgage or deed of trust, such a

provision must be included as part of any

Modification.

11-16. REINSTATEMENT REQUIREMENTS DURING FORECLOSURE PROCEEDINGS

Once a mortgage has been referred to OGC and a

Foreclosure Commissioner appointed, the mortgagor must

make a lump sum payment sufficient to bring the loan

current through principal before the Department will

consider withdrawing the foreclosure action.

Instructions for submitting payoffs and payments of

foreclosure sales proceeds are in Appendix 6.

11-17. CASH FINAL SETTLEMENTS

HUD will not accept any offer from a mortgagor that

contemplates a mortgagor paying off a mortgage loan for

less than the total indebtedness secured by the mortgage

except in conjunction with a publicly advertised HUD

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4350.1 REV-1

project mortgage auction. Of course, HUD reserves the

right to accept or reject any bid in a mortgage auction.

Also, no prepayments may be accepted if they are

otherwise prohibited by contract, regulation or law.

Instructions for submitting payoffs and payments of

foreclosure sale proceeds are in Appendix 6.

SECTION 4: OFFSETTING OF SECTION 8 PAYMENTS

11-18. GENERAL INFORMATION

The policies and procedures stated in this section apply

only to HUD-administered Section 8 contracts. The

welfare of the tenants necessitates forethought before

Section 8 payments are offset. Often offsetting Section

8 payments does not have the desired effect. Section 8

payments should only be offset for the amount of the

monthly workout or mortgage payment and then, only if all

other necessary project expenses are being paid. If it

is necessary to abate Section 8 payments for some other

reason (e.g. because of Section 8 contract violations,

such as units not meeting the appropriate repair

standard) the procedures in the Section 8 Contract

Administrator\'s Handbook should be followed.

11-19. PROCEDURES FOR OFFSETTING SECTION 8 PAYMENTS

A. Both the Section 8 HAP Contract and Regulatory Agreement

permit the exercise of remedies, including the offsetting

of Section 8 payments. Prior to offsetting any Section 8

payments, Area Counsel must perform a legal review to

assure that the applicable contract provisions have been

complied with. Before HUD can begin to offset the

Section 8 payments, HUD must notify the mortgagor of

HUD\'s intent to offset the payment, reasons why the

Department is offsetting the payments, and rights the

mortgagor has to appeal the offsetting procedure. This

notice should provide the mortgagor 30 days in which to

appeal the Department\'s decision. (See Appendix 9 for an

example of the mortgagor letter.)

B. HUD field staff should reduce the amount of Section 8

assistance being offset if there is a clear basis to show

that the project could not operate at the reduced level

of Section 8 payments (i.e., if there are court-ordered

repairs or unpaid utility bills, etc.).

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4350.1 REV-1

C. HUD will begin offsetting the Section 8 payments the

first day of the first full month following the

expiration of the 30-day period. For example, if a

mortgagor is sent a notice of intent to offset Section 8

payments on July 15, the mortgagor has 30 days from July

15 to appeal the decision, i.e., August 15. If the

appeal is denied, the offsetting may begin September 1.

If the mortgagor exercises his/her right to review the

Department\'s record pertaining to the offsetting the

offsetting action will be stayed for no more than a 30-

day period pending the outcome of the review.

D. At the same time that HUD notifies the mortgagor of the

Department\'s intent to offset Section 8 payments, HUD

Loan Management Staff must also notify the appropriate

Accounting Division of the date to begin offsetting the

Section 8 payments. (See Appendix 10 for a sample

memorandum.) Asset Management staff must notify the

Accounting Division of the identity of the project and

the amount of monthly subsidy to be offset. Asset

Management staff must give the Accounting Division notice

by the tenth of the month prior to the month in which the

offset is to occur. Asset Management staff must also

notify the Accounting Division by the tenth of any month

if there are any changes to the offset.

SECTION 5: APPROVAL AND APPEAL PROCESS

11-20. HUD STATE OR AREA OFFICE APPROVAL

The State Housing Director or, if the office has none, the

Director, Multifamily Housing Division:

A. Will review all appeals of decisions regarding Workout

proposals. All appeals, must be presented in writing 30

calendar days from the date of the HUD decision letter.

Each request shall outline why that decision should be

changed. Copies of all correspondence with the HUD

Office should be attached. All appeals, after

consultation with the Asset Management Branch Chief, will

be answered in writing 30 calendar days from the date of

the receipt. The decision of the State Housing Director

or, if the office has none, the Director, Multifamily

Housing Division is final.

B. May approve all Workouts when the minimum monthly

payments call for a payment less than 70% of monthly

accruing interest. See Paragraph 11-12 (E)(15).

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4350.1 REV-1

C. May approve longer-term Workouts in excess of 36 months.

11-21. ASSET MANAGEMENT BRANCH

The Asset Management Branch Chief has the authority to

approve the following actions:

A. All Workout Agreements on mortgages not in foreclosure

\* and not involving an excessive term, generally not more

than 36 months, that will stabilize the project\'s

physical and financial condition and will ensure that \*

necessary repairs are completed.

B. All Modifications on projects not in foreclosure that

contemplate recasting of unpaid principal and

delinquent interest that meet the requirements of

Paragraph 11-9(B).

C. Recommend foreclosure on projects.

11-22.\* WAIVER OF HANDBOOK DIRECTIVES.

As an additional tool in meeting workout/loss mitigation

objectives, HUD Field Asset Management staff are reminded

that they may waive handbook or other directives whenever a

waiver is economically prudent and/or furthers the goal of

providing decent, safe and sanitary housing, so long as the

requirement to be waived is not statutory or regulatory in

nature. 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, proper coordination and sound management

control practices. Specially designed form
[HUD-2](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/2.pdf)
may be

used for this purpose.

SECTION 6: LONGER WORKOUT ARRANGEMENTS

11-23. GENERAL INFORMATION. This section covers Workout

proposals for those projects with financial problems that

\* cannot be resolved within a short-term arrangement, i.e.,

within 36 months. In response to those project owners \*

who need Workout Agreements with a term in excess of 36

7/95 11-38

4350.1 REV-1

months, HUD has developed alternative methods and

mechanisms using a longer Workout Agreement designed to

reinstate the mortgage and restore the project to

financial and physical health. The State Director of

Housing or, if the office has none, then the Director,

Multifamily Housing Division is the approval level for

any Workout request in excess of 36 months.

Paragraphs 11-1 and 11-11 discuss procedures for a

thorough analysis of the project prior to accepting a

Workout proposal. The HUD Office is also encouraged to

consider the physical and financial condition of the

project, project occupancy, and the performance of the

owner. If it is determined that the project has been

satisfactorily maintained, has stable occupancy, and the

owner is in compliance with HUD requirements, the HUD

Office may entertain a request for a Workout proposal in

excess of 36 months.

11-24. APPLICABILITY. This section discusses alternative

\* methods for stabilizing HUD-Held mortgages insured under\*

any section of the National Housing Act and formerly

coinsured loans, endorsed for full insurance, which have

defaulted and been assigned to HUD. As stated in

Paragraph 11-4(A), authority to execute Workout

Agreements for Section 202 has not been delegated to

local HUD Offices, therefore, these guidelines do not

apply to Section 202 Housing for the Elderly and

Handicapped Direct Loan Program.

11-25. ALTERNATIVE METHODS OF WORKOUT AGREEMENTS. The following

represents methods of Workout Agreements that HUD will

consider in an effort to restore the project:

A. PARTIAL PAYMENT OF CLAIM. Upon receipt of a mortgagee\'s

election to assign, the local HUD Office should

immediately contact the owner and the mortgagee to

request consideration of a partial payment of claim in

lieu of an assignment and full payment of the mortgage

insurance claim.

Procedures for reviewing and processing partial payment

of claims are in Chapter 14 of this Handbook. Coinsured

and formerly coinsured projects are not eligible for

partial payment of claims. Current policy under a

partial payment of claim requires, among other things,

the following:

1\. Owner\'s contribution must equal or exceed 5% of the

original mortgage amount, since final endorsement.

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4350.1 REV-1

2\. Mortgage value-sharing (formerly called equity

kicker) is determined by dividing the amount of the

partial payment of claim by the unpaid principal

balance of the delinquent mortgage.

B. 3-YEAR WORKOUT AGREEMENTS. HUD Offices may approve a

Workout Agreement of varying term length options up to 36

months.

C. 4 to 9-YEAR WORKOUT AGREEMENTS. If it is determined by

the HUD Office that an additional amount of time will

allow the delinquency to be stabilized, the HUD Office

may accept a Workout proposal from the owner within 4 to

9 years. The Asset Management Branch must submit any

Workout request beyond 3 years, along with a

recommendation to approve or disapprove the Workout

proposal, to the State Director of Rousing or, if the

office has none, then the Director, Multifamily Rousing

Division. After completing its review, the State Director

of Housing or, if the office has none, then the Director,

Multifamily Housing Division will make the determination

to approve or disapprove the owner\'s request for a

Workout Agreement in excess of 3 years. The State

Director of Housing or, if the office has none, then the

Director, Multifamily Housing Division will return the

proposal to the Asset Management Branch who in turn will

inform the owner of the terms and conditions of any

approved Workout.

1\. With the exception of the longer term, the Workout

must contain the mandatory Workout provisions

specified in Paragraph 11-12.

2\. If the owner agrees to a Workout in excess of 3 years

but no more than 6 years, the owner is also expected

to do the following:

i\. The owner is expected to provide a capital

contribution of up to 10% of the original mortgage

amount.

ii\. Normally, the owner would be allowed to pay, as a

minimum, 70% of interest for the first 2 years;

however, if the owner can only pay 60% to 70%

during the first year, the HUD Office should

require the owner to increase its payment more in

the later years. The HUD Office may consider the

owner\'s proposal for increasing the amounts in the

7/95 11-40

4350.1 REV-1

later years of the Workout, e.g., up to 80% for

the 3rd year, 90% for the 4th year, 100% for the

5th year, and 110% for the 6th year.

The objective is to stabilize the delinquency, so

that at the end of the Workout term, the project\'s

financial problems can be resolved by modifying

the mortgage if, at that time, a Modification is

determined to be appropriate.

3\. If the owner agrees to Workout in excess of 6 but no

more than 9 years, the owner is expected to do the

following:

i\. The owner is expected to provide a capital

contribution of more than 10% and up to 15% of the

original mortgage amount.

ii\. The owner will be required to pay 70% of interest

for the first 2 years; up to 90% interest for the

3rd year; 100% interest for the 4th year; 110% for

the 5th and 6th year; and 120% interest for 7th

through 9th year.

11-26. NO WORKOUT IN EXCESS OF 9 YEARS. If it is determined

that the mortgage cannot be reinstated within 9 years, the

HUD Office must recommend foreclosure.

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4350.1 REV-1

APPENDIX 1

SAMPLE LETTER TO BE SENT TO

MORTGAGORS UPON RECEIPT OF A

DELINQUENCY ALERT

Dear \[Mortgagor)

HUD has received a notice from your mortgagee that it has

not received the \[month) payment for \[Project Name) , HUD Project

No.

If the project is experiencing physical or financial

problems that are affecting your ability to make timely mortgage

payments please advise this office. A meeting to discuss the

project\'s ability to meet its financial obligations can be

arranged with my office if it would be helpful. Please contact

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ of my staff at
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

to arrange a meeting.

We would like to remind you of your obligation to make

monthly mortgage payments by the first of the month. We would

also like to remind you that if your mortgage is assigned to the

Secretary, HUD has policies that may have a financially

undesirable effect on you. These policies include pursuing

foreclosure upon assignment if the loan delinquency cannot be

stabilized during the period covered by the reinstatement plan

and requiring you to report all defaults on HUD Form 2530,

whenever that form is required to be submitted.

In order to live up to your obligations under the mortgage

and note, and to avoid these potentially undesirable actions,

please make your monthly payments in a timely fashion.

Sincerely,

Director, Multifamily Housing

Division

7/95 11-42

4350.1 REV-1

APPENDIX 2

SAMPLE LETTER TO MORTGAGORS TO BE SENT

UPON RECEIPT OF A DEFAULT NOTICE

(Mortgagor)

Dear \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_:

HUD has received a notice from your mortgagee that the

mortgage for (Project Name) , HUD Project
No.\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

is in default. You must cure this default immediately. HUD

has policies designed to make it financially undesirable to

have your mortgage assigned. These policies include:

1\. HUD may begin the foreclosure process at assignment.

HUD\'s intent is to foreclose on all mortgages that

have been assigned and cannot demonstrate that the

loan delinquency will be stabilized during the period

covered by the reinstatement plan. The Department

will withdraw mortgages from foreclosure only when it

is in the best interests of the Department to do so.

2\. If you want to have the mortgage withdrawn from

foreclosure, you may have to accept an increase in

the interest rate in the mortgage note.

3\. You may be required to insert a call provision in the

note and mortgage.

4\. HUD will take administrative sanctions against you

and/or your management agent if there is evidence

that one or both of you caused the assignment.

HUD wants to remind you that we are very serious about

preventing the assignment of insured mortgages. If your

mortgagee assigns this mortgage, HUD will require you to either

cure the default or submit an acceptable reinstatement plan.

Sincerely,

Director, Multifamily Housing

Division

Enclosures

11-43 7/95

4350.1 REV-1

APPENDIX 3a

FORMAT - LETTER TO OWNER AT DEFAULT ASSIGNMENT

Addressee: Project Owner

Subject: Project Number, Name, and Location

Dear \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

The mortgage on the above project was assigned to the

Department of Rousing and Urban Development (HUD) on \[date\] As

HUD is now the lender, you must submit your plan for reinstating

the loan or arrange a meeting in our office to discuss a

reinstatement plan within 30 days. You must also execute and

return to enclosed pre-waiver workout letter before any

discussions in this regard can take place. The Department expects

to have a written reinstatement plan in effect within 90 days.

Effective immediately you are to pay all reasonable and necessary

project operating expenses (including debt service requirements)

and each month remit all remaining net cash to HUD (in accordance

with Section 239 of the National Housing Act) through the lock

box operated by the Multifamily Notes Servicing Branch. All

monthly payments are to be made to the lock box. The project

name and number should be clearly stated and the check sent to:

Multifamily Payment Processing Center, Post Office Box 70764,

Chicago, IL 60673.

HUD does not currently escrow for property insurance.

Therefore, you must arrange for insurance coverage as required by

the mortgage and make premium payments either from project income

or other sources. Insurance escrows were terminated at mortgage

assignment and any funds in the escrow were applied to sums due

under the mortgage. HUD shall be named as an additional insured

and as the loss payee on all property and casualty insurance in

force with respect to the property securing this loan. You are

responsible for providing certification of insurance to the

Department within 10 days from the date of this letter.

Until you bring the mortgage fully current, you are

prohibited from taking any owner distribution, repaying any funds

advanced to the project, or repaying either interest or principal

on any project obligation junior to HUD\'s mortgage. Further, be

advised that Sections 1715z-4a, 1715z-19 and 1735f-15 of the

National Housing Act discipline the improper use of project

funds. Section 1715z-4a provides for double damages in the event

that project funds are used in violation of the Regulatory

Agreement. Section 1715z-19 provides for fines and imprisonment

in the event that project funds are used for other than actual

7/95 11-44

4350.1 REV-1

APPENDIX 3a

and necessary operating expenses. Section 1735f-15 provides for

civil money penalties in the event that project funds are used

for other than reasonable operating expenses and necessary

repairs.

In addition, you are required to submit Monthly Reports for

Establishing Net Income, Forms HUD-93479, HUD-93480 and HUD-

93481, copies enclosed.

It is imperative that an owner of a project with an assigned

mortgage operate in accordance with a HUD-approved Workout

Agreement which is based on the owner\'s reinstatement proposal.

Your proposal should outline how you plan to reinstate the

mortgage (bring it current and resume full amortization) within

36 months. Your plan should also demonstrate that you:

1\. Did not cause the default by any deliberate or voluntary

act;

2\. Save restored to the project any funds or assets

improperly withdrawn, distributed or disbursed;

3\. Will correct any conditions constituting violations of

the Regulatory Agreement and thereafter conform to its

requirements;

4\. Will provide and maintain management acceptable to the

SOD Asset Management Branch Chief; and

5\. Will correct any physical deficiencies and make any

general upgrading repairs or renovation the project may

require.

Unless you have already submitted a detailed reinstatement

plan, you must, within 30 days from the date of this letter,

arrange a meeting in our office to discuss the terms and

conditions of an acceptable-proposal. Any questions you may have

can be answered during the meeting. It is essential that you

submit your written reinstatement proposal within 30 days of the

meeting because, as noted above, SOD expects to have a written

reinstatement plan in effect within 90 days following assignment.

In the event no acceptable plan is submitted within that time

period, this office will initiate foreclosure.

11-45 7/95

4350.1 REV-1

APPENDIX 3a

To arrange a meeting time, you should contact \[Asset

Manager\'s Name\] at \[Telephone No.\]. We look forward to working

with you to reinstate this loan.

Sincerely,

Director, Multifamily Housing

Division

Enclosures

7/95 11-46

4350.1 REV-1

APPENDIX 3b

FORMAT - LETTER TO OWNER AT G-4 ASSIGNMENT

Addressee: Project Owner

Subject: Project Number, Name, and Location

Dear \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_:

The mortgage on the above project was assigned to the

Department of Housing and Urban Development on \[date\] Each month

you should remit the scheduled mortgage payment to the lock box

operated by the Notes Receivable Branch. The project name and

number should be clearly stated and the check sent to:

Multifamily Payment Processing Center

Post Office Box 70764

Chicago, IL 60673

If you should have any questions regarding this matter,

please contact \[Asset Manager\] at \[telephone number\].

Sincerely,

Director, Multifamily Housing

Division

11-47 7/95

4350.1 REV-1

APPENDIX 4

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PROJECT NO.

PROJECT NAME

LOCATION

PROVISIONAL WORKOUT ARRANGEMENT

The undersigned Mortgagor hereby expressly acknowledges that it

is in default in the payment and/or performance of certain

obligations under the promissory note in the original principal

amount of \$ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ (the \"Note\")
secured by the

Project identified above. The Mortgagor requests the Secretary

(\"Secretary\") of the Department of Rousing and Urban Development

(\"HUD\") to forbear from the exercise of certain rights and

remedies that HUD has as a result of such default, on the terms

and conditions stated herein:

1\. Definitions. The Secretary of HUD is the owner and holder

of the above-referenced \[first lien\] \[insert when

appropriate\] mortgage loan (the \"Loan\") made to

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_-\[(\"Mortgagor\")\]
\[if

Mortgagor is the original borrower\] \[Note: If the original

borrower has sold the Project, the following additional

language must be inserted:

\"\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\[insert
name of

Mortgagor\] (\"Mortgagor\") subsequently purchased the Project

and, in connection therewith, assumed full obligation and

liability for repayment of the Loan and for satisfaction of

the terms and conditions of the Loan Documents (as

hereinafter defined).\"). The Loan was insured by mortgage

note insurance issued by the Federal Housing Administration

pursuant to the provisions of the National Housing Act. The

Secretary of HUD has succeeded to all -right, title and

interest of the original lender in and to the Loan. The

Loan is evidenced by the Note, which is secured by, among

other documents, a \[mortgage\] \[deed of trust\] \[and

assignment of rents and profits\]. (The Note, \[mortgage\]

\[deed of trust\] and all other documents executed in

connection therewith evidencing or securing the Loan are

collectively referred to herein as the \"Loan Documents.\")

2\. Waiver of Notice. Grace Periods and Defenses. Mortgagor

expressly acknowledges and agrees that, as a result of

Mortgagor\'s default, (a) HUD is entitled to assume

possession of the Project and all other encumbered

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4350.1 REV-1

APPENDIX 4

property, whether real or personal; and (b) that the

assignment of rents and profits from the Project to HUD is

present, complete and irrevocable and Mortgagor disclaims

any interest in such rents and profits.

Mortgagor acknowledges and agrees that HUD has revoked the

license granted to Mortgagor to collect and receive the

rents and profits from the Project. Mortgagor further

acknowledges and agrees that no formal action is required

for HUD to perfect its interest in the rents and profits and

that the assignment of rents and profits to HUD is now

perfected. Mortgagor also acknowledges and agrees that if,

however, an affirmative act is deemed required, this

Agreement is intended to constitute an affirmative act by

HUD to perfect its interest in the rents and profits.

Mortgagor covenants and agrees irrevocably not to assert any

claim or cause of action against HUD or to seek to recover

the rents and profits on the grounds that HUD\'s interest in

the rents and profits is not present and perfected. Until

the Loan is repaid, Mortgagor will collect the rents and

profits in trust for HUD. Mortgagor further acknowledges

that, as a result of Mortgagor\'s default, HUD is entitled to

immediate and unfettered control of and access to any and

all accounts, including reserve and escrow accounts, that

are funded, in whole or in part, by rents or proceeds from

the Project and all residual receipts.

Mortgagor acknowledges and agrees that an event of default

presently exists under the Loan Documents. Mortgagor also

acknowledges and agrees that, while no notices regarding

such default are necessary, Mortgagor has received notice of

its default. Mortgagor further acknowledges and agrees that

no notices of default will be required or necessary in the

future with respect to existing or future defaults, but that

if any such notices should be deemed required, Mortgagor

waives any and all rights to notice of payment default or

any other default, protest and notice of protest, dishonor,

diligence in collecting and the bringing of suit against any

party, notice of intention to accelerate, notice of

acceleration, demand for payment and any other notices

whatsoever regarding the Note or the other Loan Documents,

and further hereby expressly waives any claims that any

notices previously given are insufficient for any reason.

Mortgagor also waives any grace period that may exist under

the Loan Documents or

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4350.1 REV-1

APPENDIX 4

by reason of any local, state or federal law. Mortgagor

waives any and all claims and defenses now or hereafter

arising, including, but not limited to, those based upon

statutes of limitations or laches, to an action that HUD in

the future may bring under the Loan Documents arising from

or related to any delay by HUD in exercising any rights or

remedies under the Loan Documents.

3\. Forbearance. Provided that Mortgagor satisfies all of its

obligations under this Agreement and under the Loan

Documents (except as HUD has agreed in this Agreement to

forbear from enforcing the Loan Documents), HUD agrees not

to foreclose or attempt to foreclose on the Project securing

the Note or institute suit for collection of the Note

against Mortgagor from the effective date as defined in

Section 18 of this Agreement (the \"Effective Date\") through

\[insert here the date through which payments are modified

pursuant to Sections 5(a) and (b)\]. If any default shall

occur under this Agreement or under the Loan Documents

(except to the extent such default shall be expressly

excused hereby), then HUD may seek to foreclose upon the

Project or any other collateral and to exercise any and all

other remedies to which HUD may be entitled under the Loan

Documents or applicable law, without the requirement of any

notice to or cure period for the benefit of Mortgagor.

Mortgagor agrees that it will not, during the period in

which the forbearance agreed to in the immediately preceding

paragraph is in force, initiate any action of any kind

against HUD, exercise any remedy available under the Loan

Documents or otherwise or make any type of demand upon HUD

with respect to the Loan Documents, the Project or the Loan.

4\. Junior Obligations Mortgagor agrees that project revenues

will not be used to repay either interest or principal for

any project obligation, other than Operating Expenses (as

hereinafter defined) that is junior to the Secretary\'s lien.

5\. Payment Provision. Mortgagor agrees to make the following

payments, all of which payments shall be applied in

accordance with the Loan Documents:

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4350.1 REV-1

APPENDIX 4

a\. Beginning on the Effective Date and continuing through

the date \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_years thereafter, Mortgagor

shall remit by the first of the month \[insert minimum

monthly payment amount\].

b\. Any funds over \$\[insert approximately one month\'s

principal and interest\] remaining in the operating

account each month after payment of project operating

expenses will be remitted in addition to the minimum

monthly payment.

c\. Past delinquency, if any, in the Reserve for Replacement

is hereby forgiven. Payments into the Reserve for

Replacement for the duration of this workout period are

hereby waived.

d\. Mortgagor shall remit, as liquidated damages, a two

percent (2%) late charge for any payment not received by

the fifteenth of the month.

e\. Mortgagor shall pay the service charges due HUD.

6\. Lump Sum Payments. Mortgagor agrees to make the following

payments, to be applied to mortgage delinquencies, on the

dates indicated:

\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_(\*) on or before \[insert date\]

\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_ on or before \[insert date\]

(\*)OR payment in an amount to bring the mortgage current

through (interest) (principal) (approximately

\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_).

7\. Repairs. Mortgagor agrees to deliver to HUD (simultaneously

with \[within\_\_\_\_\_\_\_\_\_ (\_\_\_\_) days of\]) the Effective Date
of

this Agreement\] funds in the amount of \$\_\_\_\_\_\_\_\_\_\_\_\_ for

repairs. HUD, or its agent, shall hold such funds in

escrow. Such escrow agent shall make such disbursements

from this fund as may be requested by Mortgagor and

consented to by HUD, in HUD\'s sole and absolute discretion.

Any such reserve or escrow accounts shall be separate and

distinct from any accounts that may be established under the

Regulatory Agreement relating to the Project and shall not

be governed by the terms and conditions of the Regulatory

Agreement. Any provisions of this Agreement relating to

11-51 7/95

4350.1 REV-1

APPENDIX 4

reserve or escrow accounts shall control and supersede any

provisions of the Regulatory Agreement relating to reserve

or escrow accounts and shall survive any termination of the

Regulatory Agreement.

Mortgagor acknowledges and agrees that HUD, in its sole and

absolute discretion, may direct that the funds in any

reserve or escrow account whether established hereunder or

under any of the Loan Documents (a) be delivered to a

purchaser of the Loan and administered by the purchaser as

the purchaser so directs, (b) in the event of a default

under this Agreement or the Loan Documents or a sale of the

Loan, be applied to any outstanding delinquency that exists

or would have existed with respect to the Loan but for this

Agreement, or (c) in the event of a default under this

Agreement or the Loan Documents or a sale of the Loan, be

applied to any outstanding unpaid amount that exists with

respect to the Loan.

8\. Accounting Reports. During the term of this Agreement, the

mortgagor shall submit Monthly Reports for Establishing Net

Income (Forms HUD-93479, 93480, and 93481). The first

report shall be for the month of
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

The original reports are to be mailed to the HUD Office in

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \[identify
proper HUD office\].

9\. Cancellation Clause. This Agreement shall enter into force

as of the effective date, as defined in Section 17 of this

Agreement, and continue until and unless terminated earlier

in accordance with its terms. The forbearance by HUD

provided pursuant to this Agreement shall automatically

terminate, without any requirement of notice or opportunity

to cure, (a) in the event Mortgagor fails to comply with any

of the terms of this Agreement; (b) in the event any default

occurs under the Loan Documents which does not exist as of

the effective date of this Agreement and which is not the

subject of a forbearance provided pursuant to this

Agreement; (c) Mortgagor files a petition for bankruptcy

under any chapter of the Federal Bankruptcy Code or seeks to

avail itself of any other debtor relief law, or there is

filed against Mortgagor an involuntary petition for

bankruptcy under any chapter of the Federal Bankruptcy Code,

or any other judicial action is taken with respect to

Mortgagor by any of Mortgagor\'s creditors; or (d) HUD

7/95 11-52

4350.1 REV-1

APPENDIX 4

discovers that Mortgagor had, in any material respect,

misrepresented its or the Project\'s financial position in

connection with the negotiation of this Agreement.

HUD shall have the right to assign this Agreement at any

time, including, but not limited to, in connection with the

sale of the Loan. This Agreement shall not be assigned by

Mortgagor. In the event the Loan is sold, the purchaser may

terminate this Agreement or the forbearances provided

pursuant to this Agreement by giving sixty (60) days written

notice to Mortgagor prior to any yearly anniversary date of

this Agreement. Such termination shall be effective as of

the anniversary date so specified in such notice.

Mortgagor acknowledges that its failure to meet the terms of

this Agreement is also grounds for HUD to impose

administrative sanctions on the Mortgagor, including, but

not limited to, suspension or debarment from participation

in HUD programs.

10\. Insurance. Mortgagor agrees that it shall maintain in force

such insurance with respect to the Project as is required by

the Loan Documents. Mortgagor further agrees that any such

insurance policies shall list HUD as an additional insured

and as the loss payee.

11\. Waiver. The execution, delivery and performance of this

Agreement by HUD and the acceptance by HUD of performance of

the Mortgagor hereunder (a) shall not constitute a waiver or

release by HUD of any default that may now or hereafter

exist under the Loan Documents, and (b) except as

specifically provided herein, shall be without prejudice to,

and is not a waiver or release of, HUD\'s rights at any time

in the future to exercise any and all remedies conferred

upon HUD by the Loan Documents or otherwise at law or in

equity, including the right to accelerate the Note, if not

already accelerated, and to institute foreclosure

proceedings and/or to institute collection proceedings

against Mortgagor.

No failure or delay by HUD in exercising any right, power or

remedy which HUD may have under any of the Loan Documents or

this Agreement shall operate as a waiver thereof or of any

other right, power or remedy, nor shall any single or

partial exercise by HUD of any such

11-53 7/95

4350.1 REV-1

APPENDIX 4

right, power or remedy preclude any other or further

exercise thereof or of any other right, power or remedy.

Except as expressly provided herein, no waiver of any

provision of any Loan Document and no consent to any

departure therefrom shall ever be effective unless it is in

writing and signed by HUD, and then such waiver or consent

shall be effective only in the specific instances and for

the purposes for which given and to the extent specified in

such writing. No notice to or demand on Mortgagor or any

guarantor or other obligor shall in any case of itself

entitle any such person to any other or further notice or

demand in similar or other circumstances.

Any default by Mortgagor under the terms of this Agreement

shall also be deemed to be a non-curable default under the

Loan Documents. Similarly, any default by Mortgagor under

the terms of any of the Loan Documents (except to the extent

such default shall be expressly excused hereby) shall

constitute a non-curable default hereunder.

12\. Criminal Sanctions for Misuse of Project Funds. Section

1715z-19 of the National Housing Act provides for equity

skimming penalties. Mortgagor acknowledges that the use of

Project funds derived from the Project for any purpose other

than to meet actual and necessary Project expenses may be a

criminal offense punishable by a fine of not more than

\$250,000 and imprisonment of not more than five (5) years.

13\. Integration. The Loan Documents remain in full force and

effect, subject to the forbearances specifically provided

for in this Agreement with respect to enforcement of the

Loan Documents. This Agreement does not constitute a

modification or novation of the Loan Documents and, upon

expiration of HUD\"s forbearance pursuant to this Agreement,

all provisions of the Loan Documents shall be fully

enforceable by HUD or for its benefit. This Agreement,

including any attachments, exhibits, and schedules referred

to herein and attached, constitutes the entire agreement

between the parties pertaining to the subject matter hereof

and supersedes any and all prior agreements, representations

and understandings of the parties, written or oral.

14\. Costs. Fees and Expenses. Mortgagor shall be responsible

for any and all costs, fees and expenses, including

attorney\'s fees, that HUD may incur in connection with this

Agreement. Any such costs, fees

7/95 11-54

4350.1 REV-1

APPENDIX 4

and expenses shall not be paid out of any funds derived from

the Project.

15\. Termination. The termination of the forbearance provided

for in this Agreement shall not serve to terminate any of

the other acknowledgments and agreements set forth herein.

The agreements and acknowledgements of Mortgagor made herein

shall survive termination of this Agreement and shall be

enforceable against Mortgagor.

16\. Notice of Expiration. Forty-five (45) days prior to the

expiration of HUD\'s forbearance pursuant to this Agreement,

Mortgagor shall notify HUD of the upcoming expiration of

such forbearance period.

17\. Effective Date. The Effective Date pursuant to this

Agreement shall be the first (1st) day of the calendar month

after the month in which this Agreement is fully executed by

HUD and Mortgagor.

ASSISTANT SECRETARY FOR HOUSING-

FEDERAL HOUSING COMMISSIONER,

DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT

By:

Name:

Title:

\[NAME OF MORTGAG0R\]

By:

Name:

Title:

11-55 7/95

4350.1 REV-1

APPENDIX 5

\*\*\*MARS WORKOUT COVER SHEET INSTRUCTIONS\*\*\*

This Cover Sheet is designed to provide the Office of

Mortgage Insurance Accounting and Servicing, Multifamily Notes

Branch, with a summary of the terms and conditions of the

Provisional Workout Agreement. The Cover Sheet should he

completed and forwarded to the Multifamily Notes Branch along

with the fully signed Provisional Workout Agreement.

1\. This item is not applicable unless the Provisional Workout

Agreement is being approved as a condition of a Transfer of

Physical Assets (TPA). Enter TPA preliminary approval date

if applicable.

2\. Enter the month/year in which the first payment is due under

the Provisional Workout Agreement.

3\. Enter the month/year in which the final payment is due under

the Provisional Workout Agreement.

4\. Enter the period covered by the payment schedule outlined in

items, A through D, below. (If the monthly payments are to

change over the term of the Workout, a separate Cover Sheet

will have to be done for each period in which the change

will take place.)

A. Enter the monthly payment required under the Workout.

B. If the monthly payment includes a portion of the mortgage

delinquency, enter both the percentage and amount of the

delinquency to be paid.

C. Enter the minimum payment due under the Workout for each

account. If the monthly payment is less than the full

amount billed for that account, specify both the

percentage and the amount to be paid.

D. Enter all lump sum payments required under the Workout

and how the funds are to be applied. Remind the owner

that any lump sum payments to he applied for other than

the normal allocation under the mortgage will have to be

remitted in a separate check.

5\. Enter the amount/date for deposits to the special escrow for

repairs, if any, under the Workout.

7/95 11-56

4350.1 REV-1

APPENDIX 5

INPUT DATA SHEET

FHA Project \*: Project Name:

HQ Housing Specialist: Telephone #:

FO Housing Specialist: Telephone #:

1\. TPA Effective Date (Preliminary Approval Date):

2\. Workout Effective Date:

3\. Workout Expiration Date:

4\. Workout Agreement Payment Data:

\*Period covered: From To

A. Increment\*\* \$

B. Fraction of Delinquency Amount \$

C. Minimum Payment From Bill: (check items needed)

(if less than full amount, indicate %)

Int. on Advances

Advances

Service Charge

Tax Escrow

Interest

Principal

D. Lump Sum (see schedule below)

LUMP SUM SCHEDULE: Allocation

Bill Date Amount Code Code Legend

/ / \$ ( \_\_\_ ) 00=Normal Alloc.

/ / \$ ( \_\_\_ ) 01=Int. on Adv.

/ / \$ ( \_\_\_ ) 02=Advances

/ / \$ ( \_\_\_ ) 03=Service Chg.

/ / \$ ( \_\_\_ ) 04=Tax Escrow

/ / \$ ( \_\_\_ ) 05=Interest

/ / \$ ( \_\_\_ ) 06=Principal

/ / \$ ( \_\_\_ ) 07=Repair Escrow

/ / \$ ( \_\_\_ ) 08=Misc. Income

/ / \$ ( \_\_\_ ) 09=Other

(remarks)

Note: Lump Sum Amounts for other than the normal allocation

should be remitted in a check separate from the monthly payment.

E. Other (use remarks, if payment schedule different from

the above).

11-57 7/95

4350.1 REV-1

APPENDIX 5

5\. Special repair escrow Yes No

If yes, \$\_\_\_\_\_\_\_\_/Time Period:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\*\*REMARKS\*\*

\* If payment terms change during workout period, then

prepare a cover sheet for each time period covering the

new payment terms.

\*\* Increment amount is a set monthly amount to be submitted

in addition to the minimum monthly payment (i.e., \$2,000

\+ payment).

Reviewed by
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date

MARS Input Date
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Approved by
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date

7/95 11-58

4350.1 REV-1

APPENDIX 6

INSTRUCTIONS FOR COMPLETING A REQUEST

TO TRANSFER FUNDS BY WIRE

ITEM 1 - RECEIVER-DFI#: The Treasury Department\'s ABA

number for deposit messages is 021030004. This

number should be entered by the sending bank for

all deposit messages sent to the Treasury.

ITEM 2 - TYPE-SUBTYPE-CD: The type and subtype code will be

provided by the sending bank.

ITEM 3 - SENDER-DFI#: This number will be provided by the

sending bank.

ITEM 4 - SENDING-REF#: The sixteen character reference number

is inserted by the sending bank at its option.

ITEM 5 - AMOUNT: The transfer amount must be punctuated with

commas and decimal points; use of the \"\$\" is

optional. This item will be provided by the

depositor.

ITEM 6 - SENDER-DFI-NAME: This information is automatically

inserted by the Federal Reserve Bank.

ITEM 7 - RECEIVER-DFI-NAME: The Treasury Department\'s name for

deposit messages is \"TREAS NYC\". This name should be

entered by the sending bank.

ITEM 8 - PRODUCT CODE: A product code of \"CTR\" for customer

transfer should be the first data in the RECEIVER -

TEXT field. Other values may be entered, if

appropriate, using the ABA\'s options. A slash must

be entered after the product code.

ITEM 9 - AGENCY LOCATION CODE: THIS ITEM IS OF CRITICAL

IMPORTANCE. IT MUST APPEAR ON THE FUNDS TRANSFER

DEPOSIT MESSAGE IN THE PRECISE MANNER AS STATED TO

ALLOW FOR THE AUTOMATED PROCESSING AND CLASSIFICATION

OF THE FUNDS TRANSFER MESSAGE TO THE AGENCY LOCATION

CODE OF THE APPROPRIATE AGENCY. The agency\'s unique

code must be specified in the funds transfer message in

order for the funds to be correctly classified to the

respective agency. The ALC identification sequence

includes the

11-59 7/95

4350.1 REV-1

APPENDIX 6

beneficiary code field tag, BNF=, and identifier code,

\"/AC-\", followed by the appropriate ALC number. This

component must be in the following format:

BNF=/AC-86090300

The ALC identification sequence can, if necessary,

begin on one line and end on the next line; however,

the field tag \"BNF=\" must be one line and cannot

contain any spaces.

ITEM 10 - THIRD PARTY INFORMATION: This contains the appropriate

information to identify the reason for the funds

transfer. The Originator to Beneficiary Information

field tag \"OBI=\" is used to signify the beginning of

the free- form third party text. The field tag \"OBI=\"

must be on the same line and cannot contain any spaces.

The field tag is placed following the ALC

identification sequence and preceded by a space. An

example of this data line is as follows:

BNF=/AC-86090300 OBI=

Wire Transfer Deposit Message

Format

\(1\)

021030004 (2)

\(3\) (4) (5)

\(6\)

\(7\) (8)

TREAS NYC/CTR/

\(9\) (10)

BNF=/AC-86090300 OBI=

Multifamily Project No. Account 86X4070

Notes Receivable Branch Chief

Remitter (202) 708-4035

7/95 11-60

4350.1 REV-1

APPENDIX 6

NOTE: Items 1, 7, 8, 9, and 10 must be completed as shown above.

A separate wire transfer must be made for each mortgage

purchased.

11-61 7/95

4350.1 REV-1

APPENDIX 7

CALL PROVISION LANGUAGE TO BE INSERTED

IN MODIFICATION AGREEMENTS

The following language has been approved by the Office of General

Counsel to be included in any Modification Agreements.

A. NOTE PROVISION.

\"At any time after \* or ( \* ) years from the date of

the Note, the holder shall have the option to accelerate the

unpaid principal together with all other indebtedness under this

Note and to declare the unpaid balance of the principal together

with all interest thereon and other indebtedness under this Note

to be due and payable upon sixty days (60) prior written notice

being given by the holder to the maker or its successors or

assigns.\"

B. MORTGAGE PROVISION.

\"At any time after \* or ( \* ) years from the date of the

(insert name of document) the (Mortgagee) (Beneficiary) shall

have the option to accelerate the unpaid principal together with

all other indebtedness under the Note secured hereby and to

declare that the unpaid balance of principal together with all

interest thereon and other indebtedness under the Note and

(Mortgage) (Deed of Trust) to be due and payable upon sixty days

\(60\) prior written notice being given by the holder to the

(Mortgagor) (Trustor) or its successors or assigns.\"

\* Insert appropriate number:

The longer of the remaining term of the Section 8 contract

or ten years.

7/95 11-62

4350.1 REV-1

APPENDIX 8

SAMPLE OPTIONAL TERMS THAT MAY BE

INCLUDED IN WORKOUT ARRANGEMENTS

The language included here is designed to provide information on

the types of optional terms that may be included in workout

arrangements. The wording of these optional provisions may be

changed to reflect the circumstances of the individual project.

1\. Charging Interest on Accrued Delinquencies.

\"Interest. Interest on the outstanding delinquent amount

at the rate of\_\_\_\_\_ percent (\_\_\_%) per annum from
\_\_\_\_\_\_\_\_

to \_\_\_\_\_\_\_ shall be payable on the date the Lump Sum payment

is due.\"

2\. Letter of Credit.

\"Security. The mortgagor shall provide irrevocable, non-

documentary Letter(s) of Credit securing the Lump Sum

payments. The Letter(s) of Credit shall be redeemable by

HUD in the amount of the Lump Sum payment then due, upon the

mortgagor\'s failure to make any such payment. The Letter(s)

of Credit may be reduced by the amount of each Lump Sum

payment made.\"

11-63 7/95

4350.1 REV-1

APPENDIX 9

LETTER TO MORTGAGORS

NOTIFYING THEM OF HUD\'S INTENT

TO OFFSET SECTION 8 PAYMENTS

CERTIFIED MAIL\--RETURN RECEIPT REQUESTED

(MORTGAGOR NAME AND ADDRESS)

SUBJECT: Section 8 Offset

Project No.

City

Dear \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

Your Section 8 Housing Assistance Payments (HAP) Contract,

Regulatory Agreement and the Debt Collection Act allow the

Department to offset the Section 8 assistance when a debt is owed

to the Federal Government. The Department intends to offset

\$\_\_\_\_\_\_ per month of Section 8 assistance.

HUD will begin offsetting the Section 8 payments on the

first monthly payment after the 30 day period. Therefore, HUD

will begin offsetting your Section 8 payments on
\_\_\_\_\_\_\_\_\_\_\_\_.

You have the right to request a review of the information

the Department used to make this decision. If you want to request

a review, you must notify this office in writing within 20 days

of the date of this letter. Your letter must state why you are

seeking this review. If you wish to inspect or copy the

Department\'s records relating to this debt, you must so state in

your letter.

If you would like to discuss why HUD is offsetting your

Section 8 payments, please contact
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ at

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

Sincerely,

\[State Director of Housing or

Multifamily Division Director,

whichever is higher in office\]

7/95 11-64

4350.1 REV-1

APPENDIX 10

SAMPLE MEMO TO ACCOUNTING DIVISION REQUESTING

SECTION 8 OFFSET

TO: Director, Accounting Division

FROM: Chief, Asset Management Branch

SUBJECT: Section 8 Offset

Project Name

Section 8 Project No.

FHA Project No.

We have decided to offset the Section 8 assistance on this

mortgage
because\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

Therefore, beginning \[month\] and until further notice, please

withhold \$\_\_\_\_\_\_\_ from the Section 8 payment to the owner and

have it remitted to:

Multifamily Payment Processing Center

Post Office Box 70764

Chicago, IL 60673

The FHA number of the project must be included on the check.

The balance of the Section 8 payment should continue to be sent

directly to the owner or agent.

If you have any questions, please contact
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

at \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

cc: HMHO, HUD HQ Rm. 6164

HOMMN, HUD HQ Rm. 6246

11-65 7/95

4350.1 REV-1

APPENDIX 11

Information Sheet - Section 202 Reinstatement

Return to Headquarters

Project No.

HUD Office

Project Name

Borrower Name

INFORMATION CURRENT AS OF: (Date)

Project Information

1\. Number of Units: Total

0 BR \_\_\_\_\_\_\_ 1 BR\_\_\_\_\_\_ 2 BR \_\_\_\_\_\_ 3 BR\_\_\_\_\_\_

2\. Number Non-revenue Producing Units

3\. Occupancy Type: EH PH DD CMI

4\. Date Sustaining Occupancy: (Mo/Yr)

5\. Current Occupancy: %

6\. No. of vacant units:

7\. Date Initial Occupancy: (Mo/Yr)

8\. Date Construction Start: Completion

9\. Date Comprehensive Mgmt. Review:

Rating\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Rents

10\. Current Mo. Rents: 0 BR \$ 1 BR \$ 2 BR \$ 3 BR \$

7/95 11-66

4350.1 REV-1

APPENDIX 11

11\. Rent Increase Request: No; Yes. If Yes,

effective date\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

Amount of Increase: 0 BR \$ 1 BR \$ 2 BR \$

3 BR \$

Financial

12\. Is project submitting monthly accounting reports?

Yes No If no, why? Explain below.

13\. Is project submitting Annual Financial Statements?

Yes No If no, why? Explain below.

14\. Monthly operating expenses \$\_\_\_\_\_\_\_\_\_\_\_ (exclude

debt service and escrow deposits)

a\) Tax & Insurance Fund:

Monthly Deposit \$ Balance \$

b\) Reserve for Replacement Fund:

Monthly Deposit \$ Balance \$

c\) Other Continuing Project Expense (specify)

15\. Section 8 Vouchers:

a\) Project monthly voucher \$

(average for last 6 months)

b\) Accounting Division monthly voucher payment \$ \_\_\_\_\_\_\_

(average for last 6 months)

c\) Has the Accounting Division made any off-set from voucher

amount?

\_\_\_\_\_\_\_\_\_Yes \_\_\_\_\_\_\_\_No If yes, amount
\$\_\_\_\_\_\_\_\_\_\_

11-67 7/95

4350.1 REV-1

APPENDIX 11

Mortgage

16\. Mortgage Amount \$

(Based on Cost Certification dated \_\_\_\_\_\_\_\_\_\_\_\_\_\_Mo/Yr)

17\. Interest Rate

18\. Total Monthly Payment: \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

a\) Interest \$ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

b\) Principal \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

19\. Delinquent Interest \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

20\. Amount of Interest Accruing Monthly
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Funds Available

21\. a) Funds remaining after cost certification
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_

b\) Amount of above funds available to reduce interest

delinquency \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

c\) Original Minimum Capital Investment \$\_\_\_\_\_\_\_\_\_\_\_\_\_

Present Balance \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

d\) Operating Account Balance \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

e\) Reserve for Replacement Balance \$\_\_\_\_\_\_\_\_\_\_\_

Monthly Deposit \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

f\) Additional Funds from Borrower \$

g\) Other Funds (specify) \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7/95 11-68

4350.1 REV-1

APPENDIX 11

Other

22\. Identify on-going or completed: audits, investigations,

legal or other actions

23\. Attach additional details on a separate sheet, identify each

item by number.

Information

Prepared
by:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Phone
Number:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

11-69 7/95

4350.1 REV-1

APPENDIX 12

FORM OF PRE-WORKOUT WAIVER LETTER

\[LETTERHEAD OF THE DEPARTMENT OF

HOUSING AND URBAN DEVELOPMENT\]

\[DATE\]

BY CERTIFIED MAIL

RETURN RECEIPT REQUESTED

\[Name of Borrower\]

\[Street Address\]

\[City, State Zip Code\]

Attention: \[Name of Contact Person\]

Re: \[Name of Project/Loan\] (the \"Project\")

FHA #:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Ladies and Gentlemen:

As you know, the Secretary of the Department of Housing and

Urban Development (\"HUD\") is the owner and holder of the above-

referenced \[first lien\] \[insert when appropriate\] mortgage loan

(the \"Loan\") made to \[insert name of Borrower\] (\"Borrower\").

Borrower and HUD (collectively, the \"Parties\") acknowledge and

agree that HUD is the owner and holder as well of all documents

evidencing or securing the Loan (collectively, the \"Loan

Documents\"). The Loan Documents encumber certain real and

personal property described more completely in the Loan Documents

(the \"Property\").

Borrower has committed events of default under the Loan

Documents, including, but not limited to, failure to pay

installments due for the period of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
through

\_\_\_\_\_\_\_\_\_\_. An aggregate amount of not less than
\$\_\_\_\_\_\_\_\_\_\_

is due with respect to the Loan. The Parties acknowledge that,

in connection with Borrower\'s default under the Loan, Borrower

has requested that HUD modify or forbear from enforcing

Borrower\'s obligations under the Loan Documents. HUD is willing

to discuss Borrower\'s request, but only under the specific terms

and conditions set forth below.

7/95 11-70

4350.1 REV-1

APPENDIX 12

A. Negotiations. The Parties understand and agree that (a)

any and all discussions and negotiations, or correspondence or

drafts of documents relating to such discussions and

negotiations, concerning the Loan or the Loan Documents are to be

considered compromise and settlement negotiations and

propositions made with a view to a Compromise and settlement and

\(b\) all such negotiations and discussions are to be protected

accordingly and are not to be admissible as evidence for any

purpose whatsoever on any issue that is or might be before any

court or administrative body. The Parties acknowledge and agree

that they will use reasonable efforts to reach agreement with

respect to the proposed terns and conditions of resolution of the

existing defaults under the Loan, but, notwithstanding the

foregoing, each of the Parties specifically reserves the right to

terminate any such discussions or negotiations upon written

notice to the other Party at any time and to pursue immediately

enforcement of any and all rights and remedies available under

the Loan Documents.

B. Only Written Agreements. The Parties acknowledge and

agree that no compromise, settlement, agreement or understanding

with respect to the Loan or the Loan Documents will constitute a

legally binding agreement or contract or have any force or effect

whatsoever unless and until reduced to writing, signed by

authorized representatives of each Party and such other persons

or entities as are parties to any such agreement and, in the case

of HUD, approved by all appropriate committees and/or officials

of HUD having responsibility for the Loan and its modification or

enforcement. The Parties acknowledge and agree that they are

precluded from claiming that any amendment or modification

(whether oral or written, express or implied, or otherwise) of,

or forbearance or \"work-out\" with respect to the terms of, the

Loan or the Loan Documents has been effected except in accordance

with a written agreement approved, executed and delivered

pursuant to the terms and conditions of this letter, and the

Parties acknowledge and agree that all discussions, negotiations,

offers, proposals or agreements to recommend modifications of, or

forbearances or \"work outs\" with respect to the terms of, the

Loan or the Loan Documents (whether oral or written, express or

implied, or otherwise)

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will be and will remain revocable at will until such time as they

are incorporated into a written agreement approved, executed and

delivered by the Parties pursuant to the terms and conditions of

this letter. Finally, the Parties acknowledge and agree

specifically that no party is obligated to reach any agreement

with respect to any modification of, or forbearance or \"work out\"

with respect to the terms of, the Loan or the Loan Documents, or

any other matter and that HUD field offices, including

specifically the HUD field office with responsibility for

monitoring the Loan, have no authority to bind HUD in connection

with any modification of, or forbearance or \"work out\" with

respect to the terms of, the Loan or the Loan Documents.

C. No Waivers. No negotiations or other action undertaken

pursuant to this letter will constitute a waiver of HUD\'s rights

in connection with the Loan or under the Loan Documents, except

to the extent specifically stated in this letter or in a written

agreement executed by HUD. No delay or failure on HUD\'s part of

any party to exercise any right or remedy with respect to the

Loan or under the Loan Documents will constitute a waiver of, or

affect adversely in any manner the later enforcement or exercise

of, any such rights and remedies. The Parties specifically

acknowledge and agree that no discussion, negotiation or action

undertaken pursuant to this letter in connection with the Loan or

the Loan Documents precludes or prevents Borrower at its election

from refinancing the Loan or from obtaining alternative sources

of funding for the use and operation of the property in issue,

subject to the terms and provisions of the Loan Documents

relating to prepayment of the Loan.

D. Loan Documents Still in Force. Notwithstanding any

other provision of this letter or any claims of Borrower to the

contrary, the Loan Documents (a) formerly have not been altered,

amended, modified or rescinded in any way and (b) are in full

force and effect.

E. Advice from Independent Counsel. Each Party understands

that by executing this letter in the appropriate place it is

entering into a legally binding contract that affects its rights.

Borrower represents to HUD that it has consulted with its own

legal counsel with respect to the

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APPENDIX 12

meaning of this letter and that it is familiar with and

understands the terms and provisions of this letter.

F. Termination of Forbearance. Notwithstanding any

provision of this letter to the contrary, HUD\'s agreement to

forbear from exercising its rights and remedies under the Loan

Documents will terminate and lapse automatically (if such

forbearance has not previously been terminated) as of 5:00 P.M.

eastern time on (the \"Cut-Off Date\"), time being of the essence

to HUD. HUD has no authority to execute this pre-workout letter

after the Cut-Off Date. If the written agreement setting forth

the modifications of, or forbearances or \"work outs\" with respect

to the terms of, the Loan and the Loan Documents has not been

approved, executed and delivered by the Parties pursuant to the

terms and conditions of this letter by no later than the Cut-Off

Date, then HUD will be free immediately and without notice to

pursue enforcement of any and all rights and remedies under the

Loan Documents, including (without limitation) foreclosure and

(notwithstanding any contrary provision of the Loan Documents)

the application to the indebtedness of funds in reserve for

replacement, escrow and similar accounts.

G. HUD\'s Expenses. Borrower acknowledges and agrees to pay

the following charges from funds other than Projects funds or

Project assets: Borrower\'s legal fees on account of Borrower\'s

default under the Loan and all costs and expenses of HUD

(including, but not limited to, legal fees, trustee\'s fees, title

insurance charges, recording costs and expenses and other similar

costs) that HUD might incur on account of Borrower\'s default

under the Loan, the efforts by HUD to enforce its rights and

remedies under the Loan, any modification of, or forbearance or

\"work out\" with respect to the terms of, the Loan and the Loan

Documents or otherwise with respect to the Loan. Borrower agrees

to pay such costs and expenses upon demand.

H. Miscellaneous. The terms and provisions of this letter

will inure to the benefit of and be binding upon the Parties and

their respective successors, assigns and legal representatives

and will be governed by the federal laws of the United States of

America. All statements,

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APPENDIX 12

representations, negotiations and discussions occurring among the

parties to the Loan prior to the sending of this letter are

incorporated into this letter and are to be governed by and

subject to the terms and provisions of this letter. The terms

and provisions of this letter may not be changed, waived,

discharged or terminated orally, but only by an agreement in

writing, signed by the party against which enforcement of the

change, waiver, discharge or termination is asserted. This

letter may be executed in one or more counterparts, each of which

will constitute an original and all of which, when taken

together, will constitute one agreement. The person executing

this letter on behalf of Borrower represents that he or she has

the full authority to do so.

If the foregoing terms and provisions of this letter

summarize accurately the terms of the agreement of the Parties,

please indicate your acceptance of the terms and conditions set

forth in this letter by signing below and returning the original

to the undersigned\'s attention, while retaining a copy for your

records. HUD will not begin or continue negotiations concerning

Borrower s requested modification or forbearance unless and until

the executed copy of this letter is returned to HUD. If the

executed original copy of this letter is not returned to HUD on

or prior to the date that is five (5) business days after

Borrower\'s receipt of this letter, then HUD\'s willingness and

ability to accept the terms and provisions of this letter will

terminate automatically, and thereafter HUD will not consider or

negotiate concerning Borrower\'s requested modification or

forbearance. HUD emphasizes to you that any modification,

forbearance or other \"work out\" of the Loan and the Loan

Documents is subject to and is conditioned expressly upon

approval by the appropriate HUD credit committees and execution

and approval of appropriate Loan modification, forbearance or

\"work out\" documents prior to the Cut-Off Date.

Very truly yours,

DIRECTOR, MULTIFAMILY HOUSING

DIVISION, THE DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT

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APPENDIX 12

By:

Name:

Title:

ACKNOWLEDGED AND AGREED TO:

\[Name of Borrower\]

By:

Name:

Title:

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