U.S. Department of Housing and Urban Development

H O U S I N G

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Special Attention of: Notice H 93-23 (HUD)

All Regional Administrators,

All Regional Directors office of Housing Issued: 4/7/93

All Managers of category A and B Offices Expires: 4/30/94

All Directors of Housing Development
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All Delegated Processors Cross References:

All Public Housing Authorities (PHAs)

All State Housing Finance Agencies (HFAs)

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Subject: Need to Reduce Underwriting Risk on Multifamily Insured

and Coinsured and Delegated Processing Projects and

Problem with Summary Rejection of Applications

I. General

The purpose of this Notice is to modify and supplement

Notice 91-39 which has been extended to May 31, 1993. This

Notice will modify the number of Field reviews required for

all cases, (fully insured, coinsured, delegated processing,

technical discipline contract, including preservation); add

to and/or modify the \"Processing and Review Instructions,\"

No. II, in the original Notice 91-39 as applicable; and add

guidance on a problem with summary rejection of applications

due to \"Soft Market\" and \"Adverse Impact.\"

II\. Percentages and Types of Appraisal Reviews. (The new

percentages are effective upon receipt of this Notice.)

A. Field Review

1\. All cases processed by HUD staff, Delegated

Processors (DP) and Technical Discipline

Contractors (TDC) including projects covered by the

Emergency Low Income Housing Preservation Act

(Title II) and the Low Income Housing Preservation

and Resident Homeownership Act (Title VI) will

receive a desk review before a commitment for

mortgage insurance is issued. All contracted

appraisal reports will be field reviewed until the

Director of Housing Development is satisfied that

the degree of expertise and quality for each

contract entity is acceptable. Subsequently, the

Director of Housing Development will establish how

many and how frequent the number of cases are to be

field reviewed for each contracted entity. The

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HMIP : Distribution: W-3-1,W-2(H),W-3(H)(ZAOO)(OGC),W-4(H)(OGC),R-1,

R-2,R-3,R-3-1(H)(RC),R-3-2,R-3-3,R-6,R-6-1,R-6-2,

R-7,R-7-1,R-7-2,R-8,R-8-1

Previous Editions Are Obsolete HUD 21B(3-80)

GPO 871 902

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number and frequency of field reviews for those

appraisals done by HUD staff will be established by

the Director of Housing Development. The Director

shall develop written criteria to be used to assist

in determining which cases shall be field reviewed.

The complexity of the case and past experiences

with the TDC and DP shall be two of the criteria.

Accordingly, each case shall be documented. Field

reviews will be conducted by either the Chief

Appraiser, a Senior Staff Appraiser or another TDC

Contractor. All environmentals will be done by HUD

staff. Whenever HUD staff performs a field review,

it shall include review of the environmental

processing.

III\. Changes and/or additions to the \"Processing and Review

Instructions,\" II, in the original Notice 91-39.

A. Valuation Processing

1\. The required trending to the \"appraisal date\" in

paragraph 4 does not apply to Section 202, Section

811, or Section 232 programs except when the

Section 232 case is a stand-alone Board and Care

proposal.

2\. When the occupancy rate in a comparable project is

less than the long-term occupancy rate estimated

for the subject, and it will be used in the

appraisal of the subject property, the rent from

that comparable unit shall be adjusted downward on

Form HUD-92273 so that the effective gross incomes

of the subject and the comparable unit will be

competitive. For example, to determine the rent

adjustment, the occupancy rate A of the

comparable (.80) is divided by the occupancy rate

B used for the subject (.93) and the results C

is subtracted from 1, the results C is multiplied

by the comparable rent D (\$400) and the indicated

rent adjustment E is rounded to the nearest

dollar, (-\$56).

(A / B) - 1 = C

(.80 / .93) - 1 = - .1398

(C x D) = E

(- .1398 x 400) = - 55.91 or - \$56

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3\. Share data with DP and TDC appraisers. Should the

HUD staff review appraisal surface more current,

reliable and effective data than that reflected in

the appraisal being reviewed, he or she should

share this information with the appraiser. This

does not mean that Field Offices automatically are

to furnish data to the DP or TDC appraisers. But,

if a deficiency is identified, the reviewer must

share the basis for determining that it is a

deficiency. The Government Technical Representatives

(GTRs) and the Government Technical Monitors

(GTMs) for the DP and TDC contracts will diligently

monitor compliance with the contracts.

B. Valuation Review. The HUD staff field review appraiser

will not be required to do a narrative field review

report as required by paragraph II(B)(1), of HUD Notice

91-39, but contract reviews must meet this requirement.

C. Commercial income. The portion of paragraph II(A)(7)

of HUD Notice 91-39 that requires an independent

appraisal be made where more than 5 percent commercial

income is included in the proposal is hereby rescinded.

D. Record Keeping. The Chief of Valuation or designee

will maintain records of all discrepancies noted from

the reviews of the processing appraisals and/or review

appraisals, and corrective actions taken by him/her for

reformation. These records will be used in evaluating

the performance of staff appraisers.

E. DP and TDC review. GTRs and GTMs will review the

adequacy of the contractor\'s performance in accordance

with the contract requirements and coordinate with the

contracting officer to address performance deficiencies

and identify appropriate corrective action(s).

IV\. Preservation Appraisals Reviews.

A. Title II

Under Title II, the owner of the property is required

by statute to have the property appraised. After a

field review of the appraisal, the Office must

determine whether or not to accept the appraisal as is

or with modification. If the appraisal cannot be

accepted, the Office must conduct a new appraisal. If

the new appraisal is to be conducted by the Field

Office, the appraisal can be performed by a HUD staff

appraiser, DP or TDC. The appraisal review can be

handled by a HUD staff appraiser or another TDC

appraiser.

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B. Title VI

Sixty days after receipt of the \"Notice of Intent

(NOI),\" HUD will provide the owner with a list of

required repairs to the property determined by a

capital needs assessment. One hundred and twenty days

after the receipt of the \"NOI,\" the owner of the

property and HUD must exchange appraisals which have

been conducted by an independent appraiser hired by

both parties. The HUD appraisal will be conducted by a

DP or TDC. HUD Valuation staff appraisers or another

TDC will immediately field review both appraisals to

determine if the appraisers complied with the \"Final

Guidelines for Determining Appraisals of Preservation

Value under the Low Income Housing Preservation and

Resident Homeownership Act of 1990, published on May 8,

1992, Federal Register, at 57 FR 19970.\"

Because of the legislative time constraints relative to

requiring exchange of appraisals with the owner, a full

review may not be possible before the exchange deadline

of 120 days from the receipt of the NOI by HUD. Since

this 120-day period includes the time required to

forward the request from Loan Management to Housing

Development (Valuation Branch), contract for the

appraisal and completion, there will be little, if any,

time for an adequate review. The review must be

completed within 150 days from receipt of the NOI

because if the appraisals are not adequate, a third

appraisal will have to be conducted. Accordingly, the

appraisal must be forwarded with the caveat that: \"The

Department, due to legislative time constraints, has

not completed the review of the report but is reserving

the right to deal with any issues or deficiencies

resulting from the completion of the required review,

and obtain modifications as appropriate.\"

V. Summary Rejection without Adequate Underwriting.

The decision to reject a Section 223(f) mortgage insurance

application should not be based solely on the market

analysis findings without also considering the findings of

the underwriting analysis. Therefore, in addition to a

market analysis conducted by the Field Office Economic and

Market Analysis Staff (EMAS), HUD\'s Valuation Staff should

conduct a thorough underwriting analysis.

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The EMAS review should take into consideration whether an

existing project has substantial vacancies (is below

sustaining occupancy), is proposed for a significant rent

increase (generally 10 percent or more) or change in tenant

type. In such cases, the units should be treated as

additions to the market and should be reviewed accordingly.

In a balanced market, it should be determined whether there

is sufficient demand for the project under these

circumstances. In a soft market, there needs to be a

determination that the project is not likely to have an

adverse impact by renting up at the expense of occupancy in

other projects.

The Valuation staff must analyze all applications to

determine the obtainable market rents, the vacancy/

collection losses at those marketable rents and the

appropriate operating expenses for the market in which the

project is located. In cases where it is determined that

the proposed project will not adversely impact other

projects but that the proposed rents are not supportable,

the underwriting review may result in a mortgage amount

lower than the requested amount rather than a flat

rejection of the proposal.

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James E. Schoenberger, Associate General

Deputy Assistant Secretary for Housing

U.S. G.P.O.:1993-342-362:80076