18.3.13 Refinancing Partial Payment of Claim (PPC) Properties

A. A recast first mortgage loan and an associated Partial Payment of Claim (PPC) second mortgage may both be refinanced in a Section 223(a)(7) transaction so long as the new loan amount does not exceed the original principal amount of the recast first mortgage loan (i.e., the modified Mark to Market or PPC restructuring loan mount), and not the original principal amount prior to the PPC or the Mark to Market transaction, and it is clear the market or project conditions have improved to the point there is little risk the new loan will default.

B. HUD requires that the HUD-held second mortgage be (1) paid off in full or partially paid off; and (2) subordinated and remain secured. If the HUD-held second mortgage is partially paid off or remains unpaid, HUD will maintain the surplus cash split of 25% to owner and 75% to pay down the HUD-held second (statutory under MAHRA). Pursuant to the owner paying down (or paying off) the HUD-held second mortgage with available loan proceeds, mortgage proceeds must first be allocated to fund the reserve for replacement account (in the amount required by the CNA) and make needed repairs to assure the ongoing value and viability of the project.

C. Upon refinance, debt service payments may not exceed what is currently in place. Since these properties have previously undergone a PPC, HUD would not want them encumbered with additional debt that could negatively affect future financial stability. Consequently, the interest rate on the new mortgage must be competitive enough such that substantial savings in debt service payments will result.

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Chapter 18 Section 223(a)(7) 18.4 Processing

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D. The debt service coverage rate of 1.2x will be required to account for the additional risk inherent with a former PPC.

E. Processing of such a transaction would follow the same procedure as that of other multiple mortgages permitted to be wrapped into a single 223(a)(7) refinance transaction. HUD Regional Office Production staff should solicit particular input from Asset Management staff on these transactions.