A.5.7.4.3 — HUD Multifamily Accelerated Processing (MAP)

A. The Lender’s financial plan is developed by using the Financial Factors screen of the CNA e-Tool. The first entry on this screen identifies the Estimate Period as a number of years. The financial factors enable an auto-calculation of the financial plan for each year in the Estimate Period. Years are identified as relative years (RY) beginning with “1” and ending with the number of years in the Estimate Period, typically “20”. Calendar years are associated with the years following the date of inspection (for Section 223 applications) or the estimated date of final endorsement (for Sections 220, 221, 231 and 241(a)). Other entries define two sets of parameters, which are external variables and property-specific variables.

Estimate Period. The Estimate Period for all HUD mortgage insurance programs is the lesser of 20 years or 2 years plus the remaining term of any insured mortgage.
External Variables. External variables are economic variables in the financial plan reflecting the actual economic conditions. These are the annual rate of inflation of the costs of repairs and replacements during the Estimate Period, and annual interest earnings on the balances held in reserve for replacement escrow accounts. Because current economic conditions often depart from historical norms or averages, the financial factors screen displays the current rate of inflation for capital needs and a current interest rate on short-term deposits or certificates of deposit. These are called the “initial” rates and will reflect current business conditions and indices. The Financial Factors screen also provides for a second, or “additional” rate that reflects long-term averages for the particular rate (inflation or short-term interest). As a practical matter, long-term rates are static since they reflect

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the average value for each rate over 40 or more years. Because these external variables are the same for all CNAs at any given time, HUD’s Office of Multifamily Production will publish the values for these variables from time to time based on the following sources for inflation rates. HUD will rely on price indices published by the Department of Labor. HUD will determine short-term rates based on rates for 90-day maturities as published by the Federal Reserve Board, the Wall Street Journal, or comparable entities. The intent of this method of describing rates is to allow more realistic modeling of economic projections. Note that any characterization of inflation used in the Financial Factors screen should also be reflected in the Lender’s projections of operating expense.

Property-Specific Variables. Property-specific variables are values that are unique to the property. Except for the required minimum balance calculation, it is expected that Lenders will make repeated adjustments to these variables based on Validation Engine results as a means of perfecting an optimum combination of factors needed to balance the financing plan consistent with other underwriting considerations such as anticipated rents and operating expenses.
- Initial Deposit . The initial deposit is the amount that may be carried forward from an existing reserve for replacement escrow (e.g., in a 10-year update CNA or refinancing of an existing insured asset) and/or the amount of any lump sum deposit that may be required at the endorsement.

Year 1 Annual Deposit Per Unit . The sum estimated as the first annual contribution to the reserve for replacement escrow divided by the number of units in the property. Expressing this figure as an annual per unit number of dollars supports the common industry practice of estimating operating expenses on a per unit per annum (PUPA) basis. In no event may this figure be less than $250 for any property.

Per Annum Rate of Change in the Annual Deposit.[74]

1. The Lender will set the value of this rate of change in the annual deposits. The Lender may propose an initial rate of change followed by an additional rate of change to be applied in a specified relative year, which need not be the same relative year as indicated for either of the external variables.
1. When proposing a rate of change for the annual deposit, the Lender must demonstrate by means of a stress test that the expected rents and expenses (including the annual deposit) do not reduce the debt service coverage ratio below underwriting requirements.
1. In no event may the proposed rate of change exceed the rate of inflation applied to capital needs in any relative year of the Estimate Period.
Minimum Balance. When balancing the financial plan, the reserve account must maintain an estimated minimum balance. The CNA e-Tool provides two methods for estimating the minimum balance. The two methods are: a minimum balance as a number of dollars per unit; and a

74 Historically, HUD has required or encouraged annual deposits in amounts fixed for long periods or even for the term of a mortgage. While very safe and consistent with HUD’s long-term fixed rate mortgage programs, fixed annual deposits do not support realistic assessments of physical conditions nor realistic financial planning to address these conditions over time. Accordingly, graduated changes in annual deposits are encouraged and should be expressed as annual percentage rates of change. Mathematically, the rate of change in the annual deposit is similar to the external variables for inflation and short-term interest, but the Lender will set the value of this rate of change in the annual deposits.

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minimum balance expressed as a percentage of total uninflated needs for the Estimate Period. Only the second is used for HUD purposes. In the latter case, the CNA e-Tool auto-calculates the percentage as the inverse of the number of years in the Estimate Period (e.g., Estimate Period equals “20” then the minimum balance equals “1/20” or 5%). The effect of this calculation is a minimum balance equal to the average cost of needs for one year. It is important that all users understand that the minimum balance is established only as a means of planning for an adequate reserve. It is not intended as a limit on disbursements as repair and replacements actually occur. The intent of the minimum balance is to provide a contingency for unanticipated costs and to trigger an asset management review when actual needs result in a remaining balance that falls below the planned minimum. When applying the minimum balance, the Lender should do or consider the following:

1. Define a combination of Initial and/or Annual Deposits resulting in year-end balances that equal or exceed the required minimum balance for each of the first 10 years in the Estimate Period. When considering applications for mortgage insurance, a positive balance, but not the minimum balance, is required in the first 2 years of the Estimate Period.
1. In any year after Year 10 of the Estimate Period, a remaining balance less than the minimum balance, even a negative balance, may be allowed provided that the difference (a deficit) between the required minimum balance and the projected remaining balance does not exceed 50% of the cumulative amortization of the proposed loan for the relevant year.
1. If the dollar amount of the projected deficit in any year after Year 10 exceeds 50% of the cumulative amortization of the mortgage, then the deficit is excessive and must be mitigated by increasing the funding proposed for the reserve for replacement escrow.
1. The Lender submits a CNA based on a 20-year Estimate Period using the proposed funding (initial and annual deposits) determined in items “2” and “3” above. The result is that negative balances, if any, may not exceed 50% of the accumulated amortization of the mortgage loan balance.
1. The Lender should prepare and attach to the CNA at submission a spreadsheet comparing the results of the reserve for replacement schedule and the amount of amortization on the insured mortgage indicating the scale of any negative balance as a percentage of the cumulative amortization for each year, 11 through 20. When considering applications for mortgage insurance, the minimum balance is not required in the first 2 years of the Estimate Period.
1. It is the Lender’s responsibility to perform the reserve analysis and set the funding schedule that meets the requirements. The Needs Assessors prepare the components schedule of replacements and the anticipated costs in the CNA e-Tool but not the funding schedule (i.e. deposit amounts, etc.).