HUD Section 232 Credit Review Changes Benefit Large Healthcare Portfolios

April 04, 2024

HUD Section 232 Credit Review Changes Benefit Large Healthcare Portfolios

Effective April 10, 2024, the Department of Housing and Urban Development (HUD) is making some important changes to its credit review requirement criteria for Section 232 healthcare loan portfolios. HUD issued a Mortgagee Letter announcing it has increased its portfolio size limit triggering a Corporate Credit Review (CCR), from $90 million to approximately $194 million (or .6% of the Unpaid Principal Balance (UPB) of the entire HUD portfolio, which is approximately $32.3 billion*).

1) UPB utilized for purposes of threshold will be set annually in conjunction with HUD’s fiscal year (FY), and is the total UPB for all insured 232 mortgages as of the end of the prior FY.

2) The changes to portfolio classification do not replace other risk mitigation requirements such as a Debt Service Reserve, Mortgage Reserve Fund, or other risk mitigation.

“This is welcome news for borrowers as not only the thresholds increased from $90 million to $193.8 million, but existing owners/operators in good standing with HUD can obtain up to $50 million in additional financing within 18 months of the last Large Portfolio loan closing. HUD borrowers can now take on more debt within this timeframe without triggering additional credit reviews,” said Sampada D’Silva, Chief Credit Officer for HUD lending at Greystone.

Portfolio CCRs and master leases are the primary tools HUD’s Office of Residential Care Facilities (ORCF) uses to identify and mitigate concentration risk associated with portfolios. Now, ORCF’s approach to risk analysis for portfolios will be based on an assessment of: (1) the relative size of the portfolio compared to the overall Section 232 portfolio’s UPB for HUD’s fiscal year, and (2) the portfolio’s owner/operator relationship.

Other important new stipulations from this Mortgagee Letter include:

  • A CCR is not required for a single large loan.
  • The principal(s) must have a minimum of ten years relevant industry experience owning and/or operating residential care facilities to qualify for consideration of accumulating an aggregate HUD-insured mortgage portfolio above the threshold for a Large Portfolio (as previously defined).
  • There are limitations to accessing FHA mortgage insurance through the Section 232 program if the Borrower, Operator, principal, or affiliate is currently in bankruptcy or has filed for or emerged from bankruptcy within 5 years of a lender’s application for FHA mortgage insurance, CHOP, or similar process.
  • Owners and operators whose portfolio UPBs constitute a significant percentage of the total UPB for the entire Section 232 portfolio have not been subject to ongoing enterprise-level updates with ORCF if they are not actively applying for new FHA-insured financing. HUD will now require periodic enterprise-level financial and management updates for portfolios for the duration of the terms of their FHA-insured mortgage loans.
  • And still applicable, ORCF will require a mortgage reserve fund for all Large Portfolios and may impose additional requirements and/or limitations on the portfolio, as well as other risk mitigants. These additional requirements may include, for example, reserves for capital improvements, a higher mortgage reserve fund, lower loan-to-value requirements, professional liability insurance reserve funds, third party risk management programs for facility operations and quality of care, and limitations on cash distributions until certain sustained cash flow multiples are met.

To learn more about the new Section 232 requirements of borrowers with both small and large portfolios seeking HUD mortgage insurance, read the full HUD Mortgagee Letter.

*Based on HUD’s fiscal year ending September 30, 2023.