HUD Busts Through LEAN Queue; Invites Industry to “Bring Us Your Deals”

The Department of Housing and Urban Development (HUD) has officially “busted through” the infamous queue for its Section 232 program, it revealed at the Eastern Lenders Association Conference held in New York in early March.

Michael Vaughn, the acting director of HUD’s LEAN Section 232 program, “dropped a bomb” on attendees regarding the status of the backlog of mortgage insurance applications, says Nick Nicholson, managing director of investment banking firm Cain Brothers Funding, LLC.

HUD Whittles Down the Backlog


The hard numbers of what HUD has accomplished are exciting, he continues. And Love Funding’s senior vice president and managing director of production Jon Camps, who is also the president of the Eastern Lenders Association, said his firm has seen “dramatic improvement” in the application process.

By the end of fiscal year 2011, there were more than 300 applications in the queue, with 123 in underwriting review. As of the end of February 2012, the backlog had been reduced to 119 applications, with 163 currently under review.

Another significant stat is the number of commitments issued in February, at 74, says Nicholson, compared to just 43 in September 2011.


Cain Brothers has 11 Section 232 deals in various stages of underwriting and processing, Nicholson told SHN, and with these new developments, the firm no longer has to forewarn borrowers of a six month (or longer) wait in the queue before HUD begins processing the application. “Now we’ll likely only have to wait a month or two,” he says. “They’ve cut the timing by about 75%, which is very meaningful.”

Love Funding has noticed a difference, too, and according to Camps, deals are taking “easily inside three months,” with deals that were submitted just a couple months ago already starting to be processed. “The rest of the month, into April, we’re probably gonna see [the waiting] cut down to two months, maybe even one month,” he says, compared to the former six- to nine-month wait.

Part of what’s happening with how long it takes for a deal to get out of the queue at this point, says Camps, is whether or not applications that have been in the queue for a long time are up-to-date.

“A few months ago, HUD instructed all lenders with loans inside the queue to “prep their deals”—get all the financials, make sure everything is current so when the underwriter picks up the application, they can hit the ground running,” he says. And while some lenders’ attorneys were “caught off guard” by how quickly HUD began advancing through the backlog, Love Funding was “very well prepared” and even ended up jumping as many as 50 spots in line for one deal over lenders who “weren’t quite ready to go.”

Industry Remains Reliant on HUD’s Good Loan Terms

Everyone in the industry has known for some time that interest rates on FHA-insured loans, in the words of Nicholson, “can’t be beat with a stick.”

“The banks can’t touch them, Fannie and Freddie are a full point higher, at least,” he says. The federally-insured program also allows borrowing of up to 80 or 85% of a project’s value—much higher than other programs.

Those advantages alone were enough to get a lot of people to bring their deals to HUD, says Nicholson, confirmed by the Medicare Payment Advisory Commission’s (MedPAC) March 2012 report to Congress.

HUD lending continues to be an “important source” of funds, says the MedPAC report, going on to mention HUD’s Section 232 “overhaul,” when the number of HUD-financed projects between 2010 and 2011 increased 14% to 421 projects, with insured amounts totaling $3.4 billon in 2011.

“HUD is expected to maintain the same level of activity for 2012, but projects may be smaller,” says the Commission. “HUD underwriting considers the known and anticipated reductions in Medicare and Medicaid payments, a facility’s past performance on inspections, and other quality metrics in evaluating loan applicants.”

Outlook for 2012

Market analysts and lenders told MedPAC that little borrowing would occur in 2012, given uncertainties about the effects of Medicare policy changes implemented by CMS and possible future reductions to both Medicare and Medicaid reimbursements.

While the queues for refinancing applications have been dramatically reduced—especially for projects that already have HUD financing—the same can’t be said for new construction loan applications.

“That queue has stayed pretty level, and still has a very long wait,” says Camps. “That’s because HUD sees new construction as an additional risk, and wants to take more time in terms of the review.”

HUD recently added a third underwriter to its team for new construction applications, but after having just two, the queue is still long, he says. But, “as they start to get through the other queues, they’ll add more personnel.”

Reportedly, lenders and borrowers are more likely to wait until midyear 2012 to assess the impact of payment changes before considering new projects. It’s at this point that HUD expects to have whittled the queue down to nothing, according to Nicholson.

“They announced that they’re hoping to chip into Phase II where the queue goes down to zero,” he says. “Then borrowers won’t have to wait at all until their application is picked up. They’ve made good on their promise so far, so that may not be unrealistic.”

Check out HUD’s progress by viewing the weekly and monthly statistical reports.

Written by Alyssa Gerace