SPECIAL FOCUS: FEDERAL HOUSING ADMINISTRATION

APARTMENT FINANCE TODAY • SEPTEMBER 2007

Grappling with APPS

By Jerry Ascierto

It took an act of Congress, but the Department of Housing and Urban Development (HUD) is finally streamlining its “previous participation” process,” the electronic Active Partners Performance System (APPS).

The Federal Housing Administration (FHA) requires deal participants to disclose and certify past performance in multifamily mortgage insurance programs by filing Form 2530, a “previous participation clearance application,” in APPS. The aim is to allow the agency to see their history of meeting financial and legal obligations.

Low-income housing tax credit (LIHTC) deals suffered the most. APPS mandates sworn statements and personal details from all of a company’s principals, including passive investors in tax credit deals. Additionally, companies had to list every FHA deal they’ve been involved with, a challenging process for large organizations like Fannie Mae or Bank of America, two of the nation’s top tax credit purchasers.

Last spring, the FHA mandated use of the electronic process, which revealed the system’s bottlenecks, sometimes resulting in six-month delays. “It really just slammed the lenders in the face when it started holding up deals,” said Cheryl Malloy, a senior vice president at the Mortgage Bankers Association (MBA).

This spring, H.R. 1675, the Preservation Approval Process Improvement Act of 2007, was signed into law. The Act suspends many filing requirements for passive investors in LIHTC deals, and also allows paper processing of 2530s until the FHA meets certain requirements in upgrading the electronic system.

Processing of paper 2530s is in many cases quicker than the electronic system, so H.R. 1675 should facilitate quicker deal turnaround. The relaxed requirements for passive investors also make the process less onerous for large organizations. “It solved some of the problems,” Malloy said. “You still have to go into APPS and input data, but you don’t have to [list] every time you’ve ever participated in a HUD deal.”

The MBA now is working with the FHA on regulations that would allow lenders to complete the previous participation form for the borrower. The APPS user guide is 257 pages long, and many smaller nonprofit developers don’t have the resources to navigate the system.

The National Multi Housing Council (NMHC) also is working to smooth out the unintended consequences of the system. The processing of paper applications will increase FHA response time. “It gives you the opportunity to talk to humans and have a conversation, as opposed to having a computer error message that was going to stop progress,” said David Cardwell, the NMHC’s vice president of capital markets.

MAP lenders applauded the legislation. “It’s a very good move,” said Bruce Minchey, chief FHA underwriter at KeyCorp Real Estate Capital Markets, Inc. For passive investors, such as tax credit investors, “it’s not like they’re going to have a direct impact on how the property operates, yet they’re going to have volumes of information to put into this system,” said Minchey. “To not have them do that doesn’t really increase the risk to the program.”

The 2530 process stunted the FHA’s market share, and an improved process should relieve some of the bottleneck. However, that won’t remove all the hurdles for multifamily borrowers looking to do business with the FHA: A developer can get a bank loan in 90 days, yet must sometimes wait up to a year for the FHA to close a deal.

“It’s getting better, but its still hard,” said Mark Ragsdale, senior vice president of originations at MAP lender PNC MultiFamily Capital.

Additionally, the rule-change process underscores the inflexibility of the FHA’s organizational structure. “The thing that FHA doesn’t realize is that they have chased away business because it took an act of Congress to get them to behave properly,” said Cardwell.