Guidance for Lenders for Market Rate Projects in Areas with Significant Adverse Economic Impacts:

FHA 232 LEAN Market Conditions - FHA LEAN UPDATE REPRINTED

Areas of Concern - California, Florida, Arizona, Nevada, Michigan, Ohio, Indiana, and Illinois

The following is guidance to LENDERS regarding temporary risk management initiatives that have been implemented by OIHCF regarding the review of new construction market rate projects in areas that have been impacted by significant adverse economic conditions. In essence, OIHCF has received a number of applications for projects in areas that have been hard hit by the current economic crisis. After a thorough review of the current conditions in those areas most affected by adverse economic events, OIHCF has determined that the approval of certain market rate projects in those areas would place the FHA insurance fund at an elevated risk for higher defaults and an increase in potential insurance claims.

OIHCF recently directed one of our most experienced appraisers to Florida and Arizona to assess the prevailing market conditions for “market rate” assisted living projects. The assessment conducted in Florida was mainly contained to the area south of Tampa including the Bradenton and Sarasota areas. We are aware that the Miami, Orlando and Ft. Myers/Naples markets as well as other areas of Florida have also been severely impacted by the housing crisis and are similarly impacted. Our analysis of those areas has demonstrated a very high rate of foreclosures, a high rate of delinquent properties not yet in foreclosure, higher unemployment rates and increasing stress with the commercial real estate portfolio. OIHCF has determined that the market for assisted living projects in those areas may be far weaker than the current marketing data otherwise indicates.

With respect to Arizona, OIHCF reviewed and analyzed the potential assisted living market for the major urban areas of the state. The conclusion of our analysis indicated that the potential market for market driven assisted living was severely impacted by the housing crisis, with large numbers of vacant properties, severe price reductions and serious evolving problems with commercial real estate. It is also noteworthy that many of the Section 232 applications had weak operating entities that had little or no experience with assisted living projects. OIHCF staff has noticed that some recently reviewed Market Acceptance/preapplications and their attached market have been projecting optimistic market data from 2-3 years ago which has been projected forward without fully accounting for the current serious economic realities that have altered the market characteristics for those and other markets. As a result of the findings of our appraisal staff, OIHCF is instituting the following action:

For example, but not limited to the following geographic areas, OIHCF has determined that all market driven assisted living projects in California, Florida, Arizona, Nevada, Michigan, Ohio, Indiana, and Illinois are to be underwritten with FULL RISK MITIGATION. All mortgage insurance applications for properties in those states will be subjected to a full appraisal review and a full review of the market study and if necessary, a more thorough economic analysis. Market studies must take into account the changing economic conditions of the market areas where the facility is located, and both Lender and OIHCF reviews should reflect that reality.

With respect to nursing homes, lenders and OIHCF staff will review the fundamentals of each project. If the nursing homes are contemplated to have a high percentage of private pay residents or otherwise have unusual marketing issues, OIHCF staff will also undertake full risk mitigation. However, if nursing home applications have Certificates of Need, a patient mix that reflects the current market, and other positive underwriting characteristics, then processing will proceed without any change to the current instructions.

OIHCF will continually review the prevailing market conditions and will make appropriate changes as market circumstances dictate.