HB-1-3550 CHAPTER 10: LEVERAGED LOANS SECTION 1: UNDERSTANDING LEVERAGED LOANS 10.1 OVERVIEW A leveraged loan is an Agency loan that is supplemented by an affordable housing loan or grant from another funding source that is provided at the same time the Agency loan is closed. Only eligible leveraged loans will be considered in the payment subsidy calculation. For the purpose of payment subsidy only, an eligible leveraged loan is defined as an affordable housing loan that is characterized by long term (not less than 30 years), amortized payments with a note interest rate equal to or less than 3 percent. Detailed guidance for calculating payment subsidy is provided in Paragraph 6.12. This does not preclude other types of participating leveraging. Leveraging reduces the loan amount the Agency must provide to help an applicant obtain adequate housing. The additional funding source may be a private lender that provides home financing at market rates and terms, a State or local government, or a nonprofit organization that provides subsidized loans or grants. Leveraged loan payment, security, and processing requirements may vary from non-leveraged loans as provided in this chapter. This chapter provides basic information about leveraging and describes the modifications to regular loan processing procedures that are made when a loan is to be leveraged. A. Advantages of Leveraged Loans Leveraged loans offer advantages to both the Agency and applicants. By combining its resources with those of other lenders, the Who Can Be a Agency can assist more borrowers. For this Participating Lender? reason, loan packages that receive an affordable housing loan from an Agency recognized source “Lender,” as it is used in this chapter, refers to an will receive a processing priority when the organization that provides long term, amortized loans for housing, including private lenders, State and local supplemental funding reduces the amount governments, and nonprofit organizations. The otherwise needed from the Agency by at least Agency encourages grant funding when it is 20 percent with loan funds or 15 percent if available. However, a grant provider is not entirely grants, forgivable loans or deferred considered a “lender.” payment loans. See Paragraph 3.14 B. For some applicants, purchasing a home through a leveraged loan will be the first opportunity to establish a relationship with a private lender. For other applicants, combining the ______________________________________________________________________________ 10-1 (01-23-03) SPECIAL PN Revised (04-01-08) SPECIAL PN HB-1-3550 Paragraph 10.1 Overview Agency loan with a grant or low-interest loan from another subsidy program may be the only way to make homeownership possible. Leveraging is especially encouraged in the case of assumptions on new rates and terms, since the applicant may be able to obtain a non-Agency loan for purchase costs above the outstanding balance to be assumed. B. Two Separate Financial Agreements When a loan is leveraged, each lender enters into a separate financial agreement with the applicant. The combined resources that are provided enable the applicant to purchase a home. Although each lender remains responsible for final underwriting decisions for its loan, the application and underwriting processes should be streamlined whenever possible to avoid duplication of effort and extra burden on the applicant. 10.2 SOURCE OF LEVERAGED FUNDS Agency funds may be supplemented by funds from a variety of sources. One of the challenges for the Loan Originator will be to understand the implications for the applicant and the Agency of the requirements that may be imposed by these sources. A. Market Rate Financing Market rate financing may be appropriate under some circumstances. The applicant’s repayment ability must be considered in determining whether it is appropriate for referral to market rate sources. Market rate loans will not be considered in the payment assistance formula. Private lenders generally have a variety of loan products that are tailored to fit specific circumstances, for example, different products for new purchases, refinancing, and home improvement loans. The private lender loan must be a long-term, fixed rate mortgage of at least 30 years or a term no shorter than 15 years with a balloon payment and installment based on at least a 30-year amortization schedule. The Agency will not accept an adjusted rate mortgage (ARM) or an interest only mortgage. The Agency will not participate in loan packages that involve interest rates that are more than 2% (200 basis points) above the Agency note rate. Loan Originators may need to work with the lender and applicant to identify an appropriate loan product that meets lender and Agency requirements. B. Other Subsidized Financing Although there are many variations in the specifics, the subsidized funds that can supplement Agency funds will generally come in one of the forms described below. • Grants without long-term restrictions. Some grants are provided with no restrictions, as long as the applicant is eligible and the funds will be used for an eligible purpose. ______________________________________________________________________________ 10-2 HB-1-3550 Paragraph 10.2 Source of Leveraged Funds • Forgivable loans. Some sources provide funds that require repayment only if the home buyer fails to comply with program requirements or restrictions. For example, a funding source may provide funds for a down payment or rehabilitation that need not be repaid if the home buyer remains in the property for a specified period of time. The funds are generally provided as a loan to permit the funding agency to record the circumstances under which repayment is required. • Deferred payment loans. Deferred payment loans may be used to provide funds that are repaid only upon transfer of the property or as a balloon payment at the end of a specified period. These funding arrangements often include a provision for the funding source to share any appreciation that occurs with the home buyer. • Affordable Housing Loans. In many areas, low-interest loans are offered by State and local government agencies. These loans require repayment on a monthly basis and may include provisions for the funding source to share in any appreciation. Grants, forgivable loans, deferred payment loans, and any other nonamortizing loans are not considered in calculating the monthly principal, interest, taxes, and insurance (PITI) or total debt (TD) ratios. The Agency’s ability to recapture subsidy funds may be affected by the provisions of these loans. Agency loans should be subordinated only in the case of an amortizing loan of 20 to 30 percent of the total transaction. While an applicant may obtain a loan from another source of less than 20 percent of the total transaction, such a loan would not receive benefits such as lien priority, or processing priority. Further, USDA payment assistance is used to make the home affordable rather than to make the participating financing affordable. 10.3 KEY DIFFERENCES IN POLICIES AND PROCEDURES This paragraph highlights major policy and procedural differences between qualifying leveraged loans and other participation loans. Detailed processing guidance for originating leveraged loans is provided in Section 2 of this chapter. A. Eligible Loans and Grants Cash contributions by the applicant, gifts from individuals, and donations of land do not count as leveraged or participation amounts. These are applicant contributions. Likewise, seller contributions or assistance from organizations that require seller participation or seller contributions do not count towards leveraged or participation amounts. Subsequent loans cannot be leveraged unless they are used in conjunction with assumptions on new rates and terms. ______________________________________________________________________________ 10-3 (01-23-03) SPECIAL PN Revised (04-01-08) SPECIAL PN HB-1-3550 Paragraph 10.3 Key Differences in Policies and Procedures The Agency will not consider leveraging arrangements with market-rate financing sources in which the lender’s loan amount is less than 20 percent or greater than 50 percent of the combined transaction amount. When all the leveraging consists of subsidized financing (affordable housing products, such as down payment assistance except funds that come directly or indirectly from seller contributions, forgivable loans, etc.), the minimum acceptable leveraging is 15 percent. Other financing totaling less than 20 percent for lenders or 15 percent from other subsidized housing assistance is permissible. However, Rural Development will not subordinate its lien position to the lender if the loan is less than these required thresholds. However, these loans will receive processing priority when funds are limited. B. Lien Position To encourage participation by other lenders, the Agency will subordinate its lien position to a leveraged lender providing at least 20 percent of the financing. However, liens related to other subsidized funds provided in the form of grants and nonamortizing loans, such as deferred payment or forgivable loan, must be subordinated to the Agency's loan. In those cases where there is a soft, silent or forgivable lien, the total debt may exceed the market value as prescribed in Paragraph 6.7 F. C. Payment Subsidy Calculation Will the leveraged loan payment be Regardless of the percentage of the considered when calculating payment loan that is financed by the leveraged lender, subsidy? the monthly note installment