Mortgage Credit Panel Discussion

2015 Midwest Lenders Conference

Chicago, Illinois * October 12 - 14, 2015

Moderator: Rick Sherman, BerkadiaPanelists: Tom Bernaciak, HUD - Headquarters

Steve Ott, HUD - ChicagoBrett Neely, Great Lakes Financial

2

Revised Definitions – 2015 MAP Guide

Principal – Individuals or entities that exercise operational and/or financial control over a project. There are two types of Principals:

Active Principal – responsible for execution of all activities for the benefit of the project, regardless of the extent of ownership interest

Passive Principal – has limited or no decision making power or control, but has an ownership interest of >25% (10% for corporations)

Midwest Lenders– Mortgage Credit Discussion Panel

3

Common Attributes of a Principal

Maintains significant decision making authority

May have significant ownership interest

Involves active participation in directing the affairs of the entity

Positive past experience in developing or owning comparable properties

Midwest Lenders– Mortgage Credit Discussion Panel

4

Which Principals Undergo Credit Review?

Active Principals with >25% interest in the borrowing entity (10% for a corporation)

Active Principals with <25% ownership interest but possessing substantial financial interest or having decision making authority

An investor determined to be an essential partner from a financial and cash contribution standpoint but with <25% ownership interest

Midwest Lenders– Mortgage Credit Discussion Panel

5

Which Principals Undergo Credit Review, cont.?

Investors that have exceeded the $250M threshold or wish to avoid exceeding the threshold and wish to invest as a passive investor with less than 25% interest;

Investor with significant assets and financial contribution with an ownership interest of < 25%.

Midwest Lenders– Mortgage Credit Discussion Panel

6

Non-Profit Principals

Generally understood to mean the borrowing entity and its Board of Directors.

Financial analysis limited to: 2530 review of ownership entity and officers and resumes

of officers, and Financial and credit review of Borrowing entity

“Sponsor” – informal term used to define persons or entities who assist in development of the project

May also act as a Principal in the project

Midwest Lenders– Mortgage Credit Discussion Panel

7

Regulatory Agreement Provision Section 50

Determine the individual and/or entity with requisite control and involvement or interest in the project

Possesses positive credit history and adequate financial strength

Midwest Lenders– Mortgage Credit Discussion Panel

8

Credit & Financial Review

Financial statements REO Schedule Credit reports/credit references Form 92013-SUPP Verification of Deposits/Bank statements Resume Internet search

Midwest Lenders– Mortgage Credit Discussion Panel

General Comments

A. Less check the box, more substantive underwriting.

B. Early issue identification (Note: focus on “early”).

Mortgage Credit Top 2 + 10

Mortgage Credit Top 2 + 10 Successful and comparable experience: Type,

scope, size, operationally, market.

Organizational Charts/Borrower Narratives: Unclear and/or insufficient detail.

Section 50 Signatory: Failure to adequately identify.

Net Worth and Liquidity: Analysis and identify adjustments.

VODs: See General Comment A.

Mortgage Credit Top 2 + 10 REO/Debt Schedule: Insufficient analysis of

portfolio and risk Active Principals, if aging and/or retiring:

Succession Plan? Multi-layered financing: More detailed S&U and

flow of funds. Acquisitions/Recently Acquired Projects:

previous financials Processing Inconsistencies: HUD Forms,

Narrative, etc.

MAP GuideHandbooks Notices

MLs

MORTGAGE CREDIT TOOLBOX

Financial Stmts &

REO

Credit Reports

HUD

Forms

IOD’s & Reserves

The Voice, LLCMortgagor

100% Owner

Adam Levine76% Managing Member

Blake Shelton24% Member

Sample Organizational ChartLimited Liability Corporation (For Profit)

The Voice, LLCMortgagor

100% Owner

Adam Levine76% Member

Blake Shelton24% Managing Member

Sample Organizational ChartLimited Liability Corporation (For Profit)

Born in Chicago, LLCMortgagor

100% Owner

Actors, LLC50% Managing

Member

Harrison Ford51% Managing

Member

Donald O’Connor49% Member

Singers, LP50% Member

Nat King Cole49% General Partner

Dancers, LP51% Limited Partner

Bob Fosse25% General Partner

Other Limited Partners

< 10% each

Sample Organizational ChartLimited Liability Company (For Profit)

EFFECTIVE INTEREST

25.5% Eff 24.5% Eff 24.5% Eff 25.5% Eff

6.375% Eff

Rolling Stones, Inc.Non-Profit Mortgagor

100% Owner

Mick JaggerPresident

Keith RichardsVice President

Charlie WattsDirector

Mick TaylorDirector

Sample Organizational ChartLimited Partnership (Non-Profit)

The Voice, LPMortgagor

100% Owner

Blake Shelton

24% Limited Partner

Adam Levine

24% Limited Partner

Gwen Stefanie

10% Limited Partner

Usher Raymond

10% Limited Partner

Pharrell Williams

10% Limited Partner

Cee Lo Green

10% Limited Partner

Christina Aguilera

10% Limited Partner

Carson Daly

2% General Partner

Sample Organizational ChartLimited Partnership (For Profit)

The Fab Four, LLCMortgagor

100% Owner

Eleanor Rigby, LLC10% Managing Member

Yoko Ono1% Managing Member

John Lennon99% member

Penny Lane, Inc.90% Member

Ringo StarrPresident

George HarrisonSecretary

Paul McCartneyTreasurer

Sample Organizational ChartLimited Liability Corporation (For Profit)

80% Shareholder

20% Shareholder

The Fab Four, LLCMortgagor

100% Owner

Eleanor Rigby, LLC10% Managing Member

Yoko Ono1% Managing Member

John Lennon99% member

Penny Lane, Inc.90% Member

Ringo StarrPresident

George HarrisonSecretary

Paul McCartneyTreasurer

Liverpool Ltd. A United Kington

Corporation100% Shareholder

Sample Organizational ChartLimited Liability Corporation (For Profit)

Bootleggers, LLCMortgagor

100% Owner

Windy City, LLC76% Managing

Member

Dion O’Banion40% Managing

Member

John Dillinger30% Member

Alfonse Capone30% Member

Second City, LP24% Member

Sample Organizational ChartLimited Liability Company (For Profit)

EFFECTIVE INTEREST

30.4% Eff 22.8% Eff 22.8% Eff

Bootleggers, LLCMortgagor

100% Owner

Windy City, LLC76% Managing

Member

Dion O’Banion40% Managing

Member

John Dillinger30% Member

Alfonse Capone30% Member

Second City, LP24% Member

Bugs Moran50% Managing

Member

Alfonse Capone50% Member

Sample Organizational ChartLimited Liability Company (For Profit)

EFFECTIVE INTEREST

30.4% Eff 22.8% Eff 34.8% Eff 12.0% Eff 34.8% Eff

Chicago LPAn Illinois Non-Profit Corporation

100% Owner

Navy Pier, LLC0.01% General Partner

Rahm Emanuel20% Managing

Member

Susan Mendoza80% Member

Tax Credit Investor LLC99.98% LP

Willis Tower, Inc..01% Special Limited

Partner

Sample Organizational ChartLimited Partnership (Tax Credit)