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Audit of the Massachusetts Housing Finance Agency Overview of Audited Entity

This section describes the makeup and responsibilities of the Massachusetts Housing Finance Agency.

Table of Contents

Overview

The Massachusetts Housing Finance Agency (MassHousing) was established as an independent, quasi-public agency by Chapter 708 of the Acts and Resolves of 1966, as amended. According to its website, MassHousing’s mission is as follows: “MassHousing will confront the housing challenges facing the Commonwealth to improve the lives of its people.”

MassHousing does not receive state funding for its operations. According to its website,

[MassHousing] raises capital by selling bonds and lends the proceeds to low- and moderate-income homebuyers and homeowners, and to developers who build or preserve affordable and/or mixed-income rental housing. MassHousing does not use taxpayer dollars to sustain its operations, although it administers some publicly funded programs on behalf of the Commonwealth.

MassHousing is governed by a nine-member board of directors. Board members are appointed by the Governor.

Multifamily Housing Loan Processing

The typical multifamily housing loan from MassHousing goes through six phases: pre-application, rental underwriting, commitment, initial closing, construction/lease-up, and final closing.

Pre-application

During the pre-application phase, developers submit a Department of Housing and Community Development One-Stop Application to MassHousing. Using a One-Stop Application Checklist, an assigned MassHousing originator and an assigned MassHousing underwriter review the application. Once the application is deemed complete, the originator prepares a conceptual loan proposal that is sent to MassHousing’s Rental Underwriting Department.

Rental Underwriting

During the rental underwriting phase, the Rental Underwriting Department works with third parties (e.g., appraisers, environmental professionals, and capital needs engineers) to review the components of the application and prepare an assessment report. The underwriter determines whether the loan is an appropriate credit risk for MassHousing. If the credit risk is appropriate, the underwriter prepares a document called a proposed transactions underwriting model and sends it to the originator. Using the underwriter’s recommendation, the originator completes a loan commitment proposal and sends it to MassHousing’s staff loan committee for review.

Commitment

During the commitment phase, the staff loan committee reviews the loan commitment proposal and makes recommendations to the board of directors’ loan committee. During monthly board meetings, the board of directors votes on pending loan commitment proposals. If a proposal is approved, the board of directors issues a commitment letter, which is a legal document that establishes a contract between MassHousing and the borrower.

Initial Closing

During the initial closing phase, the borrower and MassHousing must complete, sign, and submit several documents, described below, that ensure that the project complies with MassHousing’s policies.

  • The disposition agreement, signed by the borrower and MassHousing, indicates that the borrower has ensured that at least 20% of the units will be rented to people or families whose income is no more than 80% of the area median income (AMI), at rents equal to 30% of that income limit.
  • The residential compliance agreement, signed by the borrower and MassHousing, ensures that the project will be financed, used, and operated in accordance with the Internal Revenue Code (IRC). Under the IRC, the borrower makes an irrevocable election at the time of the financing for either 20% of the units to be rented to tenants earning no more than 50% of the AMI or 40% of the units to be rented to tenants earning no more than 60% of the AMI.
  • The tenant selection plan sets out a procedure for processing and selecting applicants for subsidized units, including the establishment of preferences and priorities, occupancy standards, reviews and appeals for rejection decisions, and notice requirements.
  • MassHousing’s regulatory agreement includes requirements for tenant selection and approval, ongoing management of the project, protections and procedures intended to preserve affordable rents for low-income tenants, and profit limitations for the borrower.
  • If a multifamily project is receiving assistance under the Federal Housing Administration–Housing Finance Authority Risk-Sharing Program,2 it must further fair housing in accordance with United States Department of Housing and Urban Development (HUD) regulations by executing an affirmative fair housing marketing plan. The purpose of such a plan is to help owners market available housing units to individuals regardless of their race, color, national origin, religion, sex, familial status, or disability.

Construction/Lease-up

Throughout the construction of the project, MassHousing closely monitors the developer’s progress. When the project is 70% complete, MassHousing’s Appraisal and Marketing Department begins monitoring ongoing occupancy with the project’s property management company.

Final Closing

The final closing phase occurs once the project has achieved stabilized operations, which means it has sustained a 90% occupancy rate and maintained a defined debt-service coverage ratio3 for three months.

Rental Management

MassHousing does not own or manage any multifamily rental housing projects. Such projects are owned by third-party developers. However, MassHousing’s Rental Management Division is responsible for monitoring the property management companies that manage MassHousing’s multifamily rental portfolio. According to MassHousing management, there are more than 200 property management companies managing the portfolio.

During the pre-application phase, MassHousing conducts an extensive review of the property management companies proposed by the developer to qualify each new company. Each company is required to perform an annual review of tenant rents that are kept on file at the project site. This annual review includes a recertification of household incomes and recomputation of all affordable-unit rents and assistance payments. Records related to the annual review are readily available to MassHousing staff members on request.

MassHousing asset managers review all financed properties after one year of operation. Rental Management Division employees schedule subsequent reviews, referred to as asset management reviews (AMRs), using risk-based criteria. As we performed our audit work, we noted that although MassHousing’s “Asset Management Review Policy” was the only policy that described the process, there were variations in the process that were not clearly included in the policy.

During an AMR, using a sample of tenant files, the asset manager confirms that the required affordable units exist, with the applicable rents. The tenant file sample size is based on the project’s size and number of units and may also be influenced by prior AMR results or noted violations.

If a project is subsidized by HUD, an asset manager conducts a management and occupancy review (MOR) instead of an AMR. An MOR is very similar to an AMR, but requires a more detailed tenant file review to ensure that tenant rents comply with HUD requirements.

2.    This is a federal program that allows state and local housing finance agencies that meet certain Federal Housing Administration standards to underwrite Federal Housing Administration multifamily loans in return for sharing the risk of losses with the United States Department of Housing and Urban Development.

3.  This is a financial measurement of the cash flow an entity has available to pay current debt liabilities (net operating income divided by total debt service).

Date published: December 20, 2021
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