RRHA of Illinois “Happy 5-15 Day”

1. Rural Development RRHA of Illinois“Happy 5-15 Day” Hot Topics in 2013 Barry Ramsey Housing Program Director

2. Rural Development • Sequestration and 2013 Budget Impacts • RD Portfolio Overview (Then & Now) • Collaboration with Treasury & HUD • IRS Reporting onPredetermined Amortization Schedule System (PASS) Loans • 2014 Outlook – • “The future ain’t what it used to be.” - Yogi Berra

3. Sequestration…and the 2013 Budget • Sequestration triggered a 5% cut of all domestic discretionary funding (RD loans, grants & RA) • The 2013 budget reduced RA by an additional 2.77% • Renewal shortfalls are anticipated for 25-30 properties in IL this year • April memo from Dallas Tonsager sent to MFH Property Owners

4. Rental Assistance • USDA has developed some actions for reducing RA costs – The renewal cost of RA in 2013 is expected to be $933 million; plans to offset that figure with about $31 million in savings from initiatives are underway: • Use of Overage (overage collected will be converted to RA renewal dollars); • No incentive offers have been made to prepaying projects since August 2012. A notice will soon be published outlining plans to make offers which can be funded. Additional RA won’t be part of the offer if it is not available; • No RA is anticipated for MPR rehabs or new construction projects; • RA funds from prepaid and foreclosed properties is being converted into RA renewals; • RA not used for 6 consecutive months will no longer be transferred to other properties by State Directors, but will be converted to RA renewals; • Increased enforcement of occupancy standards targeting “over-housed” RA units like 1 person in a 2 bedroom unit when a 1 bedroom unit is available; • Continued emphasis through nationwide audits of tenant certification renewals with RA for correct income and asset documentation including death records maintained by the Social Security Administration. • Savings efforts may still result in a shortfall for some properties.

5. MFH Budget Summary #No funds are designated for Agency financing on REO properties (other than the $29min 515 loan funds for general use) *Guaranteed loans are paid from Lender fees – no cost to the Government

6. 11.4% of units have prepaid or been foreclosed, 16.4% of units have been consolidated into another project, 12.1% in additional RA has been provided (794 more units) from new projects or incentive offers to prevent prepayments, Today, over 70% of units in Illinois include RA funded by USDA. RD Portfolio (Then & Now)

7. ILLINOIS 581 properties (8/2011) 567 properties (5/2013) RD Portfolio (Then & Now) • Category 1 = needed, but able to prepay; • Category 2 = needed, core properties to preserve; • Category 3 = not needed, not viable to preserve

8. Collaboration with Treasury & HUD • Financial Reporting – consistency for annual audits and AUP requirements • Physical Inspections – acceptance of another Agency’s reports • Subsidy Layering – common underwriting for RD/HUD acquisition/rehab tax credit deals • Income Reporting / Definitions – common recertification form for all • Capital Needs Assessments – HUD template • Fair Housing Compliance Enforcement – coop agreements between USDA & HUD

9. IRS Reporting & PASS • IRS reporting is based on an IRS News Release, IR-85-55, dated 6/3/85 and states “If  loan is governed by PASS, the borrower may deduct interest computed at the full note rate of interest, but must include in income the loan credit provided by the FmHA”. • IRS form 1098 reports as an expense: • Interest paid by the borrower cash, RA, overage collected & PASS Subsidy • IRS form 1099-MISC reports as income: • Rental Assistance Payments, and • PASS Interest Credit Subsidy Payments

10. Example • $1,000,000 PASS loan closed in 1986 for 50 years at 10.625% note rate and plan II interest credit at 1% • 10.625% = $8,899.07 note payment • 1.0% = $2,118.59 reduced payment • Difference = $6,780.48 monthly subsidy • With no extra payments, interest due at installment 438 equals the subsidy amount and the approx. loan balance = $764,000 (in year 37); • With a $10,000 extra payment, interest due at installment 314 equals the subsidy amount and the approx. loan balance = $764,000 (in year 27)

11. Example • At the point when the subsidy equals the monthly interest, part of the subsidy also pays monthly principal • In our $1,000,000 loan example, this occurs in 2022. For the next 13.5 years: • Subsidy = $1,105,218 which is taxable income • Interest = $684,405 which is an expense • Difference= $420,813 which is “phantom income” • With a $10,000 extra payment, this event occurs in 2012 (10 years sooner). For the next 13.5 years, it’s the same story: subsidy exceeds interest by $420,813 • The loan pays off in 2025, almost 11 years early!

12. What Can I Do Says the Borrower? • Do Nothing…pay taxes on $420,813 and pay in full just over 10 years early • Reamortize / same rate and term (spread the $10,000 payment over the original loan term cutting the phantom income by 55%) • Reamortize / new rate and term (smaller payment & subsidy drops phantom income 90% in 30 years) • A 30 year new rate/term amortization postpones phantom income from subsidy for another 20 years; • A 50 year new rate/term amortization has no phantom income from subsidy during the entire 30 year loan term.

13. Questions? Rural Development is an Equal Opportunity Lender, Provider, and Employer. Complaints of discrimination should be sent to USDA, Director, Office of Civil Rights, Washington, D. C. 20250-9410.