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Tuesday, March 26, 2019

Mandatory Use of HUD's CNA E-Tool Is Here: Now What?

By Jeb Bonnett
June 12, 2018

Topics:
Capital Needs Assessment
HUD e-Tool
Jeb Bonnett


Jeb Bonnett is Director of Building Assessments - HUD with AEI Consultants, an international consulting firm of 25 years that provides services to commercial lenders, property owners, managers, tenants and developers. These services include environmental, property and facility assessments; zoning and energy consulting; site investigation and remediation; industrial hygiene; and construction risk management. He can be reached at jbonnett@aeiconsultants.com.

JebBonnettHUD mandates use of its Capital Needs Assessment e-Tool for FHA multifamily mortgage insurance applications, Rental Assistance Demonstration conversions, 10-year capital needs assessment update for FHA-insured multifamily properties and other asset management milestones. But many lenders, investors and consultants have expressed concern regarding technical inefficiencies with the e-Tool itself, as well as operational hurdles it creates.

The enforcement of the CNA e-Tool was enacted as part of HUD's ongoing Multifamily for Tomorrow program, which aims to improve the department's operating model, practices and customer service and increase consistency on a national scale through a series of initiatives.

These assessments are completed nationwide by a relatively small group of specialized third-party consultants who have developed their own processes over many years--and in some cases, decades.

Despite efforts by certain stakeholders to further delay the implementation of the e-Tool as a mandatory component of HUD Multifamily projects, it is now here to stay.

Below, we highlight the reasons behind the shift, discuss common issues that arise with the tool and outline strategies to prepare for the challenges the e-Tool presents to make its use as time- and cost-effective as possible.

Significant Shift with the Goal of HUD Efficiency
HUD's multifamily department includes several regional centers and satellite offices across the country. Over time, these offices had developed fragmented rules and processes.

By centralizing the assessment process and offering a software where certain issues are flagged and required to be resolved before loan applications go to HUD, the CAN e-Tool is meant to create consistency within the organization so HUD can use its budget and time more effectively.

For example, a streamlined process will make it simple for projects to be shared between different HUD offices, instead of having situations where one location is backlogged with applications while others have the capacity to take on more projects.

Creating a standardized digital assessment process is also in line with the department's Paper Reduction Act.

Mandated use of the e-Tool ensures that HUD professionals are receiving consistent and centralized internal training and consistent application deliverables for final review. It is now up to the lenders and due diligence consultants to understand the new obstacles and define new best practices.

Lender Reaction and Prevalent Issues
Lenders, consultants and other involved parties and organizations support increased efficiency in the life cycle of a capital needs assessment. As a result, many of these stakeholders have expressed concerns over the ability to be as efficient with e-Tool reporting requirements as they were with their former processes and internal software applications. These formerly helpful processes and systems, which were constructed over the past 20 years, created competitive advantages for industry-leading companies.

In comparison, the approximately one-year timespan between the launch of the e-Tool as voluntary in late 2016 and it becoming mandatory for all projects this year is a very short amount of time to determine how to overhaul these systems and adapt.

In addition, there were not many deals being put through their e-Tool paces for the entire lifecycle of a capital needs assessment during the voluntary use period. Further delaying lessons learned is the long lifecycle of a capital needs assessment, which can take up to eight months from engagement to HUD review. There may be seven months of additional in-progress projects in the pipeline that require last-minute adjustments related to any future HUD feedback.

We're observing that the biggest obstacle experienced is the lack of transparency within the e-Tool Excel itself. It is a file that requires tandem use of HUD's validation engine or maybe a proprietary application created by a lender or needs assessor. A stakeholder cannot just open an e-Tool and understand a property's capital needs as there are no built-in summary tables or flags. As a result, supplemental reporting must be formatted in tandem with the e-Tool so that all involved stakeholders can focus on the meaningful content hidden within the e-Tool.

Unfortunately, there is no publicly available tool that allows all parties to quickly know if a supplemental report matches the latest and greatest e-Tool data. Lenders will need to validate the e-Tool that the needs assessors already validated if they want to confirm that the supplemental report created to help them visualize e-Tool data is even accurate. This begs the question: Why even create a supplemental report that helps visualize e-Tool data if it is not 100 percent reliable?

In addition, the export reports generated in HUD's validation site do not closely resemble the summary reporting that the industry has become familiar with over the last 20 years. While needs assessors and lenders could eventually grow accustomed to the HUD validation engine formats, a property owner or real estate investor that has no e-Tool experience will find them challenging to understand.

One of the consequences of so much change so quickly is that the incremental timing involved with nearly every task associated in the lifecycle of a capital needs assessment has increased. In 2016 the average HUD capital needs assessment fee was approximately $3,600. Those fees have nearly doubled since then.

Overcoming Hurdles and The Good News
Now that HUD's CNA e-Tool is in effect, the best way to transition and adapt to its use is to take advantage of the resources available, rework and marry new requirements and existing processes where applicable and get to a place where potential increases in due diligence fees are sustainable.

Improving communication not just with HUD but between all involved parties and consultants working on a project is critical--and perhaps the most important strategy to enact. Specifically, providing timely property information to the needs assessor before the e-Tool is populated will reduce the need for future revisions (Rent Roll, Questionnaires and Proposed Renovation Plans, etc). Revising an e-Tool can be burdensome as downstream content can and must often be wiped out if it is related to preceding content that requires changes.

Another proactive way that lenders and investors can help streamline the process of adjusting to the e-Tool is to partner with one firm that specializes in all services, or if using multiple firms, to have open and clear lines of communication to ensure that individual responsibilities are clear.

More specifically, if Consultant Z is performing the energy audit and Consultant Y is performing the CNA, the lender should specify at the beginning whose responsibility it is to populate the energy usages in the e-Tool. Also, salient data discrepancies between two separate consultants can require additional e-Tool revisions.

A positive aspect throughout the shift to the new tool is that HUD has been very responsive. Stakeholders can reach out directly through HUD's communication portal, and we have observed consistent action from HUD to resolve issues.

Further, the department has provided numerous in-person training sessions and online training resources for the e-Tool.

Looking Ahead
This major step towards more efficiency at HUD is not without growing pains. That said, stakeholders are hopeful that after this period of adjustment is over, everyone involved will reap the benefits of a streamlined process and time savings within the department and across projects.

While the time spent and costs are almost certain to be higher for the foreseeable future, ultimately, processing times at HUD will reduce and reporting expectations will become more consistent.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)

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