September 19, 1996

                                        MORTGAGEE LETTER 96-52


SUBJECT:  Single Family Loan Production - Nonprofit Agencies as

Nonprofit agencies have long been important and active partners
with FHA in developing affordable housing.  Combining the credit
enhancement of FHA mortgage insurance with their local expertise as
housing providers, these agencies have successfully assisted many
first-time homeowners and have helped in the revitalization of
numerous inner-city neighborhoods and rural communities.  Our
support of these efforts is illustrated by, among other things,
permitting eligible nonprofit agencies to obtain insured financing
under the same favorable terms as owner occupants.  

Recently, there has been an expansion of nonprofits entering the
housing provider arena.  These include recently-established
nonprofits as well as existing nonprofits diversifying their reach
by adding affordable housing components to their mission.  FHA
encourages these efforts and, to the extent possible, will assist
nonprofits in gaining housing provider experience and credibility
in the local community.    

To help with these efforts, and at the same time assure that
nonprofits do not overextend their management ability and financial
resources thus placing FHA at an unacceptable level of risk, this
announcement contains information on acceptable affordable housing
programs as well as credit evaluation guidelines.  These will
assist underwriters in analyzing the financial condition of a
nonprofit and its ability to effectively manage an affordable
housing program.  These instructions, which supersede those in HUD
Handbook 4155.1 REV-4 Chg-1, paragraph 2-17, are not designed to
burden lenders with additional underwriting criteria, but rather to
provide technical direction to those with limited experience in
lending to nonprofits.  All other underwriting requirements
(borrower and collateral) remain valid and are important components
in assessing the insurance risk on individual mortgages.  

To be eligible as a mortgagor under FHA's programs and obtain the
same insured financing percentage as owner-occupants, the nonprofit
must be a tax-exempt organization, have a voluntary board whose
members do not personally benefit and two years experience as a
housing provider.  Documentation as evidence the nonprofit meets
the above criteria must be submitted to the local FHA office along
with the description of its intended affordable housing program. 
While all local FHA offices will recognize any office's approval of
the nonprofit's eligibility under these criteria, the affordable
housing program itself must be separately approved by the local
office.  Please note that by statute only those nonprofits exempt
under Section 501(c)(3) of the Internal Revenue Code of 1986 are
acceptable; the nonprofit must include IRS "Letter of
Determination" as verification of its tax exempt status. 
Eligibility criteria are further described in paragraph 1-5 of HUD
Handbook 4155.1, REV-4, Change 1.

For any nonprofit lacking the full two years experience as a
housing provider, consideration may be given to previous experience
it has had in providing related community services.  Upon approval
by the local FHA office, the nonprofit may be permitted to obtain
FHA mortgage financing, one property at a time, until it attains
the housing provider experience required and successfully
demonstrates its ability to either sell or rent these properties to
qualified families.  Hiring of experienced staff does not relieve
the nonprofit of the experience requirements.

The nonprofit is to demonstrate: 

-           That its affordable housing program is consistent with FHA's
            guidelines as described below.  This is determined by the
            local FHA office and is required regardless of the number of
            properties the nonprofit intends to finance with FHA mortgage
            insurance within the local FHA office jurisdiction, and

-           That it has the management ability and financial capacity to
            effectively operate each program or project being considered. 
            This is determined by the lender.

AFFORDABLE HOUSING PROGRAMS.  Affordable housing programs
administered by nonprofits must be approved by the local FHA
office.  Each affordable housing program must be a viable, well-run
operation that successfully serves the housing needs of low- and
moderate-income individuals and families.  

Once the local FHA office is satisfied that the nonprofit's
affordable housing program meets our objectives, it will issue a
letter stating this to the nonprofit.  Unless revoked by the local
office, the affordable housing program itself is approved for a
two-year period.  For those nonprofits with limited housing
provider experience, FHA may restrict the number of mortgages it
will insure.  A copy of the approval letter should be provided by
the nonprofit to each lender considering making financing available
to the nonprofit using FHA-insured mortgages.  Acceptable
affordable housing programs fall into the two categories described

Homeownership.  Our target is homeownership.  As such, we strongly
encourage nonprofit agencies to make successful attainment of
homeownership as the ultimate goal of their affordable housing
programs.  We recommend that nonprofits devise innovative
approaches to providing additional avenues for first-time and
underserved borrowers.  

Long-term Rentals.  We will also consider rental programs
administered by nonprofit agencies as meeting the requirements of
providing affordable housing.  In some markets, long-term rentals
may be the only effective way in which to provide affordable

However, a nonprofit that appears to have taken on the role of a
traditional, market rate landlord for cash-flow and income purposes
without redistributing those funds back into its housing efforts
will not have its program approved.  Nonprofits are expected to
fulfill their commitment to low- and moderate-income families.    

Elements of Successful Affordable Housing Programs:  Successful
affordable housing programs vary considerably from area to area as
nonprofits address local housing needs.  Nevertheless, experience
has shown that most successful programs have certain common
elements.  While none of the items listed immediately below are
requirements for obtaining FHA approval of the affordable housing
program, they serve as broad recommendations to nonprofits
considering development of affordable housing.
-           Pre-qualification.  If the nonprofit will eventually sell the
            properties, either with new mortgages or through credit-
            qualifying assumptions, the nonprofit should pre-qualify
            potential homebuyers, thus ensuring a ready supply of buyers.

-           Homeownership Counseling.  The nonprofit should offer or
            obtain homeownership counseling for prospective homebuyers and
            also offer it after loan closing.  If the nonprofit offers a
            lease-to-own arrangement, successful management of the monthly
            payments for a specified time should be a condition of the
            eventual sale to the homebuyer.

-           Remaining Affordable.  The PITI for the properties in question
            should remain in the "affordable" range for potential
            homebuyers/assumptors, i.e., the end product will be within
            the financial reach of those families it was designed to
-           Repair Reserves.  If the nonprofit offers a rent with option
            to buy, the rental amount should include a repair reserve to
            limit payment difficulties once the homebuyer owns the
            property and is responsible for all repairs.

MANAGEMENT AND FINANCIAL CAPACITY.  The analysis of the nonprofit's
management ability and financial capacity to encumber properties
using FHA mortgage insurance is performed by the lender providing
financing.  The lender must be able to conclude that the nonprofit
will be able to support the mortgages for which it has applied and
that it has the management resources available to administer the
affordable housing program.  This is particularly important with
those nonprofit agencies that have embarked on large-scale programs
while having only limited financial capacity or experience. 
Project sponsorship and management must be in keeping with the
capabilities of the nonprofit.  In making this determination, a
number of elements, as described below, will be evaluated.  

Program Administration.  The lender must examine the track record
of the nonprofit in developing/managing affordable housing and
determine that the nonprofit demonstrates the skills and experience
needed for the project being proposed.  It must consider whether
the project consists of lease-to-own properties or long-term
rentals, as well as the market absorption on projects the nonprofit
has completed.  Further, beneficiaries of the affordable housing
program itself may not be members of its board, employees, or
others with an identity-of-interest to the nonprofit.  Lenders may
not approve a situation where such individuals are permitted to
purchase or rent housing made available through the nonprofit using
FHA insured mortgage financing.

Management of the Nonprofit.  The nonprofit must be able to
demonstrate that:

-           Its Executive Director and/or key staff have the required
            experience in developing and administering affordable housing

-           It is reliable on the basis of its credit and community
            oriented reputation and performance or that of its principals
            and can demonstrate that it understands the responsibilities
            and obligations, including financial, that attach to
            sponsorship/operation of a project and its continuing
            successful operation.  

-           It is acting on its own behalf and is not under the influence,
            control, or direction of any outside party seeking to derive
            profit or gain from the proposed project, such as a landowner,
            real estate broker, contractor, builder, lender, or
            consultant.  (Lenders are not to provide FHA-insured financing
            to nonprofits where there is anything less than an arms-length
            transaction between the nonprofit's officers and board members
            and any individual or corporation, including family members
            and business partners, that may profit from the program
            through provision of goods or services.  Business
            relationships must be clearly disclosed.  Nonprofit
            organizations that are established by for-profit enterprises
            must be similarly evaluated.)

Financial Analysis.  The financial analysis of a nonprofit
organization differs from that of a typical profit-oriented
corporation in that it is the stewardship of the funds that is
examined rather than profits and worth.  The purpose of the
financial analysis is to determine that the nonprofit has the
financial capacity to manage the project and has financial support
which will remain during the term of the mortgages.  

Most nonprofit organizations utilize a "fund accounting" system. 
This system provides for the maintenance of separate accounts for
funds that are associated with specific activities.  Reporting on
a fund account basis helps to segregate unrestricted (may be used
for most any purpose) from restricted resources (may only be used
for a specific purpose).  

Performing a financial analysis properly requires the lender to
obtain documentation to determine both the nonprofit's actual
financial capacity and that it has demonstrated stability and
proper cash management; these documents are to be included in the
case binder submitted to FHA for insurance endorsement.  (For
relatively large-scale projects where multiple loans will close
simultaneously, the local FHA office and the lender may agree to
alternate methods of documentation submission to limit redundant
paperwork.) If the underwriter is unsure of any of the terms or
entries discussed below, including those on the attached financial
analysis worksheet, he or she should contact a CPA for additional
information.  Please recognize that while the affordable housing
program being administered by the nonprofit may be approved for a
two-year period, the nonprofit's financial capacity must be
evaluated for each mortgage being considered.

Documentation Requirements:

-           Form IRS 990, Return of Organization Exempt from Income Tax. 
            This is the tax form filed annually by the nonprofit.  (Those
            with a gross income of less than $25,000 and churches are not
            required to complete this form but will file an identification
            portion of the return.)  Among other things, Form IRS 990 and
            supporting schedules include information on the nonprofit's
            income, expenses, assets, liabilities and net assets in the
            past fiscal year.  The lender must obtain the two most recent
            fiscal year's filings.

-           Complete year-end financial statements (balance sheet,
            statement of activity, statement of cash flow) for most recent
            two fiscal years prepared in accordance with generally
            accepted accounting principles and reporting practices and
            must include the auditor's and treasurer's report and any
            supplementary schedules.  This audit must be in conformance
            with OMB Circular A-133 "Audits of Higher Education and
            Nonprofit Institutions" (if appropriate based on size of the

-           Most recent 90 day year-to-date financial statement, along
            with a certification from a CPA or other financial
            professional attesting that this information accurately
            represents the financial condition of the nonprofit.

-           Credit reports on the nonprofit itself as well as on the
            executive director/chief operating official(s) of the
            nonprofit organization.  (This is to assure that those in
            leadership positions with the nonprofit exhibit personal
            responsibilities in managing financial affairs.  These
            individuals will also be matched against CAIVRS and the LDP

-           Corporate resolution delegating signatory authority.  (The
            individual signing the loan application and other documents
            for the nonprofit agency is not personally obligated on the
-           Complete articles of incorporation and by-laws of the

Funding stream considerations:  Much of the analysis of the
nonprofit's financial capacity revolves around its funding stream. 
The lender must consider the reliability and duration of the
funding stream, and whether the primary sources of funding are
competitive, whether the nonprofit's funding stream is from a mix
of private and public sources, or only from public funds, and if
other sources of funding are available should one or more be
curtailed.  The lender must also consider whether those funding
sources permit overhead and administrative allowances as well as
the amount of the nonprofit's money that will be encumbered by the
downpayments on the loans.

Worksheet Analysis:  We have developed a financial capacity
worksheet to assist underwriters in evaluating the nonprofit's
financial condition.  Underwriters may use this worksheet or any
similar form that captures the same information.  The financial
statements and Form IRS 990 provide the information necessary to
complete this analysis.  This data, in addition to the notes to the
financial statements, are important in determining current
financial strength as well as detecting any negative trends.  

In conjunction with the questions below, the lender is responsible
for describing how it arrived at the conclusion that the nonprofit
was an acceptable mortgage risk and met FHA's eligibility criteria. 
If any of the answers to the questions below are "No," strong
compensating factors will be necessary to approve the nonprofit as
a mortgagor.  The analysis must consider the effect of the proposed
mortgage debt(s) on the nonprofit's financial condition. 
Nonprofits must disclose any pending mortgage applications,
regardless of the type of financing being considered.

From the Balance Sheet:

1.          Based on the number of mortgages being considered, does the
            nonprofit have  unrestricted cash balances exclusive of lines
            of credit and rental income from the financed properties to
            support a 6 month reserve meeting the greater of: 

            (a) 10 percent of principal, interest, taxes, and insurance
            (PITI) payments due each month on all mortgages; or 
            (b) total PITI payments for the single largest mortgage? 

2.          Is the current ratio (current assets divided by current
            liabilities) approximately 2.00 or better?  [This liquidity
            ratio gives an indication of the ability of the nonprofit to
            use its current assets to extinguish its current liabilities. 
            As a rule, the higher the current ratio, the better.  This
            ratio should also be examined as part of the trend for the
            nonprofit.  Lines of credit are not to be considered in this

3.          Is total fund balance stable or increasing?  [The fund balance
            is analogous to the equity section found on the balance sheet
            of a profit-motivated entity and should not be decreasing.] 

4.          Is the percentage of the nonprofit's total fund balance to the
            proposed mortgage debt at least 25%?  [This is to determine if
            the nonprofit has sufficient financial size to operate the
            agency and the affordable housing project.  Proposed mortgage
            debt would include any properties not complete and occupied.]

From the Statement of Activity:

1.          Are the support and revenue accounts stable or, preferably,
            increasing?  [Nonprofits with declining support and revenue
            accounts are unlikely candidates to  engage in new affordable
            housing programs using FHA-insured financing.]   

2.          Is the trend of operating expenses in line with the support
            and revenue?  [As a rule, expenses should not be increasing if
            support and revenue remain static or are decreasing.]

From the Cash Flow Information:

1.          Have the cash flows from operating activities been positive? 
            [It is the overall trend that is being analyzed, not a
            discrete point in time.] 

nonprofit's federal tax identification number into CHUMS in lieu of
a social security number.  This will help us track multiple loans
to the nonprofit as well track any defaults/claims when reported by
the servicing lender into CAIVRS.    

If you have any questions about this mortgagee letter, please
contact your local FHA office.

                         Sincerely yours,

                         Nicolas P. Retsinas
                         Assistant Secretary for Housing-
                           Federal Housing Commissioner

Suggested Nonprofit Financial Capacity Worksheet
Balance Sheet Information                                                                            Year                    199                      199         

1.  Cash Balances--(Unrestricted Funds)
    (Actual cash or equivalents, and short
    term investments. Inventories and receivables 
    should be excluded from this category. These
    funds cannot be restricted to any one fund 
    and are considered "liquid.")                                                                                                                               
2.  Total Cash Balances--Restricted and
    unrestricted liquid funds                                                                                                                                   
3.  Total Current Assets--Restricted and unrestricted                                                                                             
    assets that can be converted to cash within 
     one year (e.g. cash and near cash equivalents, 
     accounts receivable, marketable securities, prepaid 
     expenses and inventories).                   

4.  Total Current Liabilities--Restricted and unrestricted                                                                                                     
    liabilities that must be paid within one year
     (e.g. accounts and notes payable, income                              
     tax payable, and other short-term debt).

5.  Current Ratio
     (Current Assets divided by Current Liabilities)                                                                                                           
     (line three divided by line four)

6.  Unrestricted Fund Balance                                                                                                                      
7.  Total Fund Balance                                                                                                                                          
Statement of Activity

8.  Total Annual Support and Revenue                                                                                                                            
9.  Total Annual Expenses (Operating Budget)                                                                                                       
Cash Flow Information

10. Cash Flow from Operating Activities                                                                                                                         
11. Total Net Increase or (Decrease) in Cash
    Also known as an increase/decrease in working