Glossary

HUD Risk-Sharing Program (Section 542(b)/(c))

Also known as: Risk-Sharing Insurance, 542(b), 542(c)

A HUD multifamily mortgage insurance structure under which a qualified lender -- a state or local housing finance agency under Section 542(c), or another HUD-approved qualified participating entity under Section 542(b) -- shares mortgage insurance risk and loss exposure with HUD in exchange for delegated underwriting authority and a faster approval process than standard full-insurance HUD programs.

Unlike HUD's standard programs, such as 221(d)(4) and 223(f), where HUD bears essentially the full insurance risk and correspondingly re-underwrites every transaction itself, risk-sharing loans shift a negotiated share of loss exposure, commonly 50/50 though the exact split is negotiated, onto the risk-sharing lender, which allows that lender to rely more heavily on its own underwriting and close transactions materially faster than the standard MAP process typically allows. Section 542(c) risk-sharing, limited to state and local housing finance agencies, is a particularly common execution for LIHTC transactions, since a state HFA that is simultaneously allocating the tax credits and issuing tax-exempt bonds for a project can also serve as the risk-sharing lender providing HUD-insured permanent debt on the same deal, collapsing what might otherwise be three separate counterparties into one integrated public finance relationship. Because the risk-sharing lender bears real skin in the game rather than passing through insurance risk entirely to HUD, risk-sharing loans are generally underwritten somewhat more conservatively in practice than a comparable full-insurance HUD product, even though the published leverage and term parameters can look similar on paper.