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36 | M R EP O RT FEATURE T hrough the 2017 Tax Cuts and Jobs Act, Congress created Opportunity Zones to incentivize investment into undercapitalized communities considered "econom- ically distressed" in exchange for certain tax benefits. Since the IRS designated the first set in April of 2018, Opportunity Zones have grown to cover more than 8,700 census tract areas in all 50 states and the District of Columbia, along with five U.S. territories. An Opportunity Zone is defined as a low-income census tract area. It may be designated as such under a variety of criteria, such as having a high rate of poverty, median family income that is 80% or less than the median family income designated based on the location, or a rural county considered "high-migration," which combines elements of median family income and out- migration patterns. The Basics O pportunity Zones also pres- ent mortgage bankers with the unique opportunity of both increasing their own produc- tion volume and assisting in the reinvigoration of economically distressed communities through single-family renovation or rehabilitation lending programs. The most popular of these is the Standard and Limited versions of the FHA 203(k) along with the conventional renovation products from Fannie Mae and Freddie Mac. Fannie offers the HomeStyle Renovation loan while Freddie's is the CHOICERenovation loan program. All three programs share many common features, but there are also important and distinct dif- ferences. For example, there are different minimum and maximum renovation costs required along with a maximum loan-to-value allowed. However, FHA's Limited 203(k) program has had some recent enhancements that make it a game changer for properties in Opportunity Zones. The FHA Limited 203(k) pro- gram allows eligible homebuyers to purchase a single-family resi- dence and finance up to $35,000 of allowable improvements into the purchase loan with as little as a 3.5% down payment for ap- proved borrowers. With a 30-year fixed interest rate, the Limited 203(k) is a popular product for prospective homebuyers look- ing to purchase older homes that need some of the proverbial "TLC" in terms of updates and upgrades. The Limited 203(k) also allows current homeowners to finance up to the $35,000 of repairs on their primary resi- dence, making it a great option for owners looking to take on a remodeling project. On November 22, HUD Secretary Ben Carson announced enhancements to the Limited 203(k), making it an even better deal for borrowers looking to pur- chase and rehabilitate or renovate an existing primary residence located within an Opportunity Zone. After announcing incentives for multifamily property owners in May, FHA issued Mortgagee Letter (ML) 2019-18. In a nutshell, ML 2019-18 increases the Limited 203(k)'s maximum amount of al- lowable rehabilitation costs from $35,000 to $50,000 for the first 15,000 loans secured by properties located in qualified Opportunity Zones each calendar year. This change took effect with Limited 203(k) loans where the FHA case number is assigned on or after December 16, 2019. The ML indi- cates that this expanded amount of rehabilitation funds will expire December 31, 2028. According to HUD, FHA had over 623,000 active mortgages on eligible homes located in qualified Opportunity Zones as of September 30, 2019, which represents about 8% of the total number of FHA-insured mortgage loans nationally. FHA's full list of allowable improvements for the Limited 203(k) loan may be found online in the HUD Handbook 4000.1. Examples of such improvements allowed include repairing or replacing items such as plumb- ing, HVAC and electrical systems, making energy conservation improvements, lead-based paint stabilization, and connecting to public water and sewage systems. In addition to the overall benefit of helping more individu- als become homeowners, banks may also find that renovation lending in Opportunity Zones brings other benefits in their next Community Reinvestment Act (CRA) exam. Passed in 1977, CRA requires banks to meet the credit needs of the local communities in which it is chartered, consistent with safe and sound banking operations. With a particular focus on the lending done by banks in low- and moderate-income census tract areas (LMI), renovation lending in Opportunity Zones is a natural Renovated Properties, Renewed Potential Renovation loans offer another critical way for lenders and investors to leverage the potential of Opportunity Zones and assist homebuyers in search of affordable housing. By Bruce W. Schultz