Effect of Acquisition of Title by Mortgagee or the Secretary on a Title Insurance Policy

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing

Commissioner

24 CFR Parts 207, 213, 220, 221, 232, 241, 242, and 244

[Docket No. R-94-1662; FR-3224-F-02]

RIN 2502-AF64

Effect of Acquisition of Title by Mortgagee or the Secretary on a

Title Insurance Policy

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Final rule; confirmation of interim rule.

-----------------------------------------------------------------------

SUMMARY: This rule adopts as final an interim rule published on June

24, 1993 that removed a provision in current HUD regulations requiring

that any title insurance policy obtained in connection with the

insurance of multifamily mortgages must provide that, upon acquisition

of title by the mortgagee or the Secretary, ``it will become an owner's

policy running to the mortgagee or the Secretary, as the case may be''

and substitute the provision ``it will continue to provide the same

coverage as the original policy, and will run to the mortgagee or the

Secretary, as the case may be''. The purpose of this rulemaking was to

remove a regulatory restriction and to adopt in its place a more

efficient procedure.

EFFECTIVE DATE: July 1, 1994.

FOR FURTHER INFORMATION CONTACT: Gaines E. Hopkins, Managing Attorney,

Multifamily Mortgage Division, Office of General Counsel, Room 9228,

451 Seventh Street, S.W., Washington, D.C. 20410, telephone (202) 708-

4090, TDD (202) 708-3259. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Background

Section 207.36 of Title 24 of the Code of Federal Regulations

requires a mortgagee to furnish a survey and a policy of title

insurance or its equivalent as a prerequisite to the closing of an

insured multifamily housing loan. Where a title policy is to be

furnished, the regulation requires that the policy name the mortgagee

and HUD as the insured and also provide that, upon acquisition of title

by either the mortgagee or HUD, the policy will become an owner's

policy running to either the mortgagee or HUD.

If a mortgage default occurs and a mortgagee elects to exercise its

right to assign the mortgage to HUD, it must comply with 24 CFR

207.258(b)(4)(ii). This provision requires that all policies of title

insurance or evidences of title submitted to HUD have the original

title coverage extended to include the date of the assignment of the

mortgage. If the mortgagee elects to foreclose on the mortgage itself,

or if it accepts a deed-in-lieu of foreclosure from the mortgagor, the

requirements set out in Secs. 207.258(c)(8) and 207.258a apply. These

sections provide that if title insurance was utilized at the time of

endorsement, the mortgagee will be required to submit an owner's title

policy in favor of HUD that is effective on the date that the project

is conveyed to the Secretary. If, however, an abstract and attorney's

opinion were originally accepted at the time of endorsement, they are

again acceptable. It should be noted that the aforementioned

regulations either are incorporated into, or have a counterpart in, all

parts of Title 24 of the Code of Federal Regulations that are

applicable to multifamily and health care mortgage insurance programs.

There are two basic title insurance policy formats, one for owners/

mortgagors and a second for lenders/mortgagees. Each is used in both

commercial and residential transactions. The standard title policies

have been written and promulgated by the industry trade organization,

American Land Title Association (ALTA), and are used in most

jurisdictions. In jurisdictions that mandate a particular format, HUD

has deferred to state law and accepted the state-mandated format. For

the last two decades, HUD has accepted the 1970 ALTA format, and no

other ALTA format under the aforesaid regulatory requirements, in those

jurisdictions that do not otherwise require the use of a particular

title policy.

Periodically, ALTA has revised its approved standard title policy

to provide for what it perceives as changing legal and market

conditions. At the request of ALTA, HUD has reviewed each new policy

format to assess its positive or negative impact upon the specific

title insurance needs of the Department. In 1987, ALTA published a new

title policy that was reviewed and subsequently approved by HUD, but

only upon the condition that, in multifamily and health care cases,

title companies add an endorsement to the lender's policy providing

that it will automatically ``convert'' to an owner's policy if HUD

becomes the owner of the FHA-insured project as a result of

foreclosure. The HUD Office of General Counsel expressed the opinion

that a ``conversion'' endorsement is necessary to comply with the

requirement in Sec. 207.36(a)(1) ``that upon acquisition of title by

the mortgagee or the Secretary, [the title policy] will become an

owner's policy * * *.'' This endorsement condition has been strongly

resisted by ALTA and some of its individual corporate members,

resulting in situations where it was only with considerable difficulty

that title insurance was obtainable.

Title Industry Position

The title industry argues that a lender's policy cannot be

``converted'' to an owner's policy as HUD has requested and raises

arguments relating to (1) distinctions between the two formats that

bear directly upon the ``value'' of the coverage; (2) cost schedules

that are on file with state insurance commissioners; (3) the

unavailability of coverage to other mortgagees or private mortgage

insurers; (4) the prior practice of FHA; (5) a different interpretation

of the regulation; and (6) the opinion that either HUD or the lender

should pay the entire cost of a new owner's policy. Inasmuch as HUD, by

this rule, is removing the regulatory restriction, it is not necessary

to set forth the relative merits and demerits of this industry

position.

Current HUD Procedure

At present, HUD acquires title to a project pursuant to one of

several procedures. The most common procedure is for the mortgagee to

assign the mortgage to HUD when there is a default. As part of the

assignment process, the mortgagee is required, at its own expense, to

extend the coverage of the original mortgagee policy to include the

time period between the dates of original endorsement for insurance and

the assignment. This is usually accomplished by a limited title search

and a ``date-down'' endorsement of the existing title policy, but may

also be done through the purchase of an entirely new lender's policy.

After assignment of a mortgage, if the default continues, it is HUD's

policy to employ an attorney who practices in the jurisdiction where

the project is located to act as a commissioner or trustee in the

foreclosure. It is the responsibility of the foreclosure commissioner

to perform a limited title search covering the time period between the

assignment of the mortgage to HUD and the institution of proceedings

under the Federal Foreclosure Act. Even though no title policy is

obtained by HUD as a result of the foreclosure commissioner's findings

and report, HUD would have the power to bring a malpractice action

against the licensed attorney who acted as the foreclosure commissioner

if the work product were flawed.

A lender also may elect not to assign, but to institute foreclosure

proceedings on its own or to take title from the mortgagor by a deed-

in-lieu of foreclosure and to convey title directly to HUD. After the

lender obtains title to the project by means of foreclosure or a deed-

in-lieu, it is entitled to transfer title directly to HUD. If the

lender chooses to proceed in this manner, Sec. 207.258a requires that

it purchase, at its own expense, an owner's title policy ``effective on

or after the date of the recording of the conveyance to the

Commissioner.''

It should also be noted that Section 207(k) of the National Housing

Act and the implementing regulations also give HUD the option of either

proceeding to foreclosure or taking a deed-in-lieu of foreclosure

directly from the mortgagor, following the assignment of the project

mortgage to the Secretary.

HUD Response

Title insurance is necessary in virtually all primary and secondary

mortgage market transactions. Although individual title companies may

still be willing to issue the 1970 ALTA lender's title policy on a

case-by-case basis in those states where they are not forbidden by

state regulation from doing so, the 1992 ALTA lender's policy format

now represents the only title policy format that has the official

approval of the title industry's trade association for use by title

companies nationwide. The Department has determined that it is

necessary to change its regulations so that the 1992 ALTA title policy

format can be accepted by HUD for use in FHA-insured multifamily

mortgage transactions.

Consequently, the Department's regulations are revised to remove

the requirement that the Secretary, in every case, be issued an owner's

title policy. HUD would retain the flexibility, however, to make such a

determination on a case-by-case basis. Accordingly, in this rule HUD is

revising 24 CFR 207.36(a)(1) and conforming other relevant sections by

removing the phrase ``it will become an owner's policy running to the

mortgagee or the Secretary as the case may be,'' and substituting ``it

will continue to provide the same coverage as the original policy, and

will run to the mortgagee or the Secretary, as the case may be''.

As a consequence of having removed the regulatory requirement in

Sec. 207.36 requiring the purchase of an owner's policy, HUD could

either purchase an owner's title policy after acquisition of title, or

HUD could choose to self-insure after acquisition of title. After this

rule takes effect HUD will decide on a case-by-case basis either to

purchase an owner's policy at its own expense, or to self-insure for

the time period after acquisition of title.

II. Public Comment on Earlier Interim Rule

On June 24, 1993 (58 FR 34213), the Department published in the

Federal Register, an interim rule. A request was made for comment by

the public on this interim rule. One comment has been received. The

commenter, a private individual, quotes the following paragraph from

the Preamble to the interim rule and asks the following question:

``As a consequence of having removed the regulatory requirement in

Sec. 207.36 requiring the purchase of an owner's policy, HUD could

either purchase an owner's title policy after acquisition of title, or

HUD could choose to self-insure after acquisition of title. After this

rule takes effect HUD will decide on a case-by-case basis either to

purchase an owner's policy at its own expense, or to self-insure for

the time period after acquisition of title.''

``My question is where does HUD have the authority to purchase a

title insurance policy from its own funds for its own protection? The

long standing policy of the Federal Government, as enunciated

frequently by the General Accounting Office, is that the Government is

a self-insurer and will not purchase commercial insurance against loss

or damage to its own property (presumably HUD inventory property is

considered as Government property.) Does HUD have approval from the

Comptroller to use Government funds to purchase title insurance to

protect its ownership interest?''

HUD Response: It is true that the government is essentially a self-

insurer in certain specific areas, primarily loss or damage to

government property and the liability of government employees. But

there are many situations in which the government buys or pays for

insurance. Among the more well known examples are the Employee's Health

Benefits Program and the Federal Group Life Insurance. Moreover, even

the self-insurance requirement for loss to government property does not

apply in all situations. For example, the rule does not apply to a

wholly-owned government corporation (the Federal Housing Administration

(FHA) is treated as a corportion for this purpose, even though it is

not chartered as one, 53 Comp Gen 337 (1973)). Furthermore, the

Comptroller General has indicated that property acquired by FHA in

exchange for the payment of insurance benefits occupies a different

status from government owned property and does not fall within the

meaning of the policy of not carrying hazard insurance on property it

owns. Finally, the Comptroller General has never even defined title

insurance as insuring property loss and thus prohibited from purchase.

III. Findings and Certifications

Regulatory Agenda

This rule was listed as item 1598 in the Department's Semiannual

Agenda of Regulations published on April 25, 1994 (59 FR 20424, 20450)

under Office of Housing, in accordance with Executive Order 12866 and

the Regulatory Flexibility Act.

Impact on Small Entities.

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this rule before its publication and, by

approving it, certifies that this rule does not have a significant

economic impact on a substantial number of small entities. The rule

effectively liberalizes title insurance requirements which must be met

if a mortgage insurance claim is being made against HUD. Its impact on

small entities will be minimal and any such impact will be beneficial.

Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive order 12612, Federalism, has determined that the policies

contained in this notice will not have substantial direct effects on

states or their political subdivisions, or the relationship between the

federal government and the states, or on the distribution of power and

responsibilities among the various levels of government. The rule does

not significantly change existing roles and relationships between

federal, state and local governments in any of the programs to which it

applies.

Impact on the Family

The General Counsel, as the Designated Official under Executive

order 12606, The Family, has determined that this notice does not have

potential for significant impact on family formation, maintenance, and

general well-being.

Environment

In accordance with 40 CFR 1508.4 of the regulations of the Council

on Environmental Quality and 24 CFR 50.20(k) of the HUD regulations,

the policies and procedures contained in this rule relate only to

internal administrative procedures whose content does not constitute a

development decision nor affect the physical condition of project areas

or building sites and, therefore, are categorically excluded from the

requirements of the National Environmental Policy Act.

List of Subjects

24 CFR Part 207

Manufactured homes, Mortgage insurance, Reporting and recordkeeping

requirements, Solar energy.

24 CFR Part 213

Cooperatives, Mortgage insurance, Reporting and record-keeping

requirements.

24 CFR Part 220

Home improvement, Loan programs--housing and community development,

Mortgage insurance, Reporting and recordkeeping requirements, Urban

renewal.

24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

24 CFR Part 232

Fire prevention, Health facilities, Loan programs--health, Loan

programs--housing and community development, Mortgage insurance,

Nursing homes, Reporting and recordkeeping requirements.

24 CFR Part 241

Energy conservation, Home improvement, Loan programs--Housing and

Community Development, Mortgage insurance, Reporting and recordkeeping

requirements, Solar energy.

24 CFR Part 242

Hospitals, Mortgage insurance, Reporting and recordkeeping

requirements.

24 CFR Part 244

Health facilities, Mortgage insurance, Reporting and record-

keeping requirements.

The Catalog of Federal Domestic Assistance Numbers are: 14.112,

14.126, 14.128, 14.129, 14.134, 14.135, 14.138, 14.139 and 14.155.

Accordingly, the Department adopts as final and without change, the

interim rule published on June 24, 1993 (58 FR 34213) that amended 24

CFR parts 207, 213, 220, 221, 232, 241, 242 and 244.

Dated: May 23, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing, Federal Housing Commissioner.

[FR Doc. 94-13224 Filed 5-31-94; 8:45 am]

BILLING CODE 4210-27-P