Auction of Section 221 Multifamily Mortgages

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing

Commissioner

24 CFR Part 221

[Docket No. R-94-1551; FR-3009-P-01]

RIN 2502-AF27

Auction of Section 221 Multifamily Mortgages

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

Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would revise current regulations governing

the assignment of mortgages insured under section 221 of the National

Housing Act to conform with changes made by section 2201 of the Omnibus

Budget Reconciliation Act of 1990) (approved November 5, 1990).

(Section 336 of the National Affordable Housing Act, enacted later,

contains identical provisions.) Section 2201 establishes a procedure

whereby the Secretary of HUD, in lieu of accepting the assignment of a

section 221 mortgage, shall arrange for the auction sale of the

mortgage.

DATES: Comments due date: May 31, 1994.

ADDRESSES: Interested persons are invited to submit comments on the

proposed rule to the Rules Docket Clerk, Office of General Counsel,

room 10276, Department of Housing and Urban Development, 451 Seventh

Street, SW., Washington, DC 20410. Communications should refer to the

above docket number and title. A copy of each communication submitted

will be available for public inspection and copying between 7:30 a.m.

and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Audrey Hinton, Office of Multifamily

Housing Preservation and Property Disposition, Department of Housing

and Urban Development, 451 Seventh Street, SW., Washington, DC 20410,

telephone (202) 708-3555. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: The information collection requirements

contained in this proposed rule have been approved by the Office of

Management and Budget, under section 3504(h) of the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501-3520), and assigned OMB control number

2502-0460.

Section 2201 of the Omnibus Budget Reconciliation Act of 1990,

approved November 5 1990, requires HUD to implement its provisions

within thirty days from the date of enactment and provides that

implementation shall not be subject to the requirement of the issuance

of regulations. Through administrative action, the Department commenced

implementation of section 2201 effective December 5, 1990.

Before its amendment by section 2201 of the Omnibus Budget

Reconciliation Act of 1990, (Pub. L. 101-508, approved November 5,

1990), section 221(g)(4) of the National Housing Act (NHA) gave

mortgagees holding current mortgages insured under a conditional or

firm commitment issued before November 30, 1983 under section 221 of

the NHA an option to assign the mortgage to HUD at the end of twenty

years from the date of final endorsement. The statute further provided

that, upon assignment, HUD would issue to the mortgagee ten-year

debentures bearing interest at the ``going Federal rate'' with a face

amount equal to the amount of the unpaid principal balance of the

mortgage as of the date of the assignment.

Section 2201 provides for a new auction process to replace the

prior section 221(g)(4) assignment option. It provides that when a

mortgagee elects to assign a mortgage to HUD under section 221(g)(4),

the Secretary will, in lieu of accepting the assignment, arrange an

auction sale of the mortgage and pay the purchaser monthly interest

enhancement payments that are equal to the difference between the

mortgage note interest rate and the bid rate accepted by HUD applied to

the declining principal balance.

Before enactment of section 2201, the Department took assignment of

a mortgage under section 221(g)(4) and issued ten-year debentures as

described above. HUD makes interest payments on the debentures

semiannually, and the face amount of the debenture is paid at maturity

or at redemption of the debenture by HUD. HUD holds the assigned

mortgage and receives monthly mortgage payments for the remaining term

of the mortgage (typically, about 20 years) or until prepayment,

default, foreclosure or sale of the mortgage. Under the auction process

authorized by section 2201, HUD does not take assignment of the

mortgage or issue debentures; instead, HUD makes monthly interest

enhancement payments to or receives interest sharing payments from the

purchasing mortgagee, depending on whether the bid rate is higher or

lower than the note rate. These payments would continue until maturity,

prepayment, voluntary termination of insurance, default and full

payment of insurance benefits, or initiation of foreclosure proceedings

by the mortgagee in cases where the mortgagee does not intend to file a

claim for insurance benefits.

Section 2201 required HUD to implement the auction procedure within

30 days of enactment, i.e., by December 5, 1990. It further provided

that early implementation need not be subject to the requirement of

prior issuance of regulations in the Federal Register. The Department

has held several auctions and anticipates that additional auctions will

be held before the effective date of this rule. All notices of election

to assign made after December 5, 1990, are subject to the provisions of

section 2201.

Only mortgages that are current as of the twentieth anniversary

after final endorsement, and for which the mortgagee makes its election

to assign within the one-year ``window'' set forth in 24 CFR 221.775,

are eligible for inclusion in the auction. In addition, mortgages

previously sold by the Government National Mortgage Association (GNMA)

or the Federal Housing Administration (FHA) with the assignment option

deleted are not eligible for inclusion in the auction sale. The selling

mortgagee must certify that the mortgage submitted for inclusion in the

auction is eligible and that the assignment option has not been

deleted.

All mortgagees participating in the auction sale must be HUD-

approved mortgagees. There is nothing in section 2201 to preclude the

mortgagee of record from participating in the auction of the mortgages.

An approved mortgagee may assign, transfer or pledge a purchased

mortgage or a partial interest in a purchased mortgage by way of a

participation certificate or other mortgage-backed obligations in a

form acceptable to the Commissioner, under the terms and conditions

prescribed in 24 CFR section 207.261.

Section 2201 provides that HUD shall encourage participation in the

auction by state housing finance agencies, nonprofit organizations,

tenant organizations, and qualified mortgagees participating in a plan

of action under the Emergency Low Income Housing Preservation and

Resident Homeownership Act of 1987, as amended by the Low-Income

Housing and Resident Homeownership Act of 1990. The proposed rule

provides that any of these entities that are HUD-approved mortgagees

may participate in the auction. Otherwise, they may participate by

purchasing participation certificates or mortgage-backed securities

from purchasing mortgagees. The Department invites comments on other

ways to encourage the participation of these types of organizations.

Finally, it should be noted that, in January of each year, the

Department will be submitting to the Congress a report which will

include statements of the number of mortgages auctioned and sold and

their value, the amount of subsidies committed to the program, the

ability of the Department to coordinate the program with the incentives

provided under the Emergency Low Income Housing Preservation and

Resident Homeownership Act of 1987 as amended or any subsequent Act,

and the costs and benefits derived from the program for the federal

government.

Procedural Matters

Regulatory Flexibility Act

In accordance with 5 U.S.C. 605(b) (the Regulatory Flexibility

Act), the undersigned hereby certifies that this proposed rule does not

have a significant economic impact on a substantial number of small

entities. This new auction procedure provides selling mortgagees

essentially the same amount of benefits provided under the earlier

section 221(g)(4) assignment procedure. Participation by purchasing

mortgagees is completely voluntary.

Regulatory Agenda

This proposed rule was listed as sequence number 1515 in the

Department's Semiannual Agenda of Regulations published on October 25,

1993 (58 FR 56402, 56425) in accordance with Executive Order 12291 and

the Regulatory Flexibility Act.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this proposed rule does

not have potential for significant impact on family formation,

maintenance, and general well-being, and, thus, is not subject to

review under the Order.

Executive Order 12612, Federalism

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

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

contained in this proposed rule will not have federalism implications

when implemented and, thus, are not subject to review under the Order.

The proposed rule does not change in any way existing relationships

between HUD, the states, or local governments.

Environment

An environmental assessment is unnecessary, since internal

administrative procedures whose content does not constitute a

development decision affecting the physical condition of specific

project areas or building sites is categorically excluded from the

Department's National Environmental Policy Act procedures under 24 CFR

50.20(k).

The Catalog of Federal Domestic Assistance program number is

14.135.

List of Subjects in 24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

Accordingly, 24 CFR part 221 would be amended to read as follows:

PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE

1. The authority citation for 24 CFR part 221 would continue to

read as follows:

Authority: 12 U.S.C. 1715b and 17151; 42 U.S.C. 3535(d); sec.

221.544(a)(3) is also issued under 12 U.S.C. 1707(a).

2. Section 221.770 would be revised to read as follows:

Sec. 221.770 Assignment option.

Subject to the provisions of Secs. 221.791 through 221.797, a

mortgagee holding a mortgage insured pursuant to a conditional or firm

commitment issued on or before November 30, 1983 (or in the Direct

Endorsement Program, a property appraisal report signed by the

mortgagee's approval underwriter on or before November 30, 1983) has

the option to assign, transfer and deliver to the Commissioner the

original credit instrument and the mortgage securing it, provided that

the mortgage is not in default at the expiration of 20 years from the

date of final endorsement of the credit instrument. In processing a

mortgagee's claim for insurance benefits under this section, the

Commissioner may direct the mortgagee to assign, transfer, and deliver

the original credit instrument, and the mortgage securing it, directly

to the Government National Mortgage Association (GNMA). Upon

assignment, transfer, and delivery either to the Commissioner or to

GNMA, as directed, the mortgage insurance contract shall terminate and

the mortgagee shall be entitled to receive insurance benefits in

accordance with Sec. 221.780.

3. Part 221, subpart D, would be amended by adding a new

undesignated center heading following Sec. 221.790; and by adding new

Secs. 221.791 through 221.797, to read as follows:

Subpart D--Contract Rights and Obligations--Moderate Income

Projects

* * * * *

Auction of Part 221 Moderate Income Project Mortgages

Sec. 221.791 Auction of mortgages eligible for assignment under

section 221(g)(4).

All notices by a mortgagee of its election to exercise its

assignment option under Secs. 221.770 through 221.790 made after

December 5, 1990 shall be subject to this section and to Secs. 221.792

through 221.797. For mortgages for which such election was made on or

before December 5, 1990, the Commissioner will continue processing the

claim unless the mortgagee requests that the mortgage be subject to

Secs. 221.792 through 221.797.

Sec. 221.792 Auction sale in lieu of assignment.

(a)(1) With reference to any mortgage for which an election to

assign under Sec. 221.770 was transmitted to the Commissioner after

December 5, 1990, and which is eligible for assignment under that

section, the Commissioner, in lieu of accepting the assignment, will

arrange for a public auction and sale of the beneficial interests in

the mortgage loan through an auction and sale of:

(i) The mortgage loan, or;

(ii) Participation certificates or other mortgage-backed

obligations in a form acceptable to the Commissioner.

(2) The Commissioner may structure the beneficial interests of any

or all of the mortgages to be sold in the auction. The Commissioner

will arrange the auction and sale at a price, to be paid to the selling

mortgagee, consisting of the unpaid principal balance of the mortgage

as of the date of sale plus accrued mortgage interest to the date of

sale.

(b) The auction sale procedure set forth in Secs. 221.791 through

221.797 shall not affect any low-income affordability restrictions

applicable to a project under:

(1) The original regulatory agreement;

(2) A use agreement entered into under the provisions of part 248

of this chapter; or

(3) Any other agreements providing federal assistance to the

housing or its tenants.

(c) Once a mortgage has been sold in accordance with the procedures

set forth in Secs. 221.791 through 221.797, the mortgage will continue

to be insured under this part, but the mortgage will be ineligible for

assignment under Sec. 221.770.

Sec. 221.793 Eligible mortgagees.

All mortgagees participating in the auction sale as bidders must be

HUD-approved mortgagees in good standing, i.e., not under a temporary

denial of participation, not the subject of a charge issued following a

reasonable cause determination under the Fair Housing Act, not on

probation, or suspended from doing business with HUD. A mortgagee of

record may bid on a mortgage that it holds. State housing finance

agencies, mortgagees participating in a plan of action under part 248

of this chapter, non-profit organizations and tenant associations may

(if they are HUD-approved mortgagees in good standing) participate by

submitting bids, or may, regardless of whether they are HUD-approved

mortgagees, participate by such means as the purchase of participation

certificates or mortgage-backed securities from a participating

mortgagee.

Sec. 221.794 Project information.

(a) A mortgagee electing to assign its mortgage shall provide the

Commissioner and persons bidding at the auction sale with the following

information:

(1) Project name, address and HUD project number;

(2) The principal mortgage balance and current interest rate as of

the date of the election to assign;

(3) Interest rate on the original mortgage, maturity date,

amortization type, and monthly payment to principal and interest;

(4) Annual fee for servicing mortgage expressed in basis points

(percentage);

(5) Description of the characteristics of the original credit

instrument;

(6) The level and duration of applicable federal or other

subsidies;

(7) Copies of physical inspection reports completed within the past

year but not yet submitted to the Commissioner;

(8) A statement of fiscal status of the mortgage at the time of

election, including a certification that, as of the date of the

election to assign the mortgage, the mortgage is current (that is, that

no payment due under the mortgage or mortgage note is more than 30 days

late and the mortgagee has not declared a default based on the

mortgagor's failure to perform any other covenant under the provisions

of the mortgage); and

(9) Any other information the Commissioner determines to be

necessary and sets forth in administrative instructions.

(b) The mortgagee of record shall provide to the purchasing

mortgagee all documents necessary to assume liability for the payment

of mortgage insurance premiums to the Commissioner with respect to the

mortgage, including a certification that mortgage insurance premiums

payable to HUD are current.

(c) The Commissioner shall provide information to persons bidding

at the auction regarding the status of the property with reference to

the provisions of part 248 of this chapter (Prepayment of Low-income

Housing Mortgages), including:

(1) Information on eligibility to prepay the mortgage;

(2) A statement whether the owner has filed a notice of intent to

prepay or a plan of action;

(3) Details with respect to any incentives that have been provided

in lieu of the exercise of prepayment rights; and

(4) Types of subsidy provided to the project owner under a plan of

action, excluding non-project-based certificates or vouchers under part

882 or 887 of this title.

(Approved by the Office of Management and Budget under control

number 2502-0460)

Sec. 221.795 Terms and conditions of auction-sale.

(a) After receiving the information described in Sec. 221.794(a),

the Commissioner will advertise for an auction sale of the mortgage.

The auction sale announcement will include the date, time and place of

the auction, and requirements governing warranties, handling of

escrows, assignment of winning bids, and other matters.

(b) The auction will be held at any time during the six-month

period after receiving the information described in Sec. 221.794(a),

but not before two months after receiving the mortgagee's written

notice of its intent to assign its mortgage to the Commissioner.

(c) In any auction sale, the Commissioner will accept the lowest

interest rate bid by an eligible bidder that the Commissioner

determines to be acceptable. Where there are identical bids, the

earlier bid will be accepted. Notice of the accepted bid will be

published in the Federal Register.

(d) Closing of the sale will take place between the seller and the

purchaser. Except in extraordinary circumstances, as determined by the

Commissioner (who may allow for an extension of no more than 60

calendar days), the sale of the mortgage shall be closed no later than

30 business days after the winning bid has been accepted by the

Commissioner.

(e) At closing, the purchaser shall pay the seller the unpaid

principal balance of the mortgage, as of the date of closing, plus

accrued interest at the mortgage rate to that date. In addition, the

purchaser will pay the seller an amount (to be reimbursed by the

Commissioner) equal to the difference between the ``debenture rate'' in

effect as of the date of the seller's election to assign the mortgage

and the mortgage note rate, applied to the declining unpaid principal

balance of the mortgage for the period beginning 60 days after the date

of its election and ending on the closing date.

(f) (1) If any one of the following conditions occurs:

(i) No bids are received;

(ii) Bids received are not acceptable to the Commissioner; or

(iii) The sale is not closed within the time prescribed in

paragraph (d) of this section, the mortgagee shall retain the right to

assign the mortgage to the Commissioner under the provisions of

Secs. 221.770 through 221.780.

(2) At HUD's discretion, a mortgage may be included in one

additional auction. Under these circumstances, the insurance benefits

shall include an amount equal to the difference between the ``debenture

rate'' in effect on the date of the mortgagee's election to assign the

mortgage and the mortgage note rate, applied to the declining unpaid

principal balance of the mortgage for the period beginning 60 days

after the date of election until the date of the closing of the

mortgage sale, if any, resulting from the second auction or the date of

recordation.

(g) (1) The purchasing mortgagee may purchase all mortgage loans,

participation certificates, or mortgage-backed securities with either:

(i) Servicing rights released to the purchasing mortgagee, or;

(ii) Servicing rights retained by the current servicer.

(2) Regardless of whether the bidder elects to have the servicing

rights retained or released by the seller, HUD's interest enhancement

payments (or the purchasing mortgagee's interest sharing payments) will

be based on the difference between the stated interest on the mortgage

and the bid rate accepted by the Commissioner. In cases where the

winning bidder elects to have servicing retained by the seller, the

seller would be obligated to pass through to the purchaser the cash

flow on the mortgage, minus the servicing fee.

Sec. 221.796 Interest enhancement payments.

(a) Where the bid rate accepted by the Commissioner under

Sec. 221.795(c) is more than the stated interest rate on the mortgage,

the Commissioner will provide to the purchaser, and any subsequent

holder that is a HUD-approved mortgagee, monthly interest enhancement

payments based on the difference between the bid rate accepted by the

Commissioner and the stated interest rate on the mortgage. Where the

bid rate accepted by the Commissioner under Sec. 221.795(c) is less

than the stated interest rate on the mortgage, the purchaser, and any

subsequent holder, will provide the Commissioner monthly interest

sharing payments based on the difference between the stated interest

rate on the mortgage and the bid rate accepted by the Commissioner.

(b) The interest enhancement or interest sharing payments will be

paid in accordance with the scheduled amount in an amortization

schedule provided by the Commissioner, and will not take into account

prepayments or delinquencies by the mortgagor, except as provided by

the Commissioner in the Fiscal Instructions. Interest enhancement or

interest sharing payments will be paid on the first day of each month

following timely receipt of a properly completed billing form in

accordance with the time period stipulated by the Commissioner.

Interest enhancement or interest sharing payments will be made by a

method to be determined by the Commissioner. Interest enhancement or

interest sharing payments will not be subject to the Prompt Payment Act

and will not accrue interest on late payments.

(c) Interest enhancement or sharing payments will be provided until

the earlier of:

(1) The maturity date of the loan;

(2) Prepayment of the loan in full;

(3) Default and full payment of insurance benefits by the

Commissioner;

(4) Voluntary termination of mortgage insurance; or

(5) Initiation of foreclosure proceedings by the mortgagee in cases

where the mortgagee does not give the Commissioner written notice of

its election to acquire and convey title to the Commissioner.

(d) Interest enhancement payments will be treated by the mortgagee

as interest paid on the mortgage.

Sec. 221.797 Termination.

Section 221(g)(4)(C)(viii) of the National Housing Act (12 U.S.C.

17151) provides that section 221(g)(4)(C), which authorizes the auction

of mortgages in lieu of assignment to the Commissioner, shall not apply

after September 30, 1995. Consequently, Secs. 221.791 through 221.797

will be terminated or revised in the future on the basis of the

expiration or amendment of section 221(g)(4)(C) of the Act.

Dated: March 17, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 94-7265 Filed 3-28-94; 8:45 am]

BILLING CODE 4210-27-P