Sale of HUD-Held Multifamily Mortgages

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing

Commissioner

24 CFR Part 290

[Docket No. R-94-1709; FR-3549-P-01]

RIN 2502-AG18

Sale of HUD-Held Multifamily Mortgages

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

Commissioner, HUD.

ACTION: Proposed rule.

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

SUMMARY: This proposed rule sets forth the basic policies and

procedures that govern the disposition of HUD-held multifamily project

mortgages.1 In general, the Department will sell both current

mortgages and delinquent mortgages. HUD will not sell delinquent

mortgages, however, if foreclosure is unavoidable, and the project

securing the mortgage is occupied by low-income tenants who are not

receiving housing assistance but would do so under section 203 of the

Housing and Community Development Amendments of 1978 if HUD foreclosed

upon the mortgage. In addition, mortgages on subsidized properties will

only be sold with Federal Housing Administration (FHA) mortgage

insurance or equivalent tenant protections; mortgages for unsubsidized

projects may be sold without FHA insurance.

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

\1\ This rule, and the policies contained in this rule are

intended to satisfy HUD's obligations under the settlement agreement

in Walker v. Kemp, No. C 87 2628 (N.D. Cal.) with regard to the

Exhibit B mortgages.

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

DATES: Comments are due June 13, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding

this rule to the Rules Docket Clerk, Office of General Counsel, Room

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

SW., Washington, DC 20410-0500. Communications should refer to the

above docket number and title. Facsimile (FAX) comments are not

acceptable. 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: Frank Malone, Director, Office of

Preservation and Property Disposition, Office of Housing, Room 6164,

Department of Housing and Urban Development, 451 Seventh Street, SW.,

Washington, DC 20410, telephone (202) 708-3555. Hearing or speech-

impaired individuals may call HUD's TDD number (202) 708-4594. (These

telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

The Department of Housing and Urban Development's inventory of

project mortgages is large and growing. The Office of Management and

Budget acknowledged this development by designating multifamily

property and loan disposition as a High Risk Area. To reduce losses to

the FHA fund, to decrease its inventory of project mortgages, to

improve the servicing of these mortgages, and to improve the rental

services provided by properties securing its insured and HUD-held

mortgages, HUD is proposing to resume the sale of multifamily project

mortgages.

HUD's inventory of mortgages has grown significantly since mortgage

sales stopped in FY 1985. As of August 1993, HUD held over 2,400

project mortgages in inventory. (In comparison, HUD's inventory of

mortgages totaled 2300 at the end of FY 1991, 1600 at the end of FY

1989, and 1400 at the end of FY 1987.) In August of 1993, approximately

1,100 HUD-held multifamily residential mortgages with unpaid principal

balances (UPBs) of $1.5 billion were current and 1,200 with UPBs of

$5.6 billion were delinquent. Approximately 874 current mortgages (80

percent of current mortgages) and 310 delinquent mortgages (25 percent

of delinquent mortgages) were subsidized. Current mortgages included

nearly 400 mortgages assigned under Section 221(g)(4) of the National

Housing Act that were current at the time of assignment. Delinquent

mortgages included nearly 300 formerly coinsured mortgages. In

addition, the HUD-held inventory included 44 nursing home mortgages

with UPBs of about $170 million and 10 hospital mortgages with UPBs of

about $110 million.

In the FY 1992 FHA Audit Report, HUD increased its loss reserves to

$11.9 billion for its $43.6 billion of multifamily insurance in force.

One of the aims of HUD's mortgage sales program is to reduce these

projected losses by increasing the number of mortgages returned to

current status and increasing returns to the Federal Government through

mortgage sales.

B. General Policy

In general, the Department will only sell subsidized mortgages with

FHA mortgage insurance or equivalent tenant protections. The Department

may sell unsubsidized mortgages with or without mortgage insurance. In

addition, the Department will sell both current mortgages and

delinquent mortgages. The Department will not sell delinquent mortgages

that it believes cannot be worked out if the projects securing the

mortgages are occupied by low-income tenants who are not receiving

rental assistance but who would be eligible to receive rental

assistance under section 203 of the Housing and Community Development

Amendments of 1978 (HCDA of 1978) if the mortgages were foreclosed upon

by HUD. The Department will sell delinquent mortgages on such projects

that it believes can be worked out. While the Department would not

expect it to be needed, purchasers of such mortgages would retain the

option of foreclosure because the ability to foreclose facilitates

work-out activity.

In accordance with section 203(i)(2) of the HCDA of 1978, a

subsidized mortgage is defined by this rule as a mortgage on a project

which receives assistance under any of the following programs: (1) The

section 221(d)(3) Below Market Interest Rate loan program; (2) the

section 236 Interest Reduction Payment program, (3) a direct loan with

below market interest rates made under section 202 of the Housing Act

of 1959, section 401 and 404(b)(3) of the Housing Act of 1950, or

section 312 of the Housing Act of 1964; (4) the section 101 Rent

Supplement payments program; and (5) Housing assistance payments under

section 23 of the U.S. Housing Act of 1937 in effect before January 1,

1975, or section 8 of the U.S. Housing Act of 1937. Housing assistance

payments under the Section 8 Rental Certificate program (24 CFR part

882, subparts A, B, C and F), and the Section 8 Rental Voucher program

(24 CFR part 887) are excluded in determining whether a project is a

subsidized rental housing project.

Unsubsidized mortgages include mortgages on projects where rents

are partially or wholly subject to market determination rather than

regulation by HUD. Unsubsidized projects include those projects insured

under: (a) Section 207, Multifamily Rental Housing; (b) Section 213,

Cooperatives; (c) Section 220, Urban Renewal; (d) Section 221(d)(3),

Market Rate with Limited Dividend Mortgagors and without Rent

Supplement or project-based Section 8; (e) Section 221(d)(4), Market

Rate, Moderate Income Families; (f) Section 231, Elderly Housing with

Profit-motivated Mortgagors; (g) Section 232, Nursing Homes and

Intermediate Care Facilities with Profit-Motivated Mortgagors; (h)

Section 241, Supplemental Mortgages; (i) Section 242, Hospitals with

any profit motivated mortgagors and all nonprofit mortgagors with

mortgages for which an insurance commitment was issued on or after June

16, 1988; and (j) Section 608, Veteran Housing.

Generally, unsubsidized mortgages are not subject to prepayment

restrictions. However, there are some unsubsidized mortgages which

contain moderate prepayment restrictions. Some of these mortgages

contained prepayment restrictions primarily because their original non-

profit mortgagors received more favorable financing terms. HUD

permitted prepayment only with permission of the FHA Commissioner in an

effort to prevent for-profit mortgagors from using non-profit

mortgagors as agents to secure the more favorable financing terms. HUD

generally granted approval to prepay upon request if no fraud was

evident. Since the potential for fraud occurred at the time of

origination, by the time of assignment, the need for the prepayment

restriction no longer exists. Having approved prepayment liberally

while the mortgages were insured, HUD has no need to continue

prepayment restrictions following assignment when the rationale for the

restriction no longer applies.

Mortgages with moderate prepayment restrictions of this type were

insured under: (a) Section 221(d)(3) Market Rate with non-profit

mortgagors and with no Rent Supplement or Section 8 Assistance; (b)

Section 231, Housing for the Elderly with Non-profit Mortgagors (Public

and Private); (c) Section 232, Nursing Homes and Intermediate Care

Facilities with Non-profit Mortgagors; (d) Section 242, Hospitals with

Nonprofit Mortgagors, where a commitment was issued prior to June 16,

1988; and (e) Title XI, Group Practice Facilities.

Mortgages insured under section 207/223(f), Purchase/Refinancing of

Existing Multifamily Projects, also contain moderate prepayment

restrictions if the commitment was issued after October 8, 1980. For

these mortgages, during the five years following final endorsement for

insurance, prepayment is permitted only with permission of the FHA

Commissioner. The Department has used and continues to use this

prepayment restriction to prevent use of the FHA-insured mortgage as

bridge financing to facilitate condominium conversion.

Because mortgages with moderate prepayment restrictions are not

subsidized mortgages, this rule would authorize HUD to sell these

mortgages without FHA mortgage insurance.

Under this proposed rule, mortgages on formerly coinsured projects

without project-based Section 8 assistance could be sold without

insurance because the projects covered by the mortgages were not

subsidized and did not have prepayment restrictions (except for lock-

out periods permitted for certain bond-financed mortgages).

Sale with FHA mortgage insurance is an uncomplicated way to return

mortgage ownership and servicing to the private sector. HUD's policies

regarding the regulation and monitoring of insured mortgages are well

developed and well known in the housing industry. More importantly,

however, section 203(h)(1) of the HCDA of 1978 prohibits the Secretary

from selling any mortgage held by the Secretary on any subsidized

project unless the project will continue to operate in a manner which

provides rental housing on terms at least as advantageous to existing

and future tenants as the terms of the program under which the mortgage

was insured prior to the assignment of the mortgage to the Secretary.

Selling mortgages with FHA mortgage insurance ensures that existing and

future tenants will continue to enjoy the benefits of the original

subsidized housing program, while avoiding the need to create

alternative methods of providing the tenant protections that the

original subsidized housing program provided. Such alternative methods

would entail complicated financing and servicing mechanisms (as in the

case of a bare legal title sale) or the cooperation of the mortgagor

(as in the case of deed restrictions).

In addition, FHA mortgage insurance facilitates provision of

private capital. Private investors and servicers have expressed

interest in acquiring mortgages in HUD's portfolio. With mortgage

insurance to offset almost all of the risk, private lenders and

investors would be willing to purchase multifamily housing mortgages at

a higher price, while HUD collects mortgage insurance premiums to

protect the Government in the event of loss.

Prior to 1984, HUD enjoyed a low financial default rate on

mortgages sold with insurance. HUD sold 236 mortgages, with mortgage

balances totalling $409.6 million, with insurance under section 207

pursuant to section 223(c) in the period between 1967 and 1984. Of

these mortgages, 95 (with UPBs of $233.3 million) continue to be

insured, 128 are no longer insured as a consequence of repayments,

prepayments, or voluntary terminations of insurance. Only 13 were ever

re-assigned to HUD, triggering the payment of a claim, a default rate

of six percent.

While the sale of mortgages with insurance has numerous advantages,

it also has some disadvantages. Sale of mortgages with FHA mortgage

insurance requires HUD to budget a credit subsidy. Moreover, the sale

of mortgages with FHA mortgage insurance continues HUD's responsibility

to regulate the relationship between the mortgagee and the mortgagor.

Regulation leads to expenditure of government staff time and money that

could be devoted to other purposes.

Selling mortgages without FHA mortgage insurance is also consistent

with government-wide efforts to increase Federal collections, reduce

regulation in favor of competition, use Federal Government personnel

more efficiently, and return functions to the private sector.

Finally, selling mortgages without FHA mortgage insurance is

compatible with the objectives of the National Housing Act which

formulates the goal of ``a decent home and a suitable living

environment for every American family,'' since projects should continue

to provide decent and suitable housing without having a mortgage

insured by FHA.

Tenants in unsubsidized projects with current mortgages would not

be disadvantaged if their project mortgages are sold without FHA

mortgage insurance because, with some limitations, owners of

unsubsidized projects may prepay their mortgages without HUD approval

at any time. Similarly, these owners (with the approval of their

mortgagees) may voluntarily terminate their FHA mortgage insurance.

Under current conditions, prepayment and voluntary termination are

likely to occur when owners refinance existing mortgages to take

advantage of lower interest rates.

Since HUD regulation of these projects can be terminated at any

time, tenants in these projects would be provided rental housing on

terms no less advantageous than those under which the original mortgage

was insured prior to assignment, and they would be no more likely to

suffer displacement. In addition, low-income tenants in projects with

project-based section 8 assistance could continue to receive the

section 8 assistance under existing contracts, even if the mortgage is

no longer insured. This is because, subject to appropriations, it is

current HUD policy to grant extensions of project-based section 8

contracts without regard to the status of the mortgage. Under this

rule, HUD would require that purchasers of mortgages agree not to

induce any project owner to terminate a project-based section 8

assistance contract, and, in the event of foreclosure, to assume any

section 8 contract. Moreover, if an owner terminates the section 8

contract, it is current HUD policy, that, subject to appropriations,

all eligible tenants would receive section 8 certificates or vouchers.

Low-income tenants in projects without project-based section 8 could

apply for certificates or vouchers from their local public housing

authority.

Under this rule, HUD would only sell mortgages with FHA mortgage

insurance to HUD-approved mortgagees. However, this rule would allow

HUD to sell mortgages without FHA mortgage insurance without such a

restriction.

Mortgages sold with FHA mortgage insurance would be covered by the

Multifamily Mortgage Foreclosure Act, which permits HUD to require, as

a condition and term of the foreclosure sale, that the purchaser agree

to continue to operate the property in accordance with the terms of the

original FHA mortgage insurance program. Mortgages sold with FHA

insurance and subsequently foreclosed upon would also be subject to the

property management and disposition provisions of section 203 of the

HCDA of 1978 which provide for the preservation, in whole or part, of

HUD-owned projects for low- and moderate-income persons. To guard

against windfall profits by a mortgagee from the default of an insured

mortgage purchased at a discount, HUD would limit insurance proceeds.

C. Sale of Delinquent Mortgages

In addition to selling current (i.e., performing) mortgages, under

this rule HUD would sell some delinquent (i.e., nonperforming)

unsubsidized mortgages to investors who would assume the responsibility

for bringing the mortgages current, modifying them, refinancing the

property, or foreclosing the mortgage. Under the proposed rule, HUD

would not sell mortgages that it would normally foreclose upon; i.e.,

those mortgages with incurable defaults which are secured by projects

occupied by low-income tenants not currently receiving rental subsidies

but who would be eligible to receive rental assistance under section

203 of the HCDA of 1978 if the mortgages were foreclosed upon by HUD.

Loan restructuring is more desirable than foreclosure from both

HUD's and the tenants' points of view. In foreclosure, projects undergo

long periods of uncertainty, and may suffer from physical decline

because owners lack an economic incentive to invest in improvements,

and from management problems as owners focus attention on economically

viable activities.

At the present time, however, HUD lacks sufficient staff capacity

to restructure a large number of loans. By selling delinquent loans,

HUD would transfer restructuring responsibility to private purchasers

who could swiftly and aggressively restore projects to economic health

and stability. Many more tenants would benefit from swift resolution of

loan delinquencies than from foreclosure, and for this reason, HUD

proposes to sell nonperforming loans.

There are three broad groups of delinquent mortgages suitable for

sale: (1) Formerly coinsured mortgages, (2) mortgages on non-

residential property, such as nursing homes, and (3) other unsubsidized

mortgages. For formerly coinsured mortgages, it was never intended that

HUD would become the holder of the mortgage or the owner of the project

in the event of default. Under the coinsurance program, coinsuring

lenders originally were responsible for foreclosing defaulted project

mortgages and acquiring and disposing of the underlying properties.

However, HUD agreed to convert coinsured mortgages to full insurance

where the coinsuring lender issued GNMA mortgage-backed securities,

subsequently defaulted on its obligations, and was taken over by GNMA.

HUD's agreement to convert coinsured loans backed by GNMA mortgage

securities to fully insured loans accounts for the formerly coinsured

loans that are now in the HUD-held inventory.

Low-income tenants in formerly coinsured projects with HUD-held

mortgages are now potentially eligible for assistance should HUD

foreclose the mortgage or acquire and sell the property. However, most

projects with coinsured mortgages were built for market-rate occupancy.

As with formerly insured mortgages, the Department would not sell those

delinquent coinsured mortgages that it believes cannot avoid

foreclose--i.e., those that have large unresolvable delinquencies, if

those properties are occupied by low-income tenants not currently

receiving rental subsidies who would do so under section 203 of the

HCDA of 1978 if HUD foreclosed upon the mortgage.

Non-residential properties, such as nursing homes, do not have

landlord-tenant relationships and do not qualify for subsidy protection

under Section 203. Loans on these properties are particularly suitable

for a sale, because workout and renegotiation of these mortgages

requires a range of specialized skills and knowledge not widely

possessed by HUD staff.

Finally, while some unsubsidized mortgages will continue to be

foreclosed and the property sold by HUD, many unsubsidized mortgages

will be sold in periodic sales in order more quickly and effectively to

reinstate, refinance, or modify the mortgages and return the projects

to stable operating condition. As noted above, the projects covered by

unsubsidized mortgages to be sold would be occupied by tenants already

paying market rate rental. Since projects would continue to be governed

by market conditions following private mortgage restructuring, mortgage

sales would be unlikely to result in involuntary tenant displacement.

D. Sale of Subsidized Mortgages to State Agencies

In addition to selling mortgages to private investors and FHA-

approved mortgagees, HUD will consider selling subsidized HUD-held

mortgages to interested State and local governments on a negotiated

basis. Section 203(h)(3) of the HCDA of 1978 authorizes negotiated

sales to State or local governments, or a group of investors which

includes an agency of a State or local government provided that: (1)

The terms of the sale include an agreement by the State or local

government, or agency of same to act as mortgagee or owner of a

beneficial interest in the mortgage, and ensure that the project will

maintain occupancy by the tenant group originally intended to be served

by the subsidized housing program; and (2) the sales price is the best

price that the Secretary can obtain from an agency of a State or local

government, while maintaining occupancy for the tenant group originally

intended to be served by the subsidized housing program.

HUD is particularly interested in public comment from State and

local governments as to what criteria HUD should use in determining

whether to sell to State and local governments rather than private

investors.

II. Other Matters

A. Executive Order 12866

This rule was reviewed by the Office of Management and Budget (OMB)

under Executive Order 12866, Regulatory Planning and Review. Any

changes made to the rule as a result of that review are clearly

identified in the docket file, which is available for public inspection

in the office of the Department's Rules Docket Clerk, room 10276, 451

Seventh Street SW., Washington DC.

B. Environmental Impact

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 HUD

administrative procedures and, therefore, are categorically excluded

from the requirements of the National Environmental Policy Act.

C. 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 rule 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. As a result,

the rule is not subject to review under the order. Specifically, the

requirements of this rule are directed to HUD, and do not impinge upon

the relationship between Federal government and State and local

governments.

D. Executive Order 12606, the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this 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. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

E. Regulatory Flexibility Act

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

U.S.C. 605(b)) has reviewed and approved this rule, and in so doing

certifies that this rule will not have a significant economic impact on

a substantial number of small entities. This rule will not affect the

ability of small entities, relative to larger entities, to bid for and

acquire HUD-held mortgages that HUD determines to sell.

F. Regulatory Agenda

This rule was not listed in the Department's Semiannual Agenda of

Regulations published on October 25, 1993 (58 FR 56402) under Executive

Order 12291 and the Regulatory Flexibility Act, and therefore was

submitted to the Committee on Banking, Housing, and Urban Affairs of

the Senate and the Committee on Banking, Finance and Urban Affairs of

the House of Representatives under section 7(o) of the Department of

Housing and Urban Development Act.

List of Subjects in 24 CFR Part 290

Mortgage insurance, Law and moderate-income housing.

Accordingly, 24 CFR part 290 would be amended to read as follows:

PART 290--MANAGEMENT AND DISPOSITION OF HUD-OWNED MULTIFAMILY

PROJECTS AND CERTAIN MULTIFAMILY PROJECTS SUBJECT TO HUD-HELD

MORTGAGES; SALE OF HUD-HELD MORTGAGES

1. The authority citation for part 290 would continue to read as

follows:

Authority: 12 U.S.C. 1701z-11, 1701z-12, 1713, 1715b, 1715z-1b;

42 U.S.C. 3535(d).

2. Section 290.1 would be revised to read as follows:

Sec. 290.1 Applicability.

This part applies to HUD-owned multifamily housing projects and to

rental housing projects that are subject to mortgages held by HUD.

Specific provisions, as noted in the regulatory text, apply only to

``rental housing projects'' as defined in Sec. 290.3, including a HUD-

owned rental housing project.

3. In Sec. 290.3, a definition for ``subsidized mortgage'' and

``unsubsidized mortgage'' would be added in alphabetical order, and

paragraph (5) of the definition of ``subsidized rental housing

project'' would be revised to read as follows:

Sec. 290.3 Definitions.

* * * * *

Subsidized mortgage means a mortgage on a subsidized rental housing

project.

Subsidized rental housing project * * *

* * * * *

(5) Housing assistance payments under section 23 of the United

States Housing Act of 1937 in effect before January 1, 1975, or section

8 of the United States Housing Act of 1937, if:

(i) For purposes of subparts A, B, and C of this part, more than 50

percent of the units in the project are receiving such assistance; or

(ii) For purposes of subpart D of this part, any of the units in

the project are receiving such assistance.

Housing assistance payments under the section 8 Rental Certificate

program, 24 CFR part 882, subparts A, B, C, and F, and the section 8

Rental Voucher program, 24 CFR part 887, are excluded in determining

whether a project is a subsidized rental housing project.

Unsubsidized mortgage means any HUD-held mortgage which is not a

subsidized mortgage.

* * * * *

4. A new subpart D would be added to part 290 to read as follows:

Subpart D--Sale of HUD-Held Mortgages

290.200 Purpose

290.201 Sale of Subsidized HUD-held Mortgages

290.202 Sale of Unsubsidized HUD-held Mortgages

Subpart D--Sale of HUD-Held Mortgages

Sec. 290.200 Purpose.

The purpose of this subpart is to set forth HUD's policy regarding

the sale of subsidized and unsubsidized HUD-held mortgages.

Sec. 290.201 Sale of Subsidized HUD-Held Mortgages.

HUD's policy for selling subsidized HUD-held mortgages is as

follows:

(a) HUD will sell current mortgages with FHA mortgage insurance on

a competitive basis to FHA-approved mortgagees; or

(b) HUD will sell current mortgages on a negotiated basis to State

or local governments, or a group of investors which includes an agency

of a State or local government if:

(1) The terms of the sale include an agreement by the State or

local government, or agency of same to act as mortgagee or owner of a

beneficial interest in the mortgage, and ensure that the project will

maintain occupancy by the tenant group originally intended to be served

by the subsidized housing program; and

(2) The sales price is the best price that the Secretary can obtain

from an agency of a State or local government, while maintaining

occupancy for the tenant group originally intended to be served by the

subsidized housing program.

(c) HUD will sell current mortgages without FHA mortgage insurance

if HUD can offer protections equivalent to an insured sale.

(d) HUD will sell delinquent mortgages only if as part of the sales

transaction those mortgages are restructured and either FHA mortgage

insurance or equivalent protections are provided.

Sec. 290.202 Sale of Unsubsidized HUD-Held Mortgages.

HUD's policy for selling unsubsidized HUD-held mortgages is as

follows:

(a) HUD will sell current unsubsidized mortgages with or without

FHA mortgage insurance.

(b) HUD will sell delinquent unsubsidized mortgages without FHA

mortgage insurance.

(c) HUD will not sell delinquent mortgages if it believes that

foreclosure is unavoidable, and the project securing the mortgage is

occupied by low-income tenants who are not receiving housing assistance

but would do so if HUD foreclosed upon the mortgage.

Dated: March 16, 1994.

Jeanne K. Engel,

General Deputy Assistant Secretary for Housing--Federal Housing

Commissioner.

[FR Doc. 94-8620 Filed 4-12-94; 8:45 am]

BILLING CODE 4210-27-P