Sale of HUD-Held Single Family Mortgages

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing

Commissioner

24 CFR Part 291

[Docket No. FR-3814-I-01]

RIN 2502-AG42

Sale of HUD-Held Single Family Mortgages

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

Commissioner, HUD.

ACTION: Interim rule.

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SUMMARY: This interim rule sets forth HUD's policies and procedures for

the sale of HUD-held single family mortgages. HUD intends to sell a

large portion of its single family mortgages, including both performing

and nonperforming mortgages, without recourse and without FHA

insurance. HUD intends to sell these mortgages to reduce losses to the

FHA fund, decrease its inventory of single family mortgages, and

improve the servicing of these mortgages.

DATES: Effective Date: October 2, 1995.

Sunset Provision: Sections 291.300 through 291.307 shall expire and

shall not be in effect after September 30, 1996, unless prior to

September 30, 1996, HUD publishes a final rule adopting the interim

rule with or without changes, or publishes a notice in the Federal

Register to extend the effective date of the interim rule.

Comments due date: October 30, 1995.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim rule to the Office of the General Counsel, Rules Docket

Clerk, 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 during

regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above

address. HUD will not accept comments sent by facsimile (FAX).

FOR FURTHER INFORMATION CONTACT: Joseph Bates, Director, Single Family

Servicing, Office of Housing, Room 9178, Department of Housing and

Urban Development, 451 Seventh Street SW., Washington, D.C. 20410,

telephone (202) 708-1672. Hearing- or speech-impaired individuals may

call the TDD number (202) 708-4594. (These telephone numbers are not

toll-free.)

SUPPLEMENTARY INFORMATION:

Background

The Department of Housing and Urban Development's (HUD's) inventory

of single family mortgages is large and growing. Since October 1986,

HUD's portfolio of single family mortgages has increased from

approximately 49,000 to its current level of approximately 90,000. This

portfolio consists of: (1) mortgages assigned pursuant to section 230

of the National Housing Act, (2) mortgages assigned pursuant to section

221(g)(4) of the National Housing Act (automatically assigned

mortgages), and (3) purchase money mortgages issued when HUD sold

single family properties from its own inventory or issued a mortgage in

connection with the settlement of Ferrell v. Pierce. In the future, HUD

anticipates that it will acquire between 17,000 and 20,000 new single

family mortgages each year.

Although most of the single family mortgages in HUD's inventory

have outstanding delinquencies under the mortgage, about 60 percent of

these mortgages are current under forbearance agreements. Almost 40

percent of these mortgages are in default on their mortgage obligations

under forbearance and repayment agreements. Another 20 percent have

little hope of ever paying off arrearages and so remain in danger of

foreclosure over time. The Office of Management and Budget has

acknowledged the problems associated with HUD-held single family

mortgages by designating single family loan servicing a High Risk Area.

Internal audits by HUD's Inspector General (IG) have also found

significant deficiencies with HUD's management of its portfolio of

single family mortgages, and the IG has recommended that HUD implement

a single family mortgage sale program.

In June 1994, HUD held a preliminary sale of nonperforming loans,

which benefitted HUD (and therefore the public treasury) in two ways.

First, the sale brought a price that was higher than the recovery rate

on foreclosures of these loans. Second, if HUD had kept these loans in

the Secretary-held portfolio, foreclosures would have occurred over a

period of years; therefore the sale eliminated continued debt accruals.

Furthermore, HUD's experience selling performing loans (section

221(g)(4)) leads it to believe that their value will be higher in the

private sector, where greater flexibilities in loan servicing will

increase collection rates and reduce the potential for default and

foreclosure over time. HUD also benefits from the sale of all loans

because HUD's staff is then freed to focus on more mission-critical

elements of insurance operations. Therefore, to reduce future losses to

the FHA fund and decrease HUD's inventory of assigned mortgages, HUD

intends to conduct a program of regular sales of all HUD-owned single

family mortgages. During the first 12 months following the effective

date of this sales program, HUD intends to sell approximately 40,000

performing and nonperforming mortgages totaling approximately $2.0

billion.

Section 230 Assignment Program

HUD's portfolio includes defaulted mortgages assigned to HUD

pursuant to section 230 of the National Housing Act. These mortgages

were originated by a private lender and insured by HUD under title II

of the National Housing Act. Most of these loans are market rate,

unsubsidized loans. However, a very small percentage of the loans in

HUD's portfolio are subsidized under section 235 of the National

Housing Act.

Before a mortgage can be assigned to HUD, the following conditions

must be met: (1) The mortgagor must receive a notice of the mortgagee's

intention to foreclose; (2) At least three full monthly mortgage

payments remain unpaid; (3) The property is the mortgagor's principal

place of residence; (4) The mortgagor does not own other property

subject to a mortgage insured or held by HUD; (5) Circumstances beyond

the mortgagor's control caused the default and rendered the mortgagor

unable to correct the delinquency within a reasonable time or make full

mortgage payments; and (6) There is a reasonable prospect that the

mortgagor will be able to resume full mortgage payments after a period

of reduced or suspended payments (not to exceed 36 months), and will be

able to pay the mortgage in full either by its maturity date or, if

necessary, within 10 years following the maturity date.

Under this Section 230 assignment program, HUD assumes the mortgage

lenders' rights and obligations under the mortgages (in return for

payment of the lenders' mortgage insurance claims) and works out

forbearance agreements to allow the homeowners to pay delinquencies

over the periods of the mortgages. In addition to forbearance relief,

homeowners whose mortgages are accepted for the section 230 mortgage

assignment program may be entitled to make reduced or suspended

payments for up to 36 months. After this initial 36 months, mortgagors

must pay at least

[[Page 45332]]

the full monthly amount due under the mortgage, plus an additional

amount to pay off the accrued default amount (as the mortgagor's income

permits). The mortgage term may be extended up to 120 months if

necessary to pay off the entire mortgage debt, including the accrued

default.

Section 235 Mortgages

With regard to the Section 235 mortgages, 24 CFR 235.375(a)(1)

states that the assistance payments contract shall terminate when the

insurance contract terminates (except for an assignment to the

Secretary). Therefore, HUD will not be making any assistance payments

to the purchasing mortgagees on behalf of the mortgagors for these

mortgages. However, to minimize the effect on mortgagors of the sale of

these mortgages and the termination of assistance payments, HUD will

cause a reduction in the interest rates on the mortgages to a rate that

is the higher of the floor rate that was in effect when the loan was

made or the effective rate that the mortgagor is paying at the time of

the reduction in the rate. The floor rate for each mortgage is

contained on form HUD9300.

Mortgages Acquired as Automatic Assignments

HUD's portfolio also includes automatically assigned mortgages

insured pursuant to section 221 of the National Housing Act, with

special privileges under section 221(g)(4) of that Act. Section

221(g)(4) of the National Housing Act provides a ``put'' to the holders

of certain pre-November 1983 mortgages. These lenders were granted the

right to assign FHA-insured mortgages back to FHA at par in the 21st

year of the mortgage, provided that each mortgage was not in default at

the expiration of 20 years from the date the mortgage was endorsed for

insurance, and all documentation was in order. Since automatically

assigned mortgages were current when assigned to HUD, these mortgagors

have not had occasion to request and obtain foreclosure avoidance

relief in a manner provided under the Section 230 assignment program.

Purchase Money Mortgages

HUD's portfolio also includes certain purchase money mortgages that

were given in the early 1980s to facilitate sales of HUD properties

acquired as a result of foreclosure claims. These mortgages have a

variety of terms and conditions, but the mortgagors do not have rights

under Section 230 or the Ferrell court settlements.

The remaining purchase money mortgages in HUD's portfolio resulted

from settlement of various Ferrell litigation actions. Mortgagors who

should have been accepted for mortgage assignment were provided with

mortgages similar to their foreclosed mortgage, and the replacement

purchase money mortgages were created on properties that had been in

HUD's inventory of acquired properties. These mortgagors have

continuing rights under Section 230 and the Ferrell stipulation. In

some cases there are also second mortgages recorded.

Sales Policy

HUD intends to sell any or all of these single family mortgages,

regardless of the ways in which HUD acquired them, including both

performing and nonperforming mortgages. The mortgages will be sold

without FHA insurance and without recourse to HUD. However, limited

representations and warranties may be provided as will be described in

the Mortgage Loan Sales Agreements.

For ease of marketing, and to maximize its return, HUD will package

the mortgages with the assistance of a financial advisor. These pools

of mortgages could contain any combination of performing and

nonperforming mortgages, automatically assigned mortgages, mortgages

assigned to HUD pursuant to section 230 of the National Housing Act, or

purchase money mortgages. Furthermore, nothing in this interim rule

shall be construed to prevent HUD from packaging single family

mortgages with other types of HUD assets for sale.

While HUD may pool the different categories of HUD-held mortgages

for purposes of selling the mortgage, each category of mortgages will

carry its own servicing requirements. For example, mortgagors under

section 221(g)(4) may have a future right of assignment-like relief.

Therefore, the servicer of such a mortgage would have to offer the same

or similar forbearance relief as is available in the Section 230

assignment program before being able to foreclose upon the mortgage.

Any investor determined eligible by the Secretary may bid to

purchase a pool of single family HUD-held mortgages. However, HUD will

require that the purchaser place the mortgages with a HUD-approved

mortgagee for servicing for the remaining life of the mortgages. In

addition, parties whose names currently appear on HUD's most recent

``Consolidated List of Debarred, Suspended or Ineligible Contractors

and Grantees,'' or who are on probation, under a limited denial of

participation, subject to a withdrawal of approval, or otherwise

sanctioned, are ineligible to bid, either as an individual or

participant, for any of the loan pools.

Sales Procedure

Under this interim rule, HUD will make available a sample of the

mortgage loan files to prospective bidders for due diligence work for a

period of time before the bidding deadline. The interim rule does not,

however, contain details as to the sales procedure and terms of the

sale. For each sale, HUD intends to publish the procedures for the sale

and the terms of the sale in the Bid Package.

Justification for Interim Rule

HUD generally publishes a rule for public comment before issuing a

rule for effect, in accordance with its own regulations on rulemaking

at 24 CFR part 10. However, part 10 provides that prior public

procedure will be omitted if HUD determines that it is ``impracticable,

unnecessary, or contrary to the public interest'' (24 CFR 10.1). As

noted above in the ``Background'' section of this preamble, both the

Office of Management and Budget and HUD's Inspector General have noted

the deficiencies in HUD's management of its single family mortgage

portfolio. Unless a program of regular mortgage sales is implemented

immediately, HUD's mortgage servicing problems will grow increasingly

worse, with continued losses to the FHA fund. Therefore, HUD finds that

prior public procedure would be contrary to the public interest.

However, HUD is allowing for a full 60-day public comment period, after

which it will consider the relevant issues raised by the commenters in

its development of a final rule.

In establishing this single family mortgage sales program, HUD is

acting consistently with the National Housing Goals established in

section 2 of the Housing Act of 1949 (42 U.S.C. 1441). HUD has

determined that, due to its scarce staff resources, transferring

servicing functions to the private sector will greatly improve the

servicing of these mortgages. In addition, HUD has carefully considered

the protection of mortgagors' rights to foreclosure avoidance relief,

both in the provisions of this interim rule (Sec. 291.307) and in the

terms of the sales agreements. Therefore, HUD is furthering the

national goal of providing a ``decent home and a suitable living

environment for every American family.''

HUD has adopted a policy of setting an expiration date for an

interim rule, so that the regulatory provisions will expire unless a

final rule is published before that date. This ``sunset''

[[Page 45333]]

provision appears in Sec. 291.300 of this interim rule, and provides

that the interim rule will expire on the date 13 months from

publication.

Regulatory Reform

Consistent with Executive Order 12866 and President Clinton's

memorandum of March 4, 1995 to all Federal departments and agencies on

the subject of Regulatory Reinvention, HUD is reviewing all its

regulations to determine whether they can be eliminated, streamlined,

or consolidated with other regulations. As part of this review, this

interim rule, at the final rule stage, may undergo revisions in

accordance with the President's regulatory reform initiatives. In

addition to comments on the substance of these regulations, HUD

welcomes comments on how this interim rule may be made more

understandable and less burdensome.

Other Matters

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this interim

rule under Executive Order 12866, Regulatory Planning and Review. Any

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

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

in the office of HUD's Rules Docket Clerk, Room 10276, 451 Seventh

Street, S.W., Washington, DC 20410.

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 interim rule relate only

to HUD administrative procedures, and therefore are categorically

excluded from the requirements of the National Environmental Policy

Act.

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 interim 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.

Specifically, the requirements of this interim rule relate to the

sale of certain HUD assets, and do not impinge upon the relationship

between the Federal government and State and local governments. As a

result, the interim rule is not subject to review under the Order.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this interim rule does not

have potential for significant impact on family formation, maintenance,

and general well-being. This interim rule will protect mortgagors'

rights relative to forbearance, assistance, or reinstatement. Since

this interim rule will not significantly change the rights of

mortgagors or their families, no further review under the Order is

necessary.

Regulatory Flexibility Act

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

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

doing so certifies that this interim rule will not have a significant

economic impact on a substantial number of small entities. This interim

rule will not affect the ability of small entities, relative to larger

entities, to bid for and acquire HUD-held mortgages.

Regulatory Agenda

This interim rule was listed as item number 1433 in HUD's

Semiannual Agenda of Regulations published on May 8, 1995 (60 FR 23368,

23370) in accordance with Executive Order 12866 and the Regulatory

Flexibility Act.

List of Subjects in 24 CFR Part 291

Community facilities, Conflict of interests, Homeless, Lead

poisoning, Low and moderate income housing, Mortgages, Reporting and

recordkeeping requirements, Surplus government property.

Accordingly, for the reasons stated in the preamble, a new subpart

D is added to 24 CFR part 291 to read as follows:

PART 291--DISPOSITION OF HUD-ACQUIRED SINGLE FAMILY PROPERTY

1. The authority citation for part 291 continues to read as

follows:

Authority: 12 U.S.C. 1709 and 1715b; 42 U.S.C. 1441, 1441a,

1551a, and 3535(d).

2. A new subpart D, consisting of Secs. 291.300 through 291.307, is

added to read as follows:

Subpart D--Sale of Hud-Held Single Family Mortgages

Sec.

291.300 Effective date.

291.301 Definitions.

291.302 Purpose and general policy.

291.303 Eligible bidders.

291.304 Bidding process.

291.305 Evaluation and selection of bids.

291.306 Closing requirements.

291.307 Servicing requirements.

Subpart D--Sale of Hud-Held Single Family Mortgages

Sec. 291.300 Effective date.

Sections 291.300 through 291.307 shall expire and shall not be in

effect after September 30, 1996, unless prior to September 30, 1996,

HUD publishes a final rule adopting the interim rule with or without

changes, or publishes a notice in the Federal Register to extend the

effective date of Secs. 291.300 through 291.307.

Sec. 291.301 Definitions.

For purposes of this part, the following definitions apply:

Single family mortgage means a mortgage on a single family property

assigned to HUD pursuant to Section 230 of the National Housing Act, a

mortgage on a single family property insured by HUD pursuant to Section

221 of the National Housing Act, a mortgage on a single family property

issued in connection with the settlement of Ferrell v. Pierce, a non-

Ferrell purchase money mortgage issued by HUD on a single family

property sold from HUD's inventory, or any other single family mortgage

owned by HUD and representing an asset to HUD's title II mortgage

insurance funds.

Single family property means a residence containing a dwelling for

one to four families.

Sec. 291.302 Purpose and general policy.

This part sets forth HUD's policy and procedures for the sale of

HUD-held single family mortgages. In general, HUD will sell both

performing and nonperforming HUD-held single family mortgages. HUD will

sell all mortgages without recourse and without FHA insurance. HUD will

package pools of single family mortgages for sale to the general public

on a competitive basis; however, HUD may sell mortgages to government-

sponsored enterprises (GSEs) on a negotiated basis. Nothing in this

part shall be construed to prevent HUD from packaging single family

mortgages with other types of HUD assets for sale. The Secretary

retains full discretion to offer any qualifying pool of mortgages for

sale and to withhold or withdraw any offered pool of mortgages from

sale. However, when HUD offers a qualifying mortgage for sale, the

procedures set out in this part and in the Bid Package will govern the

sale of HUD-held single family mortgages.

[[Page 45334]]

Sec. 291.303 Eligible bidders.

HUD will provide information on the eligibility of bidders in the

Bid Package, a Notice in the Federal Register, or other means, at the

Secretary's full discretion. However, an individual, partnership,

corporation, or other legal entity will not be eligible to bid for any

loan pool, either as an individual or a participant, if at the time of

the sale that individual or entity is:

(a) On HUD's most recent ``Consolidated List of Debarred, Suspended

or Ineligible Contractors and Grantees'';

(b) On probation or under a limited denial of participation; or

(c) Subject to a withdrawal of approval or other sanctions.

Sec. 291.304 Bidding process.

(a) Submission of bids. All bids must be submitted to HUD in

accordance with instructions in the Bid Package for a particular sale.

(b) Effect of bid. By submitting a bid, the bidder is making an

offer to purchase single family mortgage loans as presented in the Bid

Package. Submission of a bid shall constitute acceptance of the terms

and conditions set forth in the Bid Package and the Mortgage Loan Sale

Agreement.

(c) Termination of bid. HUD reserves the right to terminate an

offering in whole or in part at any time.

(d) Rejection of bids. (1) HUD may, in its sole discretion, reject

any bid under the following circumstances:

(i) If the bidder changes the documents prescribed in the Bid

Package;

(ii) If, in HUD's sole discretion, it determines that such action

would be in the best interests of the U.S. Government.

(2) HUD can also issue a conditional rejection that will become an

acceptance upon fulfillment of HUD's requests.

(e) Withdrawal of bids. A bidder may withdraw a previously

submitted bid in accordance with the instructions in the Bid Package

for a particular sale.

(f) Bids by brokers or agents. Any bid by a broker or agent for a

principal must be in the name of the principal and signed by the

broker/agent as the attorney-in-fact for the principal. All such bid

documents must be executed so as to bind the principal by the broker/

agent as the attorney-in-fact. A power of attorney satisfactory to HUD

as to form and content must be submitted with such bids on any pool.

Sec. 291.305 Evaluation and selection of bids.

HUD will evaluate bids, approve successful bids, and notify the

successful bidder in a manner set forth in the Bid Package.

Sec. 291.306 Closing requirements.

(a) Earnest money deposit. An earnest money deposit will be

required in an amount to be determined by HUD and must be submitted to

HUD by Fed Wire within 24 hours (counting only business days) of

notification of approval of the winning bid. The earnest money deposit

is nonrefundable to the winning bidder and will be credited toward the

purchase price.

(b) Execution of Mortgage Loan Sale Agreement. At closing, the

successful bidder and HUD will execute a Mortgage Loan Sale Agreement.

(c) Withdrawal of Loans. HUD reserves the right, in its sole

discretion and for any reason whatsoever, to withdraw loan assets from

a pool prior to the closing date. Any earnest money deposits relating

to withdrawn loan assets will be retained by HUD and credited toward

the total purchase price of the remaining loan assets in the pool, in

accordance with the Mortgage Loan Sale Agreement.

Sec. 291.307 Servicing requirements.

(a) Use of HUD-approved Mortgagees. All mortgages must be serviced

by HUD-approved mortgagees for the remaining life of the mortgage. A

purchaser that is not a HUD/FHA approved mortgagee must retain a HUD/

FHA approved mortgagee to service the mortgage.

(b) Continuation of Mortgagor Rights. The purchaser may take all

lawful steps to collect the amounts due under the mortgages, including

foreclosure of the mortgages. However, the purchaser and its servicer,

and any subsequent transferee of the mortgage loan, shall be fully

bound by the terms of the Mortgage Loan Sale Agreement, including those

terms that provide the mortgagor with any rights regarding forbearance,

assistance, or reinstatement of the mortgage. The Mortgage Loan Sale

Agreement will contain provisions for substantially equivalent relief

to the relief provided by section 230 of the National Housing Act, if

such relief is applicable to the mortgage.

(c) Purchasers' Protection of Mortgagor's Rights. (1) Assigned

mortgages during forbearance period. This paragraph (c)(1) explains how

a purchaser (or a servicer of a purchased mortgage) must service a

mortgage that was assigned to HUD under section 230 of the National

Housing Act, for which less than 36 months has expired since the

mortgage was assigned to the Secretary. Such a purchaser is entitled to

collect from the mortgagor a full, reduced, or suspended payment,

depending upon mortgagor income available for application to the

mortgage, under a forbearance agreement. If a mortgagor defaults under

the forbearance agreement, the purchaser may allow reinstatement if the

mortgagor pays all or a substantial part of the arrearages accrued

under the forbearance agreement, including late charges.

(2) Assigned mortgages after forbearance period. This paragraph

(c)(2) explains how a purchaser (or a servicer of a purchased mortgage)

must service a mortgage that was assigned to HUD under section 230 of

the National Housing Act, for which more than 36 months have expired

since the mortgage was assigned to the Secretary. Such a purchaser may

require a minimum payment of the full monthly payment due under the

mortgage. A purchaser may take any lawful action to ensure that

arrearages do not continue to increase. A purchaser may require a

mortgagor to pay increased monthly mortgage payments under a new

forbearance agreement to reduce the amount in arrears if the mortgagor

has available income to support the increased payments. A purchaser

shall allow a mortgagor who defaults in making required payments to

reinstate. Reinstatement is accomplished by acceptance of a payment

that represents the additional arrearage the mortgagor has incurred

from the time the mortgagor failed to make a required monthly payment

under any outstanding forbearance agreement, or under the terms of the

mortgage if the forbearance agreement has expired. If a mortgagor

repeatedly defaults in making required mortgage payments, a purchaser

may decline to allow mortgagors to reinstate the mortgages.

(3) Section 221 Mortgages. This paragraph (c)(3) explains how a

purchaser (or a servicer of a purchased mortgage) must service a

mortgage assigned to HUD under section 221(g)(4) of the National

Housing Act. Such a purchaser must provide a mortgagor who defaults

under the terms of the mortgage foreclosure avoidance relief that is

substantially equivalent to that which the mortgagor could have

otherwise sought under section 230 of the National Housing Act if the

mortgage was still insured by HUD.

(4) Non-Ferrell Purchase Money Mortgages. A purchaser of purchase

money mortgages that did not result from the settlements of the various

Ferrell litigation actions does not have to provide relief under

section 230 of the National Housing Act, as such relief is described in

paragraphs (c)(1) and (c)(2) of this section.

(d) Section 235 Mortgages. Since the assistance payments contract

will terminate upon the sale of the

[[Page 45335]]

mortgages, in accordance with 24 CFR 235.375(a)(1), the purchasing

mortgagees will not receive any assistance payments from the Secretary

on behalf of the mortgagors. However, the Secretary will cause a

reduction in the interest rates on the mortgages to a rate that is the

higher of the floor rate that is shown on the form HUD9300 for the

particular mortgage, or the effective rate of interest that the

mortgagor is paying at the time that the reduction in interest is made.

Dated: June 20, 1995.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 95-21449 Filed 8-30-95; 8:45 am]

BILLING CODE 4210-27-P