Office of the Assistant Secretary for HousingFederal Housing Commissioner; Home Equity Conversion Mortgage Insurance Demonstration: Additional Streamlining

SUMMARY: This proposed rule would make changes to the Home Equity

Conversion Mortgage (HECM) Insurance Demonstration, including technical

and clarifying changes, to improve and streamline the program as a

supplement to the changes made through the interim rule, published on

August 16, 1995, and made final on December 21, 1995.

DATES: Comment Due Date: July 9, 1996.

ADDRESSES: Interested persons are invited to submit comments regarding

this 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 20410-0500.

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: Richard K. Manuel, Acting Director,

Single Family Development Division, Office of Insured Single Family

Housing, Room number 9272, Department of Housing and Urban Development,

451 Seventh Street, SW, Washington, DC 20410, telephone (202) 708-2700;

TTY (202) 708-4594. (These are not toll-free telephone numbers.)

SUPPLEMENTARY INFORMATION: The information collection requirements for

the Home Equity Conversion Mortgage Insurance Demonstration have been

approved by the Office of Management and Budget under the Paperwork

Reduction Act of 1995, and have been assigned OMB Control Number 2528-

0133. An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless the

collection displays a valid control number. This rule does not contain

additional information collection requirements.

Background

The Home Equity Conversion Mortgage (HECM) Insurance Demonstration

was authorized by section 417 of the Housing and Community Development

Act of 1987 (42 U.S.C. 5301), which amended section 255 of the National

Housing Act (12 U.S.C. 1715z-20) to permit elderly homeowners to borrow

against the equity in their homes. The interim rule published on August

16, 1995, at 60 FR 42754, revised 24 CFR part 206 to include

improvements to the program that did not require prior public comment

before implementation. The interim rule was made final on December 21,

1995, at 60 FR 66476. This proposed rule reflects additional ideas for

improving the program regulations for which the Department desires

public comment prior to implementation. An explanation of the proposed

changes follows.

Proposed Changes to HECM Regulations

Sections 206.3 and 206.209

A definition of ``mortgage balance'' is proposed to be included

that would make HECMs ``closed end'' credit for purposes of the

regulations implementing the Truth in Lending Act (TILA) (15 U.S.C.

1601 et seq.). The rule would continue to permit prepayment by

mortgagors as mandated by statute, but prepayments (including insurance

or condemnation proceeds that have been applied to the debt) would be

excluded from the definition of mortgage balance for purposes of

calculating future loan advances, thereby prohibiting mortgagors from

re-borrowing funds previously prepaid. A recent amendment to

Sec. 206.21(c) deleted specific reference to the ``open end'' credit

TILA regulations at 12 CFR part 226 in anticipation of this change.

Currently, HECM funds may be prepaid and borrowed again. This fact

makes the mortgage ``open end'' credit or ``revolving'' credit under

the TILA. The TILA requires initial and periodic disclosures, in

addition to those disclosures required by the HECM statute. The TILA

disclosures have been difficult for mortgagees to produce for this type

of mortgage and have increased the paperwork at closing. Mortgage

lenders ordinarily only have experience with ``closed end'' credit

requirements. Additionally, at this point in the demonstration, few, if

any, mortgagors have utilized the option to re-borrow. HUD does not

regard the option as an important aspect of the demonstration.

The definitions of ``principal limit'' and ``expected average

mortgage interest rate'' in Sec. 206.3 also would be amended to require

that the principal limit grow at the mortgage interest rate plus the

monthly mortgage insurance premium (MIP) rate instead of the expected

average mortgage interest rate (expected rate) plus the monthly MIP

rate. The expected rate would be used only when needed to project the

principal limit for calculation of future payments for adjustable rate

mortgages because the actual mortgage interest rate cannot be

calculated in advance. HUD is particularly interested in receiving

public comment on this proposal.

Under the current regulation, the principal limit increases for all

purposes each month by one-twelfth of the expected rate plus the

monthly MIP rate. For fixed rate mortgages, the expected rate is the

same as the actual fixed interest rate that appears in the note. For

adjustable rate mortgages, the expected rate is fixed at closing as the

sum of the mortgagee's margin plus the weekly average yield for U.S.

Treasury Securities adjusted to a constant maturity of 10 years. In

contrast, the mortgage balance grows at the actual current interest

rate that is applied under the note and adjusted periodically. Because

two different interest rates are used to determine the principal limit

and the mortgage balance on adjustable rate mortgages, these sums grow

at different rates and the difference between them can become

unpredictable.

When the mortgage note rate is higher than the expected rate, the

mortgage balance increases at a faster pace than the principal limit.

In this case the maximum loan advance amount available under a HECM

line of credit is eroded by interest charged to the account balance,

leaving the mortgagor with less to borrow than he or she might have

anticipated. Monthly payments under a term or tenure payment option,

however, are guaranteed under the loan agreement regardless of this

interest rate risk.

When the note rate is lower than the expected rate, the mortgage

balance grows at a slower pace than the principal limit. This

discrepancy between the note rate and the expected rate creates

additional potentially-available credit. This situation has caused

servicing problems because mortgagors that have borrowed the full

principal limit under a line of credit may at a future date have

additional credit created from the difference in the interest rates.

[[Page 21919]]

HUD has considered several solutions to this interest rate risk

problem. One solution would be to terminate a mortgagor's right to

continue borrowing once his or her mortgage balance reached the

principal limit, even if at a later time the interest rate differential

caused the principal limit to exceed the mortgage balance. The

disadvantage of this solution is that it does not address the problem

of an increasing note rate resulting in an erosion of the principal

limit. An alternative solution would be to cap the note rate at the

expected rate. However, this solution does not address the problem

presented when the note rate is below the expected rate resulting in

excess credit, and is of questionable legality due to the statutory

provision providing for a note rate negotiated between the mortgagor

and mortgagee rather than one regulated by HUD. Another solution would

be to require that all line of credit payment plans must be established

together with a term or tenure monthly payment plan. Each payment plan

would carry a separate principal limit. All fees and charges would be

charged to the monthly payment plan balance. In this way, as long as no

line of credit draws were made, the line of credit would not be

effected by the interest rate fluctuations because the line of credit

principal limit would be separate from the monthly payments principal

limit. This solution only forestalls the problem. Once a draw is made

against the line of credit the same interest rate risk problem can

occur as under the current rule.

HUD does not propose these solutions because each one requires

additional regulatory restraint on the terms and conditions of the

HECM. Instead, HUD proposes to make a program change by altering the

definitions of ``expected average mortgage interest rate'' and

``principal limit.'' The expected rate would only be used to determine

future monthly payments. (Section 206.25(b)(1)(vi) provides for

continued use of the expected rate to calculate future estimated

interest that will accrue on scheduled monthly payments.) The monthly

calculation of growth to the principal limit would not involve the

expected rate but would instead be determined by using the mortgage

note rate plus the monthly MIP rate. In this way, both the principal

limit and the mortgage balance would grow at the same rate. This

solution would give mortgagors and mortgagees more certainty in knowing

what funds would be available to be drawn than the current system.

In low interest rate markets, mortgagors would not have the benefit

of an increase in available principal limit. In high interest rate

markets, mortgagors would not experience the erosion of lines of

credit. These variations in the available principal limit would be

replaced by a system with greater predictability. In the long run, the

principal limit is expected to be approximately the same as the current

rule because the expected rate under the current rule encompasses the

market's best estimate of future note rates. This rule change would be

effective only for mortgages which the mortgagee closed on or after the

effective date of the final rule.

Section 206.8.

A new Sec. 206.8 would be added to provide a first lien priority to

all debt secured by the HECM, including all direct payments to the

mortgagor and all other loan advances under the HECM for purposes such

as interest, taxes and special assessments, premiums for hazard or

mortgage insurance, servicing charges and costs of collection. Any

contrary State laws would be preempted. This preemption is proposed to

clarify the current uncertainty regarding the lien priority to be

accorded HECM loan advances in certain circumstances and to ensure that

all HECM debt will have a first lien priority. That priority is a basic

assumption behind the computer model used to determine the amount of

payments to the mortgagor. State law would still be applicable for

determining the authority of a mortgagee to make a HECM loan as

provided in Sec. 206.9(a) of the current HECM regulation.

In the absence of an applicable Federal statute or regulation, lien

priority would be determined under United States v. Kimbell Foods,

Inc., 440 U.S. 715 (1979) if the HECM had been assigned to HUD. In most

circumstances courts applying Kimbell Foods have determined that the

lien priority law of the State should be adopted as the Federal rule of

decision. State law would also apply while the HECM was still held by

the mortgagee as an insured mortgage.

State law is sometimes unclear regarding the appropriate priority

to be given to loan advances made many years after the original

mortgage was recorded when other liens have been filed in the interim.

To the extent State laws are clear, they differ, and some would have

the effect of subordinating the priority of HECM loan advances made

after certain events such as the filing of another lien that has been

brought to the attention of the HECM mortgagee. HUD or the mortgagee

could guard against loss of priority to some extent by stopping further

loan advances directly to the mortgagor (as permitted by the HECM loan

documents when needed to protect lien priority) but this will not

protect the lien priority of the mandatory loan advances that will

continue for interest, mortgage insurance premiums and servicing

charges. HUD or the mortgagee may find it necessary to accelerate the

loan and foreclose to prevent the continued growth of debt without a

first lien priority. Even without a foreclosure, the homeowner may have

to move if loan advances are stopped, because of inability to pay basic

homeowner expenses such as real estate taxes without further advances.

This result would conflict with the program goal of non-displacement of

an elderly homeowner that desires to continue living in his or her

home.

The proposed rule would serve as a Federal law that courts would

use to determine the lien priority of HECM loan advances. Kimbell Foods

would be inapplicable for a HECM assigned to HUD because that decision

guides courts only in the absence of a Federal law, and the regulation

would otherwise preempt state law that would be applied to an insured

HECM still held by a mortgagee. This use of a regulation to avoid any

application of Kimbell Foods is in accord with Chicago Title Ins. Co.

v. Sherred Village Associates, 708 F. 2d 804 (1st Cir. 1983), and

preemption by regulation of state law that would otherwise apply to

privately-held mortgages has been approved by the Supreme Court in

cases such as Fidelity Federal Savings and Loan Association v. De La

Cuesta, 458 U.S. 141 (1982) and United States v. Shimer, 367 U.S. 374

(1961).

The proposed priority lien regulation would assure that HECM loan

advances made in accordance with the loan agreement would not be

interrupted due to the application of State lien priority laws.

Reasonable arguments can be made that, even without this rule, Kimbell

Foods would not compel application of State lien priority laws to a

HECM held by HUD due to distinctive features of the HECM program, and

that State laws would not apply to a HECM held by a private mortgagee

if conflict with the program goal of non-displacement, as described

above, would occur. This proposed rule does not reject those arguments.

It recognizes the uncertainty of current law and proposes to replace

that uncertainty with a clear rule on which HUD, mortgagees and other

potential lienors can rely. Private creditors intending to rely on the

equity of the mortgagor in the home will be on clear notice that the

[[Page 21920]]

entire HECM debt will be superior to any other private lien. The

proposed priority lien regulation would have one exception to permit a

higher priority for state or local liens for taxes or special

assessments, to the extent provided by State or local law.

Section 206.21

Paragraph (b) of Sec. 206.21 would be amended to permit a mortgage

that provides for monthly adjustments to the interest rate to be

converted to one that provides for annual adjustments if the mortgage

is assigned to HUD by the mortgagee. This would enable HUD to reduce

greatly the servicing burden associated with ARMs that are assigned to

HUD. A similar change is proposed for Sec. 206.121(c) regarding the

second mortgage held by HUD. If the mortgagee had drafted the second

mortgage to provide for monthly adjustments HUD could convert it to

annual adjustments.

Section 206.25

Section 206.25(d) would be revised to permit the principal limit

amount set aside for a line of credit to increase at the same rate as

the full principal limit whether or not combined with a term or tenure

option with monthly payments. HUD has been informed that the current

regulation has been interpreted to permit this by some participants in

the HECM program, including the Federal National Mortgage Corporation

(FNMA). Although not necessarily in conformity with HUD's original

intentions behind Sec. 206.25(d), this approach to calculating the

principal limit for a line of credit has the advantage of simplicity as

compared to HUD's original intention, and does not result in increased

risk to the borrower or HUD. HUD is proposing a formal change in

regulations to permit FNMA and others to continue with a practice that

is compatible with the general design of the HECM program. Most of the

actual difference in results between the various approaches to

Sec. 206.25(d) would be eliminated as a result of the separate proposal

to calculate the principal limit using the actual mortgage interest

rate instead of the expected average mortgage interest rate; the

proposed change to Sec. 206.25(d) is a technical revision to eliminate

remaining perceived adverse effects of the current Sec. 206.25(d). A

conforming change would be made to Sec. 206.19(c) to avoid conflicting

descriptions of how line of credit payments are calculated.

Section 206.26

The specific dollar amount of $20 that mortgagees may charge when

payments are recalculated would be removed from Sec. 206.26(d), and the

Secretary would be given discretion to set a fee. The Secretary would

continue to set a maximum fee at $20, but would establish the amount in

Handbook 4235.1 subject to future reconsideration.

Section 206.27

Changes to Secs. 206.27(d), 206.117, and 206.121(c) are proposed to

be made to give the Secretary the option to eliminate the HUD-held

second mortgage. The current regulations require originating mortgagors

to execute a second HECM security instrument and note (second mortgage)

held by the Secretary. The second mortgage comes into effect only if a

mortgagee defaults in making payments and is unable or unwilling to

assign the mortgage to HUD. It assures that any funds advanced by HUD

are secured by a mortgage. (In the case of assignments, the Secretary

continues making payments to the mortgagor under the first mortgage and

the second mortgage is not utilized.) HUD now concludes that it is

inappropriate to bind itself by regulation to this particular approach

to protection of the Secretary's financial interests.

In practice, the second mortgage has proven to be cumbersome and

costly to mortgagors. First, in virtually all cases mortgagors are

required to pay recording fees per page of documents recorded. Two

mortgages double the recording fees. Second, mortgagees and mortgagors

have mistakenly believed that the second mortgage represents additional

mortgage debt and have been confused as to the purpose of the second

mortgage. Third, when the mortgage has been paid off, release of the

second mortgage has been time-consuming. The provisions in the legal

documents regarding the relationship between the debts secured by the

first and second mortgages if the second mortgage is used are complex,

untested and without close precedent and therefore could invite

litigation.

HUD's ultimate objective is to eliminate or reduce reliance on the

second mortgage as the means of protecting the mortgagor and HUD

against mortgagee defaults. The proposed changes would permit the

Secretary to do without the second mortgage when deemed prudent. HUD

does not expect to change its current practices, however, until it is

reasonably certain that it has a legal means of enforcing an assignment

of the first mortgage free and clear of any interests of other parties.

At such time as legal doubts are resolved, HUD anticipates that the

second mortgage requirement could be terminated without further

regulatory changes.1

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\1\ Complete abandonment of a second mortgage requirement might

not be prudent in the absence of a statutory change--which has not

been proposed to date by HUD--that would guarantee HUD the right to

assume first mortgages upon mortgagee default, similar to language

found in section 306(g)(1) of the National Housing Act (12 U.S.C.

1723)(g)(1)). Section 306(g)(1) provides that the Government

National Mortgage Association (GNMA) shall be subrogated fully to

the rights of a defaulted issuer when GNMA makes the payment of

principal and interest on securities guaranteed by GNMA. Section

306(g)(1) further provides that GNMA may provide by regulation or

contract with the issuer for the extinguishment, upon default by the

issuer, of any right, title or interest of the issuer in the assumed

mortgages (this provision also appears in GNMA regulations at 24 CFR

390.15(b)).

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Sections 206.27 and 206.35

Currently part 206 does not permit mortgagors to hold only a life

estate in the mortgaged property. At least one eligible mortgagor must

hold title in fee simple or through a long-term leasehold of a fee

simple interest. HUD is proposing amendment of sections 206.27(c)(1)

and 206.35 to permit mortgages to be insured and remain in force even

if no eligible mortgagor has any interest in the property greater than

a life estate. If a mortgagor holds only a life estate when the

mortgage is executed, all holders of any future interest in the

property (remainder or reversion) would also be required to execute the

mortgage to ensure that the mortgage was secured by a fee simple. A

holder of a future interest would not execute the note or loan

agreement and would not have the rights to loan proceeds of other

mortgagors. The proposed change would also permit a mortgagor who held

fee simple title when the mortgage was executed to subsequently convey

his or her interests in the property as long as a life estate is

retained.

Because the mortgage will in all cases be secured by a fee simple

or long-term leasehold interest in the property, mortgagees and HUD

should not be subject to any greater financial risk if the proposed

change is adopted. The proposed change would recognize that an elderly

homeowner may wish to convey future interests in his or her home as an

estate planning measure while retaining a life interest to ensure a

continued right of occupancy for the remaining lifetime. There is no

conflict between this approach to estate planning and the basic

objective of the HECM program--to provide elderly homeowners the

financial means to continue residing in their homes for the remainder

of their lifetimes. HUD has already accommodated other approaches to

estate planning by

[[Page 21921]]

permitting mortgagors to convey joint ownership of the mortgaged

property to other non-elderly, non-occupant parties and by permitting a

living trust to hold legal title to the home for benefit of the elderly

homeowner.

Section 206.45

A new paragraph (e) would be added to Sec. 206.45 to incorporate

the free assumability regulations at 24 CFR 203.41 and 234.66 which

were published in a final rule at 58 FR 42645 (August 11, 1993). Those

rules codify HUD's general policy that the property mortgaged under its

single family mortgage insurance programs must be freely marketable

except for a limited number of specific exceptions, primarily those

permissible for affordable housing purposes. While HUD does not have

the same concerns about restrictions on assumptions for the HECM

program as for other single family programs, because a HECM by its

nature is not assumable, HUD is concerned that any property acquired by

the mortgagee or HUD through foreclosure or deed-in-lieu of foreclosure

needs to be readily marketable without restrictions to a wide potential

market. HUD has identified one area of special impact of this policy on

the HECM program for which it specifically seeks comment. The rule

would prevent use of the HECM program for a unit in a condominium if

the condominium association possesses a right of first refusal (unless

the condominium project received written approval from HUD prior to

September 10, 1993). HUD believes that there may be a substantial

number of condominiums existing prior to that date that did not obtain

FHA approval, have condominium associations with rights of first

refusal, and have current unit owners that would be prospective

applicants for a HECM. A recent proposed amendment of Sec. 206.51 (60

FR 32630, June 23, 1995) would permit HECMs on some individual units in

a condominium project that have not received HUD approval but such

units would also be affected by the proposed change to Sec. 206.45. HUD

therefore also seeks comment on whether, if the proposed change to

Sec. 206.51 is adopted, HUD should insure a HECM on a unit in a

condominium project that does not meet usual HUD policy regarding

rights of first refusal.

Section 206.125

Paragraph (d) of Sec. 206.125 would be amended to apply HUD's State

by State time frames to define ``reasonable diligence'' as provided in

24 CFR 203.356.

Section 206.209

Section 206.209 would be revised to reflect the proposed policy

that pre-payments do not increase the amount of funds available to be

borrowed as discussed for Sec. 206.3. The regulation also would provide

that in the event the prepayment is made from insurance or condemnation

proceeds, the principal limit would decrease by the amount of proceeds

not applied to repair of the property. This will reflect the permanent

reduction in the value of the security that resulted from the

condemnation or unrepaired damage.

The prepayment requirements which permit the mortgagee to charge

interest if the prepayment is not made within the required time frames

would be eliminated. The current prepayment provision parallels the

prepayment procedures for Section 203(b) mortgages. The prepayment

regulation for Section 203(b) mortgages is necessary to assure that

prepayments are made in a timely fashion so that interest due to GNMA

security holders is available to the GNMA issuers. Since HECMs are not

securitized there is no need to restrict the time of prepayment.

Other Matters

Environmental Impact

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations at 24 CFR part 50,

which implements section 102(2)(C) of the National Environmental Policy

Act of 1969 (NEPA). This Finding of No Significant Impact is available

for public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

Office of the Rules Docket Clerk, Office of the General Counsel,

Department of Housing and Urban Development Room 10276, 451 Seventh

Street, SW, Washington, DC 20410.

Impact on Small Entities

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

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

by approving it certifies that this proposed rule would not have a

significant economic impact on a substantial number of small entities.

The proposed rule is limited to revision of the Home Equity Conversion

Mortgage Demonstration. Specifically, the requirements of the proposed

rule are directed to making the program more efficient for

participating mortgagees, mortgagors and the Department.

Executive Order 12612, Federalism

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

of Executive Order 12612, has determined that Sec. 206.8 of the

proposed rule has federalism implications. Specifically, the rule

provides that State law on lien priority would be preempted if HECM

loan advances made by private mortgagees would not have a first lien

priority (subject only to liens for State or local taxes or special

assessments). (Preemption is not an issue for loan advances made by HUD

because Federal law rather than State law would apply under United

States v. Kimbell Foods, Inc., 440 U.S. 715 (1979).

The purpose of the proposed rule is to permit a mortgagee to be

able to continue to make loan advances in accordance with the loan

agreement (including advances for accruing interest and mortgage

insurance premiums) as long as the elderly homeowner/mortgagor desires

to continue to occupy his or her home, while still maintaining a first

lien priority for all advances. If State law was applied and resulted

in granting priority to some other lien created after the HECM was

recorded, the mortgagee would need to stop further payments to the

mortgagor. The mortgagee might also need to foreclose to stop the

continuing accrual of items such as interest and mortgage insurance

premium with a junior lien priority. Either result would conflict with

the HECM program goal of preventing displacement of the elderly

homeowner, either directly from foreclosure or indirectly because of

lack of funds available to the homeowner for the expenses of

homeownership.

This conflict itself might result in preemption of State law under

relevant Supreme Court opinions. The proposed rule would remove any

doubt and provide needed clarification for HUD, mortgagees, and other

creditors who may rely on the mortgagor's equity. HUD has concluded

that State law would ordinarily result in a first lien status for all

HECM loan advances, but is concerned that applicable law is not always

clear and that some situations might occur in which the application of

State law would leave the first lien status in doubt. The effect of the

proposed preemption is likely to be small but it is important to ensure

that the HECM program remains a first mortgage program as intended by

Congress.

HUD has concluded that it is not necessary to preempt laws that

would give priority to liens for unpaid State or local taxes or special

assessments. If the mortgagee pays them and later files an

[[Page 21922]]

insurance claim, HUD would reimburse the mortgagee for those amounts as

part of the insurance benefits. This distinguishes these liens from

other liens and there is therefore no need to object to a superior lien

position. This exception permitting superior liens for unpaid taxes and

special assessments means that the proposed rule would have no

substantial direct effects on States or their political subdivisions,

or the relationship between the Federal government and the States.

The Department believes that although the proposed rule might have

federalism implications, it is designed to achieve a legitimate Federal

purpose and is carefully crafted to limit its effects to those

necessary to achieve that end. In these circumstances, the Department

believes that the Order imposes no bar to implementation of the rule.

For these reasons, the General Counsel has determined that the rule's

federalism implications are not sufficiently significant to warrant

preparation of a Federalism Assessment under section 6(b) of the Order.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

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

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.

List of Subjects in 24 CFR Part 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, 24 CFR part 206 is proposed to be amended as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

1. The authority citation for part 206 continues to read as

follows:

Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).

2. Section 206.3 is amended by revising the first sentence of the

definition of ``expected average mortgage interest rate,'' by revising

the definition of ``principal limit,'' and by adding a new definition

of ``mortgage balance,'' to read as follows:

Sec. 206.3 Definitions.

* * * * *

Expected average mortgage interest rate means the mortgage interest

rate used to calculate future payments to the mortgagor and is

established when the mortgage interest rate is established. * * *

* * * * *

Mortgage balance means the total amount of accrued debt calculated

in accordance with the terms of the mortgage. For the purpose of

recalculating payments under Secs. 206.19(c), 206.25(b)(ii), 206.25(d)

and 206.26(c), the mortgage balance includes principal that has been

repaid, including insurance or condemnation proceeds that have been

applied to the debt, unless the mortgage was executed before [effective

date of final rule].

* * * * *

Principal limit means the maximum disbursement that could be

received in any month under a mortgage, assuming that no other

disbursements are made, taking into account the age of the youngest

mortgagor, the mortgage interest rate, and the maximum claim amount.

Mortgagors over the age of 95 will be treated as though they are 95 for

purposes of calculating the principal limit. The principal limit is

used to calculate payments to a mortgagor. It is calculated for the

first month that a mortgage could be outstanding using factors provided

by the Secretary. It increases each month thereafter at a rate equal to

one-twelfth of the mortgage interest rate in effect at that time, plus

one-twelfth of one-half percent per annum, unless the mortgage was

executed on or after [effective date of final rule]. If the mortgage

was executed before [effective date of final rule], the principal limit

increases at a rate equal to the expected average mortgage interest

rate plus one-twelfth of one-half percent per annum. The principal

limit may decrease because of insurance or condemnation proceeds

applied to the mortgage balance under Sec. 209.209(b) of this chapter.

* * * * *

3. Subpart A is amended by adding a new Sec. 206.8, to read as

follows:

Sec. 206.8 Preemption.

(a) Lien priority. The full amount secured by the mortgage shall

have the same priority over any other liens on the property as if the

full amount had been disbursed on the date the initial disbursement was

made, regardless of the actual date of any disbursement. The amount

secured by the mortgage shall include all direct payments by the

mortgagee to the mortgagor and all other loan advances permitted by the

mortgage for any purpose including loan advances for interest, taxes

and special assessments, premiums for hazard or mortgage insurance,

servicing charges and costs of collection, regardless of when the

payments or loan advances were made. The priority provided by this

section shall apply notwithstanding any State constitution, law or

regulation.

(b) Second mortgage. If the Secretary holds a second mortgage, it

shall have a priority subordinate only to the first mortgage (and any

senior liens permitted by paragraph (a) of this section).

4. Section 206.19 is amended to revise paragraph (c), to read as

follows:

Sec. 206.19 Payment options.

* * * * *

(c) Line of credit payment option. Under the line of credit payment

option, payments are made by the mortgagee to the mortgagor at times

and in amounts determined by the mortgagor as long as the amounts do

not exceed the payment amounts permitted by Sec. 206.25(d).

* * * * *

5. Section 206.21 is amended to add paragraph (b)(3), to read as

follows:

Sec. 206.21 Interest rate.

* * * * *

(b) * * *

(3) A mortgage providing for monthly adjustments to the interest

rate may be converted by the Secretary to one providing for annual

adjustments at any time after the mortgage is assigned to the Secretary

by providing notice to the mortgagor.

* * * * *

6. Section 206.25 is amended to revise paragraph (d), to read as

follows:

Sec. 206.25 Calculation of payments.

* * * * *

(d) Line of credit separately or with monthly payments. If the

mortgagor has a line of credit, separately or combined with the term or

tenure payment option, the principal limit is divided into an amount

set aside for servicing charges under Sec. 206.19(d), an amount equal

to the line of credit (including any portion of the principal limit set

aside for repairs or property charges under Sec. 206.19(d)), and the

remaining amount of the principal limit (if any). The line of credit

amount increases at the same rate as the total principal limit

increases under Sec. 206.3. A payment under the line of credit may not

exceed the difference between the current amount of the principal limit

for the line of credit and the portion of the mortgage balance,

including accrued interest and MIP,

[[Page 21923]]

attributable to draws on the line of credit.

* * * * *

7. Section 206.26 is amended to revise paragraph (d), to read as

follows:

Sec. 206.26 Change in payment option.

* * * * *

(d) Fee for change in payment. The mortgagee may charge a fee, not

to exceed an amount determined by the Secretary, whenever payments are

recalculated.

* * * * *

8. Section 206.27 is amended to revise paragraphs (c)(1) and (d),

to read as follows:

Sec. 206.27 Mortgage provisions.

* * * * *

(c) * * *

(1) The mortgage shall state that the mortgage balance will be due

and payable in full if

(i) A mortgagor dies and the property is not the principal

residence of at least one surviving mortgagor, or

(ii) A mortgagor conveys all or his or her title in the property

and no other mortgagor retains title to the property. For purposes of

the preceding sentence, a mortgagor retains title in the property if

the mortgagor continues to hold title to any part of the property in

fee simple, as a leasehold interest as set forth in Sec. 206.45(a), or

as a life estate.

* * * * *

(d) Second mortgage to Secretary. Unless otherwise provided by the

Secretary, a second mortgage to secure any payments by the Secretary as

provided in Sec. 206.121(c) must be given to the Secretary before a

Mortgage Insurance Certificate is issued for the mortgage.

* * * * *

9. Section 206.35 is amended by adding a new sentence at the end,

to read as follows:

Sec. 206.35 Title held by mortgagor..

* * * If one or more mortgagors hold a life estate in the property,

for purposes of this section only the term ``mortgagor'' shall include

each holder of a future interest in the property (remainder or

reversion) who has executed the mortgage.

10. Section 206.45 is amended to add a new paragraph (e), to read

as follows:

Sec. 206.45 Eligible properties.

* * * * *

(e) Freely marketable. The property must be freely marketable.

Conveyance of the property may only be restricted as permitted under 24

CFR 203.41 or 234.66 and this part.

11. Section 206.117 is revised to read as follows:

Sec. 206.117 General.

The Secretary is required by statute to take any action necessary

to provide a mortgagor with funds to which the mortgagor is entitled

under the mortgage and which the mortgagor does not receive because of

the default of the mortgagee. The Secretary may hold a second mortgage

to secure repayment by the mortgagor under Sec. 206.27(d) or may accept

assignment of the first mortgage.

12. Section 206.121 is amended by revising the first two sentences

of paragraph (c), to read as follows:

Sec. 206.121 Secretary authorized to make payments.

* * * * *

(c) Second mortgage. If the contract of insurance is terminated as

provided in Sec. 206.133(c), all payments to the mortgagor by the

Secretary will be secured by the second mortgage, if any. Payments will

be due and payable in the same manner as under the insured first

mortgage, except that if the first mortgage provided for monthly

adjustments to the interest rate under Sec. 206.21(b)(2) then the

Secretary may convert the second mortgage to an annually adjustable

interest rate under Sec. 206.21(b)(1) at any time by providing notice

to the mortgagor. * * *

13. Section 206.125 is amended to revise paragraph (d)(3), to read

as follows:

Sec. 206.125 Acquisition and sale of the property.

* * * * *

(d) * * *

(3) The mortgagee must give written notice to the Secretary within

30 days after the initiation of foreclosure proceedings, and must

exercise reasonable diligence in prosecuting the foreclosure

proceedings to completion and in acquiring title to and possession of

the property. A time frame that is determined by the Secretary to

constitute ``reasonable diligence'' for each State is made available to

mortgagees.

* * * * *

14. Section 206.209 is revised to read as follows:

Sec. 206.209 Prepayment.

(a) No charge or penalty. The mortgagor may prepay a mortgage in

full or in part without charge or penalty at any time, regardless of

any limitations on prepayment stated in a mortgage. Amounts prepaid are

not available to be re-borrowed, unless the mortgage was executed

before [effective date of final rule].

(b) Insurance and condemnation proceeds. If insurance or

condemnation proceeds are paid to the mortgagee, the principal limit

and the mortgage balance shall be reduced by the amount of the proceeds

not applied to restoration or repair of the damaged property.

Dated: April 12, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-11649 Filed 5-9-96; 8:45 am]

BILLING CODE 4210-27-P