Office of the Assistant Secretary for Housing-Federal Housing Commissioner; Mortgage Insurance on Condominium Units in Non-FHA Approved Projects

SUMMARY: This rule adds provisions to the regulations governing Federal

Housing Administration (FHA) mortgage insurance on condominium units to

permit insurance of mortgages on individual units in condominium

projects that have not received FHA approval in advance. These ``spot

loans'' will be approved under less stringent requirements than the

existing requirements for mortgage insurance for condominiums, but

mortgages on these units are required to satisfy standards that assure

that the risk involved for FHA is reasonable. The final rule does make

one change from the proposed rule in response to public comment--to

increase, for small projects, the percentage of units that may be

approved for FHA mortgage insurance.

EFFECTIVE DATE: June 28, 1996.

FOR FURTHER INFORMATION CONTACT: Richard Manuel, Director, Single

Family Development Division, Office of Insured Single Family Housing,

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

Washington, D.C. 20410. He may be reached at (202) 708-2700 (not a

toll-free number). For hearing- and speech-impaired persons, this

number may be accessed via text telephone by dialing the Federal

Information Relay Service at 1-800-877-9339.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

The information collection requirements contained in Sec. 234.26(i)

of this rule were reviewed and approved by the Office of Management and

Budget under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520)

and assigned OMB approval number 2502-0513. 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.

I. Response to Public Comments

On June 23, 1995, HUD published a proposed rule to revise the

regulations concerning eligibility of mortgages for insurance under the

Home Equity Conversion Mortgage Insurance program (24 CFR part 206) or

under the Condominium Ownership Mortgage Insurance program (24 CFR part

234). During the comment period, which ended August 22, 1995, HUD

received 7 public comments from lending institutions and individuals.

Three of the public comments favored the rule, while the remaining

comments focused on difficulties with the rule. The only change being

made in the rule as a result of consideration of these public comments

is to increase the percentage of units on which ``spot loans'' are

permitted from 10 percent to 20 percent of the units in a project of 30

or fewer units.

General comments

Several commenters stated that the rule would permit elderly

homeowners to take advantage of the Home Equity Conversion Mortgage

program more easily, since they would not have to make public to other

unit owners in the condominium that they were seeking additional income

from this source. Similarly, homeowners would be able to use the

refinancing program that permits cash out to the buyer in a project not

currently eligible for FHA mortgage insurance. The availability of this

additional cash to condominium owners will increase their ability to

keep up with growing costs for such basic needs as increasing

condominium association fees, health care costs, or other essential

services.

One commenter praised the reduction in paperwork, noting that the

Federal National Mortgage Association (``Fannie Mae'') and the Federal

Home Loan Mortgage Corporation (``Freddie Mac'') streamlined their

project approval processes in the past decade, with each one using a

procedure very similar to the one proposed in this rule for one class

of mortgage (Fannie Mae Type A condominium and Freddie Mac Class III

condominium).

A commenter also praised this effort as contributing towards

stabilizing the condominium resale market.

Specific Comments

Ten Percent Limit on Participation in a Project

1. Comment: There is no way now to track how many units in a

particular project have received the benefit of FHA mortgage insurance.

Even though project approval requests could be added to HUD's existing

CHUMS system at the time of project approval, spot loans would be

difficult to track. This problem is complicated by the multitude of

direct endorsement lenders.

Response: Since the Department currently is without the technical

or staffing capability to track the exact number of FHA-insured

mortgages in a condominium project, mortgagees will be responsible for

assuring that the condominium project meets all the streamlined

approval requirements. These streamlined requirements are similar to

Fannie Mae's requirements for approving ``Type A condominiums,'' found

in Part VIII, Chapter 2, Sec. 201 of its Selling Guide. To the extent

that the Department has information that can assist in ensuring

compliance with the new FHA requirements, it will provide mortgagees

with that information.

The rule requires lenders to monitor all of the requirements,

including the limit on FHA spot loans in a project of no more than ten

percent of the units and certifying to this effect. The Department

recognizes that there is some potential for exceeding the prescribed

limit, either accidentally or intentionally. The local HUD offices or

the Regional Processing Centers will be conducting random reviews of

these mortgage loans. Mortgage lenders demonstrating a pattern of abuse

will be subject to sanctions.

The Department relies primarily on this limitation on the number of

loans in a project to minimize risk of loss. As an additional

safeguard, however, risk of loss also is minimized by the other

requirements added to Sec. 234.26, which collectively should ensure the

viability of the project.

2. Comment: HUD need not limit this type of approval to 10 percent

of the units. Alternative suggestions were to eliminate the limit

entirely (Fannie Mae and Freddie Mac do not so limit their exposure);

to add a requirement for the lender to insure that the project's budget

is adequate, such as to fund replacement of common elements; or to

increase the percentage to 20 percent of the units if the project has

fewer than 30 units and/or has been in existence for more than five

years. For example, in a project of fewer than 10 units, even one unit

would exceed the 10 percent limit.

Response: The reason for this restriction is to limit the

Department's risk of loss under this program. Furthermore, it assures

that the spot loan process does not become a means of circumventing the

requirements and protection of HUD's condominium approval process.

Since the Department recognizes that small condominium

[[Page 26983]]

projects might not be able to participate in the spot loan program, we

are accepting the recommendation to permit up to 20% of the units in a

project of 30 or fewer units to have FHA-insured mortgages.

Concern About Default Rate

1. Comment: Units insured under spot loans pose a greater risk of

default than those approved as part of a project approval. Many of the

criteria relied upon in approving condominium developments for FHA

insurance under the Section 234(c) program would not be used in the

case of spot loans.

Response: The Department expects mortgage lenders to apply sound

underwriting practices in processing spot loans. In most cases, spot

loan projects should have the same maintenance level, reserves for

replacement level, plan for maintenance, and insurance coverage as

comparable developments approved under the Section 234(c) program.

Lenders also should look at the length of time the homeowners

association has operated successfully. All pertinent information

regarding the viability of the development should be reviewed. Lenders

may wish to create checksheets to facilitate this review. Presently,

the Department believes that it is unnecessary to require all spot loan

appraisals to be done on the Fannie Mae Form 1073, as one commenter

suggested.

2. Comment: One method for limiting FHA's risk would be to limit

spot loan mortgage insurance to reverse mortgage loans.

Response: The impetus for the spot loan program was to provide home

mortgage insurance for those seeking to purchase condominium units in

developments where there is little likelihood that the development

would make the requisite changes in its legal documents (usually to

benefit one association member) to obtain FHA approval. However, the

Department wants spot loans to be available in forward loans as well as

reverse loans. Reducing the risk of loss is addressed by limiting the

Department's involvement in the development.

Downpayment

Comment: Given the additional risk involved in approving mortgage

insurance without the full approval process, the downpayment should be

proportionately increased, for example to 20 or 30 percent.

Response: The Department believes that increased downpayment

requirements would thwart the spot loan program and, particularly,

those constituents the Department has traditionally served--middle- and

moderate-income families who normally could not obtain loans in other

mortgage insurance markets. Few of FHA traditional constituents could

afford to meet a 20 percent downpayment requirement. As previously

noted, the Department has determined that spot loans pose a

``reasonable risk,'' which the rule controls largely by limiting the

Department's involvement in each development.

Enforcement of lender responsibilities

Comment: If a lender approves a mortgage for FHA insurance under

the spot loan provisions and the project does not satisfy the

eligibility requirements stated in the regulation, there should be a

penalty. Cancellation of the mortgage insurance or loss of the lender's

direct endorsement authority might be appropriate.

Response: The Department agrees that enforcement mechanisms

governing mortgagee activity apply to this program, as to other FHA

mortgage insurance activity. The Department will monitor activity under

the spot loan program.

Miscellaneous

1. Comment: Current provisions for FHA-approved projects with

respect to the 51% owner-occupancy requirement should be loosened--

permitting HUD field offices to approve a lower percentage if

appropriate.

Response: This provision is not new. It follows current practice

for non-spot loans. The Department does not believe it appropriate to

change this requirement at this time.

2. Comment: The criterion (Sec. 234.26(i)(1)(iii)) limiting the

number of units owned by a single entity in a project for which a spot

loan approval is sought should be changed to the number of units

controlled by a single entity. This would prevent insuring mortgages in

projects where family members and wholly owned businesses or

partnerships own more than 10 percent of the units in a project.

Response: The Department believes that ``ownership'' is a

reasonable standard to use and that is easy to understand. ``Control''

is harder to identify and enforce. The Department declines to change

this provision.

Findings and Certifications

Impact on the Environment

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations at 24 CFR part 50 that

implement section 102(2)(C) of the National Environmental Policy Act of

1969, 42 U.S.C. 4332, in connection with the proposed rule on this

subject. The Finding of No Significant Impact is available for public

inspection and copying during regular business hours (7:30 a.m. to 5:30

p.m.) in the Office of the Rules Docket Clerk, room 10276, 451 Seventh

Street, SW, Washington, DC 20410-0500.

Federalism Impact

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

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

contained in this rule do not have significant impact on States or

their political subdivisions since the provisions of the proposed rule

affect private purchasers and sellers of condominium units.

Impact on 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. Therefore, the rule is not subject to review under

the Order. The rule merely broadens the coverage of condominium units

for which mortgage insurance can be obtained.

Impact on Small Entities

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

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

approving it certifies that this rule will not have a significant

impact on a substantial number of small entities, because it makes

available additional financing options for purchasers and sellers of

condominium units.

Catalog

The Catalog of Federal Domestic Assistance number for the program

affected by this proposed rule is 14.133.

List of Subjects

24 CFR Part 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

24 CFR Part 234

Condominiums, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, for the reasons stated in the preamble, parts 206 and

234 of title 24 of the Code of Federal Regulations are amended as

follows:

[[Page 26984]]

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

1. The authority citation continues to read as follows:

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

2. Section 206.51 is revised to read as follows:

Sec. 206.51 Eligibility of mortgages involving a dwelling unit in a

condominium.

If the mortgage involves a dwelling unit in a condominium, the

project in which the unit is located shall have been committed to a

plan of condominium ownership by deed, or other recorded instrument,

that is acceptable to the Secretary, except as provided in

Sec. 234.26(i) of this chapter.

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

3. The authority citation for part 234 continues to read as

follows:

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

234.520(a)2)(ii) is also issued under 12 U.S.C. 1701(a).

4. In Sec. 234.26, a new paragraph (i) would be added, to read as

follows:

Sec. 234.26 Project requirements.

* * * * *

(i) Notwithstanding the requirements of paragraphs (a) through (h)

of this section, a loan on a single unit in an unapproved condominium

project (``spot loan'') may qualify for mortgage insurance under this

part.

(1) The project must meet the following criteria:

(i) All units, common elements, and facilities--including those

that are part of any master association--must have been completed, and

the project cannot be subject to additional phasing or annexation. The

project must provide for undivided ownership of common areas by unit

owners;

(ii) Control of the owners' association must have been turned over

to the unit purchasers, and the unit purchasers must have been in

control for at least one year;

(iii) At least 90% of the total units in the project must have been

conveyed to the unit purchasers, and at least 51% of the total units in

the project must have been conveyed to purchasers who are occupying the

units as their principal residences or second homes. No single entity

(the same individual, investor group, partnership, or corporation) may

own more than 10% of the total units in the project;

(iv) The units in the project must be owned in fee simple or be an

eligible leasehold interest, as described in Sec. 234.65, and the unit

owners must have sole ownership interest in, and right to the use of,

the project's facilities, common elements, and limited common elements

including parking, recreational facilities, etc.;

(v) The project must be covered by hazard, flood, and liability

insurance acceptable to the Commissioner;

(vi) For projects with more than 30 units, no more than 10% of the

total units in the project may be encumbered by FHA-insured mortgages.

(If more than 10% of the units in the project are encumbered by FHA-

insured mortgages, the condominium project must be approved under

paragraphs (a) through (h) of this section.) For smaller projects, no

more than 20% of the total units in the project may be encumbered by

FHA-insured mortgages; and

(vii) The assumability provisions of Sec. 234.66 must be satisfied.

(2) Lenders must perform an underwriting analysis and certify that

a project satisfies the eligibility criteria for a ``spot loan'' in a

condominium project that has not been approved by FHA. Lenders may use

information from the appraiser, the owners' association, the management

company, the real estate broker, and the project developer, but the

lender must ensure the accuracy of the information obtained from these

sources.

(Approved by the Office of Management and Budget under control

number 2502-0513)

Dated: May 22, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-13335 Filed 5-28-96; 8:45 am]

BILLING CODE 4210-27-P