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

SUMMARY: This rule makes final the proposed rule issued by the

Department on May 10, 1996, which proposed 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. This rule also

makes further streamlining amendments.

EFFECTIVE DATE: October 17, 1996; except that the amendment to the

definition of ``principal limit'' in Sec. 206.3, as made by this rule,

shall have an effective date of January 5, 1997.

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:

Background

The Home Equity Conversion Mortgage (HECM) Insurance Demonstration

was authorized by section 417 of the Housing and Community Development

Act of 1987, Pub.L. 100-242, 101 STAT. 1908, which amended the National

Housing Act, Pub.L. 73-479, 48 STAT. 1246 (12 U.S.C. 1715z-20) to add

new section 255 to permit elderly homeowners to borrow against the

equity in their homes. The regulations for the HECM program were

established as part 206 of title 24 of the Code of Federal Regulations

(June 9, 1989, 54 FR 24833).

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.

On May 10, 1996, at 61 FR 21918, the Department published a

proposed rule which reflected additional ideas for improving the

program regulations for which the Department desired public comment

prior to implementation. The public was afforded a 60-day comment

period which expired on July 9, 1996. Seven commenters responded: two

attorneys (one on behalf of a mortgagee), three mortgagees, and two

national cooperative associations. Below is a listing of the comments

presented. Following each comment is the Department's response.

Comment: Section 206.8 would expressly preempt contrary State laws.

Nothing in the statute suggests that Congress intended to preempt any

State laws. This could be detrimental to HECM lenders if they rely on

such provisions which are later over-turned. This section should not be

included in the final rule.

Response: The Department has considered the legal arguments made by

the commentor and concludes that the Department does have the authority

to ensure that all HECM debt will have a first lien priority. As stated

in the proposed rule, ``(t)hat priority is a basic assumption in the

computer model used to determine the amount of payments to the

mortgagor.''

Comment: In Sec. 206.21(b)(3), HUD is proposing to provide itself

the unilateral right to make annual adjustments to a HECM loan's

interest rate, even in those cases where the underlying contract

assigned to HUD provides for monthly adjustments. The commenter

challenges the right for HUD to make unilateral changes to the original

contract and make annual interest rate adjustments. A yearly adjustment

could have a serious adverse effect on consumers when the interest

rates are going down, and the consumers cannot enjoy the benefits of

decreasing interest charges. This section is inappropriate and should

not be included in the final rule.

Response: The Department withdraws this proposed change to convert

monthly adjustments to the interest rate to annual adjustments if the

mortgage is assigned. It should be noted that the commentor

misunderstood the intent of the proposed change. It would not have

applied to existing mortgages, but prospectively to mortgages newly

originated.

Comment: Several commenters oppose altering the HECM from an open-

end credit instrument to a closed-end instrument. The change would deny

future HECM users an important freedom enjoyed by current HECM users:

the option to conserve the estates they will leave to their heirs by

reducing outstanding loan balances when circumstances permit it, while

retaining the right to draw again upon this revolving credit should

needs arise. This change would make HECMs less attractive and less

functional to older people and would be a significant change for the

worse in the HECM program. Although the ability to redraw may not be a

frequently used feature by HECM borrowers, the ability to re-borrow

raises the ``comfort level'' of some HECM borrowers who may already be

confused and uncertain about this mortgage loan product.

The Truth in Lending Act (TILA) rules for open-end credit are not

burdensome in the origination process. For example, the disclosures

provided pursuant to Regulation Z can be generated on a printed form

with a minimal number of blanks completed with costs for a particular

State. These disclosures can then be copied and used for multiple

transactions. Furthermore, if the change is adopted, in addition to

standard closed-end truth in lending disclosure, lenders will have to

produce closed-end credit variable rate transaction program disclosures

pursuant to Regulation Z because virtually all HECM loans have

adjustable rates. In many respects these disclosures are similar to the

home equity open-end credit disclosures currently provided pursuant to

Regulation Z at application, and therefore, nothing is gained from the

change to closed-end requirements with respect to disclosures given at

application.

FNMA has recently introduced the Home Keeper open-end credit

reverse mortgage program and has no current plans to change its program

to closed-end credit. Therefore, lenders will still have to be familiar

with open-end credit requirements, and it will be confusing to both

lenders and applicants to have two similar programs, one open-end

credit and one closed-end credit.

Response: We agree with commenters and withdraw the proposed rule

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

regulations implementing the Truth in Lending Act.

Comment: One commenter recommends an improvement in the way

servicing firms present periodic HECM statements of account to

borrowers. Currently, most HECM servicers omit a statement of the line

of credit funds available to the borrower, and all servicers have

declined to

[[Page 49031]]

inform borrowers of the rate of growth in effect for these available

funds as of the statement date.

Response: This comment does not apply to this rule. We will review,

however, the actual practices and requirements for lender statements of

account to the borrower and determine if they include adequate

disclosures of the loan balances and account activities.

Comment: The HECM regulations should be expanded to include housing

cooperatives; elderly residents of housing cooperatives should not be

excluded. This will have an enormous impact on the ability of elderly

homeowners to afford to live on their own.

If HUD expands the HECM regulations to include housing

cooperatives, the regulations should also be changed to allow HUD to

insure a HECM on a unit in a condominium or housing cooperative project

even if the project does not meet usual HUD policy regarding ``rights

of first refusal.'' In both a condominium and a housing cooperative,

rights of first refusal are a necessary safeguard for the project. In

addition, it is an industry-wide accepted practice that protects the

investment of these homeowners as well as the mortgage holder. Rights

of first refusal do not prevent the unit from being widely marketable

without restrictions to a wide potential market. Rather, it should be

viewed as enhancing the value of the unit as well as providing a

necessary protection for future purchasers.

Response: The single family insurance program for cooperative units

is inactive. Cooperative units, therefore, are not eligible for the

HECM program. At this time, HUD lacks the field and headquarters

resources to undertake this type of effort which would require us to

first study the feasibility of including cooperative units in the HECM

program.

Comment: The commenter agrees with HUD's proposal to give the

Secretary the option to eliminate the HUD-held second mortgage. It has

proven to be cumbersome and costly. A lot of time is spent explaining

the function of the second mortgage to lenders, borrowers, title

companies, and recorders.

Response: HUD will keep this proposal in the final rule.

This Final Rule

This rule makes final the provisions proposed in the May 10, 1996

proposed rule. In light of the comments discussed above, the Department

withdraws the proposed change to Sec. 206.21(b)(3) to convert monthly

adjustments to the interest rate to annual adjustments if the mortgage

is assigned. The Department also withdraws the proposed change to

Sec. 206.3 to add a new definition of ``mortgage balance'' that would

make HECMs ``closed end'' credit and a related proposed change in

Sec. 206.209(a).

The effective date for the amendment to the definition of

``principal limit'' in Sec. 206.3, is delayed until 120 days from date

of publication. Desktop HECM software will have to be modified, and the

Lockheed/Martin (CDSI) system will also have to be changed. Also,

lenders, servicers, and FNMA will probably have to make system changes.

The extended delayed effective date for this particular amendment will

provide the time necessary for the various system changes to be made.

Streamlining

President Clinton's memorandum of March 4, 1995, titled

``Regulatory Reinvention Initiative'' directed heads of Federal

departments and agencies to review all existing regulations to

eliminate those that are outdated and modify others to increase

flexibility and reduce burden. As a part of HUD's overall effort to

reduce regulatory burden and streamline the content of title 24 of the

Code of Federal Regulations, this rule removes those provisions which

are unnecessary to be codified because they are duplicative of

statutory language or because they can be made available through other

non-rulemaking means.

The August 16, 1995 interim rule (as made final on December 21,

1995) made changes to part 206 to improve and streamline the program

based on the first five years of the demonstration. This final rule

also makes additional streamlining changes by removing several

provisions of the HECM regulations which repeat statutory language from

the legislation. It is unnecessary to maintain statutory requirements

in the Code of Federal Regulations (CFR), since these requirements are

otherwise fully accessible and binding. Furthermore, if regulations

contain statutory language, HUD must amend the regulations whenever

Congress amends the statute. This final rule removes repetitious

statutory language and replaces it with a citation to the specific

statutory section for easy reference. The following streamlining

amendments are made, therefore, by this rule:

1. Section 206.1 Purpose is amended to state that the purpose is

set out in section 255(a) of the National Housing Act (NHA).

2. Section 206.3 Definitions is amended to delete an unnecessary

definition and, for certain other definitions, to cross-reference to

the statute or other sections of the CFR in order to avoid duplication.

3. Section 206.9 Eligible mortgagees is amended to revise

paragraph (a) so that it cross-references in order to the statute to

avoid duplication.

4. Section 206.33 Age of mortgagor is amended to remove an

outdated reference.

5. Section 206.41 Counseling is amended to revise paragraph (b) so

that it cross-references to the statute in order to avoid duplication.

6. Section 206.43 Information to mortgagor is deleted because it

pertains to material to be given by the mortgagee to the mortgagor and

can be handled in a handbook or other issuance.

7. The last sentence of Sec. 206.47(c) is deleted because it merely

repeats the substance of Sec. 206.31(b).

8. Section 206.115 Termination is deleted because the provisions

are combined with Sec. 206.133(f) Termination of insurance contract--

Effect of termination.

9. Section 206.119 Written statement of procedures to mortgagor is

deleted because it pertains to material that can be handled in a

handbook or other issuance.

10. A technical correction is made to Sec. 206.121(b) to substitute

and incorrect reference to the Treasury Financial Manual.

Findings and Certifications

Information Collection Requirements. 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.

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.

[[Page 49032]]

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 would

not have a significant economic impact on a substantial number of small

entities. The rule is limited to revision of the Home Equity Conversion

Mortgage Demonstration. Specifically, the requirements of the 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 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 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 rule removes any doubt and

provides 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

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 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 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 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.

Unfunded Mandates Reform Act. Title II of the Unfunded Mandates

Reform Act of 1995, Public Law 104-4, established requirements for

Federal agencies to assess the effects of their regulatory actions on

State, local, and tribal governments and the private sector. This rule

does not impose any Federal mandates on any State, local, or tribal

governments or the private sector within the meaning of the Unfunded

Mandates Reform Act of 1995.

Catalog of Federal Domestic Assistance. The Catalog of Federal

Domestic Assistance number for the HECM progam is 14.183.

List of Subjects for 24 CFR Part 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, 24 CFR part 206 is 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 206.1 is revised to read as follows:

Sec. 206.1 Purpose.

The purposes of the Home Equity Conversion Mortgage Insurance

program are set out in section 255(a) of the National Housing Act,

Public Law 73-479, 48 STAT. 1246 (12 U.S.C. 1715z-20) (``NHA'').

3. Section 206.3 is amended by removing the term ``assessment,'' by

revising the first sentence of the definition of ``expected average

mortgage interest rate,'' and by revising the definitions of ``Contract

of insurance,'' ``MIP,'' ``Mortgagee,'' ``principal limit,'' and

``Secretary,'' to read as follows:

Sec. 206.3 Definitions.

* * * * *

Contract of insurance (See 24 CFR 203.251(j)).

* * * * *

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. * * *

* * * * *

MIP (See 24 CFR 203.251(k)).

* * * * *

Mortgagee (See section 255(b)(2) of NHA).

* * * * *

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

[[Page 49033]]

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 January 5, 1997. If the mortgage

was executed before January 5, 1997, 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.

* * * * *

Secretary (See 24 CFR 5.100).

4. Subpart A is amended to add 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).

5. Section 206.9 is amended by revising paragraph (a) to read as

follows:

Sec. 206.9 Eligible mortgagees.

(a) Statutory requirements. (See section 255(b)(3) of NHA).

* * * * *

6. 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).

* * * * *

7. 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, attributable to draws on the line

of credit.

* * * * *

8. 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.

* * * * *

9. 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 a mortgagor dies and the property is not the

principal residence of at least one surviving mortgagor, or 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.

* * * * *

10. Section 205.33 is revised to read as follows:

Sec. 206.33 Age of mortgagor.

The youngest mortgagor shall be 62 years of age or older at the

time the mortgagee submits the application for insurance.

11. Section 206.35 is amended to add a new sentence at the end, to

read as follows:

Sec. 206.35 Eligibility of title.

* * * 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.

12. Section 206.41 is amended by revising paragraph (b) to read as

follows:

Sec. 206.41 Counseling.

* * * * *

(b) Information to be provided. (See section 255(f) of NHA).

* * * * *

Sec. 206.43 [Removed and reserved]

13. Section 206.43 is removed and reserved.

14. Section 206.47 is amended to add a new paragraph (e) to read as

follows:

Sec. 206.47 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 24 CFR 234.66 and this part.

* * * * *

Sec. 206.47 [Amended]

15. Section 206.47 is amended to remove the last sentence of

paragraph (c).

Sec. 206.115 [Removed and reserved]

16. Section 206.115 is removed and reserved.

17. 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

[[Page 49034]]

the mortgagor under Sec. 206.27(d) or may accept assignment of the

first mortgage.

Sec. 206.119 [Removed and reserved]

18. Section 206.119 is removed and reserved.

19. In Sec. 206.121 paragraph (b) is amended by removing the term

``Treasury Fiscal Requirements Manual'' from the second sentence and to

add in its place the term ``Treasury Financial Manual'', and paragraph

(c) is amended by revising the first and second sentences 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. * * *

* * * * *

20. 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.

* * * * *

21. Section 206.133 is amended to revise paragraph (f) to read as

follows:

Sec. 206.133 Termination of insurance contract.

* * * * *

(f) Effect of termination. When the insurance contract is

terminated, the mortgagee shall pay the monthly MIP which has accrued

for the current month and which has not yet been paid to the Secretary,

but the obligation to pay any subsequent MIP shall cease and all rights

of the mortgagor and mortgagee shall be terminated except as otherwise

provided in this part.

* * * * *

22. 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.

(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: September 6, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-23717 Filed 9-16-96; 8:45 am]

BILLING CODE 4210-27-P