Sale of HUD-Held Multifamily Mortgages

SUMMARY: This rule adds two provisions which conform the mortgage sale

regulations to Departmental policy statements made in the preamble to

the proposed and final rule.1 First, in the sale of delinquent

mortgages on partially-assisted and subsidized projects, HUD will

require the assumption of federal rental subsidy contracts by project

purchasers, including foreclosure purchasers. In addition, mortgage

purchasers may not foreclose in a manner that would terminate such

assisted tenants' leases. Second, owners of partially-assisted and

subsidized projects will continue to be subject to a prohibition

against discriminating against certificate and voucher holders after a

mortgage sale without insurance. In addition, owners of both subsidized

and unsubsidized projects with mortgages that are delinquent when sold

by HUD must agree to record a covenant running with the land to

continue this obligation through the maturity date of the mortgage, as

part of the consideration of a loan restructuring or compromise of the

mortgage indebtedness with the mortgage purchaser. Alternatively, if

the mortgage purchaser forecloses, this nondiscrimination obligation

would become applicable to the project purchaser at foreclosure.

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

intended to satisfy HUD's obligations under the settlement agreement

in Walker v. Kemp, No. C 87 2628 (N.D. Cal.).

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The Department is also providing guidance to the public on its

interpretation of the current rule excluding delinquent unsubsidized

mortgages from sale where HUD believes that foreclosure is unavoidable

and the project is occupied by unassisted very low-income tenants who

would be likely to pay in excess of 30 percent of their adjusted

monthly income if the mortgage were to be sold and then foreclosed.

DATES: Effective date: March 7, 1996.

Comment due date: April 8, 1996.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim 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. Communications should refer to the

above docket number and title. 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. Faxed comments will not be

accepted.

FOR FURTHER INFORMATION CONTACT: Audrey Hinton, Associate Director for

Program Operations, Office of Multifamily Asset Management and

Disposition, Office of Housing, Room 6160, Department of Housing and

Urban Development, 451 Seventh Street, S.W., Washington, D.C. 20410,

telephone (202) 708-3730, Ext. 2691. Hearing or speech-impaired

individuals may call HUD's TDD number (202) 708-4594 or 1-800-877-8399

(Federal Information Relay Service TDD). (Other than the ``800''

number, these are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Background

The source of the Secretary's authority to sell, transfer and

otherwise deal with multifamily mortgages is section 207(l) of the

National Housing Act (12 U.S.C. 1713(l)), section 7(i) of the

Department of Housing and Urban Development Act (42 U.S.C. 3535(i)),

and section 203 of the Housing and Community Development Act Amendments

of 1978, as amended, (12 U.S.C. 1701z-11) (``the 1978 Act''). Section

203 of the 1978 Act also addresses the terms and conditions under which

HUD-held mortgages may be sold, distinguishing between mortgages

securing subsidized and unsubsidized projects and authorizing the

Secretary to enter into negotiated sales of mortgages on subsidized

projects with state and local housing agencies.

A final mortgage sale rule was published on September 22, 1994 at

59 FR 48726, following public notice and a 60-day comment period on a

proposed rule, published on April 11, 1994 at 59 FR 17500. The final

rule became effective on October 24, 1994.

Subsequently, the mortgage sale regulations were included in a

comprehensive revision of 24 CFR part 290. This is an interim rule,

published and made effective on March 2, 1995 at 60 FR 11487. The

September 22, 1994 mortgage sale rules were renumbered. Moreover, the

final rule text was adapted to a new question and answer format,

designed to enhance the accessibility of HUD's regulations to the

general public. The March 2, 1995 interim rule includes a new goal

section for the mortgage sale program, 24 CFR 290.3(b), based on

language in the preamble to the proposed rule. It also includes a

definition section, 24 CFR 290.5, applicable to all subparts of the 290

regulations. The mortgage sale regulations are currently codified at 24

CFR part 290, subpart I, in the April 1, 1995 edition of the Code of

Federal Regulations.

The following section-by-section analysis describes the amendments

made by this rule and related matters.

Section 290.110 How will HUD sell unsubsidized mortgages?

This rule does not amend Sec. 290.110. Rather, the preamble

provides an informational explanation of how this provision has been

and will be implemented by HUD and in particular, discusses the

provision requiring the exclusion of certain delinquent mortgages from

sale.

By way of background, Congress clarified the Secretary's broad

discretion in selling mortgages on unsubsidized projects in section

101(b) of the Multifamily Housing Property Disposition Reform Act of

1994 (``the 1994 Act'') by adding section 203(k)(4) to the 1978 Act, as

amended (12 U.S.C. 1701z-11(k)(4)). Under section 203(k)(4), the

Secretary is expressly authorized to sell mortgages held on

unsubsidized projects on any terms and conditions the Secretary

prescribes, notwithstanding any other provision of law. The 1994 Act

also changed the definitions of ``subsidized'' and ``unsubsidized''

projects, set forth in section 203(b)(2) of the 1978 Act, as amended.

The category of unsubsidized projects was expanded to include

partially-assisted projects (those projects without mortgage interest

subsidies and with project-based rental subsidies for 50% or less of

the units). (12 U.S.C. 1701z-11(b)(2); 24 CFR 290.5.) The final

mortgage sale rule, published on September 22, 1994, as well as the

March 2, 1995 interim rule, reflect the changes made in the 1994 Act.

Consistent with the current rule, the Department plans to sell

unsubsidized mortgages without FHA insurance, on a competitive basis.

Section 290.110 permits the sale of unsubsidized mortgages with or

without FHA mortgage insurance. To date, HUD has sold all such

mortgages (current and delinquent) without insurance and

[[Page 4581]]

intends to continue this policy and practice for all future sales.

Further, Sec. 290.100 is explicit that all unsubsidized mortgages will

be sold on a competitive basis. This reflects the Department's policy

and practice, including plans for the sale of mortgages on partially-

assisted projects. The preamble to the September 24, 1994 final rule

(59 FR 48727) suggested the possibility of specialized auctions for

these mortgages involving a group of investors selected, in part, on

the basis of their commitment to preserving the economically integrated

rental use of the housing. This is no longer the Department's plan. The

mechanism for preserving the mixed-income nature of partially-assisted

housing will be the continuation of federal rental subsidies pursuant

to Sec. 290.112 and continuation of the owners' duty to refrain from

unreasonably refusing to lease units to certificate and voucher

holders, including current and future tenants, pursuant to Sec. 290.114

of this interim rule.

Section 290.110(b) permits the sale of delinquent unsubsidized

mortgages without FHA mortgage insurance but excludes certain mortgages

from sale. Under Sec. 290.110(b), HUD will not sell a mortgage if HUD

believes that foreclosure is unavoidable and the project securing the

mortgage is occupied by very low-income tenants who are not receiving

federal rental housing assistance and who are or might become rent-

burdened (paying rent in excess of 30% of adjusted monthly income) if

the mortgage were to be sold and foreclosed. When formulating this

rule, HUD took into consideration tenant protections under the property

disposition provisions of the statute, section 203(g) of the 1978 Act,

as amended (12 U.S.C. 1701z-11(g)). If HUD forecloses on a mortgage,

then for a two-year period following disposition of the project, rents

for pre-existing unassisted very low-income tenants cannot be increased

by the purchaser to such an extent that these tenants would become

rent-burdened. Further, such tenants, who were already rent-burdened

prior to disposition, receive a rent freeze for a two-year period. (See

preamble to the proposed rule, 59 FR 17502 (April 13, 1994) and to the

final rule, 59 FR 48727 (September 22, 1994).)

The preambles to the proposed and final rules do not indicate how

HUD would interpret and apply the phrase ``foreclosure is unavoidable''

and no public comments were offered on this specific issue. HUD's

practice has been to consider foreclosure to be ``unavoidable'' if

legal notice of the foreclosure sale has been published or HUD has

initiated foreclosure sale marketing activities. Picking one or more

procedural steps results in the application of a uniform, objective

standard by the agency. However, these benchmarks are not predictive of

whether ``foreclosure is unavoidable'' in any given situation and have

been questioned by owners and other affected parties in specific cases.

In theory and in practice, a borrower might offer HUD (or a mortgage

purchaser if the loan were to be sold) an acceptable workout agreement

late in the foreclosure process or seek approval to transfer the

property to a purchaser who offers to invest resources to cure the

mortgage delinquency.

HUD has reconsidered its practice and decided to advise the public

of the circumstances that will give rise to a determination that

foreclosure is unavoidable for purposes of Sec. 290.110(b). In the

future, HUD plans to use different but objective guidelines, ones that

relate more closely to Congressional intent in giving HUD broad

discretion in the management and disposition of its portfolio of

unsubsidized mortgages. In the sale of delinquent unsubsidized

mortgages, HUD's primary objective is to avoid foreclosures by

maximizing opportunities for private sector loan restructurings. This

is the most expeditious way to restore properties to stable operating

condition, which benefits all current and future tenants and affected

communities.

First, HUD's general practice will be to consider foreclosure to be

unavoidable if the project is occupied and HUD is mortgagee-in-

possession (``MIP''). Typically, HUD seeks MIP status where the owner

has abandoned the property or where necessary to protect the health and

safety of residents while HUD pursues a foreclosure action. In these

circumstances, prospects for a successful loan restructuring are remote

and the probability of foreclosure is high. While not a constraint on

the exercise of the Secretary's discretion to sell unsubsidized

mortgages under section 203(k)(4) of the 1978 Act, as amended, it

should be noted that, when HUD is MIP, it has certain statutory duties

with respect to the operation of a project. (See, e.g., sections

203(d)(2) and 203(j)(1) of the 1978 Act.)

Second, even when the agency is not MIP, HUD's general practice

will be to consider foreclosure to be unavoidable where HUD has

determined that the property may be vacated by a foreclosure sale

purchaser for demolition, rebuilding, conversion of use or substantial

rehabilitation resulting in temporary relocation of more than 90 days

or permanent displacement of residents. (See section 203 (g) and (j) of

the 1978 Act, as amended; 24 CFR 290.42 and 290.88.) Typically, HUD's

decision will be reflected in the foreclosure sale bid package and in

its foreclosure sale notices sent to tenants and local government

pursuant to section 203(c)(3)(A) of the 1978 Act, as amended; 24 CFR

290.22. Implementation of such foreclosure terms, including provision

of tenant relocation assistance, requires ongoing HUD involvement and

control. HUD's general practice will be to exclude the mortgages on

such projects from its sale program.

Neither HUD's earlier practice nor this revised guideline is

intended to create new binding norms. It simply interprets the

underlying standard which continues to be whether foreclosure is

unavoidable and whether unassisted very low-income tenants are or would

become rent-burdened if the mortgage were to be sold and foreclosed.

Section 290.112 What are the requirements for continuing federal rental

subsidy contracts?

The preamble to the proposed mortgage sale rule stated that ``The

Department will sell delinquent mortgages on such projects that it

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

be needed, purchasers of such mortgages would retain the option of

foreclosure because the ability to foreclose facilitates workout

activity.'' (See 59 FR 17501.) As discussed earlier, this reflects the

Department's current policy and experience. Yet, no matter how

prescient the Department might be in selecting delinquent mortgages for

sale, some post-sale foreclosures will inevitably occur. HUD believes

that this eventuality must be addressed more fully and prescriptively

than it was in the proposed and final rule. Potential investors,

project owners and tenants would benefit from a clearer statement of

HUD's policies and loan sale requirements.

In the preamble to the April 13, 1994 proposed rule, HUD stated

that ``Under this rule, HUD would require that purchasers of mortgages

agree not to induce any project owner to terminate a project-based

Section 8 assistance contract, and, in the event of foreclosure, to

assume any Section 8 contract.'' (59 FR 17502) HUD received a comment

that this policy and related statements should be included in the rule

text and that ``purchasers of mortgages should be required to impose

[[Page 4582]]

upon any purchaser of a project at foreclosure the obligation to accept

the existing Section 8 contract.'' (National Housing Law Project

letter, June 10, 1994, page 6.) In the preamble to the September 22,

1994 final rule, HUD rejected this change as unnecessary while agreeing

with the policy content of the comment. (59 FR 48727) Section 8 housing

assistance continues when a purchaser at foreclosure, with HUD's

approval, agrees to assume the obligations of the housing assistance

payments contract. However, the legal basis for requiring the

assumption of such contracts by a project purchaser, including a

foreclosure purchaser, warrants clarification.

Section 290.112 of this rule implements HUD's authority under

section 203(k) of the 1978 Act to include this requirement in its

mortgage sale documents. As a term or condition of buying a delinquent

HUD-held mortgage, the mortgage purchaser and its successors or assigns

must agree to assume project-based and tenant-based rental subsidy

contracts, in the event it acquires title to the project. Further, the

mortgage purchaser and its successors and assigns must also agree to

record a covenant as a condition of a loan restructuring, or acceptance

of an owner's discounted pay-off of the debt, or in the event of

foreclosure, in the foreclosure deed. The covenant will require the

assumption of any federal rental subsidy contract by any project

purchaser, for any sale occurring during the life of such subsidy

contract. The covenant will expire on the date the last project-based

federal rental subsidy contract expires by its own terms.

Imposition of this condition on a mortgage purchaser and

indirectly, on a current or future project owner, is well within the

scope of HUD's discretion. If an owner has been spared from

foreclosure, which typically carries significant adverse tax

consequences, and has received the benefit of a loan restructuring or

discounted pay-off from the mortgage sale purchaser, the owner has

received consideration for recording this covenant. Extracting a public

policy quid pro quo from the owner, in the form of a covenant requiring

future owners to assume federal project-based and tenant-based rental

assistance contracts, further assures that HUD's mortgage sale program

benefits low-income tenants.

As indicated by the ``except where otherwise approved by HUD''

language in Sec. 290.112, HUD retains its authority under the rental

subsidy contract and applicable program regulations to reject the

assignment of a subsidy contract to a foreclosure purchaser or other

purchaser, to terminate the contract, and to provide certificates or

vouchers to assisted tenants. The obligation of a purchaser to assume a

federal subsidy contract does not imply any obligation on the part of

HUD to approve the assignment of the contract to a new project owner.

In HUD's discussion of the ongoing nature of Section 8 contracts

post-foreclosure in the preamble to the proposed rule, it was assumed,

sub silentio, that tenant leases entered into pursuant to such

contracts would also remain in effect. Under most state laws, these

leases could be terminated by foreclosure, raising a question about the

rights of assisted tenants in occupancy. This rule is intended to

eliminate any uncertainty about this by requiring the mortgage

purchaser and its successors and assigns, in the event of a foreclosure

of the mortgage, to foreclose in a manner that does not interfere with

any lease of tenants receiving existing federal project-based or

tenant-based rental assistance. Subject to this limitation, the rule is

not intended to alter or otherwise affect the good cause eviction

standards or other procedural requirements provided by HUD's

regulations. (See, e.g., 24 CFR part 247 and Secs. 880.607 and

881.607.)

The Department is considering adopting requirements safeguarding

the possessory rights of unassisted tenants in the event of a

foreclosure. This is consistent with the congressional statement of

policy that the administration of federal housing and development

programs should minimize involuntary displacement of persons from homes

and neighborhoods, 42 U.S.C. 5313 (note). Specifically, HUD would

require that existing leases of unassisted tenants be maintained after

foreclosure for a period equal to the remaining term of the lease or

one year, whichever period is shorter, if the leases could otherwise be

extinguished under state foreclosure law. This is analogous to the

obligation imposed on foreclosure sale purchasers when HUD forecloses

under the Multifamily Mortgage Foreclosure Act of 1981, as amended, 12

U.S.C. 3713(c); 24 CFR 27.45(b). This requirement was not raised in the

April 13, 1994 proposed rule. HUD has not included a provision in this

rule and will take public comment into consideration before adding such

a provision through a final rule.

On or about the mortgage sale closing date, HUD also will take

steps to provide notice, through posting or otherwise, to tenants in

projects covered by Sec. 290.112. The notice will inform tenants that

HUD has sold the mortgage on their project and will advise them of the

continuation of federal rent subsidy and of the tenant lease

protections in event of foreclosure. HUD will advise tenants of their

right to enforce these requirements.

Section 290.114 What policies apply concerning nondiscrimination in

admitting certificate and voucher holders?

This new section would continue in effect, after a mortgage sale

without FHA mortgage insurance, policies against an owner's

unreasonable refusal to lease to Section 8 certificate and voucher

holders. As explained herein, owners of subsidized and some

unsubsidized (partially-assisted) projects are bound by this

nondiscrimination provision while HUD insures or holds the mortgage.

All purchasers of HUD foreclosed properties, whether formerly

subsidized or unsubsidized, are subject to a comparable requirement.

This rule effectuates HUD's intent, as set forth in the preamble to

the proposed mortgage sale rule. (59 FR 17502) In response to public

comment, HUD declined to include in the regulation, itself, a

nondiscrimination prohibition on the grounds that the requirement was

imposed by other regulations. (59 FR 48727) The Department had in mind

section 8(t) of the United States Housing Act of 1937 (42 U.S.C.

1437f(t)), which contains a prohibition against refusing to lease to

certificate or voucher holders. Its applicability to project owners

that have received Section 8 is not affected by HUD's sale of these

mortgages. However, HUD now recognizes that another applicable

provision, section 183(c) of the Housing and Community Development Act

of 1987 (42 U.S.C. Sec. 1437f note)(the ``1987 Act''), covers

additional types of projects (such as a 221(d)(3)(BMIR) or Section 236

project without Section 8 LMSA). Upon sale of the mortgage without

insurance, section 183(c) coverage would be terminated.

Section 183(c) of the 1987 Act provides that, while HUD insures or

holds a mortgage, ``No owner of a subsidized project, as defined in

section 203(i)(2) of the Housing and Community Development Amendments

of 1978 Act, as amended by section 181(h) of this Act [the 1987 Act]''

shall refuse to lease any available unit to Section 8 certificate or

voucher holders.'' Section 203(i)(2) was repealed by the complete

amendment of section 203 in section 101 of the 1994 Act. Section 203(b)

of the 1978 Act, as amended by the 1994 Act, nonetheless, makes it

clear that the previous definition of ``subsidized project'' continues

to apply for purposes of

[[Page 4583]]

section 183(c). Therefore, although partially-assisted projects

(projects with market-rate mortgages and with project-based rental

assistance, but on no more than 50 percent of the units) are

``unsubsidized projects'' for purposes of mortgage sales and project

sales under section 203 of the 1978 Act, they are ``subsidized

projects'' for purposes of section 183(c).

The purpose of this new Sec. 290.114 is to provide a clear basis

for HUD to impose, as a term or condition in its sale of certain

mortgages, a prohibition on discrimination against Section 8

certificate or voucher holders. Section 290.114(a) contains a

nondiscrimination requirement comparable to section 183(c). Section

290.114(c) applies this requirement to all projects that were subject

to section 183(c) immediately before a mortgage sale without FHA

mortgage insurance. If HUD continued to hold the mortgage, the

nondiscrimination obligation would terminate when the mortgage

obligation was satisfied, whether through a prepayment or regular

mortgage amortization. Therefore, the rule similarly limits the period

of this obligation with respect to current mortgages on partially-

assisted projects and subsidized projects sold without FHA insurance.

Section 290.114(d) requires, for any mortgage that is delinquent at

the time HUD offers it for sale, that the mortgage purchaser impose a

nondiscrimination covenant as a condition of any loan restructuring,

acceptance of a discounted pay-off of the debt from the owner, or in

the event of foreclosure, in the foreclosure deed. The covenant would

be applicable for a period equal to the remaining term of the HUD

mortgage. For the reasons discussed in the explanation of Sec. 290.112,

extracting a public policy quid pro quo from the owner, in the form of

a covenant not to discriminate against Section 8 certificate or voucher

holders, is an appropriate means to further assure that HUD's mortgage

sale program benefits lower income tenants.

With respect to delinquent mortgages that are foreclosed by

mortgage purchasers, or their successors or assigns, the rule simply

assures parity with the treatment of projects foreclosed by HUD.

Section 204 of the 1978 Act (12 U.C.C. 1701z-12), directs HUD to

require a purchaser of any HUD-owned multifamily project to not

unreasonably refuse to lease units to certificate holders that rent at

or below Section 8 fair market rents. This provision also applies to a

party that outbids HUD at the foreclosure sale and acquire title. (See

24 CFR 290.30 and 290.46.) Accordingly, Sec. 290.114(d) applies to the

sale of all delinquent HUD-held mortgages, including delinquent

mortgages securing unsubsidized projects with no project-based

assistance.

Section 290.114(a) excludes unsubsidized mortgages securing

projects with no project-based assistance if they are current at the

time HUD offers them for sale. The Department has excluded these

projects because they are not subject to section 183(c) of the 1987 Act

immediately before HUD sells the mortgages and are not at risk of

foreclosure, making future coverage under section 204 of the 1978 Act,

discussed below, an irrelevant factor.

Other Matters

Executive Order 12866

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

under Executive Order 12866, Regulatory Planning and Review. Any

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

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

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

Seventh Street SW, Washington, D.C.

Regulatory Reinvention

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, the Department is reviewing all

its regulations to determine whether certain regulations 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 at the final rule stage in accordance with the President's

regulatory reform initiatives. In addition to comments on the substance

of these regulations, the Department welcomes comments on how this

interim rule may be made more understandable and less burdensome.

Environmental Impact

In accordance with 40 CFR 1508.4 of the regulations of the Council

on Environmental Quality and 24 CFR 50.20(k) of the HUD regulations,

the policies and procedures contained in this rule relate only to HUD

administrative procedures and, therefore, are categorically excluded

from the requirements of the National Environmental Policy Act.

Executive Order 12612, Federalism

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

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

contained in this rule will not have substantial direct effects on

States or their political subdivisions, or the relationship between the

federal government and the States, or on the distribution of power and

responsibilities among the various levels of government. As a result,

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

requirements of this rule are directed to HUD administrative

procedures, and do not impinge upon the relationship between Federal

government and State and local governments.

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.

Regulatory Flexibility Act

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

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

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

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

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

acquire HUD-held mortgages that HUD decides to sell.

Justification for Interim Rulemaking

In general, the Department publishes a rule for public comment

before issuing a rule for effect, in accordance with its own

regulations on rulemaking, 24 CFR part 10. However, part 10 provides

for exceptions from that general rule where the agency finds good cause

to omit advance notice and public participation. The good cause

requirement is satisfied when prior public procedure is

``impracticable, unnecessary, or contrary to the public interest.'' (24

CFR 10.1) The Department finds that prior public comment is unnecessary

because adequate opportunity to comment on the two regulatory

provisions added by this rule has already been provided. The policies

implemented by Secs. 290.112 and 290.114 were discussed in the April

1994 proposed mortgage sale rule and in

[[Page 4584]]

the September 1994 final rule. In both documents, these policies were

described as existing HUD policy, and HUD received public comment

requesting that the policies be included in the rule itself. When the

Department published the September 1994 final rule, it did not include

the policies in the rule, not from a disagreement with the commenter

over the substance of the policy, but because the Department believed

that the policies could be implemented without adding regulatory

provisions. As discussed above in the section-by-section analysis,

there are limitations in existing authority that could allow for less

than full and effective implementation of either of these policies.

Further, inclusion of these requirements in announcements of future

mortgage sales or in HUD loan sale documents may not provide adequate

notice to tenants, owners and prospective investors of these

obligations. On further consideration, therefore, the Department is

establishing express regulatory bases for these policies.

List of Subjects in 24 CFR part 290

Low and moderate income housing, Mortgage insurance.

Accordingly part 290 of Title 24 of the Code of Federal Regulations

is amended as follows:

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

PROJECTS AND CERTAIN MULTIFAMILY PROJECTS SUBJECT TO HUD-HELD

MORTGAGES

1. The authority citation for part 290 is revised to read as

follows:

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

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

2. New Secs. 290.112 and 290.114 are added to read as follows:

Sec. 290.112 What are the requirements for continuing federal rental

subsidy contracts?

For any mortgage that, at the time HUD offers the mortgage for sale

without FHA mortgage insurance, is delinquent and secures a subsidized

project or unsubsidized project that receives any of the forms of

assistance enumerated in paragraph (4)(i) to (4)(iv) of the

``subsidized project'' definition in Sec. 290.5:

(a) The mortgage purchaser and its successors and assigns shall

require the mortgagor to record a covenant running with the land as

part of any loan restructuring or of a final compromise of the mortgage

debt and shall include a covenant in any foreclosure deed executed in

connection with the mortgage. The covenant shall continue in effect

until the last federal project-based rental assistance contract expires

by its own terms. The covenant shall provide that, except where

otherwise approved by HUD, a project purchaser shall agree to assume

the obligations of any outstanding--

(1) Project-based federal rental subsidy contract; and

(2) Tenant-based Section 8 housing assistance payments contract

with a public housing agency and the related lease.

(b) In the event of foreclosure of the mortgage sold by HUD, the

mortgage purchaser and its successors and assigns shall not foreclose

in a manner that interferes with any lease related to federal project-

based assistance or any lease related to tenant-based, Section 8

housing assistance payments.

Sec. 290.114 What policies apply concerning nondiscrimination in

admitting certificate and voucher holders?

(a) Nondiscrimination requirement. For any mortgage described in

paragraph (c) or (d) of this section that HUD sells without FHA

mortgage insurance, the project owner shall not unreasonably refuse to

lease a dwelling unit offered for rent, offer or sell cooperative

stock, or otherwise discriminate in the terms of tenancy or cooperative

purchase and sale because any tenant or purchaser is a certificate or

voucher holder under 24 CFR part 982.

(b) Inapplicability to current mortgages securing unsubsidized

projects that receive no project-based assistance. The

nondiscrimination requirements of this section do not apply to any

mortgage, that is current under the terms of the mortgage, at the time

HUD offers it for sale, if the mortgage secures an unsubsidized project

that does not receive any of the forms of project-based assistance

enumerated in paragraph (4)(i) to (4)(iv) of the ``subsidized project''

definition in Sec. 290.5.

(c) Applicability to mortgages securing unsubsidized projects

receiving project-based assistance (partially-assisted projects) or

securing subsidized projects. (1) The nondiscrimination requirement in

paragraph (a) of this section applies to the project owner upon the

sale of a mortgage without FHA mortgage insurance if, at the time HUD

offers the it for sale, the mortgage secures:

(i) An unsubsidized project that receives any of the forms of

assistance enumerated in paragraph (4)(i) to (4)(iv) of the

``subsidized project'' definition in Sec. 290.5; or

(ii) A subsidized project, as defined in Sec. 290.5.

(2) This requirement shall continue in effect until the mortgage is

paid in full, including by a mortgage prepayment, except as provided in

paragraph (d) of this section.

(d) Covenant requirement for all delinquent mortgages sold without

FHA mortgage insurance. This paragraph (d) applies to the sale of any

mortgage that is delinquent at the time HUD offers it for sale without

FHA mortgage insurance, without regard to the subsidy status of the

project. The mortgage purchaser and its successors and assigns shall

require the mortgagor to record a covenant running with the land as

part of any loan restructuring or final compromise of the mortgage debt

and shall include a covenant in any foreclosure deed executed in

connection with the mortgage. The covenant shall set forth the

nondiscrimination requirement in paragraph (a) of this section. The

covenant shall continue in effect until a date that is the same as the

maturity date of the mortgage sold by HUD.

Dated: January 11, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 96-2455 Filed 2-5-96; 8:45 am]

BILLING CODE 4210-27-P