Streamlining the Single Family Components of the Single Family- Multifamily Regulations

SUMMARY: This final rule amends primarily the single family components

of HUD's regulations for certain FHA single family and multifamily

housing mortgage insurance programs. In an effort to comply with the

President's regulatory reform initiatives, this rule streamlines these

regulations by eliminating regulatory provisions that are redundant,

obsolete, or otherwise unnecessary.

EFFECTIVE DATE: December 26, 1996.

FOR FURTHER INFORMATION CONTACT: Richard K. Manuel, Director of the

Home Mortgage Insurance Division, Department of Housing and Urban

Development, Room 9272, 451 Seventh Street, SW, Washington, DC 20410,

telephone number (202) 708-2700 (this is not a toll-free number). A

telecommunications device for hearing- and speech-impaired persons

(TTY) is available at (800) 877-8339 (Federal Information Relay

Service).

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a

memorandum to all Federal departments and agencies regarding regulatory

reinvention. In response to this memorandum, HUD conducted a page-by-

page review of its regulations to determine which could be eliminated,

consolidated, or otherwise improved. HUD determined that the

regulations for certain Federal Housing Administration (FHA) programs

could be improved and streamlined by eliminating obsolete and

unnecessary provisions, and by consolidating provisions that were

repeated throughout several sets of regulations. Therefore, on April 1,

1996 (61 FR 14396), HUD published a final rule streamlining the

regulations for certain FHA single family housing, multifamily housing,

and health care facility mortgage insurance programs. Today's final

rule will continue HUD's efforts to streamline its FHA regulations by

amending the single family components of parts 220, 221, and 234 to

eliminate regulatory provisions that are redundant, obsolete, or

otherwise unnecessary. Today's final rule will also remove the single

family components of the obsolete program in part 213, and both the

single family and the multifamily components of the regulations for the

obsolete program in part 233. This final rule will thereby eliminate

approximately 44 pages of unnecessary regulations.

I. Single Family Streamlining

A. Part 220

The Mortgage Insurance and Insured Improvement Loans for Urban

Renewal and Concentrated Development Areas Program (part 220) is

relatively inactive; there were few new loans insured in FY 1996, and

HUD does not anticipate that this volume will increase. The April 1,

1996 final rule (61 FR 14396) streamlined the multifamily components of

the regulations in part 220. Today's final rule will similarly

streamline the single family components of these regulations by

removing the eligibility provisions in subpart A. HUD has determined

that it is unnecessary to retain these requirements because the

statute, supplemented by the contract of insurance and HUD handbooks,

will be sufficient. HUD is, however, retaining the provisions in these

regulations regarding contract rights and obligations, because they are

necessary for the continued administration of the outstanding loans

insured under the program.

B. Part 221

Several single family provisions of HUD's regulations in part 221

for the Low Cost and Moderate Income Mortgage Insurance Program are

duplicative or obsolete. Specifically, this final rule streamlines

these provisions by correcting Sec. 221.1(a), which contains a general

cross-reference to the single family mortgage insurance regulations in

part 203, along with a list of the exceptional sections in part 203

that do not apply to mortgages insured under section 221 of the

National Housing Act (12 U.S.C. 1715l) (the Act). Although Sec. 203.17

(Mortgage provisions) appears on this list of exceptions, the

requirements of Sec. 203.17 actually do apply to mortgages insured

under section 221 of the Act, and in fact there are provisions within

part 221 that duplicate those requirements. Therefore, this final rule

removes Sec. 203.17 from the list of exceptions in Sec. 221.1, and it

also removes those provisions that duplicate the requirements in

Sec. 203.17. This rule also removes Sec. 203.46, which no longer

exists, from the list of exceptions in Sec. 221.1. This rule removes

Secs. 221.60 and 221.65, which are obsolete due to the inactivity of

the mortgage insurance programs under sections 221(h) and 221(i) of the

Act to which they apply. This rule also removes several other

provisions that are duplicative either of part 203 or of the statute,

or that are obsolete.

C. Part 234

Several provisions in HUD's regulations for the Condominium

Ownership Mortgage Insurance Program in part 234 repeat the general

single family mortgage insurance regulations in part 203. Therefore,

this final rule will amend subpart A of part 234, which contains the

eligibility requirements, to provide a general cross-reference to the

similar eligibility requirements in subpart A of part 203. Subpart A of

part 234 will retain those eligibility provisions that are unique to

the Condominium Ownership Mortgage Insurance Program.

II. Obsolete Programs

A. Part 213

There was no new loan activity in fiscal year (FY) 1996 in the

single family component of HUD's Cooperative Housing Mortgage Insurance

Program in part 213. HUD has determined that, due to the changes in the

housing market and other factors, the single family component of this

program is obsolete. Therefore, this final rule will remove the single

family regulations in part 213 (subparts C, D, and E). A ``savings

clause'' will be maintained in part 213 providing that the single

family regulations in effect immediately before December 26, 1996 will

continue to apply to any existing mortgages.

B. Part 233

HUD's regulations for the Experimental Housing Mortgage Insurance

Program in part 233 are also obsolete. This program has been inactive

for approximately 15 years. In accordance with the President's National

Homeownership Strategy (May 1995), HUD will consider whether the

program would effectively promote technological advances in

homebuilding products. If HUD decides to expand and promote the

program, it will develop new and more appropriate regulations at that

time. Therefore, this final rule will remove the substance of the

regulations in part 233, including both the single family and the

multifamily components. A ``savings clause'' will be maintained in part

200, subpart W (Sec. 200.1302), providing that the regulations in

effect immediately before December 26, 1996

[[Page 60159]]

will continue to apply to any existing mortgages.

III. Clarifications and Corrections

HUD is taking the opportunity in this final rule to clarify or

correct certain provisions in its FHA regulations. First, this rule

corrects a provision of the April 1, 1996 final rule (61 FR 14396). In

an earlier final rule published in the Federal Register on September

11, 1995, HUD established a new Sec. 200.1301 to contain the savings

clauses for several expiring FHA programs. In the April 1, 1996 final

rule, HUD intended to add a list of additional expiring programs to a

new Sec. 200.1302. Due to an error, however, rather than adding a new

Sec. 200.1302, the April 1, 1996 rule inadvertently revised

Sec. 200.1301, supplanting the list of programs initially issued in

Sec. 200.1301 on September 11, 1995. To correct this error, the Federal

Register published a correction document on October 17, 1996 (61 FR

54267), which effectively reestablished Sec. 200.1301 as it appeared in

the September 11, 1995 rule, and added a new Sec. 200.1302 as HUD

intended in the April 1, 1996 rule.

While that error in the April 1, 1996 final rule has been

corrected, today's final rule will correct another error. In the

preamble to the April 1, 1996 rule, on page 14397, toward the bottom of

the first column, HUD states that ``Part 222 which pertains to

Servicepersons Mortgage Insurance Program is an expired program. No

more mortgages are insured under this program. The part will be removed

and a savings clause will be retained.'' HUD inadvertently omitted part

222 from the savings clause for additional expiring programs (see 61 FR

14404-05). Therefore, this final rule will correct the provision for

additional expiring programs in Sec. 200.1302 to include part 222.

Second, this rule clarifies a new provision in Sec. 234.26

regarding requirements for the insurance of mortgages on individual

units in condominium projects that have not received FHA approval in

advance. On May 29, 1996 (61 FR 26962), HUD published a final rule in

the Federal Register that added paragraph (i) to Sec. 234.26 to permit

such ``spot loans'' if the project meets certain criteria. In

Sec. 234.26(i)(1)(vi), HUD requires that for projects with fewer than

30 units, no more than 20 percent of the units in the project may be

encumbered by FHA-insured mortgages. This final rule clarifies that for

projects with four units (20 percent of which would be less than one

whole unit), only one unit may be encumbered by an FHA-insured

mortgage.

IV. Justification for Final Rulemaking

HUD generally publishes a rule for public comment before issuing a

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

in 24 CFR part 10. However, part 10 provides for exceptions to the

general rule if 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). HUD finds that good cause exists

to publish this rule for effect without first soliciting public

comment. This rule merely removes obsolete and unnecessary regulatory

provisions, and consolidates repetitive requirements; it does not

establish or affect substantive policy. Therefore, prior public comment

is unnecessary.

Findings and Certifications

Regulatory Flexibility Act

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

U.S.C. 605(b)), has reviewed and approved this final 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 merely

streamlines regulations by removing unnecessary provisions. The rule

will have no adverse or disproportionate economic impact on small

businesses.

Environmental Impact

This streamlining final rule will not have an environmental impact.

When HUD was developing its final rule published on April 1, 1996 (61

FR 14396) that streamlined the regulations for certain FHA single

family housing, multifamily housing, and health care facility mortgage

insurance programs, a Finding of No Significant Impact with respect to

the environment was 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). That Finding applies to

today's final rule, which continues HUD's streamlining efforts by

primarily amending the single family components of those regulations.

The Finding 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.

Executive Order 12612, Federalism

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

of Executive Order 12612, Federalism, has determined that 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. No programmatic or policy changes

will result from this rule that would affect the relationship between

the 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 will not have

the potential for significant impact on family formation, maintenance,

or 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.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-

4; approved March 22, 1995) (UMRA) establishes requirements for Federal

agencies to assess the effects of their regulatory actions on State,

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

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

governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 200

Administrative practice and procedure, Claims, Equal employment

opportunity, Fair housing, Home improvement, Housing standards,

Incorporation by reference, Lead poisoning, Loan programs--housing and

community development, Minimum property standards, Mortgage insurance,

Organization and functions (Government agencies), Penalties, Reporting

and recordkeeping requirements, Social security, Unemployment

compensation, Wages.

24 CFR Part 213

Cooperatives, Mortgage insurance, Reporting and recordkeeping

requirements.

24 CFR Part 220

Home improvement, Loan programs--housing and community development,

[[Page 60160]]

Mortgage insurance, Reporting and recordkeeping requirements, Urban

renewal.

24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

24 CFR Part 233

Home improvement, Loan programs--housing and community development,

Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 234

Condominiums, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, chapter II of title 24 of the Code of Federal

Regulations is amended as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

1. The authority citation for 24 CFR part 200 continues to read as

follows:

Authority: 12 U.S.C. 1701-1715z-18; 42 U.S.C. 1436a and 3535(d).

2. In subpart W, section 200.1302 is revised to read as follows:

Sec. 200.1302 Additional expiring programs--savings clause.

No new loan assistance, additional participation, or new loans are

being insured under the programs listed in this section.

(a) Any existing loan assistance, ongoing participation, or insured

loans under the following programs will continue to be governed by the

regulations in effect as they existed immediately before May 1, 1996:

Part 215 Rent Supplement Payments Program

Part 222 Serviceperson's Mortgage Insurance Program

Part 237 Special Mortgage Insurance for Low and Moderate Income

Families

(b) Any existing loan assistance, ongoing participation, or insured

loans under the following program will continue to be governed by the

regulations in effect as they existed immediately before December 26,

1996:

Part 233 Experimental Housing Mortgage Insurance Program

PART 213--COOPERATIVE HOUSING MORTGAGE INSURANCE

3. The authority citation for part 213 continues to read as

follows:

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

4. Subpart C consisting of Sec. 213.501, is revised to read as

follows:

Subpart C--Individual Properties Released From Project Mortgage;

Expiring Program

Sec. 213.501 Savings clause.

No new loans are being insured under the Cooperative Housing

Mortgage Insurance Program for individual properties released from a

project mortgage. Any existing insured loans on individual properties

released from a project mortgage under this program will continue to be

governed by the regulations on eligibility requirements, contract

rights and obligations, and servicing responsibilities in effect as

they existed immediately before December 26, 1996.

Subparts D and E--[Removed]

5. In part 213, subpart D (consisting of Secs. 213.751 and 213.752)

and subpart E (consisting of Sec. 213.800) are removed.

PART 220--MORTGAGE INSURANCE AND INSURED IMPROVEMENT LOANS FOR

URBAN RENEWAL AND CONCENTRATED DEVELOPMENT AREAS

6. The authority citation for part 220 continues to read as

follows:

Authority: 12 U.S.C. 1713, 1715b, 1715k; 42 U.S.C. 3535(d).

Subpart A--[Removed]

7. In part 220, subpart A (consisting of Secs. 220.1 through

220.249) is removed.

PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE

8. The authority citation for 24 CFR part 221 continues to read as

follows:

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

221.544(a)(3) is also issued under 12 U.S.C. 1707(a).

9. Section 221.1 is amended by revising paragraph (a) to read as

follows:

Sec. 221.1 Cross-reference.

(a) All of the provisions of subpart A, part 203 of this chapter

concerning eligibility requirements of mortgages covering one- to four-

family dwellings under section 203 of the National Housing Act (12

U.S.C. 1709) apply to mortgages on dwellings insured under section 221

of the National Housing Act (12 U.S.C. 1715l), except the following

provisions:

Sec.

203.18 Maximum mortgage amount.

203.18a Solar energy system.

203.18b Increased mortgage amount.

203.19 Mortgagor's minimum investment.

203.28 Economic soundness of project.

203.42 Rental properties.

203.43h Eligibility of mortgages on Indian land insured pursuant to

section 248 of the National Housing Act.

203.43i Eligibility of mortgages on Hawaiian Home Lands insured

pursuant to section 247 of the National Housing Act.

203.43j Eligibility of mortgages on Allegany Reservation of Seneca

Nation of Indians.

203.45 Eligibility of graduated payment mortgages.

203.49 Eligibility of adjustable rate mortgages.

203.50 Eligibility of rehabilitation loans.

203.51 Applicability.

* * * * *

Secs. 221.3 and 221.5 [Removed]

10. Sections 221.3 and 221.5 are removed.

11. Section 221.20 is amended by revising paragraph (c) to read as

follows:

Sec. 221.20 Maximum mortgage amount--loan-to-value limitation.

* * * * *

(c) Definitions. As used in the section, the terms principal

residence, secondary residence, eligible non-occupant mortgagor, undue

hardship, and vacation home are defined in Sec. 203.18(f) of this

chapter.

* * * * *

Secs. 221.25, 221.30, 221.32, 221.35, and 221.45 [Removed]

12. Sections 221.25, 221.30, 221.32, 221.35, and 221.45 are

removed.

13. Section 221.50 is amended by revising paragraph (a) to read as

follows:

Sec. 221.50 Mortgagor's minimum investment.

(a) At the time the mortgage on a single-family dwelling is

insured, a mortgagor other than a mortgagor qualifying as a ``displaced

family'' (as that term is defined in section 221(f) of the Act) shall

have paid in cash or its equivalent at least 3 percent of the

Commissioner's estimate of the acquisition cost of the property.

* * * * *

Secs. 221.57, 221.60, 221.65, and 221.70 [Removed]

14. Sections 221.57, 221.60, 221.65, and 221.70 are removed.

PART 233--EXPERIMENTAL HOUSING MORTGAGE INSURANCE

15. Part 233 is removed.

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

16. The authority citation for 24 CFR 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. 1707(a).

[[Page 60161]]

17. In part 234, subpart A is revised to read as follows:

Subpart A--Eligibility Requirements--Individually Owned Units

Sec.

234.1 Cross-reference.

234.3 Definitions.

234.17 Mortgagor and mortgagee requirements for maintaining flood

insurance coverage.

234.26 Project requirements.

234.54 Eligibility of assigned mortgages and mortgages covering

acquired property.

234.63 Location of property.

234.65 Nature of title.

234.66 Free assumability; exceptions.

Subpart A--Eligibility Requirements--Individually Owned Units

Sec. 234.1 Cross-reference.

(a) All of the provisions of subpart A of part 203 of this chapter

concerning eligibility requirements of mortgages covering one- to four-

family dwellings under section 203 of the National Housing Act (12

U.S.C. 1709) apply to mortgages on individually owned units insured

under section 234 of the National Housing Act (12 U.S.C. 1715y), except

the following provisions:

Sec.

203.12 Mortgage insurance on proposed or new construction in a new

subdivision.

203.14 Builders' warranty.

203.18a Solar energy system.

203.18c One-time or up-front mortgage insurance premium excluded

from limitations on maximum mortgage amounts.

203.38 Location of dwelling.

203.42 Rental properties.

203.43c Eligibility of mortgages involving a dwelling unit in a

cooperative housing development.

203.43d Eligibility of mortgages in certain communities.

203.43f Eligibility of mortgages covering manufactured homes.

203.43g Eligibility of mortgages in certain communities.

203.43h Eligibility of mortgages on Indian land insured pursuant to

section 248 of the National Housing Act.

203.43i Eligibility of mortgages on Hawaiian Home Lands insured

pursuant to section 247 of the National Housing Act.

203.43j Eligibility of mortgages on Allegany Reservation of Seneca

Nation of Indians.

203.50 Eligibility of rehabilitation loans.

(b) For the purposes of this subpart, all references in part 203 of

this chapter to section 203 of the Act shall be construed to refer to

section 234 of the Act.

Sec. 234.3 Definitions.

The terms Act, Beginning of amortization, Commissioner, FHA,

Insured Mortgage, Mortgage, Mortgagee, Mortgagor, and State, as used in

this part, are defined in Sec. 203.251 of this chapter. The following

terms, as used in this part, are defined as follows:

Bona fide tenants' organization means an association of tenants

formed by the tenants to promote their interests in a particular

project, with membership in the association open to each tenant, and

all requirements of the association applying equally to every tenant.

Common areas and facilities means those areas of the project and of

the property upon which it is located that are for the use and

enjoyment of the owners of family units located in the project. The

areas may include the land, roofs, main walls, elevators, staircases,

lobbies, halls, parking space and community and commercial facilities.

Conversion means the date on which all documents necessary to

create a condominium under State law (and under local law, where

applicable) have been recorded.

Family unit means a one-family unit including the undivided

interest in the common areas and facilities, and such restricted common

areas and facilities as may be designated.

Project means a structure or structures containing four or more

family units.

Project mortgage means a mortgage which is or has been insured

under any of the FHA multifamily housing programs, other than sections

213(a)(1) and 213(a)(2) of the Act (12 U.S.C. 1715e).

Restricted common areas and facilities means those areas and

facilities restricted to a particular family unit or number of family

units.

Tenant means the occupant(s) named in the lease or rental agreement

of a housing unit in a project as of the date the condominium

conversion documents are properly filed for the project, or as of the

date on which the occupants are notified by management of intent to

convert the project to a condominium, whichever is earlier.

Sec. 234.17 Mortgagor and mortgagee requirements for maintaining flood

insurance coverage.

The maintenance of flood insurance coverage on the project by the

condominium association will satisfy the requirements of Sec. 203.16a

of this chapter if such coverage protects the interest of the mortgagor

in the family unit. For this purpose, ``the interest of the mortgagor''

is defined as insurance coverage equal to the replacement cost of the

project less land costs.

Sec. 234.26 Project requirements.

No mortgage shall be eligible for insurance unless the following

requirements are met:

(a) Location of family unit. The family unit shall be located in a

project that the Commissioner determines to be acceptable.

(b) Plan of condominium ownership. The project in which the unit is

located shall have been committed to a plan of condominium ownership by

a deed, or other recorded instrument, that is acceptable to the

Commissioner.

(c) Releases. The family unit shall have been released from any

mortgage covering the project or any part of the project.

(d) Certificate by mortgagee. The mortgagee shall certify that:

(1) The deed of the family unit and the deed or other recorded

instrument committing the project to a plan of condominium ownership

comply with legal requirements of the jurisdiction.

(2) The mortgagor has good marketable title to the family unit,

subject only to a mortgage that is a valid first lien on the family

unit.

(3) The family unit is assessed and subject to assessment for taxes

pertaining only to that unit.

(e) Conditions and provisions. (1) The Commissioner may require

such conditions and provisions as the Commissioner determines are

necessary for the protection of consumers and the public interest.

(2) An application for mortgage insurance of a unit will not be

approved if approval would result in less than 80 percent of the FHA-

insured mortgages covering units in the project being occupied by

mortgagors or co-mortgagors as a principal residence or a secondary

residence (as these terms are defined in Sec. 203.18 of this chapter).

(3) In addition to the other requirements of this section, in order

for a project to be acceptable to the Secretary, at least 51 percent of

all family units (including units not covered by FHA-insured mortgages)

must be occupied by the owners as a principal residence or a secondary

residence (as these terms are defined in Sec. 203.18 of this chapter),

or must have been sold to owners who intend to meet this occupancy

requirement.

(f) Limitations on conversion of rental housing to condominium use.

With respect to a family unit in any project that was converted from

rental housing, no insurance will be provided under this section

unless:

(1) The conversion occurred more than one year before the

application for insurance; or

(2) The mortgagor or comortgagor was a tenant of a unit in the

rental housing project converted to condominium use; or

[[Page 60162]]

(3) The conversion of the property is sponsored by a bona fide

tenants' organization representing a majority of the households in the

project.

(g) Projects covered by an insured or Secretary-held mortgage. In

addition to the requirements contained in paragraphs (a) through (f) of

this section, projects which are covered by an FHA-insured project

mortgage, or by a mortgage held by the Secretary, must be in compliance

with a conversion plan approved by the Commissioner. The conversion

plan shall provide for:

(1) The termination by payment in full of the mortgage or by

voluntary termination of the insurance contract covering any HUD/FHA-

insured or Secretary-held mortgage on the project, unless the

Commissioner determines that the Commissioner's interests, and those of

the individuals purchasing the family units, are best served by not

requiring the termination of the insurance or payment in full of the

mortgage.

(2) On release of a family unit from the project mortgage, payment

shall be made on the outstanding balance of the project mortgage in an

amount equal to the share of the balance determined by HUD to be

attributable to the family unit.

(3) The project mortgagee shall certify that, notwithstanding any

provisions of the mortgage covering prepayment, no charge is

contemplated or has been collected for prepayment in full of the

project mortgage.

(h) Projects not covered by an insured or Secretary-held mortgage.

In addition to the requirements contained in paragraphs (a) through (f)

of this section, projects which are not covered by an insured project

mortgage or by a Secretary-held mortgage and which have not been

approved by the Department of Veterans Affairs for its guaranty,

insurance, or direct loan programs shall meet the requirements of this

paragraph. Except with the approval of the Commissioner for the purpose

of constructing or converting the project in phases or stages, any

special right of the declarant (as declarant and not as a unit owner)

to do any or all of the following must have expired or must have been

waived in a recorded instrument:

(1) Add land or units to the condominium;

(2) Convert common elements into additional units or limited common

elements;

(3) Withdraw land from the condominium;

(4) Use easements through the common elements for the purpose of

making improvements within the condominium or within any adjacent land;

or

(5) Convert a unit into two or more units, common elements, or into

two or more units and common elements.

(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 percent of the total units in the project must

have been conveyed to the unit purchasers, and at least 51 percent 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 percent 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 percent

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

mortgages. (If endorsement would result in more than 10 percent of the

units in such a project being encumbered by FHA-insured mortgages, the

condominium project must be approved under paragraphs (a) through (h)

of this section.) For projects with between 5 and 30 units inclusive,

no more than 20 percent of the total units may be encumbered by FHA-

insured mortgages. For projects with four units, only one unit may be

encumbered by an FHA-insured mortgage under the spot loan procedure of

this paragraph (i); 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.)

Sec. 234.54 Eligibility of assigned mortgages and mortgages covering

acquired property.

The Commissioner may insure under this part, without regard to any

limitation upon eligibility contained in this subpart (except that the

property must be located in a condominium project approved under

Sec. 234.26), any mortgage assigned to the Commissioner in connection

with payment under a contract of mortgage insurance, or executed in

connection with a sale by the Commissioner of any property acquired in

the settlement of an insurance claim under any section or title of the

Act.

Sec. 234.63 Location of property.

The mortgage, to be eligible for insurance, shall be on property

located in a State, as defined in Sec. 203.251 of this chapter, and not

located on ``Hawaiian home lands,'' as that term is defined in section

247(d)(2) of the Act.

Sec. 234.65 Nature of title.

A mortgage, to be eligible for insurance, shall be on a fee

interest in, or on a leasehold interest in, a one-family unit in a

project including an undivided interest in the common areas and

facilities, and such restricted common areas and facilities as may be

designated. To be eligible, a leasehold interest shall be under a lease

for not less than 99 years which is renewable, or under a lease having

a period of not less than 10 years to run beyond the maturity date of

the mortgage.

Sec. 234.66 Free assumability; exceptions.

For purposes of HUD's policy of free assumability with no

restrictions, as provided in Sec. 203.41 of this chapter, the

definition of Legal restrictions on conveyance in Sec. 203.41(a)(3) of

this chapter does not include rights of first refusal held by a

condominium association for a project approved by the Secretary under

this subpart prior to September 10, 1993.

18. Section 234.251 is revised to read as follows:

[[Page 60163]]

Sec. 234.251 Definitions.

The definitions in Sec. 203.251 of this chapter apply to this

subpart.

Sec. 234.256 [Amended]

19. Section 234.256 is amended by revising paragraphs (a), (b),

(e), and (f), to read as follows:

(a) Selling mortgagor. The requirements for the selling mortgagor

are set forth in Sec. 203.258(a) of this chapter.

(b) Purchasing mortgagor. (1) If the dwelling is a principal or

secondary place of residence, the requirements for the purchasing

mortgagor are set forth in Sec. 203.258(b)(1) of this chapter.

* * * * *

(e) Direct endorsement. Requirements for the direct endorsement

program are set forth in Sec. 203.258(f) of this chapter.

(f) Substitute mortgagor is defined in Sec. 203.258(f) of this

chapter.

20. Section 234.259 is revised to read as follows:

Sec. 234.259 Claim procedure--graduated payment mortgages.

Section 203.436 of this chapter applies to mortgages under this

subpart.

Dated: November 6, 1996.

Stephanie A. Smith,

General Deputy Assistant Secretary for Housing-Federal Housing

Commissioner.

[FR Doc. 96-29925 Filed 11-25-96; 8:45 am]

BILLING CODE 4210-27-P