Sale of HUD-Held Single Family Mortgages; Final Rule

SUMMARY: This document represents the final rulemaking for an interim

rule that HUD published in the Federal Register on August 31, 1995

regarding the sale of HUD-held single family mortgage loans. This rule

adopts the interim rule as final, and makes certain changes to the

rule's provisions.

EFFECTIVE DATE: March 25, 1997.

FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Single

Family Servicing Division, Office of Housing, Room 9178, Department of

Housing and Urban Development, 451 Seventh Street SW., Washington, DC

20410, telephone (202) 708-1672. (This telephone number is not toll-

free.) Hearing- or speech-impaired individuals may access this number

via TTY by calling the Federal Information Relay Service at (800) 877-

8339.

SUPPLEMENTARY INFORMATION:

Background

HUD established its policies and procedures for the sale of HUD-

held single family mortgage loans through an interim rule published in

the Federal Register on August 31, 1995 (60 FR 45331), and corrected on

October 6, 1995 (60 FR 52296).1 As described in the preamble to

the August 31, 1995 interim rule, HUD is conducting a program of

regular sales of all HUD-owned single family mortgage loans in order to

decrease HUD's inventory of assigned mortgage loans and to reduce

further losses to the Federal Housing Administration (FHA) mortgage

insurance funds. The sale of both single family and multifamily

mortgage loans is a key component of President Clinton's initiative to

reinvent HUD.

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\1\ HUD extended the effectiveness of the interim rule through a

notice published in the Federal Register on August 27, 1996 (61 FR

43966). That notice provided that the provisions of the interim rule

will be effective until the final rule is published and becomes

effective.

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In the August 31, 1995 interim rule, HUD invited the public to

comment on these policies and procedures. HUD has not, however,

received any comments on the interim rule.

Success of the Sales Program

In conducting the single family mortgage loan sale program, HUD is

promoting the National Housing Goals established in section 2 of the

Housing Act of 1949 (42 U.S.C. 1441) by helping to provide a ``decent

home and a suitable living environment for every American family.'' One

of the policies behind the National Housing Goals is that private

enterprise must be encouraged to serve the nation's housing needs. HUD

has determined that transferring servicing functions to private

entities greatly improves the servicing of these mortgages. In

addition, HUD has emphasized the protection of the mortgagors' rights

to foreclosure avoidance relief, both in the regulations and the Loan

Sale Agreement.

HUD's first three sales under the single family mortgage loan sale

program were very successful. In the first sale, conducted on October

25, 1995, HUD sold 9,870 single family mortgage loans in an auction,

and an additional 3,111 loans in a competitive re-offering held a week

later. These loans carried an aggregate unpaid principal balance (UPB)

of approximately $522 million, and the winning bids averaged 75 percent

of the mortgage loans' UPB and generated approximately $8.3 million in

Federal budget savings.

In the second sale, conducted on March 20, 1996, HUD auctioned

16,231 single family mortgage loans, carrying a UPB of approximately

$743 million. The winning bid was 83.57 percent of UPB. This sale

generated $140 million in budget savings, according to the calculations

of the Office of Management and Budget (OMB).

In the third sale, conducted on September 4, 1996, HUD auctioned

16,996 single family mortgage loans, carrying a UPB of approximately

$804.5 million. The winning bid averaged 90.759 percent of UPB. The

third sale generated approximately $164 million in budget savings.

Changes in this Final Rule

Due to the successful results of HUD's first three sales of single

family mortgage loans, and to the fact that HUD has received no public

comments on the August 31, 1995 interim rule (60 FR 45331), this final

rule contains only the following changes to the interim rule:

1. The final rule deletes Sec. 291.300, which provided that the

provisions of the interim rule would be effective until September 30,

1996, unless HUD adopted the interim provisions as final (with or

without changes) or published a notice in the Federal Register

extending the effectiveness. With the publication of this final rule,

which adopts the interim provisions as final with changes, Sec. 291.300

is obsolete.

2. The final rule includes in Sec. 291.301 a definition of ``Bid

package,'' which did not appear in the interim rule. HUD determined

that including this definition, which describes the contents of the bid

package, will make the regulations clearer.

This final rule also includes in Sec. 291.301 a new definition of

``Payment plan agreement.'' For the purposes of certain assigned

mortgage loans, this term represents a forbearance agreement between

the purchaser and the mortgagor for payments after the expiration of an

initial 36-month forbearance period. Paragraph 11 of this preamble,

below, further describes the use of this term.

3. The final rule provides parenthetical information regarding

mortgage loans assigned to HUD under section 230(b) of the National

Housing Act. Since the publication of the August 31, 1995 interim rule,

the Balanced Budget Downpayment Act, I (Pub. L. 104-99; approved

January 26, 1996) replaced the language of section 230 of the National

Housing Act. Section 230(b) of the National Housing Act had previously

authorized the Secretary to take assignment of a defaulted mortgage

loan and provide assistance to the defaulted borrower. The new language

in section 230 authorizes the Secretary to pay partial claims and to

facilitate mortgage modifications by taking assignment of performing

mortgage loans after they have been modified to cure the default.

Congress provided that the ``old'' section 230(b) assignment program

requirements (those that appeared in section 230(b) prior to the

January 26, 1996 amendment) would continue to govern with regard to

mortgage loans for which the borrower applied for assignment prior to

April 26, 1996 (the date of enactment of the Omnibus Consolidated

Rescissions and Appropriations Act of 1996 (Pub. L. 104-134; approved

April 26, 1996)). While the Secretary can no longer accept assignments

of mortgage loans under the old section 230(b) assignment program

(unless the application for assignment was made before April 26, 1996),

HUD still has such mortgage loans in its inventory that it wishes to

sell. Therefore, this final rule adds parenthetical information

throughout the rule to clarify that HUD is referring to the old section

230(b) assignment program, and to mortgage loans assigned under that

program, in these mortgage sale regulations, rather than to the

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newly enacted section 230 modification and assignment process enacted

January 26, 1996 (see, e.g., the definition of ``Single family mortgage

loan'' in Sec. 291.301).

HUD may also decide to sell the mortgage loans that it acquires in

the future through the newly enacted section 230 modification and

assignment process. HUD has determined that the provisions of this

final rule would accommodate this decision, since the definition of

``Single family mortgage loan'' in Sec. 291.301 would include such

mortgage loans.

4. This final rule uses the term ``Loan Sale Agreement''

throughout, rather than the term ``Mortgage Loan Sale Agreement.''

``Loan Sale Agreement'' is the term actually used in the agreement

between HUD and the purchaser. This final rule simply conforms the

regulations to the correct terminology.

5. This final rule provides that individuals or entities that are

suspended from doing business with HUD, in addition to those that are

debarred, will not be eligible to bid in a sale under this sales

program. As provided in the August 31, 1995 interim rule (60 FR 45331),

HUD initially determined that an individual or entity would be

ineligible to bid if they were on HUD's most recent ``Consolidated List

of Debarred, Suspended or Ineligible Contractors and Grantees,'' if

they were on probation or under a limited denial of participation, or

if they were subject to a withdrawal of approval or other sanctions.

While HUD amended the interim rule on October 6, 1995 (60 FR 52296) to

exclude only those individuals or entities that had been debarred, HUD

has determined through its experience in the initial sales that it is

also necessary to exclude individuals and entities that have been

suspended. Since HUD protects the interests of homeowners with

mortgages that it previously insured, owned, and serviced, HUD will

ensure that bidders are not otherwise suspended from doing business

with the agency.

6. This final rule simplifies Sec. 291.304(d)(1)(i) of the interim

rule (Sec. 291.304(f)(1) of this final rule) regarding the

circumstances under which HUD can reject a bid. Section 291.304(a) of

both the interim rule and this final rule requires that all bids must

be submitted in accordance with the bid package instructions. However,

the interim rule mentioned in Sec. 291.304(d)(1)(i) one circumstance

under which a bidder would not be in compliance with the instructions--

if the bidder changes the documents prescribed in the bid package. This

final rule amends that provision simply to track the clearer language

in Sec. 291.304(a).

7. This final rule reorganizes the provisions in Sec. 291.306 of

the interim rule. That section of the interim rule, with the heading

``Closing requirements,'' described the requirements for earnest money

deposits, the execution of the Loan Sale Agreement, and HUD's

withdrawal of loans from a bidding pool. However, earnest money

deposits are submitted during the bidding process, rather than the

closing process. Similarly, the bidder submits an executed copy of the

Loan Sale Agreement with its bid; HUD then executes the Loan Sale

Agreement when it accepts the successful bid. Therefore, this rule will

move these requirements to Secs. 291.304 and 291.305, and will provide

appropriate information regarding the closing process in Sec. 291.306.

8. This final rule clarifies Sec. 291.307(a) by providing that all

mortgage loans purchased through the mortgage loan sale program must be

serviced by a mortgagee that has servicing approval by HUD. Although

the Loan Sale Agreement already contains this specification, HUD has

determined that including it in the regulations will avoid confusion.

9. This final rule clarifies Sec. 291.307(b) of the interim rule

regarding the continuation of the mortgagor's rights, in order to avoid

any confusion about the purchaser's right to foreclose. The interim

rule provided that the purchaser and servicer will be fully bound by

the Loan Sale Agreement, including any mortgagor rights to forbearance.

However, this final rule will clarify that the purchaser and the

servicer must service these loans in accordance with the servicing

requirements in the Loan Sale Agreement in order to preserve the

mortgagors' rights under the assignment program, and must ensure that

these requirements have been followed prior to initiating foreclosure.

10. This final rule streamlines Sec. 291.307(c)(1) regarding the

servicing requirements for assigned mortgage loans within the initial

36-month forbearance period. This final rule provides generally that

the purchaser must service these mortgage loans in essentially the same

manner as HUD serviced the loans while HUD held them. Specific

servicing requirements will be set forth in the Loan Sale Agreement for

each sale.

The purpose of the assignment program is to enable the homeowner to

avoid foreclosure and retain ownership of the property. Therefore, the

assignment program provides certain rights to the mortgagor regarding

such forms of relief as forbearance. Even if HUD sells the mortgage

loans, HUD and the purchaser must guarantee that the mortgagors' rights

under the assignment program will be protected during the first 36

months of assignment. While the regulations must therefore provide the

purchaser's general responsibility in servicing these mortgage loans,

it is unnecessary to specify all aspects of HUD's servicing policies in

the regulations. Specific servicing requirements are set forth in the

Loan Sale Agreement, which will primarily reflect the provisions of HUD

Handbook 4330.2 REV-1, Mortgage Assignment Processing and Secretary-

Held Servicing (March 1991).

11. This final rule clarifies Sec. 291.307(c)(2) regarding the

servicing requirements for assigned mortgage loans after the expiration

of the 36-month forbearance period. First, this final rule uses the

term ``Payment plan agreement'' (in Secs. 291.301 and 291.307(c)(2)) to

represent a forbearance agreement between the purchaser and the

mortgagor for payments after the expiration of the initial 36-month

forbearance period. The interim rule used the terms ``new forbearance

agreement'' and ``outstanding forbearance agreement,'' which could be

confused with the initial forbearance agreement in effect during the

36-month period after assignment. This clarifying change should help

avoid confusion.

Second, this final rule clarifies that the purchaser must renew

payment plan agreements upon their expiration at least through and

including the expiration of the original term of the mortgage loan, so

long as the mortgagor has complied with the prior agreement.

Furthermore, a purchaser may only foreclose if a mortgagor defaults in

making payments required under the most recent payment plan agreement

and cannot or will not reinstate. This requirement has been in the Loan

Sale Agreement. HUD has decided to include the provision in the final

rule, as well, in order to clarify and emphasize the requirement.

Third, this final rule removes a sentence from Sec. 291.307(c)(2)

that is redundant and potentially confusing. This rule removes the

sentence providing that a purchaser may take any lawful action to

ensure that arrearages do not continue to increase. HUD has determined

that Sec. 291.307(c)(2) of this final rule accurately and clearly

presents the servicing requirements without this sentence.

12. This final rule revises Sec. 291.307(c)(3) of the interim rule

regarding the servicing requirements for mortgages assigned to HUD

under

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section 221(g)(4) of the National Housing Act. Section 291.307(c)(3) of

the interim rule provided that a purchaser of such mortgages must

provide a defaulting mortgagor ``foreclosure avoidance relief that is

substantially equivalent to that which the mortgagor could have

otherwise sought under section 230 of the National Housing Act'' (60 FR

45334). While HUD was under no legal obligation to provide such relief,

due to administrative and recordkeeping concerns, HUD at its discretion

provided foreclosure avoidance relief analogous to section 230 for

loans assigned to HUD under 221(g)(4). However, with the recent

amendment to section 230 of the National Housing Act (described above

in paragraph 3 of this preamble), the foreclosure avoidance relief

under the old section 230 assignment program is no longer available.

Therefore, HUD will not require purchasers to provide forbearance for

221(g)(4) mortgage loans that are current, and this final rule removes

that obsolete reference. This final rule also removes a similar

reference in Sec. 291.307(b).

Section 291.307(c)(3) of this final rule will provide, however,

that 221(g)(4) mortgage loans that are not current are subject to

forbearance agreements and the servicing requirements in

Sec. 291.307(c)(1) and (c)(2).

13. This final rule removes Sec. 291.307(c)(4) of the interim rule

regarding purchase money mortgages (PMMs) that were not part of the

settlements resulting from the Ferrell litigation actions. 2 As a

result of the Ferrell litigation, HUD agreed to provide certain

foreclosure avoidance relief to mortgagors with FHA insured mortgages.

Section 291.307(c)(4) of the interim rule provided only that a

purchaser of non-Ferrell PMMs does not have to provide relief under

section 230 of the National Housing Act. This paragraph is unnecessary,

since it does not contain any regulatory requirements.

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\2\ The history of the Ferrell litigation is described in Brown

v. Lynn, 385 F. Supp. 986 (N.D. Ill., 1974). The litigation resulted

in a 1976 stipulation and consent decree, Ferrell v. Hills, (N.D.

Ill., E.D., July 29, 1976), which was then replaced by the Amended

Stipulation in August 1979.

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14. For mortgages subsidized under section 235 of the National

Housing Act, this final rule clarifies the status of assistance payment

contracts. Furthermore, this final rule provides the Secretary with

essential flexibility when reducing the interest rates on the loans. As

described in the interim rule, when HUD sells these loans, the

assistance payments contracts will terminate. To minimize the effect of

this termination on the mortgagors, this final rule removes the complex

formula provided in Sec. 291.307(d) of the interim rule, and it allows

the Secretary to reduce the interest rate to that which will adequately

compensate the mortgagors for the termination of assistance.

Findings and Certifications

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this rule under

Executive Order 12866, Regulatory Planning and Review. OMB determined

that this rule is a ``significant regulatory action,'' as defined in

section 3(f) of the Order. Any changes made to this rule as a result of

that review are clearly identified in the docket file. The docket file

and the Economic Analysis prepared for this rule are available for

public inspection between 7:30 a.m. and 5:30 p.m. in the Office of the

Rules Docket Clerk, Department of Housing and Urban Development, Room

10276, 451 Seventh Street, SW., Washington, DC 20410.

Environmental Impact

The policies and procedures contained in this rule do not direct,

provide for assistance or loan and mortgage insurance for, or otherwise

govern or regulate property acquisition, disposition, lease,

rehabilitation, alteration, demolition, or new construction, or set out

or provide for standards for construction or construction materials,

manufactured housing, or occupancy, within the meaning of 24 CFR

50.19(c)(1). Therefore they 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, on the relationship between the

Federal Government and the States, or on the distribution of power and

responsibilities among the various levels of government. Specifically,

the requirements of this rule relate to the sale of certain HUD assets,

and do not impinge upon the relationship between the Federal Government

and State and local governments. As a result, this rule is not subject

to review under 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. This rule will protect mortgagors' rights relative

to forbearance, assistance, or reinstatement. Since this rule will not

significantly change the rights of mortgagors or their families, no

further review under the order is necessary.

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 doing so

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

a substantial number of small entities. This rule contains only the

minimum requirements necessary to operate the single family mortgage

loan sale program, and it will not affect the ability of small

entities, relative to larger entities, to bid for and acquire HUD-held

mortgages.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub.

L. 104-4; approved March 22, 1995), 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.

Congressional Review of Major Final Rules

This rule is a ``major rule'' as defined in the Administrative

Procedure Act (5 U.S.C. 804(2)).

List of Subjects in 24 CFR Part 291

Community facilities, Conflict of interests, Homeless, Lead

poisoning, Low and moderate income housing, Mortgages, Reporting and

recordkeeping requirements, Surplus government property.

Accordingly, for the reasons stated in the preamble, 24 CFR part

291, subpart D is amended as follows:

a. The interim rule published August 31, 1995 (60 FR 45331);

corrected on October 6, 1995 (60 FR 52296); and extended on August 27,

1996 (61 FR 43966), is adopted as final; and

b. Is further amended as follows:

1. The authority citation for 24 CFR part 291 continues to read as

follows:

Authority: 12 U.S.C. 1709 and 1715b; 42 U.S.C. 1441, 1441a,

1551a, and 3535(d).

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2. Subpart D is revised to read as follows:

Subpart D--Sale of HUD-Held Single Family Mortgage Loans

Sec.

291.301 Definitions.

291.302 Purpose and general policy.

291.303 Eligible bidders.

291.304 Bidding process.

291.305 Selection of bids and execution of Loan Sale Agreement.

291.306 Closing requirements.

291.307 Servicing requirements.

Subpart D--Sale of HUD-Held Single Family Mortgage Loans

Sec. 291.301 Definitions.

For purposes of this subpart, the following definitions apply:

Bid package means the documents prepared for bidders in a mortgage

loan sale, and includes the following: An Executive Summary containing

information on FHA single family mortgage loan sales and background on

HUD programs; a description of post-sale servicing requirements; due

diligence information and reports; mortgage loan information; a copy of

the Loan Sale Agreement and its exhibits; bidding and closing

information; and such other information and requirements as the

Secretary may determine necessary.

Payment plan agreement, for purposes of Sec. 291.307(c)(2), means

an agreement between the purchaser and the mortgagor for payments after

the 36-month period of statutorily authorized forbearance relief has

expired.

Single family mortgage loan means a mortgage loan on a single

family property assigned to HUD under section 230(b) of the National

Housing Act (as that subsection existed prior to January 26, 1996) (12

U.S.C. 1715u), a mortgage loan on a single family property insured by

HUD under section 221 of the National Housing Act (12 U.S.C. 1715l), a

mortgage loan on a single family property issued in connection with the

settlement of the Ferrell litigation, a purchase money mortgage loan

issued by HUD on a single family property sold from HUD's inventory

that was not connected with the settlement of the Ferrell litigation,

or any other single family mortgage loan owned by HUD and representing

an asset to HUD's Title II mortgage insurance funds.

Single family property means a residence with one to four dwelling

units.

Sec. 291.302 Purpose and general policy.

This subpart sets forth HUD's policy and procedures for the sale of

HUD-held single family mortgage loans. In general, HUD will sell both

performing and nonperforming HUD-held single family mortgage loans. HUD

will sell all mortgage loans without recourse and without FHA

insurance. HUD will package pools of single family mortgage loans for

sale to the general public on a competitive basis; however, HUD may

sell mortgage loans to government-sponsored enterprises (GSEs) on a

negotiated basis. Nothing in this subpart shall be construed to prevent

HUD from packaging single family mortgage loans with other types of HUD

assets for sale. The Secretary retains full discretion to offer any

qualifying pool of mortgage loans for sale and to withhold or withdraw

any offered pool of mortgage loans from sale. However, when HUD offers

a qualifying mortgage loan for sale, the procedures set out in this

subpart and in the bid package will govern the sale of HUD-held single

family mortgage loans.

Sec. 291.303 Eligible bidders.

HUD will provide information on the eligibility of bidders in the

bid package, a notice in the Federal Register, or other means, at the

Secretary's full discretion. However, an individual, partnership,

corporation, or other legal entity will not be eligible to bid for any

loan pool, either as an individual or a participant, if at the time of

the sale, that individual or entity is debarred or suspended from doing

business with HUD under 24 CFR part 24.

Sec. 291.304 Bidding process.

(a) Submission of bids. All bids must be submitted to HUD in

accordance with instructions in the bid package for a particular sale.

(b) Effect of bid. By submitting a bid, the bidder is making an

offer to purchase single family mortgage loans as presented in the bid

package. Submission of a bid constitutes acceptance of the terms and

conditions set forth in the bid package. Along with the bid, the bidder

must submit an executed copy of the Loan Sale Agreement, which is

included in the bid package.

(c) Earnest money deposits. The bidder must submit to HUD, along

with its bid, an earnest money deposit in an amount to be determined by

HUD. The earnest money deposit is nonrefundable to the winning bidder

and will be credited toward the purchase price.

(d) Termination of offering. HUD reserves the right to terminate an

offering in whole or in part at any time before the bid date.

(e) Withdrawal of loans. HUD reserves the right, in its sole

discretion and for any reason whatsoever, to withdraw loan assets from

a pool prior to the bid date. Any earnest money deposits relating to

withdrawn loan assets will be retained by HUD and credited toward the

total purchase price of the remaining loan assets in the pool, in

accordance with the Loan Sale Agreement. After the bid date, HUD can

withdraw mortgage loans in accordance with the Loan Sale Agreement.

(f) Rejection of bids. (1) HUD may, in its sole discretion, reject

any bid under the following circumstances:

(i) If the bid does not conform with the instructions in the bid

package; or

(ii) If, in HUD's sole discretion, it determines that such action

would be in the best interests of the U.S. Government.

(2) HUD can also issue a conditional rejection that will become an

acceptance upon fulfillment of HUD's requests.

(g) Withdrawal of bids. A bidder may withdraw a previously

submitted bid in accordance with the instructions in the bid package

for a particular sale.

(h) Bids by brokers or agents. Any bid by a broker or agent for a

principal must be in the name of the principal and signed by the

broker/agent as the attorney-in-fact for the principal. All such bid

documents must be executed so as to bind the principal by the broker/

agent as the attorney-in-fact. A power of attorney satisfactory to HUD

as to form and content must be submitted with each bid.

Sec. 291.305 Selection of bids and execution of Loan Sale Agreement.

HUD will evaluate bids, select successful bids, and notify the

successful bidder in a manner set forth in the bid package. HUD will

complete the execution of the Loan Sale Agreement when it accepts the

successful bid.

Sec. 291.306 Closing requirements.

(a) Closing date payment. On the closing date, the purchaser must

pay to HUD the closing date payment, consisting of the balance of the

amount due on the bid price, as adjusted in accordance with the Loan

Sale Agreement.

(b) Closing documents. HUD will execute and deliver to the

purchaser a bill of sale transferring title to the mortgage loans sold

in the sale. The purchaser must deliver to HUD the documents required

at closing, in addition to the closing date payment.

Sec. 291.307 Servicing requirements.

(a) Use of HUD-approved servicing mortgagees. All mortgage loans

must be serviced by HUD-approved servicing mortgagees for the remaining

life of the mortgage loans. A purchaser that is not

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a HUD-approved servicing mortgagee must retain a HUD-approved servicing

mortgagee to service the mortgage loans.

(b) Continuation of mortgagor rights. The purchaser may take all

lawful steps to collect the amounts due under the mortgage loans. These

steps may include foreclosure, but only after the servicer has provided

all required forms of relief for the mortgagor in accordance with

paragraph (c) of this section. The purchaser and its servicer, and any

subsequent transferee of or servicer for the mortgage loan, will be

fully bound by the terms of the Loan Sale Agreement, including those

terms that provide the mortgagor with any rights regarding forbearance,

assistance, or reinstatement of the mortgage loan.

(c) Purchaser's protection of mortgagor's rights. (1) Assigned

mortgage loans during forbearance period. This paragraph (c)(1)

explains how a purchaser (or a servicer of a purchased mortgage loan)

must service a mortgage loan that was assigned to HUD under section

230(b) of the National Housing Act (as that subsection existed prior to

January 26, 1996), for which not more than 36 months has expired since

the mortgage loan assignment was accepted by the Secretary. Such a

purchaser must service these mortgage loans in essentially the same

manner as HUD was required to service the loans while HUD held them.

Specific servicing requirements will be set forth in the Loan Sale

Agreement for each sale.

(2) Assigned mortgage loans after the initial 36-month forbearance

period. This paragraph (c)(2) explains how a purchaser (or a servicer

of a purchased mortgage loan) must service a mortgage loan that was

assigned to HUD under section 230(b) of the National Housing Act (as

that subsection existed prior to January 26, 1996), for which more than

36 months has expired since the mortgage loan assignment was accepted

by the Secretary.

(i) Such purchaser may require the mortgagor to pay at least the

full monthly payment due under the mortgage loan. A purchaser may also

require a mortgagor to pay increased monthly mortgage loan payments

under a renewed payment plan agreement to reduce the amount in arrears

if the mortgagor's available income (as calculated according to the

Loan Sale Agreement) can support the increased payments. A purchaser

must renew payment plan agreements at least through and including the

expiration of the original term of the mortgage loan, so long as the

mortgagor complies with the prior payment plan agreement.

(ii) If the mortgagor defaults under a payment plan agreement

established by the purchaser, the mortgagor shall have the right to

reinstate the most recent payment plan agreement if the mortgagor makes

a lump sum payment in an amount necessary to cure the default. If the

mortgagor defaults under the most recent payment plan agreement and

does not reinstate, the purchaser may terminate the payment plan

agreement and take such action as may be permitted under the terms of

the mortgage.

(iii) The purchaser's right to demand payment of a reinstatement

amount from the mortgagor may be limited by the terms of the Loan Sale

Agreement.

(3) Section 221 Mortgages. This paragraph (c)(3) explains how a

purchaser (or a servicer of a purchased mortgage) must service a

mortgage assigned to HUD under section 221(g)(4) of the National

Housing Act.

(i) Current section 221(g)(4) mortgage loans. Section 221(g)(4)

mortgage loans that are current as of the closing date are not subject

to the servicing requirements set forth in paragraphs (c)(1) and (c)(2)

of this section.

(ii) Defaulted section 221(g)(4) mortgage loans. With respect to

any section 221(g)(4) mortgage loan as to which a payment default has

occurred, and as to which HUD, as of the closing date, was providing or

had agreed to provide forbearance relief, the purchaser must continue

to provide forbearance relief and must service such mortgage loans as

set forth in paragraphs (c)(1) and (c)(2) of this section.

(d) Section 235 mortgage loans--(1) Assistance payments contract.

If, prior to the mortgage loan sale, the assistance payments contract

has not been previously terminated under 24 CFR 235.375(a), the

contract will terminate as to each mortgage loan upon the sale of the

mortgage loan. The purchasing mortgagee will therefore not receive any

assistance payments on behalf of the mortgagor for any Section 235

mortgage loan sold.

(2) Reduction in interest rates. For a Section 235 mortgage loan

that was accompanied by an assistance payments contract that was still

in effect on the date of the sale, the Secretary will reduce the

interest rate on the mortgage loan to a rate to be determined by the

Secretary.

Dated: December 17, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 97-1647 Filed 1-23-97; 8:45 am]

BILLING CODE 4210-27-P