Home Equity Conversion Mortgage Insurance; Right of First Refusal Permitted for Condominium Associations

SUMMARY: This interim rule removes, for the Home Equity Conversion

Mortgage (HECM) insurance program only, the current restriction on FHA

mortgage insurance for a dwelling unit in a condominium project where

the condominium association has a right of first refusal to purchase

units that are offered for sale. As a result of this change, some

condominium units in projects may be approved for the HECM program.

DATES: Effective Date: May 11, 1998.

Comment Due Date: June 8, 1998.

ADDRESSES: Interested persons are invited to submit comments regarding

this rule to the Regulations Division, Office of General Counsel, Room

10276, Department of Housing and Urban Development, 451 Seventh Street,

SW, Washington, DC 20410-0500. Communications should refer to the above

docket number and title. Facsimile (FAX) comments are not acceptable. 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.

FOR FURTHER INFORMATION CONTACT: John J. Coonts, Director, Office of

Insured Single Family Housing, Room 9266, Department of Housing and

Urban Development, 451 Seventh Street, SW, Washington, DC 20410,

telephone (voice) (202) 708-3046. (This is not a toll-free number.)

Hearing-impaired or speech-impaired individuals may access the voice

telephone listed by calling the Federal Information Relay Service

during working hours at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

This interim rule addresses a difficult area that has been the

subject of prior FHA rulemaking and involves balancing competing

policies. These policies relate to the extent to which property subject

to an FHA-insured mortgage must be freely transferable without

restrictions. The interim rule makes one limited refinement to current

FHA policies.

FHA published a final rule on September 17, 1996 (61 FR 49033) to

add 24 CFR 206.45(e) 1. It generally bars Home Equity

Conversion Mortgage (HECM) insurance for a home that is not freely

marketable, with the exception of restrictions on conveyance that are

permitted for other FHA programs by 24 CFR 203.41 (for property other

than condominium units) or 24 CFR 234.66 (for condominium units.) The

FHA policy permits certain restrictions that facilitate affordable

housing programs, and a limited number of other restrictions, such as a

limitation of housing to elderly residents when consistent with the

Fair Housing Act and State and local non-discrimination laws.

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\1\ A typographical error in the final rule, which has been

corrected, designated the new provision as Sec. 203.47(e). The

proposed rule had correctly indicated that the new provision would

be Sec. 203.45(e).

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The FHA policy was codified, for programs other than the HECM

program, as a regulation in 1993 (new 24 CFR 203.41 and 234.66 were

added) to incorporate administrative policies on permissible

restrictions on conveyance that FHA developed in the preceding decades

(58 FR 42649, August 11, 1993 (final rule) and 56 FR 58762, November

21, 1991 (proposed rule)).

One provision of the regulation generally prohibited mortgage

insurance on property for which another party held a right of first

refusal, in part because such a right could make more difficult an

expeditious sale at fair market value by a mortgagor in financial

distress. A delay in the sale of a property, or inability to sell at a

price that would cover the mortgage debt, could result in a mortgage

default entitling the mortgagee to foreclose and claim insurance

benefits from HUD. Similarly, rights of first refusal and other

restrictions on conveyance can increase the difficulty to FHA in

marketing an acquired property expeditiously at fair market value,

thereby increasing FHA's holding costs and decreasing its ultimate

recovery. FHA's policies on rights of first refusal and other

restrictions on conveyance also recognized the potential that the right

could be improperly used for discriminatory purposes. The 1991 proposed

rule would have permitted only rights of first refusal that would be

exercised in the context of an affordable housing program by a public

body or an eligible non-profit organization (or an assignee who would

occupy the property) within a reasonable time after the event

permitting exercise of the right (i.e., a bona fide purchase offer by

another person) occurred. Also, the right had to permanently terminate

if mortgage assignment to HUD, foreclosure, or a deed in lieu of

foreclosure took place.

In response to a public comment stating that this exception was too

narrow, the 1993 final rule added a sentence that authorized HUD to

approve an individual or organization who was not a public body or

eligible non-profit organization to hold a right of first refusal under

the same conditions. As explained in the rule preamble, this change was

to accommodate ``unusual situations,'' such as employer homebuyer

assistance to low- or moderate-income employees in areas with little or

no affordable housing, when the employer would want to be able to

continue to limit the homeownership to employees needing assistance.

HUD stated (58 FR 42647):

This provision is not intended to permit condominium

associations to have rights of first refusal, and HUD approval

should not be requested for rights held by a condominium

association, or rights held by others if a condominium is not

involved in an affordable housing program.

FHA has long been aware that condominium organizational documents

frequently grant to the condominium association a right of first

refusal to purchase the unit of a condominium unit owner who offers a

unit for sale, and that prohibiting FHA insurance in such cases can

exclude some of the condominium market (particularly existing projects

not originally conceived as attracting a market likely to use FHA

programs). From 1981 until 1993, when 24 CFR 234.66 took effect, FHA

administrative policy permitted rights of first refusal for existing

condominium projects that otherwise were acceptable for FHA mortgage

insurance. HUD pointed this out in its rule preamble (56 FR 58764) but

clearly indicated that it proposed to reverse this policy except for

the ``grandfathering'' under Sec. 234.66 of condominium projects

already approved by HUD.

When the proposal to change policy was published for public comment

in 1991, the HECM program was operating at a very low volume. Any

special concerns that might be relevant to the program if 24 CFR 203.41

and 234.66 were to be applied to the HECM program were not taken into

consideration because the 1993 rule did not apply at all to the HECM

program. Although no rule barred HECM mortgage insurance in

condominiums

[[Page 17655]]

with rights of first refusal, it was barred as a practical matter

because Sec. 206.51 of the HECM program regulations restricted the HECM

program to condominium projects approved by FHA and FHA did not approve

any projects solely for the HECM program.

HUD proposed in 1996 to formally apply to the HECM program the

general policies regarding restrictions on conveyance (see 61 FR 21918,

May 10, 1996). HUD stated in the rule preamble:

While HUD does not have the same concerns about restrictions on

conveyance for the HECM program as for other single family programs,

because a HECM by its nature is not assumable, HUD is concerned that

any property acquired by the mortgagee or HUD through foreclosure or

deed-in-lieu of foreclosure needs to be readily marketable without

restrictions to a wide potential market. HUD has identified one area

of special impact of this policy on the HECM program for which it

specifically seeks comment. The rule would prevent use of the HECM

program for a unit in a condominium if the condominium project

possesses a right of first refusal (unless the condominium project

received written approval from HUD prior to September 10, 1993). HUD

believes there may be a number of successful condominiums existing

prior to that date that did not obtain FHA approval, have

condominium associations with rights of first refusal, and have

current unit owners that would be prospective applicants for a HECM.

A recent proposed amendment of Sec. 206.51 [adopted in final form on

May 29, 1996, 61 FR 26984] would permit HECMs on some individual

units in a condominium project that have not received HUD approval

but such units would also be affected by the proposed change to

Sec. 206.45. HUD therefore also seeks comment on whether, if the

proposed amendment to Sec. 206.51 is adopted, HUD should insure a

HECM on a unit in a condominium project that does not meet usual HUD

policy regarding rights of first refusal. (61 FR 21921)

No public comments were received that generally opposed the application

of Sec. 234.66 in its entirety, but one commenter did--in the context

of discussing extension of the HECM program to cooperatives--oppose

applying the restriction against rights of first refusal to

condominiums in the HECM program. As stated at 61 FR 49031:

Comment: * * * If HUD expands the HECM regulations to include

housing cooperatives, the regulations should also be changed to

allow HUD to insure a HECM on a unit in a condominium or housing

cooperative project even if the project does not meet usual HUD

policy regarding ``rights of first refusal.'' In both a condominium

and a housing cooperative, rights of first refusal are a necessary

safeguard for the project. In addition, it is an industry-wide

accepted practice that protects the investment of these homeowners

as well as the mortgage holder. Rights of first refusal do not

prevent the unit from being widely marketable without restrictions

to a wide potential market. Rather, it should be viewed as enhancing

the value of the unit as well as providing a necessary protection

for future purchasers.

Response: The single family insurance program for cooperatives

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

HECM program. * * *

HUD received no other comments indicating that the proposed rule would

cause any specific problems and the proposed rule was adopted without

change in this regard. The final rule and preamble did not address the

commenter's remarks on the value of rights of first refusal for

condominiums in the HECM program, except through silence and failure to

make any change in the final rule to permit rights of first refusal.

Reason for Change

This rulemaking will allow an eligible owner of a condominium unit

to obtain a HECM when a right of first refusal would have otherwise

precluded the elderly homeowner from obtaining HECM financing.

It has come to FHA's attention that in several recent instances an

elderly homeowner living in a condominium has attempted to obtain a

HECM loan but was precluded from doing so because the condominium

association held a right of first refusal. As discussed above, FHA has

previously considered the HECM program separately from other FHA single

family programs with regard to the application of general policies

against restrictions on conveyance, and expressed specific concern

about the application of the ban on rights of first refusal held by

condominium associations.

In addition to the concerns expressed above, it is unlikely that

many HECM applicants are living in condominiums that were established

with the intent of qualifying the units for traditional FHA mortgage

insurance. FHA programs are typically used to help finance the purchase

of condominium units for first-time homebuyers and others who are

unable to afford the larger downpayment required for other mortgage

alternatives. Particularly in the case of a condominium project

specifically designed for occupancy by the elderly, a condominium

developer or person who converted a rental building to condominium

ownership would have been unlikely to have avoided providing a right of

first refusal for the condominium association if that was a common

practice in the area, as frequently is the case. Thus, the FHA policy

regarding rights of first refusal by condominium associations can have

a disproportionately adverse effect, although unintentional, when

applied to the HECM program.

HUD is again seeking public comment on whether, on balance, it is

preferable to accept these risks rather than to deny access to the HECM

program to a substantial proportion of elderly owners of condominium

units. Because FHA has previously sought public comment on this issue

and received no comment supporting the restriction of rights of first

refusals for condominiums in the HECM program but did receive an

opposing comment, and because there have been actual instances recently

identified in which mortgage insurance has been unavailable under

current policy but which could have been acceptable to HUD, HUD

considers it appropriate to refine its policy on an interim basis

pending consideration of any further public comments on the subject.

This is a minor change to the basic and continuing HUD policy that

restrictions on conveyance for all FHA single family programs,

including the HECM program, should be severely limited, and condominium

rights of first refusal should ordinarily be covered by those

limitations.

Condominium associations are not permitted to exercise their rights

of first refusal to engage in discriminatory practices when an elderly

homeowner, or the homeowner's heirs, dispose of the property. The

Department will use all of its enforcement authority at its disposal if

discriminatory practices occur as a result of the exercise of a right

of first refusal.

Effect of Change

Section 206.51 of the HECM program regulations requires that the

condominium project be acceptable to HUD (other than spot loans meeting

the requirements of Sec. 234.26(i)), but it does not mandate project

approval standards identical to those used in the basic FHA program for

mortgage insurance on condominium units under section 234(c) of the

National Housing Act (Sec. 234.26). To date, HUD administrative policy

has been to permit HECMs (other than spot loans) only for condominium

units in projects that were accepted for the section 234(c) program. As

a result of this rule change, some condominium projects may be approved

for the HECM program but not for the section 234(c) program. HUD will

issue appropriate administrative instructions concerning the lists of

FHA-approved condominiums.

The rule change also affects HECM spot loans. They will now be

permitted in projects that have not received FHA

[[Page 17656]]

approval, subject to the general rules limiting spot loans, if no

restrictions on conveyance barred by Sec. 203.41 apply to the unit

other than a right of first refusal for the condominium association.

Other Matters

Justification for Interim 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). The Department finds that good

cause exists to publish this rule for effect before it receives and

completes consideration of public comments, because the public was

previously afforded an opportunity to comment on the precise issue

involved in this interim rule, and the only relevant comment supported

the position adopted in this interim rule. In addition, the Department

now has specific examples regarding the adverse effect of the current

rule on potential mortgagors under the HECM program which it lacked

when evaluating the previous rulemaking. After the previous rulemaking,

the potential adverse effect of the policy in the current rule was

expanded due to adoption of the ``spot loan'' procedure which opened up

the HECM program to condominiums that are not eligible for project

approval under the section 234(c) program. This increased the adverse

effect of the Department's previous handling of the issue and is

additional information that causes the Department to consider its

rulemaking and adjust the result in a minor but specific manner.

This interim rule should have no adverse effect on those who had

the opportunity to comment in previous rulemaking. It will, however,

immediately benefit others by expanding the available means through

which mortgagees and mortgagors can obtain the benefits of FHA mortgage

insurance for a HECM on a dwelling in a condominium unit. In the

interest of obtaining the fullest participation possible in determining

the proper means of administering the HECM program, the Department

again invites public comment on the policy presented in interim rule.

The comments received within the 60-day comment period will be

considered during development of a final rule that ultimately will

supersede this interim rule.

Regulatory Flexibility Act

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

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

doing so certifies that this interim rule will not have a significant

economic impact on a substantial number of small entities. This rule

removes the current restriction on FHA mortgage insurance for a

dwelling unit in a condominium project where the condominium

association has a right of first refusal to purchase units that are

offered for sale. Small entities are specifically invited, however, to

comment on whether this rule will significantly affect them, and

persons are invited to submit comments according to the instructions in

the DATES and COMMENTS sections in the preamble of this interim rule.

Environmental Finding

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations in 24 CFR part 50 that

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

1969 (42 U.S.C. 4332). This Finding of No Significant Impact is

available for public inspection between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules Docket Clerk, Office of General

Counsel, Department of Housing and Urban Development, Room 10276, 451

7th Street S.W., Washington, D.C. 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 interim

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 interim rule that

would affect the relationship between the Federal government and State

and local governments.

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 interim

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.

Catalog

The Catalog of Federal Domestic Assistance number for the Home

Equity Conversion Mortgage Program is 14.183.

List of Subjects in Part 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, 24 CFR part 206 is amended as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

1. The authority for part 206 continues to read as follows:

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

2. Section 206.45(e) is revised to read as follows:

Sec. 206.45 Eligible properties.

* * * * *

(e) Restrictions on conveyance. The property must be freely

marketable. Conveyance of the property may only be restricted as

permitted under 24 CFR 203.41 or 24 CFR 234.66 and this part, except

that a right of first refusal to purchase a unit in a condominium

project is permitted if the right is held by the condominium

association for the project.

Dated: February 20, 1998.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 98-9419 Filed 4-8-98; 8:45 am]

BILLING CODE 4210-27-P