[Federal Register Volume 59, Number 183 (Thursday, September 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23412]


[[Page Unknown]]

[Federal Register: September 22, 1994]


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Part III





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



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24 CFR Parts 203 and 291




Single Family Property Disposition Program; Final Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 203 and 291

[Docket No. R-94-1670; FR-3253-F-02]
RIN 2502-AF75

 
Single Family Property Disposition Program

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This rule makes final, with changes, the amendments to 
regulations at 24 CFR parts 203 and 291 announced in an interim rule 
published on October 20, 1993 (58 FR 54244), with an effective date of 
November 19, 1993. The regulations govern the disposition of HUD-
acquired single family properties (part 291) and the circumstances 
under which HUD will accept such properties when they are occupied 
(part 203). The preamble to this final rule responds to the comments 
received from the public on the interim rule.

EFFECTIVE DATE: October 24, 1994.

FOR FURTHER INFORMATION CONTACT: David H. Patton, Acting Director, 
Single Family Property Disposition, room 9172, Department of Housing 
and Urban Development, 451 Seventh Street SW, Washington, DC 20410-
0500; telephone (202) 708-0740; TDD for hearing- and speech-impaired 
(202) 708-4594. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: The amendments made in this rule do not 
affect the information collection requirements for the Single Family 
Property Disposition program, which were previously approved by the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
and assigned OMB control numbers 2502-0306.

I. Background

    Title II of the National Housing Act (the Act) authorizes HUD to 
insure mortgages for single family residences through the Federal 
Housing Administration (FHA) single family mortgage insurance program. 
The disposition program for single family properties, acquired by HUD 
in exchange for payment of insurance claims, is authorized by section 
204(g) of the Act. The regulations governing the disposition program 
are codified at 24 CFR part 291.
    On October 20, 1993, the Department published an interim rule, 
which subsequently became effective on November 19, 1993, amending 
certain provisions of part 291 to allow for greater flexibility in 
fluctuating market situations and to provide greater opportunities for 
affordable housing to families and to State and local governments or 
nonprofit organizations serving low- and moderate-income families. The 
purpose of the amendments was to implement the policy of President 
Clinton and Secretary Cisneros to expand access to affordable 
homeownership and help revitalize neighborhoods.

II. Amendments Made by Interim Rule

Single Family Property Disposition (24 CFR Part 291)

    1. The purpose of the disposition program was changed to place 
greater emphasis on homeownership and improvement of neighborhoods, by 
providing that the primary objective of the program is to reduce the 
inventory of acquired properties in a manner that expands homeownership 
opportunities, strengthens neighborhoods and communities, and ensures a 
maximum return to the mortgage insurance fund. (24 CFR 291.1(a).)
    2. A definition of ``revitalization areas'' was added, which 
defined the term as urban neighborhoods that are targeted by a city for 
coordinating affordable housing programs and enhanced supportive 
services, and where a significant number of HUD-owned properties have 
been in inventory at least six months. (24 CFR 291.5.)
    3. Purchase money mortgages (PMMs) in revitalization areas were 
made available for 85 percent of the purchase price, at current market 
interest rates, for a period not to exceed five years for direct sale 
purchasers (i.e., governmental entities and private nonprofit 
organizations) meeting FHA mortgage credit standards and purchasing 
properties for ultimate resale to owner-occupant purchasers at or below 
115 percent of median income. (24 CFR 291.100(d).)
    4. The definition of owner-occupant purchaser was amended to limit 
it to purchasers who intend to occupy the property as their primary 
residence. (The rule had previously included governmental entities and 
private nonprofit organizations as owner-occupant purchasers.) (24 CFR 
291.5.)
    5. Owner-occupant purchasers were given a priority in the 
competitive bid sales method. In revitalization areas, the priority was 
made available for up to 30 days and only for properties offered with 
FHA mortgage insurance. In all other areas, the priority was made 
available for all properties for a period of time to be set by the 
field office, depending on local circumstances. (24 CFR 291.105(a).)
    6. The limitation on the amount of financing and closing costs that 
HUD pays was removed, and the rule was amended to provide that HUD will 
determine the maximum limit appropriate for the area. (24 CFR 
291.105(b).)
    7. The discount available on direct sale purchases was changed from 
10 percent to an amount to be determined appropriate by HUD, but not 
less than 10 percent, depending on the location of the property or the 
number of properties purchased in a single transaction. (24 CFR 291.110 
(a) and (b).)
    8. The procedure by which potential purchasers under the direct 
sales program are notified of eligible properties was amended. (24 CFR 
291.110(a).)
    9. A provision was added to allow for a direct sale to an 
individual or other entity not otherwise specified in the rule where a 
finding is made, in writing, that such a sale would further the goals 
of the National Housing Act and would be in the best interests of the 
Secretary. (24 CFR 291.110(g).)
    10. The rule was amended to permit initial 15-day extensions for 
closing at no cost to owner-occupant purchasers where documentation 
indicates that (1) proper and timely loan application was made, (2) the 
delay is not the fault of the buyer, and (3) mortgage approval is 
imminent. A further amendment allowed extensions at no cost, at any 
time and to any purchaser, where the delay is the fault of HUD or a 
direct endorsement lender. (24 CFR 291.130(b).)
    11. An amendment was made to provide that, in the case of an 
uninsured sale, 100 percent of an earnest money deposit made by an 
owner-occupant purchaser will be returned where the purchaser is pre-
approved for mortgage financing in an appropriate amount by a 
recognized mortgage lender and, despite good faith efforts, is unable 
to obtain mortgage financing; and, where an owner-occupant purchaser 
has not been preapproved and despite good faith efforts cannot obtain 
mortgage financing, 50 percent of the earnest money deposit will be 
returned. (24 CFR 291.135.) A definition of ``pre-approved'' was added 
to mean that a commitment has been obtained from a recognized mortgage 
lender for mortgage financing in a specified dollar amount sufficient 
to purchase the property. (24 CFR 291.5.)

Occupied Conveyance (24 CFR Part 203)

    The occupied conveyance rule at 24 CFR 203.670 and 203.671 was 
amended to provide that HUD may accept occupied properties to avoid the 
payment of excessive eviction or relocation expenses required by a 
local government. A technical correction was also being made to 
Secs. 203.675(b)(4) and 203.676 to conform with an earlier amendment to 
the rule published on September 16, 1991 (56 FR 46964) regarding the 
conveyance of properties occupied by persons who suffer a long-term or 
permanent illness.

III. Public Comments

    The Department received 40 public comments during the 60-day 
comment period that ended on December 20, 1993. The comments were from 
governmental entities, private nonprofit organizations, and three 
members of Congress. The comments are discussed below. Numbers in 
parentheses following the comment refer to the number of commenters 
raising the issue.
    Comment: HUD should continue to give a priority to purchase (and 
lease, in the case of homeless providers) to nonprofits and government 
agencies, particularly grantees under HOPE for Homeownership of Single 
Family Homes (HOPE 3). (36)
    Response: The Department agrees that changes to its procedures for 
offering properties to governmental entities and nonprofit 
organizations are appropriate. The final rule has been changed to 
include governmental entities and nonprofit organizations in the 
definition of owner-occupant purchasers, thereby giving them a 
simultaneous opportunity to purchase properties eligible for FHA 
mortgage insurance during the competitive bidding period. If a 
nonprofit or government agency submits the highest net offer, without 
any discount being considered, and that offer is otherwise acceptable, 
it will be accepted and a discount of 10 percent (15 percent if five or 
more properties are purchased and closed simultaneously), regardless of 
the property's location, will be applied at closing. For properties not 
eligible for FHA mortgage insurance, nonprofits and government agencies 
will have first opportunity to purchase at HUD's determination of fair 
market value. Offers accepted will reflect the appropriate discount. 
For properties offered without FHA mortgage insurance, the discount 
will be 30 percent in revitalization areas, and 10 percent in all other 
areas (or 15 percent, as appropriate).
    Comment: In establishing revitalization areas, the number of FHA 
foreclosures in process should be taken into consideration rather than 
the number of properties currently on hand. (7)
    Response: Due to the several uncertainties surrounding foreclosures 
(payoff by mortgagor, purchase by third parties, bankruptcy, redemption 
periods, the varying length of time in which foreclosure occurs, etc.), 
the Department believes that the use of foreclosures in process is not 
practical in establishing revitalization areas. The Department 
continues to believe it is appropriate to establish revitalization 
areas based on experience with its property disposition program and 
based on areas designated by localities for expanding affordable 
housing opportunities.
    Comment: The discount in revitalization areas should be greater. 
(4)
    Response: The available discount is based on anticipated savings to 
the Department, both in terms of selling on a direct basis and in 
selling properties more quickly that may otherwise require extended 
periods of marketing. The amount is supported by an evaluation 
performed on the Single Family Property Disposition Demonstration 
Program conducted by the Department on sales of properties in 
economically distressed areas. The Department believes that the current 
discount level is appropriate, but retains flexibility in making future 
determinations based on changing housing market conditions.
    Comment: There should be a requirement for owner-occupant buyers to 
repair to code. (3)
    Response: The Department believes that such a requirement, and its 
enforcement, properly rests with the local government.
    Comment: The program should be monitored and reports provided to 
the public. (3)
    Response: The Department does not believe there is an urgent need 
to devote already scarce resources to large scale monitoring of this 
unsubsidized program. To the extent the Department learns of 
falsification of the Sales Contract, or other abuses in the program, 
corrective measures will be taken at that time. In this regard, steps 
have been taken to determine the appropriateness of having the 
Department's computer system perform limited checking on owner-
occupants purchasing more than one principal residence. Also, the Sales 
Contract now includes a warning to purchasers about the possible 
consequences of falsifying that document. The Department has recently 
authorized Field Offices to include resale restrictions on certain 
properties to prevent windfall profits and require that the properties 
be used for affordable housing goals. A provision has been added to the 
final rule at Sec. 291.110(a)(3) to authorize the Department to request 
information when considered appropriate on the disposition of 
properties sold to governmental entities and nonprofits. Consideration 
is also being given to other administrative procedures to prevent abuse 
from all categories of buyers.
    Comment: Minimum residency requirements for owner-occupant buyers 
should be established. (2)
    Response: The Department does not agree that such requirements 
should be established. Unnecessary hardships could be placed on owner-
occupants in some cases where job relocations or other circumstances 
may necessitate moving. As discussed above, the Department has taken 
some measures already, and is considering others, to prevent possible 
abuses.
    Comment: The number of properties nonprofits may purchase should be 
limited and based on the number they have completed successfully. (2)
    Response: Nonprofit organizations are currently eligible to 
purchase discounted properties based on differing pre-qualification 
standards. While the Department believes it would not be in its best 
interests to require a second approval, nonprofits not previously 
approved under another HUD program will generally be subject to 
requirements much like those used in the HOPE 3 program as a condition 
to purchasing properties at discounted prices. (See the HOPE 3 
regulations at 24 CFR part 572.) In addition, the Department may 
specify a required minimum number of properties to be completed 
successfully, before the purchase of additional properties.
    Comment: In pricing HUD properties, appraisers should use 
distressed properties as comparables. (2)
    Response: HUD believes its procedure for pricing properties, 
regardless of their location, is a fair one. Appraisers utilize recent 
sales of comparable properties in similar condition, and HUD's listing 
price is reflective of the needed level of repairs.
    Comment: HUD should continue to provide lists of available 
properties. (2)
    Response: HUD's Field Offices are required by Sec. 291.110(a) to 
provide lists of properties available for direct purchase upon request. 
Where Field Offices have provided lists routinely, they have not been 
instructed to discontinue the practice, and some are continuing that 
practice. To eliminate unnecessary and duplicative work, however, some 
offices may elect to have the newspaper advertisement, where such 
advertising is used, also serve as official notification to the 
nonprofits and government agencies. In areas where newspapers are not 
used to advertise properties, other means must be used to notify 
nonprofits and government agencies of available properties in a timely 
manner. In those instances where properties being offered without FHA 
mortgage insurance are first made available to nonprofits and 
government agencies, Field Offices will continue to provide lists 
directly to those potential purchasers. The Department does not believe 
this practice creates a hardship on program participants.
    Comment: A process should be established for nonprofits to appeal 
Field Office decisions. (1)
    Response: The Department does not believe such a process is 
necessary and, in fact, could serve to undermine the authority vested 
in HUD's Field Offices. HUD headquarters will continue to oversee the 
program and to discuss issues with both the buyer community and its 
Field Offices in order to reach fair and appropriate decisions. The 
Department does not see the necessity of a formal appeal process to 
accomplish this.
    Comment: A means should be developed for low-income buyers to 
compete better with higher income owner-occupant purchasers. (1)
    Response: The Department believes that restricting sales only to 
buyers under a specific income limit could be viewed as discriminatory, 
unfair to other owner-occupant buyers, and not in the best interests of 
the Department or the FHA insurance fund, in its efforts to dispose of 
the inventory in a timely manner and at the maximum return to the 
insurance funds. Changes made in this final rule to give a priority 
purchase period to governmental agencies and nonprofits on certain 
properties will enhance the opportunity of low-income purchasers to 
acquire properties through programs sponsored by those agencies and 
organizations.
    Comment: Investors should not be allowed to purchase properties. 
(1)
    Response: The Department has significantly restricted the 
opportunity for investors to purchase. In the case of properties 
eligible for FHA mortgage insurance (those generally in better 
condition), owner-occupants (which includes nonprofits and government 
agencies) have first opportunity to purchase. For properties not 
eligible for FHA mortgage insurance, the nonprofits and government 
agencies have first opportunity to purchase, followed by other owner-
occupant buyers, before being offered to all purchasers. It should be 
kept in mind that there will be certain properties, due to their 
physical condition, that will not be purchased by any owner-occupant 
purchaser, so it would not be in the best interests of the Department 
to eliminate totally the investor buyer from this program.
    Comment: A discount in the sales price should be given to owner-
occupants who have received certificates for completing homebuyer 
education seminars. (1)
    Response: Although the Department recognizes the value of 
homeownership counseling programs, it does not believe the suggestion 
would be in its best interests. It is unlikely that there would be any 
``standard'' by which certificates would be issued to potential buyers 
by the many different organizations providing such counseling. Further, 
the discount offered by HUD is justified primarily by the savings to 
the Department on direct sales to nonprofits and government agencies. 
These same savings (sales commission, closing/financing costs, and 
expected holding costs) would not be realized in sales to other than 
direct sale buyers. Although the Department will not sell to owner-
occupant buyers that are not government agencies or nonprofits at 
discounted prices, properties purchased at the deep discount by those 
organizations are primarily intended to be resold to persons who are at 
or below 115 percent of median income for their area, when adjusted for 
family size, or used to shelter the homeless. Therefore, the program 
will enhance affordable homeownership opportunities.
    Comment: Consideration should be given to accepting purchase offers 
from direct sale buyers that are below asking price. (1)
    Response: This action clearly would not be in the Department's best 
interests. At the time properties are available for direct purchase, 
the asking prices are based on very recent appraisals and the 
Department has no reason to believe those prices are not reflective of 
true market value. To accept offers below those prices would 
effectively increase the discount the Department is willing to provide 
and undermine the return to the mortgage insurance funds. If properties 
remain available at the time of offering to the general public, those 
buyers who previously could purchase direct then have the opportunity 
to bid competitively and may, in fact, submit offers below the asking 
price at that time.
    Comment: Homeless providers should be permitted to purchase only in 
nonrevitalization areas. (1)
    Response: An agency that is a homeless provider (and may have 
leased properties from the Department for that purpose) often may be 
the same nonprofit or government agency that can purchase on a direct 
basis. Such an agency has the right to purchase properties it has 
leased, regardless of their location. Further, the Department does not 
see a legitimate reason to restrict homeless providers only to 
nonrevitalization areas and believes that such action would be 
detrimental to the goal of expanding homeownership opportunities.

IV. Other Amendments

    As a result of an agreement with nonprofit organizations to place 
certain limits on the amount of required earnest money deposits, thus 
alleviating possible hardships on owner-occupant purchasers, the 
Department has determined that the amount of such a deposit on a 
property with a sales price of $50,000 or less shall be $500, except 
that for vacant lots the amount shall be 50 percent of the list price. 
For a property with a sales price greater than $50,000, the deposit 
shall be set by the Field Office in an amount not less than $500 or 
more than $2,000. This amendment is made in this final rule at 
Sec. 291.105(h)(1).

V. Other Matters

    Findings made under the National Environmental Policy Act, 
Executive Orders on Federalism and The Family, and the Regulatory 
Flexibility Act that were discussed in the preamble to the interim rule 
are not affected by any changes made in this final rule.
    This rule was listed as sequence number 1594 in the Department's 
Semiannual Agenda of Regulations published at 59 FR 20424, 20449 on 
April 25, 1994, under Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects

24 CFR Part 291

    Community facilities, Homeless, Surplus government property, Low 
and moderate income housing, Mortgages, Lead poisoning, Conflict of 
interests, Reporting and recordkeeping requirements.
    Accordingly, the interim rule amending 24 CFR parts 203 and 291 
published on October 20, 1993 at 58 FR 54244 through 54248 is adopted 
as final, with further amendments to part 291 to read as follows:

PART 291--DISPOSITION OF HUD-ACQUIRED SINGLE FAMILY PROPERTY

    1. The authority citation for part 291 continues to read as 
follows:

    Authority: 12 U.S.C. 1709 and 1715(b); 42 U.S.C. 1441, 1441a, 
and 3535(d).

    2. Section 291.5 is amended by removing the definition for ``Direct 
sale purchaser'', and revising the definitions of ``Owner-occupant 
purchaser'' and ``Revitalization area'', to read as follows:


Sec. 291.5  Definitions.

* * * * *
    Owner-occupant purchaser means a purchaser who intends to use the 
property as his or her principal residence; a State, governmental 
entity, tribe, or agency thereof; or a private nonprofit organization 
as defined in Sec. 291.405 of this part. For purposes of this part, a 
State means any of the several States, the District of Columbia, the 
Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, 
the Northern Mariana Islands, the Trust Territory of the Pacific 
Islands, and any other territory or possession of the United States. 
Governmental entities include those with general governmental powers 
(e.g., a city or county), as well as those with limited or special 
powers (e.g., public housing agencies).
* * * * *
    Revitalization area means a neighborhood that has a significant 
concentration of vacant properties, including properties needing 
extensive repairs that have been in HUD's inventory at least six 
months, or a longer period as determined appropriate by the Secretary; 
exhibits other characteristics of economic distress; and has been 
targeted by the locality for establishing affordable housing and 
providing adequate supportive services.
* * * * *
    3. In Sec. 291.100, paragraph (d)(2) and the last sentence of 
paragraph (h) are revised to read as follows:


Sec. 291.100  General policy.

    (d) * * *
    (2) In revitalization areas, HUD, in its sole discretion, may take 
back purchase money mortgages (PMMs) on property purchased by 
governmental entities or private nonprofit organizations who buy 
property for ultimate resale to owner-occupant purchasers with incomes 
at or below 115 percent of the area median income. When offered by HUD, 
PMMs will be available for 85 percent of the purchase price, at market 
rate interest, for a period not to exceed five years. Mortgagors must 
meet FHA mortgage credit standards.
* * * * *
    (h) Open listings. * * * Purchasers participating in the 
competitive sales program, except government entities and nonprofit 
organizations, must submit bids through a participating broker.
* * * * *
    4. In Sec. 291.105, paragraphs (a) and (h)(1) are revised, to read 
as follows:


Sec. 291.105  Competitive sales procedure.

    (a) General. (1) Properties are sold to the general public on a 
competitive bid basis through local real estate brokers except as 
provided in Sec. 291.100(h). If a property fails to generate an 
acceptable bid or offer during the bidding period, it will remain on 
the market for an extended listing period, as described in paragraph 
(f) of this section. If a property's price or terms are changed, it 
will again be subject to another competitive bidding period.
    (2) For properties being offered with mortgage insurance, priority 
will be given to owner-occupant purchasers, as defined in Sec. 291.5, 
for a period of up to 30 days, as determined by HUD. For all other 
properties (i.e., properties not offered with mortgage insurance), 
priority will be given to governmental entities and nonprofit 
organizations prior to other owner-occupant purchasers.
* * * * *
    (h) Earnest money deposits. (1) The amount of earnest money deposit 
required for a property with a sales price of $50,000 or less is $500, 
except that for vacant lots the amount is 50 percent of the list price. 
For a property with a sales price greater than $50,000, the amount of 
earnest money deposit required in the area is set by the Field Office, 
in an amount not less than $500 or more than $2,000. In determining the 
amount of earnest money deposits, a Field Office considers comparable 
practice in the locality, area real estate market conditions, the type 
of offers generally received, and the ability of the area's typical 
buyers to secure financing. Information on the amount of the required 
earnest money deposit is available from the Field Office or 
participating real estate brokers.
* * * * *
    5. Section 291.110 is amended by revising paragraph (a) and 
revising the phrase ``field office manager'' to read ``Field Office'' 
in paragraph (b)(1), to read as follows:


Sec. 291.110  Other sales procedures.

    (a) Direct sales of properties without mortgage insurance to 
governmental entities and private nonprofit organizations. (1) State 
and local governments, public agencies, and qualified private nonprofit 
organizations that have been preapproved to participate by HUD, 
according to standards determined by the Secretary, may purchase 
properties directly from HUD at a discount off the list price 
determined by the Secretary to be appropriate, but not less than 10 
percent, for use in HUD and local housing or homeless programs. The 
amount of the discount may vary, depending on the area, the type of 
sale, or the number of properties purchased and closed in a single 
transaction.
    (2)(i) Purchasers under paragraph (a)(1) of this section must 
designate geographical areas of interest, by ZIP code, to appropriate 
HUD Field Offices. Upon request, for those properties not eligible for 
mortgage insurance, and before they are publicly listed, Field Offices 
will notify governmental entities and nonprofit organizations in 
writing when eligible properties become available in the areas 
designated by them. Field Offices will coordinate the dissemination of 
the information to ensure that where more than one purchaser designates 
a specific area, those purchasers receive the list of properties at the 
same time, based on intervals agreed upon between HUD and the 
purchasers. Properties will be sold on a first come-first served basis.
    (ii) Purchasers under paragraph (a)(1) of this section must notify 
HUD of preliminary interest in specific properties within five days of 
the notification of available properties (where notification is by 
mail, the five days will begin to run five days after mailing). Those 
properties in which purchasers express an interest will be held off the 
market for a ten-day consideration and inspection period. Other 
properties on the list will continue to be processed for public sale. 
HUD may limit the number of properties held off the market for a 
purchaser at any one time, based upon the purchaser's financial 
capacity as determined by HUD and upon past performance in HUD 
programs. At the end of the ten-day consideration and inspection 
period, properties in which no governmental entity or nonprofit 
organization has expressed a specific intent to purchase will be 
offered for sale under the competitive bid process. Properties in which 
a governmental entity or nonprofit organization expressed an intent to 
purchase, during the ten-day period, will continue to be held off the 
market pending receipt of the sales contract. If a sales contract is 
not received within a time period of up to ten days, as determined by 
HUD, following expiration of the ten-day consideration and inspection 
period, and no other governmental entity or nonprofit organization has 
expressed an interest, then the property will be offered for sale under 
the competitive bid process.
    (3) In order to ensure that properties purchased at a discount are 
being utilized for expanding affordable housing opportunities, HUD may 
require, as appropriate, periodic, limited information regarding the 
purchase and resale of such properties, and certain restrictions on the 
resale of such properties.
* * * * *


Sec. 291.135  [Amended]

    6. Section 291.135 is amended by removing paragraph (d).
Nicolas P. Retsinas,
Assistant Secretary-Federal Housing Commissioner.
    Dated: July 28, 1994.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 94-23412 Filed 9-21-94; 8:45 am]
BILLING CODE 4210-27-P