[Federal Register Volume 60, Number 216 (Wednesday, November 8, 1995)]
[Rules and Regulations]
[Pages 56498-56501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27430]




[[Page 56497]]

_______________________________________________________________________

Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 235



Refinancing Mortgages Under Section 235(r) of the National Housing Act; 
Amendment; Final Rule

  Federal Register / Vol. 60, No. 216 / Wednesday, November 8, 1995 / 
Rules and Regulations   

[[Page 56498]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner

24 CFR Part 235

[Docket No. FR-3927-F-01]
RIN 2502-AG52


Refinancing Mortgages Under Section 235(r) of the National 
Housing Act; Amendment

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rule amends the regulations for refinancing mortgages 
under section 235(r) of the National Housing Act. Since the enactment 
of this program in 1988, mortgagees have not expressed an interest in 
participating in this program. Therefore, HUD seeks to enhance the 
program by providing for the payment by HUD, rather than by the 
mortgagee, of the incentive to the mortgagors and of specific 
refinancing costs, and by limiting the origination of these loans to 
the number of approved mortgagees that would make the program most 
attractive. This rule also eliminates obsolete regulations within 24 
CFR part 235.

EFFECTIVE DATE: December 8, 1995.

FOR FURTHER INFORMATION CONTACT: Robert E. Falkenstein, Jr., Office of 
Insured Single Family, Department of Housing and Urban Development, 
room 9278, 451 Seventh Street SW., Washington, DC 20410; Telephone 
number (202) 708-0614, ext. 2214; TDD (202) 708-4594. (These are not 
toll free numbers.)

SUPPLEMENTARY INFORMATION:

I. Background

    Congress added section 235 to the National Housing Act (12 U.S.C. 
1715z) (the Act) in 1968. This provision authorized the Secretary to 
insure mortgages so that lower income families could acquire housing. 
Section 235 also authorized the Secretary to assist the mortgagor by 
contracting with the mortgagee to make a portion of the mortgage 
payments on behalf of the mortgagor. Many of the mortgages insured 
under section 235, which are still outstanding, were made during the 
high interest rate years of 1980, 1981, and 1982. HUD would be able to 
save substantial amounts of assistance payments if the mortgages were 
refinanced at the current lower interest rates. Congress enacted 
section 235(r) of the Act in 1988 so that mortgages insured and 
assisted under section 235 of the National Housing Act could be 
refinanced at a reduced interest rate.

A. HUD's Payment of Mortgagors' Incentives and Refinancing Costs

    Although HUD published regulations in 1991 1 and 1992 2 
to make the 235(r) program attractive to mortgagees and mortgagors, no 
mortgages have been made nor insured under the program. However, HUD 
published those regulations on the basis that the mortgagee would have 
to pay the incentive payment to the mortgagor as well as the 
refinancing costs, and then recoup these costs through a premium 
interest rate. Although section 235(r) authorized the Secretary to make 
such payments, Congress did not appropriate funds for the payments 
until it passed the Departments of Veterans Affairs and Housing and 
Urban Development, and Independent Agencies Appropriations Act, 1995 
(Pub. L. 103-327, approved September 28, 1994).

    \1\ 56 FR 27622; June 14, 1991.
    \2\ 57 FR 62452; December 30, 1992.
---------------------------------------------------------------------------

    In light of the appropriation, HUD can now amend the 235(r) 
regulations to provide for the payment of the incentive and refinancing 
costs by HUD rather than the mortgagee. The mortgagee will not have to 
recoup any such costs through the maximum interest rate, which will be 
set by the Secretary. The Secretary has established the maximum rate by 
reference to the daily Government National Mortgage Association (GNMA) 
coupon quote as shown on a financial news wire service (such as 
Telerate), which is described below, plus a margin to be determined by 
the Secretary.

B. Limiting Origination to the Efficient Number of Mortgagees

    HUD realized that in order to participate in the 235(r) program, 
most mortgagees would have to create a mechanism to provide for 
refinancing these loans. The expense of creating the mechanism to 
refinance a small universe of mortgages may have discouraged 
participation in this program. However, HUD considered that the 
mortgagee's expenses in preparing for the program would be most 
efficiently offset by the mortgagee's fees if participation was limited 
to one mortgagee. Therefore, HUD prepared and advertised a Request for 
Proposal (RFP) to contract with a single mortgagee that was approved by 
the Federal Housing Administration (FHA). The contract would have 
provided for the successful mortgagee to handle the disbursement of the 
funds that HUD is authorized to pay for mortgagor incentives and the 
refinancing costs, notify the mortgagors of the opportunity to 
refinance, and originate all the mortgages. However, HUD received no 
applications under the RFP.
    HUD desires to make this program as attractive as possible to 
encourage mortgagees to make these mortgages, which will in turn save 
HUD subsidy funds. HUD is currently trying to ascertain the source of 
the lack of interest in the program and the contract that HUD sought to 
award. Therefore, the Secretary will decide after the publication of 
these amendments whether the program would be enhanced by limiting it 
to less than all HUD-approved mortgagees. The Secretary could then 
determine if it would be practical to publish another RFP in an attempt 
to obtain one or more contractors to handle the entire program for HUD.
    Accordingly, this rule amends the interest rate provisions, 
formerly in Sec. 235.1202(b)(3), to provide that the interest rate on 
these loans shall be negotiated between the parties. The interest rate 
shall not exceed the GNMA coupon rate, which is based on the closing 
price for three-month forward delivery contracts, closest to par but 
not exceeding par, on the date the Direct Endorsement mortgagee's 
underwriter executes the Mortgage Credit Analysis Worksheet, form HUD-
92900 WS, or the date of the closing of the mortgage, whichever rate is 
higher, plus a margin to be determined by the Secretary. The Secretary 
will also pay the mortgagee a discount, as part of the refinancing 
costs. The maximum discount points that HUD will pay on these mortgages 
is to be determined by the Secretary. The mortgagors shall not be 
charged discounts. These provisions are located in Sec. 235.1218(c) of 
this rule. As a result of this rule, HUD will no longer publish a 
notice in the Federal Register announcing the interest rate for the 
235(r) mortgages or the margin.
    This rule also amends the refinancing costs provisions, formerly in 
Sec. 235.1202(b)(4), to eliminate the payment of the financing costs by 
the mortgagee, and to provide that the Secretary will pay for such 
costs, to be disbursed by the mortgagee on behalf of the Secretary. 
These provisions are located in Sec. 235.1218(d) of this rule.
    This rule amends the eligible mortgagees provision, formerly in 
Sec. 235.1202(b)(5), to allow the Secretary to limit participation in 
the program to 

[[Page 56499]]
a specified number of mortgagees, depending upon the amount of interest 
generated by these amendments. This provision is located in 
Sec. 235.1218(e) of this rule.
    This rule also makes other miscellaneous amendments to subpart H of 
part 235, to conform all the regulations with the changes in the 
program mentioned above.

II. Regulatory Reinvention

    Consistent with Executive Order 12866 and President Clinton's 
memorandum of March 4, 1995 to all Federal Departments and Agencies on 
regulatory reinvention, HUD has reviewed all its regulations to 
determine whether certain regulations can be eliminated, streamlined, 
or consolidated with other regulations. With this review, HUD has 
determined that while the 235(r) program is active, HUD can eliminate 
other portions of 24 CFR part 235 that are obsolete.
    First, since HUD is no longer insuring new mortgages under section 
235 of the National Housing Act, this rule eliminates all of the 
eligibility provisions in subpart A except those required for the 
235(r) program. The provisions required for the 235(r) program will now 
be located in subpart H. HUD will maintain a ``savings'' clause in 
subpart A, which will provide that the regulations in the subpart in 
effect before the effective date of this rule will continue to apply to 
any outstanding mortgages.
    Second, subparts D, E, and F implemented the Rehabilitation Sales 
Projects Program authorized by section 235(j) of the National Housing 
Act. HUD insured such mortgages in the 1970s, but few of these 
mortgages remain outstanding. This rule will eliminate these subparts 
except for a ``savings'' clause.
    Therefore, this final rule will result in the elimination of 
approximately 14 pages of obsolete regulations.

III. Justification for Final Rulemaking

    HUD generally publishes a rule for public comment before issuing a 
rule for effect, in accordance with its regulations on rulemaking in 24 
CFR part 10. However, part 10 provides for exceptions from that general 
rule when 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, 
in that prior public procedure is unnecessary.
    Section 235(r)(7) of the National Housing Act provides that this 
program shall be implemented by a notice published in the Federal 
Register. However, since implementation of the program has required 
changes to codified regulations, it has been necessary for HUD to 
implement this program through rulemaking. The amendments described 
above would not impose a regulatory burden on the public, but instead 
would relieve a financial burden on the parties to these mortgages. 
Therefore, HUD finds that there is good cause for final rulemaking in 
this case, and that it is unnecessary to solicit prior public comment.

IV. Other Matters

A. National Environmental Policy Act

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The 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, 451 Seventh Street SW, Room 10276, 
Washington, DC 20410.

B. Executive Order 12286

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review, issued by the 
President on September 30, 1993. Any changes made in this rule 
subsequent to its submission to OMB are identified in the docket file, 
which is available for public inspection as provided under the section 
of this preamble entitled ``National Environmental Policy Act.''

C. Regulatory Flexibility Act

    The Secretary, in approving this rule for publication, has 
certified, in accordance with the Regulatory Flexibility Act (5 U.S.C. 
605(b)) that the rule does not have a significant economic impact on a 
substantial number of small entities. If the rule affects small 
entities at all, the impact will be positive, as the rule is amending a 
HUD-insured mortgage program in an effort to make it more acceptable in 
the financial market.

D. Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this rule will not have substantial direct effects on 
States or their political subdivisions, or the relationship between the 
Federal government and the States, or on the distribution of power and 
responsibilities among the various levels of government. As a result, 
the rule is not subject to review under the Order.

E. 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. The rule involves the refinancing of mortgages 
insured under section 235 by mortgages to be insured under section 
235(r). The purpose of the refinancing is to lower the interest rate on 
the mortgages so that the assistance payments being made by HUD will be 
reduced, thus saving HUD large cash outlays. The potential effect on 
families would be beneficial in that they would have a potential 
savings with respect to repayment of assistance payments to HUD and 
would also receive an incentive payment to refinance. Therefore, no 
further review under the Order is necessary.

List of Subjects in 24 CFR Part 235

    Condominiums, Cooperatives, Grant programs--housing and community 
development, Low and moderate income housing, Mortgage insurance, 
Reporting and recordkeeping requirements.

    Accordingly, 24 CFR part 235 is amended as follows:

PART 235--MORTGAGE INSURANCE AND ASSISTANCE PAYMENTS FOR HOME 
OWNERSHIP AND PROJECT REHABILITATION

    1. The authority citation for 24 CFR part 235 is revised to read as 
follows:

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


Secs. 235.1202, 235.1204, 235.1206, 235.1308, 235.1210, 235.1212, 
235.1314, 235.1216, 235.1218, 235.1220, and 235.1222 [Redesignated as 
235.1218, 235.1220, 235.1222, 235.1224, 235.1266, 235.1228, 235.1230, 
235.1232, 235.1234, 235.1236, and 235.1238].

    2. Sections 235.1202, 235.1204, 235.1206, 235.1208, 235.1210, 
235.1212, 235.1214, 235.1216, 235.1218, 235.1220, and 235.1222 are 
redesignated as Secs. 235.1218, 235.1220, 235.1222, 235.1224, 235.1226, 
235.1228, 235.1230, 235.1232, 235.1234, 235.1236, and 235.1238, 
respectively.


Sec. 235.1  [Redesignated as 235.1202]

    3. Section 235.1 is redesignated as Sec. 235.1202, and it is 
amended by 

[[Page 56500]]
revising the introductory text of paragraph (a) to read as follows:


Sec. 235.1202  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 apply to 
mortgages insured under section 235(r) of the National Housing Act, 
except the following provisions:
* * * * *
    3. A new Sec. 235.1 is added to subpart A to read as follows:


Sec. 235.1  Applicability of regulations.

    The regulations regarding eligibility requirements for homes for 
lower income families in force before December 8, 1995, will continue 
to govern the rights and obligations of mortgagors, mortgagees, and the 
Department of Housing and Urban Development with respect to loans 
insured under section 235(i) of the National Housing Act.


Sec. 235.2  [Removed]

    4. Section 235.2 is removed.


Sec. 235.3  [Redesignated as 235.1204]

    5. Section 235.3 is redesignated as Sec. 235.1204.


Sec. 235.3  [Redesignated as 235.1204]

    6. Section 235.5 is redesignated as Sec. 235.1206.


Sec. 235.9  [Removed]

    7. Section 235.9 is removed.


Sec. 235.10  [Redesignated as 235.1208 and amended]

    8. Section 235.10 is redesignated as Sec. 235.1208, and is amended 
by removing paragraphs (a) and (b), by redesignating paragraphs (c), 
(d), and (e) as paragraphs (a), (b), and (c), respectively, and by 
removing the parenthetical phrase at the end of paragraph (c).


Sec. 235.11  [Removed]

    9. Section 235.11 is removed.


Sec. 235.12  [Redesignated as 235.1210]

    10. Section 235.12 is redesignated as Sec. 235.1210.


Secs. 235.13, 235.15, 235.16, 235.18, and 235.20  [Removed]

    11. Sections 235.13, 235.15, 235.16, 235.18, and 235.20 are 
removed.


Sec. 235.22  [Redesignated as 235.1212]

    12. Section 235.22 is redesignated as Sec. 235.1212.


Secs. 235.25, 235.30, 235.31, and 235.32  [Removed]

    13. Sections 235.25, 235.30, 235.31, and 235.32 are removed.


Sec. 235.33  [Redesignated as 235.1214]

    14. Section 235.33 is redesignated as Sec. 235.1214.


Secs. 235.35, 235.37, 235.38, and 235.39  [Removed]

    15. Sections 235.35, 235.37, 235.38, and 235.39 are removed.


Sec. 235.40  [Redesignated as Sec. 235.1216]

    16. Section 235.40 is redesignated as Sec. 235.1216.


Sec. 235.45  [Removed]

    17. Section 235.45 is removed.
    18. Subpart D is revised to read as follows:

Subpart D--Rehabilitation Sales Projects


Sec. 235.501  Applicability of regulations.

    The regulations regarding eligibility requirements, contract rights 
and obligations, and assistance payments for rehabilitation sales 
projects in force before December 8, 1995, will continue to govern the 
rights and obligations of mortgagors, mortgagees, and the Department of 
Housing and Urban Development with respect to loans insured under 
section 235(j) of the National Housing Act.

Subparts E and F--[Removed]

    19. Subparts E and F are removed.


Sec. 235.1200  [Amended]

    20. Section 235.1200 is amended by removing the second sentence.
    21. Section 235.1218 is revised to read as follows:


Sec. 235.1218  Additional eligibility requirements.

    (a) Mortgage amount. It must be in an amount not exceeding the 
lesser of:
    (1) The unpaid principal balance due on the mortgage being 
refinanced, including any advances properly made by the mortgagee under 
the terms of the mortgage and any current interest due and delinquent 
interest not to exceed two months; and
    (2) The original principal amount of the mortgage being refinanced.
    (b) Maturity date. It must have a maturity not to exceed the 
remaining term of the section 235 mortgage being refinanced. In the 
event that the remaining term is measured in years and months, the 
terms for the refinancing mortgage shall be rounded down to the next 
whole year.
    (c) Interest rate. (1) The 235(r) interest rate is the rate 
negotiated between the parties. Such rate shall not exceed the GNMA 
coupon rate plus a margin to be determined by the Secretary. The GNMA 
coupon rate is based on the closing price for three-month forward 
delivery contracts closest to par but not exceeding par on one of the 
following dates, whichever rate is higher:
    (i) The date the Direct Endorsement mortgagee's underwriter signs 
the Mortgage Credit Analysis Worksheet (form HUD-92900 WS); or
    (ii) The date the mortgage is closed.
    (2) The Secretary will pay the mortgagee a discount as part of the 
refinancing costs. The maximum discount points will be determined by 
the Secretary.
    (3) For a mortgage to be insurable under this subpart, the interest 
rate on the mortgage must be less than the interest rate shown on the 
mortgage being refinanced. The Secretary shall determine how much less 
the interest rate on the mortgage shall be in order for it to be 
insured.
    (d) Mortgagors' Incentive and Refinancing Costs. The incentive to 
the mortgagors and the refinancing costs that the Secretary will pay 
for mortgages insured under this subpart are as follows:
    (1) An amount determined by the Secretary to be an incentive to the 
mortgagor to refinance a mortgage insured under section 235; and
    (2) Amounts as determined by the Secretary for discounts, loan 
origination fees, closing costs, and other costs incurred in connection 
with the refinancing.
    (e) Eligible mortgagees. The Secretary shall determine whether this 
program will be open to all approved Direct Endorsement mortgagees, or 
only to those approved Direct Endorsement mortgagees that meet certain 
specified requirements. The Secretary may limit the program to a 
designated number of Direct Endorsement approved mortgagees if such a 
limitation will facilitate the most expeditious handling of these 
refinancing mortgages.
    (f) Eligible mortgagor. (1) It must be executed by a mortgagor who 
is eligible for, and receiving, assistance payments with respect to the 
mortgage being refinanced and from whom a recertification was obtained 
within the preceding twelve months prior to the application for the 
235(r) mortgage, or a new recertification was required prior to the 
execution of the mortgage credit worksheet by the direct endorsement 
lender, or the firm commitment was issued by HUD.
    (2) The mortgagor must be an occupant of the property securing the 
mortgage. 

[[Page 56501]]

    (3) The mortgagor has not received payments for the costs of 
refinancing or the mortgagor's incentive, nor have such payments been 
made on his behalf, as described in paragraph (d) of this section, for 
a period of 60 months from the date of the first payment of principal 
and interest on the mortgage to be refinanced; provided, however, that 
if the mortgagor pays its own cost to refinance, then this prohibition 
will not apply.
    (4) The mortgagor is eligible to continue to receive assistance in 
connection with the 235(r) mortgage, or the mortgagee has executed a 
HUD Notice of Suspension form that suspends the assistance payment 
contract from the date of disbursement of the mortgage loan.
    (5) The mortgagor has agreed to recertify, on a form prescribed by 
the Secretary, as to occupancy, employment, family composition and 
income in accordance with 24 CFR 235.350.
    (6) If the property is subject to a recapture mortgage securing the 
payment to the Secretary of assistance payments made on behalf of the 
mortgagor, the mortgagor must agree to modify and subordinate such 
mortgage to the mortgage to be insured under section 235(r) in 
accordance with instructions of the Secretary.
    (7) If the mortgage submitted for insurance requires an increase in 
the mortgagor's portion of the monthly payments due under the mortgage 
by more than $50.00 over the amount the mortgagor was paying on the 
mortgage being refinanced, then a mortgage credit analysis must be 
performed on the mortgagor to establish that his income is or will be 
adequate to meet his portion of the periodic payment due under the new 
mortgage and that the mortgagor has a general credit standing 
satisfactory to the Secretary as required by 24 CFR 203.34.
    (8) Cooperative members, who are receiving assistance payments, 
which in all cases are based on the cooperative member's proportionate 
share of the obligation under the project mortgage, are not eligible 
for section 235(r) mortgages.
    (g) Monthly Payments. The mortgage must have monthly principal and 
interest payments at the 235(r) interest rate that are less than the 
monthly payments of principal and interest on the mortgage being 
refinanced.


Sec. 235.1220  [Amended]

    22. Section 235.1220 is amended by revising the introductory text 
of paragraph (c) to read as follows:


Sec. 235.1220  Processing section 235(r) mortgages under the direct 
endorsement program.

* * * * *
    (c) Authority to sign. The mortgagees that have the authority to 
originate and close mortgages in accordance with Sec. 235.1218(e) shall 
have the authority to sign for and on behalf of the Secretary, in 
accordance with procedures established by the Secretary, without 
further specific approval, the following documents:
* * * * *
    Dated: September 1, 1995.
James E. Schoenberger,
Associate General Deputy Assistant Secretary for Housing-Federal 
Housing Commissioner.
[FR Doc. 95-27430 Filed 11-7-95; 8:45 am]
BILLING CODE 4210-27-P