[Federal Register Volume 61, Number 92 (Friday, May 10, 1996)]
[Proposed Rules]
[Pages 21918-21923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11649]
[[Page 21917]]
_______________________________________________________________________
Part VIII
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 206
Home Equity Conversion Mortgage Insurance Demonstration: Additional
Streamlining; Proposed Rule
Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed
Rules
[[Page 21918]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 206
[Docket No. FR-2958-P-04]
RIN 2502-AF32
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner; Home Equity Conversion Mortgage Insurance Demonstration:
Additional Streamlining
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would make changes to the Home Equity
Conversion Mortgage (HECM) Insurance Demonstration, including technical
and clarifying changes, to improve and streamline the program as a
supplement to the changes made through the interim rule, published on
August 16, 1995, and made final on December 21, 1995.
DATES: Comment Due Date: July 9, 1996.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, 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: Richard K. Manuel, Acting Director,
Single Family Development Division, Office of Insured Single Family
Housing, Room number 9272, Department of Housing and Urban Development,
451 Seventh Street, SW, Washington, DC 20410, telephone (202) 708-2700;
TTY (202) 708-4594. (These are not toll-free telephone numbers.)
SUPPLEMENTARY INFORMATION: The information collection requirements for
the Home Equity Conversion Mortgage Insurance Demonstration have been
approved by the Office of Management and Budget under the Paperwork
Reduction Act of 1995, and have been assigned OMB Control Number 2528-
0133. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection displays a valid control number. This rule does not contain
additional information collection requirements.
Background
The Home Equity Conversion Mortgage (HECM) Insurance Demonstration
was authorized by section 417 of the Housing and Community Development
Act of 1987 (42 U.S.C. 5301), which amended section 255 of the National
Housing Act (12 U.S.C. 1715z-20) to permit elderly homeowners to borrow
against the equity in their homes. The interim rule published on August
16, 1995, at 60 FR 42754, revised 24 CFR part 206 to include
improvements to the program that did not require prior public comment
before implementation. The interim rule was made final on December 21,
1995, at 60 FR 66476. This proposed rule reflects additional ideas for
improving the program regulations for which the Department desires
public comment prior to implementation. An explanation of the proposed
changes follows.
Proposed Changes to HECM Regulations
Sections 206.3 and 206.209
A definition of ``mortgage balance'' is proposed to be included
that would make HECMs ``closed end'' credit for purposes of the
regulations implementing the Truth in Lending Act (TILA) (15 U.S.C.
1601 et seq.). The rule would continue to permit prepayment by
mortgagors as mandated by statute, but prepayments (including insurance
or condemnation proceeds that have been applied to the debt) would be
excluded from the definition of mortgage balance for purposes of
calculating future loan advances, thereby prohibiting mortgagors from
re-borrowing funds previously prepaid. A recent amendment to
Sec. 206.21(c) deleted specific reference to the ``open end'' credit
TILA regulations at 12 CFR part 226 in anticipation of this change.
Currently, HECM funds may be prepaid and borrowed again. This fact
makes the mortgage ``open end'' credit or ``revolving'' credit under
the TILA. The TILA requires initial and periodic disclosures, in
addition to those disclosures required by the HECM statute. The TILA
disclosures have been difficult for mortgagees to produce for this type
of mortgage and have increased the paperwork at closing. Mortgage
lenders ordinarily only have experience with ``closed end'' credit
requirements. Additionally, at this point in the demonstration, few, if
any, mortgagors have utilized the option to re-borrow. HUD does not
regard the option as an important aspect of the demonstration.
The definitions of ``principal limit'' and ``expected average
mortgage interest rate'' in Sec. 206.3 also would be amended to require
that the principal limit grow at the mortgage interest rate plus the
monthly mortgage insurance premium (MIP) rate instead of the expected
average mortgage interest rate (expected rate) plus the monthly MIP
rate. The expected rate would be used only when needed to project the
principal limit for calculation of future payments for adjustable rate
mortgages because the actual mortgage interest rate cannot be
calculated in advance. HUD is particularly interested in receiving
public comment on this proposal.
Under the current regulation, the principal limit increases for all
purposes each month by one-twelfth of the expected rate plus the
monthly MIP rate. For fixed rate mortgages, the expected rate is the
same as the actual fixed interest rate that appears in the note. For
adjustable rate mortgages, the expected rate is fixed at closing as the
sum of the mortgagee's margin plus the weekly average yield for U.S.
Treasury Securities adjusted to a constant maturity of 10 years. In
contrast, the mortgage balance grows at the actual current interest
rate that is applied under the note and adjusted periodically. Because
two different interest rates are used to determine the principal limit
and the mortgage balance on adjustable rate mortgages, these sums grow
at different rates and the difference between them can become
unpredictable.
When the mortgage note rate is higher than the expected rate, the
mortgage balance increases at a faster pace than the principal limit.
In this case the maximum loan advance amount available under a HECM
line of credit is eroded by interest charged to the account balance,
leaving the mortgagor with less to borrow than he or she might have
anticipated. Monthly payments under a term or tenure payment option,
however, are guaranteed under the loan agreement regardless of this
interest rate risk.
When the note rate is lower than the expected rate, the mortgage
balance grows at a slower pace than the principal limit. This
discrepancy between the note rate and the expected rate creates
additional potentially-available credit. This situation has caused
servicing problems because mortgagors that have borrowed the full
principal limit under a line of credit may at a future date have
additional credit created from the difference in the interest rates.
[[Page 21919]]
HUD has considered several solutions to this interest rate risk
problem. One solution would be to terminate a mortgagor's right to
continue borrowing once his or her mortgage balance reached the
principal limit, even if at a later time the interest rate differential
caused the principal limit to exceed the mortgage balance. The
disadvantage of this solution is that it does not address the problem
of an increasing note rate resulting in an erosion of the principal
limit. An alternative solution would be to cap the note rate at the
expected rate. However, this solution does not address the problem
presented when the note rate is below the expected rate resulting in
excess credit, and is of questionable legality due to the statutory
provision providing for a note rate negotiated between the mortgagor
and mortgagee rather than one regulated by HUD. Another solution would
be to require that all line of credit payment plans must be established
together with a term or tenure monthly payment plan. Each payment plan
would carry a separate principal limit. All fees and charges would be
charged to the monthly payment plan balance. In this way, as long as no
line of credit draws were made, the line of credit would not be
effected by the interest rate fluctuations because the line of credit
principal limit would be separate from the monthly payments principal
limit. This solution only forestalls the problem. Once a draw is made
against the line of credit the same interest rate risk problem can
occur as under the current rule.
HUD does not propose these solutions because each one requires
additional regulatory restraint on the terms and conditions of the
HECM. Instead, HUD proposes to make a program change by altering the
definitions of ``expected average mortgage interest rate'' and
``principal limit.'' The expected rate would only be used to determine
future monthly payments. (Section 206.25(b)(1)(vi) provides for
continued use of the expected rate to calculate future estimated
interest that will accrue on scheduled monthly payments.) The monthly
calculation of growth to the principal limit would not involve the
expected rate but would instead be determined by using the mortgage
note rate plus the monthly MIP rate. In this way, both the principal
limit and the mortgage balance would grow at the same rate. This
solution would give mortgagors and mortgagees more certainty in knowing
what funds would be available to be drawn than the current system.
In low interest rate markets, mortgagors would not have the benefit
of an increase in available principal limit. In high interest rate
markets, mortgagors would not experience the erosion of lines of
credit. These variations in the available principal limit would be
replaced by a system with greater predictability. In the long run, the
principal limit is expected to be approximately the same as the current
rule because the expected rate under the current rule encompasses the
market's best estimate of future note rates. This rule change would be
effective only for mortgages which the mortgagee closed on or after the
effective date of the final rule.
Section 206.8.
A new Sec. 206.8 would be added to provide a first lien priority to
all debt secured by the HECM, including all direct payments to the
mortgagor and all other loan advances under the HECM for purposes such
as interest, taxes and special assessments, premiums for hazard or
mortgage insurance, servicing charges and costs of collection. Any
contrary State laws would be preempted. This preemption is proposed to
clarify the current uncertainty regarding the lien priority to be
accorded HECM loan advances in certain circumstances and to ensure that
all HECM debt will have a first lien priority. That priority is a basic
assumption behind the computer model used to determine the amount of
payments to the mortgagor. State law would still be applicable for
determining the authority of a mortgagee to make a HECM loan as
provided in Sec. 206.9(a) of the current HECM regulation.
In the absence of an applicable Federal statute or regulation, lien
priority would be determined under United States v. Kimbell Foods,
Inc., 440 U.S. 715 (1979) if the HECM had been assigned to HUD. In most
circumstances courts applying Kimbell Foods have determined that the
lien priority law of the State should be adopted as the Federal rule of
decision. State law would also apply while the HECM was still held by
the mortgagee as an insured mortgage.
State law is sometimes unclear regarding the appropriate priority
to be given to loan advances made many years after the original
mortgage was recorded when other liens have been filed in the interim.
To the extent State laws are clear, they differ, and some would have
the effect of subordinating the priority of HECM loan advances made
after certain events such as the filing of another lien that has been
brought to the attention of the HECM mortgagee. HUD or the mortgagee
could guard against loss of priority to some extent by stopping further
loan advances directly to the mortgagor (as permitted by the HECM loan
documents when needed to protect lien priority) but this will not
protect the lien priority of the mandatory loan advances that will
continue for interest, mortgage insurance premiums and servicing
charges. HUD or the mortgagee may find it necessary to accelerate the
loan and foreclose to prevent the continued growth of debt without a
first lien priority. Even without a foreclosure, the homeowner may have
to move if loan advances are stopped, because of inability to pay basic
homeowner expenses such as real estate taxes without further advances.
This result would conflict with the program goal of non-displacement of
an elderly homeowner that desires to continue living in his or her
home.
The proposed rule would serve as a Federal law that courts would
use to determine the lien priority of HECM loan advances. Kimbell Foods
would be inapplicable for a HECM assigned to HUD because that decision
guides courts only in the absence of a Federal law, and the regulation
would otherwise preempt state law that would be applied to an insured
HECM still held by a mortgagee. This use of a regulation to avoid any
application of Kimbell Foods is in accord with Chicago Title Ins. Co.
v. Sherred Village Associates, 708 F. 2d 804 (1st Cir. 1983), and
preemption by regulation of state law that would otherwise apply to
privately-held mortgages has been approved by the Supreme Court in
cases such as Fidelity Federal Savings and Loan Association v. De La
Cuesta, 458 U.S. 141 (1982) and United States v. Shimer, 367 U.S. 374
(1961).
The proposed priority lien regulation would assure that HECM loan
advances made in accordance with the loan agreement would not be
interrupted due to the application of State lien priority laws.
Reasonable arguments can be made that, even without this rule, Kimbell
Foods would not compel application of State lien priority laws to a
HECM held by HUD due to distinctive features of the HECM program, and
that State laws would not apply to a HECM held by a private mortgagee
if conflict with the program goal of non-displacement, as described
above, would occur. This proposed rule does not reject those arguments.
It recognizes the uncertainty of current law and proposes to replace
that uncertainty with a clear rule on which HUD, mortgagees and other
potential lienors can rely. Private creditors intending to rely on the
equity of the mortgagor in the home will be on clear notice that the
[[Page 21920]]
entire HECM debt will be superior to any other private lien. The
proposed priority lien regulation would have one exception to permit a
higher priority for state or local liens for taxes or special
assessments, to the extent provided by State or local law.
Section 206.21
Paragraph (b) of Sec. 206.21 would be amended to permit a mortgage
that provides for monthly adjustments to the interest rate to be
converted to one that provides for annual adjustments if the mortgage
is assigned to HUD by the mortgagee. This would enable HUD to reduce
greatly the servicing burden associated with ARMs that are assigned to
HUD. A similar change is proposed for Sec. 206.121(c) regarding the
second mortgage held by HUD. If the mortgagee had drafted the second
mortgage to provide for monthly adjustments HUD could convert it to
annual adjustments.
Section 206.25
Section 206.25(d) would be revised to permit the principal limit
amount set aside for a line of credit to increase at the same rate as
the full principal limit whether or not combined with a term or tenure
option with monthly payments. HUD has been informed that the current
regulation has been interpreted to permit this by some participants in
the HECM program, including the Federal National Mortgage Corporation
(FNMA). Although not necessarily in conformity with HUD's original
intentions behind Sec. 206.25(d), this approach to calculating the
principal limit for a line of credit has the advantage of simplicity as
compared to HUD's original intention, and does not result in increased
risk to the borrower or HUD. HUD is proposing a formal change in
regulations to permit FNMA and others to continue with a practice that
is compatible with the general design of the HECM program. Most of the
actual difference in results between the various approaches to
Sec. 206.25(d) would be eliminated as a result of the separate proposal
to calculate the principal limit using the actual mortgage interest
rate instead of the expected average mortgage interest rate; the
proposed change to Sec. 206.25(d) is a technical revision to eliminate
remaining perceived adverse effects of the current Sec. 206.25(d). A
conforming change would be made to Sec. 206.19(c) to avoid conflicting
descriptions of how line of credit payments are calculated.
Section 206.26
The specific dollar amount of $20 that mortgagees may charge when
payments are recalculated would be removed from Sec. 206.26(d), and the
Secretary would be given discretion to set a fee. The Secretary would
continue to set a maximum fee at $20, but would establish the amount in
Handbook 4235.1 subject to future reconsideration.
Section 206.27
Changes to Secs. 206.27(d), 206.117, and 206.121(c) are proposed to
be made to give the Secretary the option to eliminate the HUD-held
second mortgage. The current regulations require originating mortgagors
to execute a second HECM security instrument and note (second mortgage)
held by the Secretary. The second mortgage comes into effect only if a
mortgagee defaults in making payments and is unable or unwilling to
assign the mortgage to HUD. It assures that any funds advanced by HUD
are secured by a mortgage. (In the case of assignments, the Secretary
continues making payments to the mortgagor under the first mortgage and
the second mortgage is not utilized.) HUD now concludes that it is
inappropriate to bind itself by regulation to this particular approach
to protection of the Secretary's financial interests.
In practice, the second mortgage has proven to be cumbersome and
costly to mortgagors. First, in virtually all cases mortgagors are
required to pay recording fees per page of documents recorded. Two
mortgages double the recording fees. Second, mortgagees and mortgagors
have mistakenly believed that the second mortgage represents additional
mortgage debt and have been confused as to the purpose of the second
mortgage. Third, when the mortgage has been paid off, release of the
second mortgage has been time-consuming. The provisions in the legal
documents regarding the relationship between the debts secured by the
first and second mortgages if the second mortgage is used are complex,
untested and without close precedent and therefore could invite
litigation.
HUD's ultimate objective is to eliminate or reduce reliance on the
second mortgage as the means of protecting the mortgagor and HUD
against mortgagee defaults. The proposed changes would permit the
Secretary to do without the second mortgage when deemed prudent. HUD
does not expect to change its current practices, however, until it is
reasonably certain that it has a legal means of enforcing an assignment
of the first mortgage free and clear of any interests of other parties.
At such time as legal doubts are resolved, HUD anticipates that the
second mortgage requirement could be terminated without further
regulatory changes.1
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\1\ Complete abandonment of a second mortgage requirement might
not be prudent in the absence of a statutory change--which has not
been proposed to date by HUD--that would guarantee HUD the right to
assume first mortgages upon mortgagee default, similar to language
found in section 306(g)(1) of the National Housing Act (12 U.S.C.
1723)(g)(1)). Section 306(g)(1) provides that the Government
National Mortgage Association (GNMA) shall be subrogated fully to
the rights of a defaulted issuer when GNMA makes the payment of
principal and interest on securities guaranteed by GNMA. Section
306(g)(1) further provides that GNMA may provide by regulation or
contract with the issuer for the extinguishment, upon default by the
issuer, of any right, title or interest of the issuer in the assumed
mortgages (this provision also appears in GNMA regulations at 24 CFR
390.15(b)).
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Sections 206.27 and 206.35
Currently part 206 does not permit mortgagors to hold only a life
estate in the mortgaged property. At least one eligible mortgagor must
hold title in fee simple or through a long-term leasehold of a fee
simple interest. HUD is proposing amendment of sections 206.27(c)(1)
and 206.35 to permit mortgages to be insured and remain in force even
if no eligible mortgagor has any interest in the property greater than
a life estate. If a mortgagor holds only a life estate when the
mortgage is executed, all holders of any future interest in the
property (remainder or reversion) would also be required to execute the
mortgage to ensure that the mortgage was secured by a fee simple. A
holder of a future interest would not execute the note or loan
agreement and would not have the rights to loan proceeds of other
mortgagors. The proposed change would also permit a mortgagor who held
fee simple title when the mortgage was executed to subsequently convey
his or her interests in the property as long as a life estate is
retained.
Because the mortgage will in all cases be secured by a fee simple
or long-term leasehold interest in the property, mortgagees and HUD
should not be subject to any greater financial risk if the proposed
change is adopted. The proposed change would recognize that an elderly
homeowner may wish to convey future interests in his or her home as an
estate planning measure while retaining a life interest to ensure a
continued right of occupancy for the remaining lifetime. There is no
conflict between this approach to estate planning and the basic
objective of the HECM program--to provide elderly homeowners the
financial means to continue residing in their homes for the remainder
of their lifetimes. HUD has already accommodated other approaches to
estate planning by
[[Page 21921]]
permitting mortgagors to convey joint ownership of the mortgaged
property to other non-elderly, non-occupant parties and by permitting a
living trust to hold legal title to the home for benefit of the elderly
homeowner.
Section 206.45
A new paragraph (e) would be added to Sec. 206.45 to incorporate
the free assumability regulations at 24 CFR 203.41 and 234.66 which
were published in a final rule at 58 FR 42645 (August 11, 1993). Those
rules codify HUD's general policy that the property mortgaged under its
single family mortgage insurance programs must be freely marketable
except for a limited number of specific exceptions, primarily those
permissible for affordable housing purposes. While HUD does not have
the same concerns about restrictions on assumptions 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 association possesses a right of first refusal (unless
the condominium project received written approval from HUD prior to
September 10, 1993). HUD believes that there may be a substantial
number of 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 (60
FR 32630, June 23, 1995) 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 change 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.
Section 206.125
Paragraph (d) of Sec. 206.125 would be amended to apply HUD's State
by State time frames to define ``reasonable diligence'' as provided in
24 CFR 203.356.
Section 206.209
Section 206.209 would be revised to reflect the proposed policy
that pre-payments do not increase the amount of funds available to be
borrowed as discussed for Sec. 206.3. The regulation also would provide
that in the event the prepayment is made from insurance or condemnation
proceeds, the principal limit would decrease by the amount of proceeds
not applied to repair of the property. This will reflect the permanent
reduction in the value of the security that resulted from the
condemnation or unrepaired damage.
The prepayment requirements which permit the mortgagee to charge
interest if the prepayment is not made within the required time frames
would be eliminated. The current prepayment provision parallels the
prepayment procedures for Section 203(b) mortgages. The prepayment
regulation for Section 203(b) mortgages is necessary to assure that
prepayments are made in a timely fashion so that interest due to GNMA
security holders is available to the GNMA issuers. Since HECMs are not
securitized there is no need to restrict the time of prepayment.
Other Matters
Environmental Impact
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 implements section 102(2)(C) of the National Environmental Policy
Act of 1969 (NEPA). 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 the General Counsel,
Department of Housing and Urban Development Room 10276, 451 Seventh
Street, SW, Washington, DC 20410.
Impact on Small Entities
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this proposed rule would not have a
significant economic impact on a substantial number of small entities.
The proposed rule is limited to revision of the Home Equity Conversion
Mortgage Demonstration. Specifically, the requirements of the proposed
rule are directed to making the program more efficient for
participating mortgagees, mortgagors and the Department.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, has determined that Sec. 206.8 of the
proposed rule has federalism implications. Specifically, the rule
provides that State law on lien priority would be preempted if HECM
loan advances made by private mortgagees would not have a first lien
priority (subject only to liens for State or local taxes or special
assessments). (Preemption is not an issue for loan advances made by HUD
because Federal law rather than State law would apply under United
States v. Kimbell Foods, Inc., 440 U.S. 715 (1979).
The purpose of the proposed rule is to permit a mortgagee to be
able to continue to make loan advances in accordance with the loan
agreement (including advances for accruing interest and mortgage
insurance premiums) as long as the elderly homeowner/mortgagor desires
to continue to occupy his or her home, while still maintaining a first
lien priority for all advances. If State law was applied and resulted
in granting priority to some other lien created after the HECM was
recorded, the mortgagee would need to stop further payments to the
mortgagor. The mortgagee might also need to foreclose to stop the
continuing accrual of items such as interest and mortgage insurance
premium with a junior lien priority. Either result would conflict with
the HECM program goal of preventing displacement of the elderly
homeowner, either directly from foreclosure or indirectly because of
lack of funds available to the homeowner for the expenses of
homeownership.
This conflict itself might result in preemption of State law under
relevant Supreme Court opinions. The proposed rule would remove any
doubt and provide needed clarification for HUD, mortgagees, and other
creditors who may rely on the mortgagor's equity. HUD has concluded
that State law would ordinarily result in a first lien status for all
HECM loan advances, but is concerned that applicable law is not always
clear and that some situations might occur in which the application of
State law would leave the first lien status in doubt. The effect of the
proposed preemption is likely to be small but it is important to ensure
that the HECM program remains a first mortgage program as intended by
Congress.
HUD has concluded that it is not necessary to preempt laws that
would give priority to liens for unpaid State or local taxes or special
assessments. If the mortgagee pays them and later files an
[[Page 21922]]
insurance claim, HUD would reimburse the mortgagee for those amounts as
part of the insurance benefits. This distinguishes these liens from
other liens and there is therefore no need to object to a superior lien
position. This exception permitting superior liens for unpaid taxes and
special assessments means that the proposed rule would have no
substantial direct effects on States or their political subdivisions,
or the relationship between the Federal government and the States.
The Department believes that although the proposed rule might have
federalism implications, it is designed to achieve a legitimate Federal
purpose and is carefully crafted to limit its effects to those
necessary to achieve that end. In these circumstances, the Department
believes that the Order imposes no bar to implementation of the rule.
For these reasons, the General Counsel has determined that the rule's
federalism implications are not sufficiently significant to warrant
preparation of a Federalism Assessment under section 6(b) of the Order.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this proposed rule would
not have potential for significant impact on family formation,
maintenance, and general well-being, and, thus, is not subject to
review under the order. No significant change in existing HUD policies
or programs will result from promulgation of this rule, as those
policies and programs relate to family concerns.
List of Subjects in 24 CFR Part 206
Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, 24 CFR part 206 is proposed to be amended as follows:
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
1. The authority citation for part 206 continues to read as
follows:
Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).
2. Section 206.3 is amended by revising the first sentence of the
definition of ``expected average mortgage interest rate,'' by revising
the definition of ``principal limit,'' and by adding a new definition
of ``mortgage balance,'' to read as follows:
Sec. 206.3 Definitions.
* * * * *
Expected average mortgage interest rate means the mortgage interest
rate used to calculate future payments to the mortgagor and is
established when the mortgage interest rate is established. * * *
* * * * *
Mortgage balance means the total amount of accrued debt calculated
in accordance with the terms of the mortgage. For the purpose of
recalculating payments under Secs. 206.19(c), 206.25(b)(ii), 206.25(d)
and 206.26(c), the mortgage balance includes principal that has been
repaid, including insurance or condemnation proceeds that have been
applied to the debt, unless the mortgage was executed before [effective
date of final rule].
* * * * *
Principal limit means the maximum disbursement that could be
received in any month under a mortgage, assuming that no other
disbursements are made, taking into account the age of the youngest
mortgagor, the mortgage interest rate, and the maximum claim amount.
Mortgagors over the age of 95 will be treated as though they are 95 for
purposes of calculating the principal limit. The principal limit is
used to calculate payments to a mortgagor. It is calculated for the
first month that a mortgage could be outstanding using factors provided
by the Secretary. It increases each month thereafter at a rate equal to
one-twelfth of the mortgage interest rate in effect at that time, plus
one-twelfth of one-half percent per annum, unless the mortgage was
executed on or after [effective date of final rule]. If the mortgage
was executed before [effective date of final rule], the principal limit
increases at a rate equal to the expected average mortgage interest
rate plus one-twelfth of one-half percent per annum. The principal
limit may decrease because of insurance or condemnation proceeds
applied to the mortgage balance under Sec. 209.209(b) of this chapter.
* * * * *
3. Subpart A is amended by adding a new Sec. 206.8, to read as
follows:
Sec. 206.8 Preemption.
(a) Lien priority. The full amount secured by the mortgage shall
have the same priority over any other liens on the property as if the
full amount had been disbursed on the date the initial disbursement was
made, regardless of the actual date of any disbursement. The amount
secured by the mortgage shall include all direct payments by the
mortgagee to the mortgagor and all other loan advances permitted by the
mortgage for any purpose including loan advances for interest, taxes
and special assessments, premiums for hazard or mortgage insurance,
servicing charges and costs of collection, regardless of when the
payments or loan advances were made. The priority provided by this
section shall apply notwithstanding any State constitution, law or
regulation.
(b) Second mortgage. If the Secretary holds a second mortgage, it
shall have a priority subordinate only to the first mortgage (and any
senior liens permitted by paragraph (a) of this section).
4. Section 206.19 is amended to revise paragraph (c), to read as
follows:
Sec. 206.19 Payment options.
* * * * *
(c) Line of credit payment option. Under the line of credit payment
option, payments are made by the mortgagee to the mortgagor at times
and in amounts determined by the mortgagor as long as the amounts do
not exceed the payment amounts permitted by Sec. 206.25(d).
* * * * *
5. Section 206.21 is amended to add paragraph (b)(3), to read as
follows:
Sec. 206.21 Interest rate.
* * * * *
(b) * * *
(3) A mortgage providing for monthly adjustments to the interest
rate may be converted by the Secretary to one providing for annual
adjustments at any time after the mortgage is assigned to the Secretary
by providing notice to the mortgagor.
* * * * *
6. Section 206.25 is amended to revise paragraph (d), to read as
follows:
Sec. 206.25 Calculation of payments.
* * * * *
(d) Line of credit separately or with monthly payments. If the
mortgagor has a line of credit, separately or combined with the term or
tenure payment option, the principal limit is divided into an amount
set aside for servicing charges under Sec. 206.19(d), an amount equal
to the line of credit (including any portion of the principal limit set
aside for repairs or property charges under Sec. 206.19(d)), and the
remaining amount of the principal limit (if any). The line of credit
amount increases at the same rate as the total principal limit
increases under Sec. 206.3. A payment under the line of credit may not
exceed the difference between the current amount of the principal limit
for the line of credit and the portion of the mortgage balance,
including accrued interest and MIP,
[[Page 21923]]
attributable to draws on the line of credit.
* * * * *
7. Section 206.26 is amended to revise paragraph (d), to read as
follows:
Sec. 206.26 Change in payment option.
* * * * *
(d) Fee for change in payment. The mortgagee may charge a fee, not
to exceed an amount determined by the Secretary, whenever payments are
recalculated.
* * * * *
8. Section 206.27 is amended to revise paragraphs (c)(1) and (d),
to read as follows:
Sec. 206.27 Mortgage provisions.
* * * * *
(c) * * *
(1) The mortgage shall state that the mortgage balance will be due
and payable in full if
(i) A mortgagor dies and the property is not the principal
residence of at least one surviving mortgagor, or
(ii) A mortgagor conveys all or his or her title in the property
and no other mortgagor retains title to the property. For purposes of
the preceding sentence, a mortgagor retains title in the property if
the mortgagor continues to hold title to any part of the property in
fee simple, as a leasehold interest as set forth in Sec. 206.45(a), or
as a life estate.
* * * * *
(d) Second mortgage to Secretary. Unless otherwise provided by the
Secretary, a second mortgage to secure any payments by the Secretary as
provided in Sec. 206.121(c) must be given to the Secretary before a
Mortgage Insurance Certificate is issued for the mortgage.
* * * * *
9. Section 206.35 is amended by adding a new sentence at the end,
to read as follows:
Sec. 206.35 Title held by mortgagor..
* * * If one or more mortgagors hold a life estate in the property,
for purposes of this section only the term ``mortgagor'' shall include
each holder of a future interest in the property (remainder or
reversion) who has executed the mortgage.
10. Section 206.45 is amended to add a new paragraph (e), to read
as follows:
Sec. 206.45 Eligible properties.
* * * * *
(e) Freely marketable. The property must be freely marketable.
Conveyance of the property may only be restricted as permitted under 24
CFR 203.41 or 234.66 and this part.
11. Section 206.117 is revised to read as follows:
Sec. 206.117 General.
The Secretary is required by statute to take any action necessary
to provide a mortgagor with funds to which the mortgagor is entitled
under the mortgage and which the mortgagor does not receive because of
the default of the mortgagee. The Secretary may hold a second mortgage
to secure repayment by the mortgagor under Sec. 206.27(d) or may accept
assignment of the first mortgage.
12. Section 206.121 is amended by revising the first two sentences
of paragraph (c), to read as follows:
Sec. 206.121 Secretary authorized to make payments.
* * * * *
(c) Second mortgage. If the contract of insurance is terminated as
provided in Sec. 206.133(c), all payments to the mortgagor by the
Secretary will be secured by the second mortgage, if any. Payments will
be due and payable in the same manner as under the insured first
mortgage, except that if the first mortgage provided for monthly
adjustments to the interest rate under Sec. 206.21(b)(2) then the
Secretary may convert the second mortgage to an annually adjustable
interest rate under Sec. 206.21(b)(1) at any time by providing notice
to the mortgagor. * * *
13. Section 206.125 is amended to revise paragraph (d)(3), to read
as follows:
Sec. 206.125 Acquisition and sale of the property.
* * * * *
(d) * * *
(3) The mortgagee must give written notice to the Secretary within
30 days after the initiation of foreclosure proceedings, and must
exercise reasonable diligence in prosecuting the foreclosure
proceedings to completion and in acquiring title to and possession of
the property. A time frame that is determined by the Secretary to
constitute ``reasonable diligence'' for each State is made available to
mortgagees.
* * * * *
14. Section 206.209 is revised to read as follows:
Sec. 206.209 Prepayment.
(a) No charge or penalty. The mortgagor may prepay a mortgage in
full or in part without charge or penalty at any time, regardless of
any limitations on prepayment stated in a mortgage. Amounts prepaid are
not available to be re-borrowed, unless the mortgage was executed
before [effective date of final rule].
(b) Insurance and condemnation proceeds. If insurance or
condemnation proceeds are paid to the mortgagee, the principal limit
and the mortgage balance shall be reduced by the amount of the proceeds
not applied to restoration or repair of the damaged property.
Dated: April 12, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-11649 Filed 5-9-96; 8:45 am]
BILLING CODE 4210-27-P