[Federal Register Volume 61, Number 104 (Wednesday, May 29, 1996)]
[Rules and Regulations]
[Pages 26982-26984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13335]
[[Page 26981]]
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Part III
Department of Housing and Urban Development
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24 CFR Parts 206 and 234
Condominium Units in Non-FHA Approved Projects; Mortgage Insurance;
Final Rule
Federal Register / Vol. 61, No. 104 / Wednesday, May 29, 1996 / Rules
and Regulations
[[Page 26982]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 206 and 234
[Docket No. FR-3655-F-02]
RIN 2502-AG23
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner; Mortgage Insurance on Condominium Units in Non-FHA
Approved Projects
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, (HUD).
ACTION: Final rule.
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SUMMARY: This rule adds provisions to the regulations governing Federal
Housing Administration (FHA) mortgage insurance on condominium units to
permit insurance of mortgages on individual units in condominium
projects that have not received FHA approval in advance. These ``spot
loans'' will be approved under less stringent requirements than the
existing requirements for mortgage insurance for condominiums, but
mortgages on these units are required to satisfy standards that assure
that the risk involved for FHA is reasonable. The final rule does make
one change from the proposed rule in response to public comment--to
increase, for small projects, the percentage of units that may be
approved for FHA mortgage insurance.
EFFECTIVE DATE: June 28, 1996.
FOR FURTHER INFORMATION CONTACT: Richard Manuel, Director, Single
Family Development Division, Office of Insured Single Family Housing,
Department of Housing and Urban Development, 451 Seventh Street, SW,
Washington, D.C. 20410. He may be reached at (202) 708-2700 (not a
toll-free number). For hearing- and speech-impaired persons, this
number may be accessed via text telephone by dialing the Federal
Information Relay Service at 1-800-877-9339.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Statement
The information collection requirements contained in Sec. 234.26(i)
of this rule were reviewed and approved by the Office of Management and
Budget under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520)
and assigned OMB approval number 2502-0513. 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.
I. Response to Public Comments
On June 23, 1995, HUD published a proposed rule to revise the
regulations concerning eligibility of mortgages for insurance under the
Home Equity Conversion Mortgage Insurance program (24 CFR part 206) or
under the Condominium Ownership Mortgage Insurance program (24 CFR part
234). During the comment period, which ended August 22, 1995, HUD
received 7 public comments from lending institutions and individuals.
Three of the public comments favored the rule, while the remaining
comments focused on difficulties with the rule. The only change being
made in the rule as a result of consideration of these public comments
is to increase the percentage of units on which ``spot loans'' are
permitted from 10 percent to 20 percent of the units in a project of 30
or fewer units.
General comments
Several commenters stated that the rule would permit elderly
homeowners to take advantage of the Home Equity Conversion Mortgage
program more easily, since they would not have to make public to other
unit owners in the condominium that they were seeking additional income
from this source. Similarly, homeowners would be able to use the
refinancing program that permits cash out to the buyer in a project not
currently eligible for FHA mortgage insurance. The availability of this
additional cash to condominium owners will increase their ability to
keep up with growing costs for such basic needs as increasing
condominium association fees, health care costs, or other essential
services.
One commenter praised the reduction in paperwork, noting that the
Federal National Mortgage Association (``Fannie Mae'') and the Federal
Home Loan Mortgage Corporation (``Freddie Mac'') streamlined their
project approval processes in the past decade, with each one using a
procedure very similar to the one proposed in this rule for one class
of mortgage (Fannie Mae Type A condominium and Freddie Mac Class III
condominium).
A commenter also praised this effort as contributing towards
stabilizing the condominium resale market.
Specific Comments
Ten Percent Limit on Participation in a Project
1. Comment: There is no way now to track how many units in a
particular project have received the benefit of FHA mortgage insurance.
Even though project approval requests could be added to HUD's existing
CHUMS system at the time of project approval, spot loans would be
difficult to track. This problem is complicated by the multitude of
direct endorsement lenders.
Response: Since the Department currently is without the technical
or staffing capability to track the exact number of FHA-insured
mortgages in a condominium project, mortgagees will be responsible for
assuring that the condominium project meets all the streamlined
approval requirements. These streamlined requirements are similar to
Fannie Mae's requirements for approving ``Type A condominiums,'' found
in Part VIII, Chapter 2, Sec. 201 of its Selling Guide. To the extent
that the Department has information that can assist in ensuring
compliance with the new FHA requirements, it will provide mortgagees
with that information.
The rule requires lenders to monitor all of the requirements,
including the limit on FHA spot loans in a project of no more than ten
percent of the units and certifying to this effect. The Department
recognizes that there is some potential for exceeding the prescribed
limit, either accidentally or intentionally. The local HUD offices or
the Regional Processing Centers will be conducting random reviews of
these mortgage loans. Mortgage lenders demonstrating a pattern of abuse
will be subject to sanctions.
The Department relies primarily on this limitation on the number of
loans in a project to minimize risk of loss. As an additional
safeguard, however, risk of loss also is minimized by the other
requirements added to Sec. 234.26, which collectively should ensure the
viability of the project.
2. Comment: HUD need not limit this type of approval to 10 percent
of the units. Alternative suggestions were to eliminate the limit
entirely (Fannie Mae and Freddie Mac do not so limit their exposure);
to add a requirement for the lender to insure that the project's budget
is adequate, such as to fund replacement of common elements; or to
increase the percentage to 20 percent of the units if the project has
fewer than 30 units and/or has been in existence for more than five
years. For example, in a project of fewer than 10 units, even one unit
would exceed the 10 percent limit.
Response: The reason for this restriction is to limit the
Department's risk of loss under this program. Furthermore, it assures
that the spot loan process does not become a means of circumventing the
requirements and protection of HUD's condominium approval process.
Since the Department recognizes that small condominium
[[Page 26983]]
projects might not be able to participate in the spot loan program, we
are accepting the recommendation to permit up to 20% of the units in a
project of 30 or fewer units to have FHA-insured mortgages.
Concern About Default Rate
1. Comment: Units insured under spot loans pose a greater risk of
default than those approved as part of a project approval. Many of the
criteria relied upon in approving condominium developments for FHA
insurance under the Section 234(c) program would not be used in the
case of spot loans.
Response: The Department expects mortgage lenders to apply sound
underwriting practices in processing spot loans. In most cases, spot
loan projects should have the same maintenance level, reserves for
replacement level, plan for maintenance, and insurance coverage as
comparable developments approved under the Section 234(c) program.
Lenders also should look at the length of time the homeowners
association has operated successfully. All pertinent information
regarding the viability of the development should be reviewed. Lenders
may wish to create checksheets to facilitate this review. Presently,
the Department believes that it is unnecessary to require all spot loan
appraisals to be done on the Fannie Mae Form 1073, as one commenter
suggested.
2. Comment: One method for limiting FHA's risk would be to limit
spot loan mortgage insurance to reverse mortgage loans.
Response: The impetus for the spot loan program was to provide home
mortgage insurance for those seeking to purchase condominium units in
developments where there is little likelihood that the development
would make the requisite changes in its legal documents (usually to
benefit one association member) to obtain FHA approval. However, the
Department wants spot loans to be available in forward loans as well as
reverse loans. Reducing the risk of loss is addressed by limiting the
Department's involvement in the development.
Downpayment
Comment: Given the additional risk involved in approving mortgage
insurance without the full approval process, the downpayment should be
proportionately increased, for example to 20 or 30 percent.
Response: The Department believes that increased downpayment
requirements would thwart the spot loan program and, particularly,
those constituents the Department has traditionally served--middle- and
moderate-income families who normally could not obtain loans in other
mortgage insurance markets. Few of FHA traditional constituents could
afford to meet a 20 percent downpayment requirement. As previously
noted, the Department has determined that spot loans pose a
``reasonable risk,'' which the rule controls largely by limiting the
Department's involvement in each development.
Enforcement of lender responsibilities
Comment: If a lender approves a mortgage for FHA insurance under
the spot loan provisions and the project does not satisfy the
eligibility requirements stated in the regulation, there should be a
penalty. Cancellation of the mortgage insurance or loss of the lender's
direct endorsement authority might be appropriate.
Response: The Department agrees that enforcement mechanisms
governing mortgagee activity apply to this program, as to other FHA
mortgage insurance activity. The Department will monitor activity under
the spot loan program.
Miscellaneous
1. Comment: Current provisions for FHA-approved projects with
respect to the 51% owner-occupancy requirement should be loosened--
permitting HUD field offices to approve a lower percentage if
appropriate.
Response: This provision is not new. It follows current practice
for non-spot loans. The Department does not believe it appropriate to
change this requirement at this time.
2. Comment: The criterion (Sec. 234.26(i)(1)(iii)) limiting the
number of units owned by a single entity in a project for which a spot
loan approval is sought should be changed to the number of units
controlled by a single entity. This would prevent insuring mortgages in
projects where family members and wholly owned businesses or
partnerships own more than 10 percent of the units in a project.
Response: The Department believes that ``ownership'' is a
reasonable standard to use and that is easy to understand. ``Control''
is harder to identify and enforce. The Department declines to change
this provision.
Findings and Certifications
Impact on the Environment
A Finding of No Significant Impact with respect to the environment
was made in accordance with HUD regulations at 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969, 42 U.S.C. 4332, in connection with the proposed rule on this
subject. The Finding of No Significant Impact is available for public
inspection and copying during regular business hours (7:30 a.m. to 5:30
p.m.) in the Office of the Rules Docket Clerk, room 10276, 451 Seventh
Street, SW, Washington, DC 20410-0500.
Federalism Impact
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 do not have significant impact on States or
their political subdivisions since the provisions of the proposed rule
affect private purchasers and sellers of condominium units.
Impact on 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. Therefore, the rule is not subject to review under
the Order. The rule merely broadens the coverage of condominium units
for which mortgage insurance can be obtained.
Impact on Small Entities
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that this rule will not have a significant
impact on a substantial number of small entities, because it makes
available additional financing options for purchasers and sellers of
condominium units.
Catalog
The Catalog of Federal Domestic Assistance number for the program
affected by this proposed rule is 14.133.
List of Subjects
24 CFR Part 206
Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
24 CFR Part 234
Condominiums, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, for the reasons stated in the preamble, parts 206 and
234 of title 24 of the Code of Federal Regulations are amended as
follows:
[[Page 26984]]
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
1. The authority citation continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).
2. Section 206.51 is revised to read as follows:
Sec. 206.51 Eligibility of mortgages involving a dwelling unit in a
condominium.
If the mortgage involves a dwelling unit in a condominium, the
project in which the unit is located shall have been committed to a
plan of condominium ownership by deed, or other recorded instrument,
that is acceptable to the Secretary, except as provided in
Sec. 234.26(i) of this chapter.
PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE
3. The authority citation for part 234 continues to read as
follows:
Authority: 12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d). Section
234.520(a)2)(ii) is also issued under 12 U.S.C. 1701(a).
4. In Sec. 234.26, a new paragraph (i) would be added, to read as
follows:
Sec. 234.26 Project requirements.
* * * * *
(i) Notwithstanding the requirements of paragraphs (a) through (h)
of this section, a loan on a single unit in an unapproved condominium
project (``spot loan'') may qualify for mortgage insurance under this
part.
(1) The project must meet the following criteria:
(i) All units, common elements, and facilities--including those
that are part of any master association--must have been completed, and
the project cannot be subject to additional phasing or annexation. The
project must provide for undivided ownership of common areas by unit
owners;
(ii) Control of the owners' association must have been turned over
to the unit purchasers, and the unit purchasers must have been in
control for at least one year;
(iii) At least 90% of the total units in the project must have been
conveyed to the unit purchasers, and at least 51% of the total units in
the project must have been conveyed to purchasers who are occupying the
units as their principal residences or second homes. No single entity
(the same individual, investor group, partnership, or corporation) may
own more than 10% of the total units in the project;
(iv) The units in the project must be owned in fee simple or be an
eligible leasehold interest, as described in Sec. 234.65, and the unit
owners must have sole ownership interest in, and right to the use of,
the project's facilities, common elements, and limited common elements
including parking, recreational facilities, etc.;
(v) The project must be covered by hazard, flood, and liability
insurance acceptable to the Commissioner;
(vi) For projects with more than 30 units, no more than 10% of the
total units in the project may be encumbered by FHA-insured mortgages.
(If more than 10% of the units in the project are encumbered by FHA-
insured mortgages, the condominium project must be approved under
paragraphs (a) through (h) of this section.) For smaller projects, no
more than 20% of the total units in the project may be encumbered by
FHA-insured mortgages; and
(vii) The assumability provisions of Sec. 234.66 must be satisfied.
(2) Lenders must perform an underwriting analysis and certify that
a project satisfies the eligibility criteria for a ``spot loan'' in a
condominium project that has not been approved by FHA. Lenders may use
information from the appraiser, the owners' association, the management
company, the real estate broker, and the project developer, but the
lender must ensure the accuracy of the information obtained from these
sources.
(Approved by the Office of Management and Budget under control
number 2502-0513)
Dated: May 22, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-13335 Filed 5-28-96; 8:45 am]
BILLING CODE 4210-27-P