[Federal Register Volume 61, Number 181 (Tuesday, September 17, 1996)]
[Rules and Regulations]
[Pages 49030-49034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23717]



[[Page 49029]]


_______________________________________________________________________

Part III





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 206



Home Equity Conversion Mortgage Insurance Demonstration: Additional 
Streamlining; Final Rule

  Federal Register / Vol. 61, No. 181 / Tuesday, September 17, 1996 / 
Rules and Regulations  

[[Page 49030]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 206

[Docket No. FR-2958-F-05]
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: Final rule.

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

SUMMARY: This rule makes final the proposed rule issued by the 
Department on May 10, 1996, which proposed 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. This rule also 
makes further streamlining amendments.

EFFECTIVE DATE: October 17, 1996; except that the amendment to the 
definition of ``principal limit'' in Sec. 206.3, as made by this rule, 
shall have an effective date of January 5, 1997.

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:

Background

    The Home Equity Conversion Mortgage (HECM) Insurance Demonstration 
was authorized by section 417 of the Housing and Community Development 
Act of 1987, Pub.L. 100-242, 101 STAT. 1908, which amended the National 
Housing Act, Pub.L. 73-479, 48 STAT. 1246 (12 U.S.C. 1715z-20) to add 
new section 255 to permit elderly homeowners to borrow against the 
equity in their homes. The regulations for the HECM program were 
established as part 206 of title 24 of the Code of Federal Regulations 
(June 9, 1989, 54 FR 24833).
    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.
    On May 10, 1996, at 61 FR 21918, the Department published a 
proposed rule which reflected additional ideas for improving the 
program regulations for which the Department desired public comment 
prior to implementation. The public was afforded a 60-day comment 
period which expired on July 9, 1996. Seven commenters responded: two 
attorneys (one on behalf of a mortgagee), three mortgagees, and two 
national cooperative associations. Below is a listing of the comments 
presented. Following each comment is the Department's response.
    Comment: Section 206.8 would expressly preempt contrary State laws. 
Nothing in the statute suggests that Congress intended to preempt any 
State laws. This could be detrimental to HECM lenders if they rely on 
such provisions which are later over-turned. This section should not be 
included in the final rule.
    Response: The Department has considered the legal arguments made by 
the commentor and concludes that the Department does have the authority 
to ensure that all HECM debt will have a first lien priority. As stated 
in the proposed rule, ``(t)hat priority is a basic assumption in the 
computer model used to determine the amount of payments to the 
mortgagor.''
    Comment: In Sec. 206.21(b)(3), HUD is proposing to provide itself 
the unilateral right to make annual adjustments to a HECM loan's 
interest rate, even in those cases where the underlying contract 
assigned to HUD provides for monthly adjustments. The commenter 
challenges the right for HUD to make unilateral changes to the original 
contract and make annual interest rate adjustments. A yearly adjustment 
could have a serious adverse effect on consumers when the interest 
rates are going down, and the consumers cannot enjoy the benefits of 
decreasing interest charges. This section is inappropriate and should 
not be included in the final rule.
    Response: The Department withdraws this proposed change to convert 
monthly adjustments to the interest rate to annual adjustments if the 
mortgage is assigned. It should be noted that the commentor 
misunderstood the intent of the proposed change. It would not have 
applied to existing mortgages, but prospectively to mortgages newly 
originated.
    Comment: Several commenters oppose altering the HECM from an open-
end credit instrument to a closed-end instrument. The change would deny 
future HECM users an important freedom enjoyed by current HECM users: 
the option to conserve the estates they will leave to their heirs by 
reducing outstanding loan balances when circumstances permit it, while 
retaining the right to draw again upon this revolving credit should 
needs arise. This change would make HECMs less attractive and less 
functional to older people and would be a significant change for the 
worse in the HECM program. Although the ability to redraw may not be a 
frequently used feature by HECM borrowers, the ability to re-borrow 
raises the ``comfort level'' of some HECM borrowers who may already be 
confused and uncertain about this mortgage loan product.
    The Truth in Lending Act (TILA) rules for open-end credit are not 
burdensome in the origination process. For example, the disclosures 
provided pursuant to Regulation Z can be generated on a printed form 
with a minimal number of blanks completed with costs for a particular 
State. These disclosures can then be copied and used for multiple 
transactions. Furthermore, if the change is adopted, in addition to 
standard closed-end truth in lending disclosure, lenders will have to 
produce closed-end credit variable rate transaction program disclosures 
pursuant to Regulation Z because virtually all HECM loans have 
adjustable rates. In many respects these disclosures are similar to the 
home equity open-end credit disclosures currently provided pursuant to 
Regulation Z at application, and therefore, nothing is gained from the 
change to closed-end requirements with respect to disclosures given at 
application.
    FNMA has recently introduced the Home Keeper open-end credit 
reverse mortgage program and has no current plans to change its program 
to closed-end credit. Therefore, lenders will still have to be familiar 
with open-end credit requirements, and it will be confusing to both 
lenders and applicants to have two similar programs, one open-end 
credit and one closed-end credit.
    Response: We agree with commenters and withdraw the proposed rule 
change that would make HECMs ``closed end'' credit for purposes of the 
regulations implementing the Truth in Lending Act.
    Comment: One commenter recommends an improvement in the way 
servicing firms present periodic HECM statements of account to 
borrowers. Currently, most HECM servicers omit a statement of the line 
of credit funds available to the borrower, and all servicers have 
declined to

[[Page 49031]]

inform borrowers of the rate of growth in effect for these available 
funds as of the statement date.
    Response: This comment does not apply to this rule. We will review, 
however, the actual practices and requirements for lender statements of 
account to the borrower and determine if they include adequate 
disclosures of the loan balances and account activities.
    Comment: The HECM regulations should be expanded to include housing 
cooperatives; elderly residents of housing cooperatives should not be 
excluded. This will have an enormous impact on the ability of elderly 
homeowners to afford to live on their own.
    If HUD expands the HECM regulations to include housing 
cooperatives, the regulations should also be changed to allow HUD to 
insure a HECM on a unit in a condominium or housing cooperative project 
even if the project does not meet usual HUD policy regarding ``rights 
of first refusal.'' In both a condominium and a housing cooperative, 
rights of first refusal are a necessary safeguard for the project. In 
addition, it is an industry-wide accepted practice that protects the 
investment of these homeowners as well as the mortgage holder. Rights 
of first refusal do not prevent the unit from being widely marketable 
without restrictions to a wide potential market. Rather, it should be 
viewed as enhancing the value of the unit as well as providing a 
necessary protection for future purchasers.
    Response: The single family insurance program for cooperative units 
is inactive. Cooperative units, therefore, are not eligible for the 
HECM program. At this time, HUD lacks the field and headquarters 
resources to undertake this type of effort which would require us to 
first study the feasibility of including cooperative units in the HECM 
program.
    Comment: The commenter agrees with HUD's proposal to give the 
Secretary the option to eliminate the HUD-held second mortgage. It has 
proven to be cumbersome and costly. A lot of time is spent explaining 
the function of the second mortgage to lenders, borrowers, title 
companies, and recorders.
    Response: HUD will keep this proposal in the final rule.

This Final Rule

    This rule makes final the provisions proposed in the May 10, 1996 
proposed rule. In light of the comments discussed above, the Department 
withdraws the proposed change to Sec. 206.21(b)(3) to convert monthly 
adjustments to the interest rate to annual adjustments if the mortgage 
is assigned. The Department also withdraws the proposed change to 
Sec. 206.3 to add a new definition of ``mortgage balance'' that would 
make HECMs ``closed end'' credit and a related proposed change in 
Sec. 206.209(a).
    The effective date for the amendment to the definition of 
``principal limit'' in Sec. 206.3, is delayed until 120 days from date 
of publication. Desktop HECM software will have to be modified, and the 
Lockheed/Martin (CDSI) system will also have to be changed. Also, 
lenders, servicers, and FNMA will probably have to make system changes. 
The extended delayed effective date for this particular amendment will 
provide the time necessary for the various system changes to be made.

Streamlining

    President Clinton's memorandum of March 4, 1995, titled 
``Regulatory Reinvention Initiative'' directed heads of Federal 
departments and agencies to review all existing regulations to 
eliminate those that are outdated and modify others to increase 
flexibility and reduce burden. As a part of HUD's overall effort to 
reduce regulatory burden and streamline the content of title 24 of the 
Code of Federal Regulations, this rule removes those provisions which 
are unnecessary to be codified because they are duplicative of 
statutory language or because they can be made available through other 
non-rulemaking means.
    The August 16, 1995 interim rule (as made final on December 21, 
1995) made changes to part 206 to improve and streamline the program 
based on the first five years of the demonstration. This final rule 
also makes additional streamlining changes by removing several 
provisions of the HECM regulations which repeat statutory language from 
the legislation. It is unnecessary to maintain statutory requirements 
in the Code of Federal Regulations (CFR), since these requirements are 
otherwise fully accessible and binding. Furthermore, if regulations 
contain statutory language, HUD must amend the regulations whenever 
Congress amends the statute. This final rule removes repetitious 
statutory language and replaces it with a citation to the specific 
statutory section for easy reference. The following streamlining 
amendments are made, therefore, by this rule:
    1. Section 206.1  Purpose is amended to state that the purpose is 
set out in section 255(a) of the National Housing Act (NHA).
    2. Section 206.3  Definitions is amended to delete an unnecessary 
definition and, for certain other definitions, to cross-reference to 
the statute or other sections of the CFR in order to avoid duplication.
    3. Section 206.9  Eligible mortgagees is amended to revise 
paragraph (a) so that it cross-references in order to the statute to 
avoid duplication.
    4. Section 206.33  Age of mortgagor is amended to remove an 
outdated reference.
    5. Section 206.41  Counseling is amended to revise paragraph (b) so 
that it cross-references to the statute in order to avoid duplication.
    6. Section 206.43  Information to mortgagor is deleted because it 
pertains to material to be given by the mortgagee to the mortgagor and 
can be handled in a handbook or other issuance.
    7. The last sentence of Sec. 206.47(c) is deleted because it merely 
repeats the substance of Sec. 206.31(b).
    8. Section 206.115  Termination is deleted because the provisions 
are combined with Sec. 206.133(f) Termination of insurance contract--
Effect of termination. 
    9. Section 206.119  Written statement of procedures to mortgagor is 
deleted because it pertains to material that can be handled in a 
handbook or other issuance.
    10. A technical correction is made to Sec. 206.121(b) to substitute 
and incorrect reference to the Treasury Financial Manual.

Findings and Certifications

    Information Collection Requirements. 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.
    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.

[[Page 49032]]

    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 would 
not have a significant economic impact on a substantial number of small 
entities. The rule is limited to revision of the Home Equity Conversion 
Mortgage Demonstration. Specifically, the requirements of the 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 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 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 rule removes any doubt and 
provides 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 
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 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 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 rule does 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.
    Unfunded Mandates Reform Act. Title II of the Unfunded Mandates 
Reform Act of 1995, Public Law 104-4, established requirements for 
Federal agencies to assess the effects of their regulatory actions on 
State, local, and tribal governments and the private sector. This rule 
does not impose any Federal mandates on any State, local, or tribal 
governments or the private sector within the meaning of the Unfunded 
Mandates Reform Act of 1995.

    Catalog of Federal Domestic Assistance. The Catalog of Federal 
Domestic Assistance number for the HECM progam is 14.183.

List of Subjects for 24 CFR Part 206

    Aged, Condominiums, Loan programs--housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

    Accordingly, 24 CFR part 206 is amended as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

    1. The authority 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 206.1 is revised to read as follows:


Sec. 206.1   Purpose.

    The purposes of the Home Equity Conversion Mortgage Insurance 
program are set out in section 255(a) of the National Housing Act, 
Public Law 73-479, 48 STAT. 1246 (12 U.S.C. 1715z-20) (``NHA'').
    3. Section 206.3 is amended by removing the term ``assessment,'' by 
revising the first sentence of the definition of ``expected average 
mortgage interest rate,'' and by revising the definitions of ``Contract 
of insurance,'' ``MIP,'' ``Mortgagee,'' ``principal limit,'' and 
``Secretary,'' to read as follows:


Sec. 206.3   Definitions.

* * * * *
    Contract of insurance (See 24 CFR 203.251(j)).
* * * * *
    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. * * *
* * * * *
    MIP (See 24 CFR 203.251(k)).
* * * * *
    Mortgagee (See section 255(b)(2) of NHA).
* * * * *
    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

[[Page 49033]]

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 January 5, 1997. If the mortgage 
was executed before January 5, 1997, 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.
* * * * *
    Secretary (See 24 CFR 5.100).
    4. Subpart A is amended to add 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).
    5. Section 206.9 is amended by revising paragraph (a) to read as 
follows:


Sec. 206.9  Eligible mortgagees.

    (a) Statutory requirements. (See section 255(b)(3) of NHA).
* * * * *
    6. 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).
* * * * *
    7. 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, attributable to draws on the line 
of credit.
* * * * *
    8. 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.
* * * * *
    9. 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 a mortgagor dies and the property is not the 
principal residence of at least one surviving mortgagor, or 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.
* * * * *
    10. Section 205.33 is revised to read as follows:


Sec. 206.33  Age of mortgagor.

    The youngest mortgagor shall be 62 years of age or older at the 
time the mortgagee submits the application for insurance.
    11. Section 206.35 is amended to add a new sentence at the end, to 
read as follows:


Sec. 206.35  Eligibility of title.

    * * * 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.
    12. Section 206.41 is amended by revising paragraph (b) to read as 
follows:


Sec. 206.41  Counseling.

* * * * *
    (b) Information to be provided. (See section 255(f) of NHA).
* * * * *


Sec. 206.43  [Removed and reserved]

    13. Section 206.43 is removed and reserved.
    14. Section 206.47 is amended to add a new paragraph (e) to read as 
follows:


Sec. 206.47  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 24 CFR 234.66 and this part.
* * * * *


Sec. 206.47  [Amended]

    15. Section 206.47 is amended to remove the last sentence of 
paragraph (c).


Sec. 206.115  [Removed and reserved]

    16. Section 206.115 is removed and reserved.
    17. 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

[[Page 49034]]

the mortgagor under Sec. 206.27(d) or may accept assignment of the 
first mortgage.


Sec. 206.119  [Removed and reserved]

    18. Section 206.119 is removed and reserved.
    19. In Sec. 206.121 paragraph (b) is amended by removing the term 
``Treasury Fiscal Requirements Manual'' from the second sentence and to 
add in its place the term ``Treasury Financial Manual'', and paragraph 
(c) is amended by revising the first and second sentences 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. * * *
* * * * *
    20. 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.
* * * * *
    21. Section 206.133 is amended to revise paragraph (f) to read as 
follows:


Sec. 206.133   Termination of insurance contract.

* * * * *
    (f) Effect of termination. When the insurance contract is 
terminated, the mortgagee shall pay the monthly MIP which has accrued 
for the current month and which has not yet been paid to the Secretary, 
but the obligation to pay any subsequent MIP shall cease and all rights 
of the mortgagor and mortgagee shall be terminated except as otherwise 
provided in this part.
* * * * *
    22. 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.
    (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: September 6, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-23717 Filed 9-16-96; 8:45 am]
BILLING CODE 4210-27-P