[Federal Register Volume 61, Number 229 (Tuesday, November 26, 1996)]
[Rules and Regulations]
[Pages 60158-60163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29925]



[[Page 60157]]

_______________________________________________________________________

Part III





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 200, et al.



Streamlining the Single Family Components of the Single Family-
Multifamily Regulations; Final Rule

  Federal Register / Vol. 61, No. 229 / Tuesday, November 26, 1996 / 
Rules and Regulations  

[[Page 60158]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200, 213, 220, 221, 233, and 234

[Docket No. FR-4112-F-01]
RIN 2502-AG80


Streamlining the Single Family Components of the Single Family-
Multifamily Regulations

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

ACTION: Final rule.

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

SUMMARY: This final rule amends primarily the single family components 
of HUD's regulations for certain FHA single family and multifamily 
housing mortgage insurance programs. In an effort to comply with the 
President's regulatory reform initiatives, this rule streamlines these 
regulations by eliminating regulatory provisions that are redundant, 
obsolete, or otherwise unnecessary.

EFFECTIVE DATE: December 26, 1996.

FOR FURTHER INFORMATION CONTACT: Richard K. Manuel, Director of the 
Home Mortgage Insurance Division, Department of Housing and Urban 
Development, Room 9272, 451 Seventh Street, SW, Washington, DC 20410, 
telephone number (202) 708-2700 (this is not a toll-free number). A 
telecommunications device for hearing- and speech-impaired persons 
(TTY) is available at (800) 877-8339 (Federal Information Relay 
Service).

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a 
memorandum to all Federal departments and agencies regarding regulatory 
reinvention. In response to this memorandum, HUD conducted a page-by-
page review of its regulations to determine which could be eliminated, 
consolidated, or otherwise improved. HUD determined that the 
regulations for certain Federal Housing Administration (FHA) programs 
could be improved and streamlined by eliminating obsolete and 
unnecessary provisions, and by consolidating provisions that were 
repeated throughout several sets of regulations. Therefore, on April 1, 
1996 (61 FR 14396), HUD published a final rule streamlining the 
regulations for certain FHA single family housing, multifamily housing, 
and health care facility mortgage insurance programs. Today's final 
rule will continue HUD's efforts to streamline its FHA regulations by 
amending the single family components of parts 220, 221, and 234 to 
eliminate regulatory provisions that are redundant, obsolete, or 
otherwise unnecessary. Today's final rule will also remove the single 
family components of the obsolete program in part 213, and both the 
single family and the multifamily components of the regulations for the 
obsolete program in part 233. This final rule will thereby eliminate 
approximately 44 pages of unnecessary regulations.

I. Single Family Streamlining

A. Part 220

    The Mortgage Insurance and Insured Improvement Loans for Urban 
Renewal and Concentrated Development Areas Program (part 220) is 
relatively inactive; there were few new loans insured in FY 1996, and 
HUD does not anticipate that this volume will increase. The April 1, 
1996 final rule (61 FR 14396) streamlined the multifamily components of 
the regulations in part 220. Today's final rule will similarly 
streamline the single family components of these regulations by 
removing the eligibility provisions in subpart A. HUD has determined 
that it is unnecessary to retain these requirements because the 
statute, supplemented by the contract of insurance and HUD handbooks, 
will be sufficient. HUD is, however, retaining the provisions in these 
regulations regarding contract rights and obligations, because they are 
necessary for the continued administration of the outstanding loans 
insured under the program.

B. Part 221

    Several single family provisions of HUD's regulations in part 221 
for the Low Cost and Moderate Income Mortgage Insurance Program are 
duplicative or obsolete. Specifically, this final rule streamlines 
these provisions by correcting Sec. 221.1(a), which contains a general 
cross-reference to the single family mortgage insurance regulations in 
part 203, along with a list of the exceptional sections in part 203 
that do not apply to mortgages insured under section 221 of the 
National Housing Act (12 U.S.C. 1715l) (the Act). Although Sec. 203.17 
(Mortgage provisions) appears on this list of exceptions, the 
requirements of Sec. 203.17 actually do apply to mortgages insured 
under section 221 of the Act, and in fact there are provisions within 
part 221 that duplicate those requirements. Therefore, this final rule 
removes Sec. 203.17 from the list of exceptions in Sec. 221.1, and it 
also removes those provisions that duplicate the requirements in 
Sec. 203.17. This rule also removes Sec. 203.46, which no longer 
exists, from the list of exceptions in Sec. 221.1. This rule removes 
Secs. 221.60 and 221.65, which are obsolete due to the inactivity of 
the mortgage insurance programs under sections 221(h) and 221(i) of the 
Act to which they apply. This rule also removes several other 
provisions that are duplicative either of part 203 or of the statute, 
or that are obsolete.

C. Part 234

    Several provisions in HUD's regulations for the Condominium 
Ownership Mortgage Insurance Program in part 234 repeat the general 
single family mortgage insurance regulations in part 203. Therefore, 
this final rule will amend subpart A of part 234, which contains the 
eligibility requirements, to provide a general cross-reference to the 
similar eligibility requirements in subpart A of part 203. Subpart A of 
part 234 will retain those eligibility provisions that are unique to 
the Condominium Ownership Mortgage Insurance Program.

II. Obsolete Programs

A. Part 213

    There was no new loan activity in fiscal year (FY) 1996 in the 
single family component of HUD's Cooperative Housing Mortgage Insurance 
Program in part 213. HUD has determined that, due to the changes in the 
housing market and other factors, the single family component of this 
program is obsolete. Therefore, this final rule will remove the single 
family regulations in part 213 (subparts C, D, and E). A ``savings 
clause'' will be maintained in part 213 providing that the single 
family regulations in effect immediately before December 26, 1996 will 
continue to apply to any existing mortgages.

B. Part 233

    HUD's regulations for the Experimental Housing Mortgage Insurance 
Program in part 233 are also obsolete. This program has been inactive 
for approximately 15 years. In accordance with the President's National 
Homeownership Strategy (May 1995), HUD will consider whether the 
program would effectively promote technological advances in 
homebuilding products. If HUD decides to expand and promote the 
program, it will develop new and more appropriate regulations at that 
time. Therefore, this final rule will remove the substance of the 
regulations in part 233, including both the single family and the 
multifamily components. A ``savings clause'' will be maintained in part 
200, subpart W (Sec. 200.1302), providing that the regulations in 
effect immediately before December 26, 1996

[[Page 60159]]

will continue to apply to any existing mortgages.

III. Clarifications and Corrections

    HUD is taking the opportunity in this final rule to clarify or 
correct certain provisions in its FHA regulations. First, this rule 
corrects a provision of the April 1, 1996 final rule (61 FR 14396). In 
an earlier final rule published in the Federal Register on September 
11, 1995, HUD established a new Sec. 200.1301 to contain the savings 
clauses for several expiring FHA programs. In the April 1, 1996 final 
rule, HUD intended to add a list of additional expiring programs to a 
new Sec. 200.1302. Due to an error, however, rather than adding a new 
Sec. 200.1302, the April 1, 1996 rule inadvertently revised 
Sec. 200.1301, supplanting the list of programs initially issued in 
Sec. 200.1301 on September 11, 1995. To correct this error, the Federal 
Register published a correction document on October 17, 1996 (61 FR 
54267), which effectively reestablished Sec. 200.1301 as it appeared in 
the September 11, 1995 rule, and added a new Sec. 200.1302 as HUD 
intended in the April 1, 1996 rule.
    While that error in the April 1, 1996 final rule has been 
corrected, today's final rule will correct another error. In the 
preamble to the April 1, 1996 rule, on page 14397, toward the bottom of 
the first column, HUD states that ``Part 222 which pertains to 
Servicepersons Mortgage Insurance Program is an expired program. No 
more mortgages are insured under this program. The part will be removed 
and a savings clause will be retained.'' HUD inadvertently omitted part 
222 from the savings clause for additional expiring programs (see 61 FR 
14404-05). Therefore, this final rule will correct the provision for 
additional expiring programs in Sec. 200.1302 to include part 222.
    Second, this rule clarifies a new provision in Sec. 234.26 
regarding requirements for the insurance of mortgages on individual 
units in condominium projects that have not received FHA approval in 
advance. On May 29, 1996 (61 FR 26962), HUD published a final rule in 
the Federal Register that added paragraph (i) to Sec. 234.26 to permit 
such ``spot loans'' if the project meets certain criteria. In 
Sec. 234.26(i)(1)(vi), HUD requires that for projects with fewer than 
30 units, no more than 20 percent of the units in the project may be 
encumbered by FHA-insured mortgages. This final rule clarifies that for 
projects with four units (20 percent of which would be less than one 
whole unit), only one unit may be encumbered by an FHA-insured 
mortgage.

IV. Justification for Final Rulemaking

    HUD generally publishes a rule for public comment before issuing a 
rule for effect, in accordance with its own regulations on rulemaking 
in 24 CFR part 10. However, part 10 provides for exceptions to the 
general rule if 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. This rule merely removes obsolete and unnecessary regulatory 
provisions, and consolidates repetitive requirements; it does not 
establish or affect substantive policy. Therefore, prior public comment 
is unnecessary.

Findings and Certifications

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This rule merely 
streamlines regulations by removing unnecessary provisions. The rule 
will have no adverse or disproportionate economic impact on small 
businesses.

Environmental Impact

    This streamlining final rule will not have an environmental impact. 
When HUD was developing its final rule published on April 1, 1996 (61 
FR 14396) that streamlined the regulations for certain FHA single 
family housing, multifamily housing, and health care facility mortgage 
insurance programs, a Finding of No Significant Impact with respect to 
the environment was 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). That Finding applies to 
today's final rule, which continues HUD's streamlining efforts by 
primarily amending the single family components of those regulations. 
The Finding 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.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that 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. No programmatic or policy changes 
will result from this rule that would affect the relationship between 
the Federal Government and State and local governments.

Executive Order 12606, the Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this rule will not have 
the potential for significant impact on family formation, maintenance, 
or 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.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and on the private sector. This rule 
does not impose any Federal mandates on any State, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Home improvement, Housing standards, 
Incorporation by reference, Lead poisoning, Loan programs--housing and 
community development, Minimum property standards, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

24 CFR Part 213

    Cooperatives, Mortgage insurance, Reporting and recordkeeping 
requirements.

24 CFR Part 220

    Home improvement, Loan programs--housing and community development,

[[Page 60160]]

Mortgage insurance, Reporting and recordkeeping requirements, Urban 
renewal.

24 CFR Part 221

    Low and moderate income housing, Mortgage insurance, Reporting and 
recordkeeping requirements.

24 CFR Part 233

    Home improvement, Loan programs--housing and community development, 
Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 234

    Condominiums, Mortgage insurance, Reporting and recordkeeping 
requirements.

    Accordingly, chapter II of title 24 of the Code of Federal 
Regulations is amended as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

    1. The authority citation for 24 CFR part 200 continues to read as 
follows:

    Authority: 12 U.S.C. 1701-1715z-18; 42 U.S.C. 1436a and 3535(d).

    2. In subpart W, section 200.1302 is revised to read as follows:


Sec. 200.1302  Additional expiring programs--savings clause.

    No new loan assistance, additional participation, or new loans are 
being insured under the programs listed in this section.
    (a) Any existing loan assistance, ongoing participation, or insured 
loans under the following programs will continue to be governed by the 
regulations in effect as they existed immediately before May 1, 1996:

Part 215  Rent Supplement Payments Program
Part 222  Serviceperson's Mortgage Insurance Program
Part 237  Special Mortgage Insurance for Low and Moderate Income 
Families

    (b) Any existing loan assistance, ongoing participation, or insured 
loans under the following program will continue to be governed by the 
regulations in effect as they existed immediately before December 26, 
1996:

Part 233  Experimental Housing Mortgage Insurance Program

PART 213--COOPERATIVE HOUSING MORTGAGE INSURANCE

    3. The authority citation for part 213 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715e; 42 U.S.C. 3535(d).
    4. Subpart C consisting of Sec. 213.501, is revised to read as 
follows:

Subpart C--Individual Properties Released From Project Mortgage; 
Expiring Program


Sec. 213.501  Savings clause.

    No new loans are being insured under the Cooperative Housing 
Mortgage Insurance Program for individual properties released from a 
project mortgage. Any existing insured loans on individual properties 
released from a project mortgage under this program will continue to be 
governed by the regulations on eligibility requirements, contract 
rights and obligations, and servicing responsibilities in effect as 
they existed immediately before December 26, 1996.

Subparts D and E--[Removed]

    5. In part 213, subpart D (consisting of Secs. 213.751 and 213.752) 
and subpart E (consisting of Sec. 213.800) are removed.

PART 220--MORTGAGE INSURANCE AND INSURED IMPROVEMENT LOANS FOR 
URBAN RENEWAL AND CONCENTRATED DEVELOPMENT AREAS

    6. The authority citation for part 220 continues to read as 
follows:

    Authority: 12 U.S.C. 1713, 1715b, 1715k; 42 U.S.C. 3535(d).

Subpart A--[Removed]

    7. In part 220, subpart A (consisting of Secs. 220.1 through 
220.249) is removed.

PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE

    8. The authority citation for 24 CFR part 221 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715l; 42 U.S.C. 3535(d). Section 
221.544(a)(3) is also issued under 12 U.S.C. 1707(a).

    9. Section 221.1 is amended by revising paragraph (a) to read as 
follows:


Sec. 221.1  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 (12 
U.S.C. 1709) apply to mortgages on dwellings insured under section 221 
of the National Housing Act (12 U.S.C. 1715l), except the following 
provisions:

Sec.
203.18  Maximum mortgage amount.
203.18a  Solar energy system.
203.18b  Increased mortgage amount.
203.19   Mortgagor's minimum investment.
203.28  Economic soundness of project.
203.42  Rental properties.
203.43h  Eligibility of mortgages on Indian land insured pursuant to 
section 248 of the National Housing Act.
203.43i  Eligibility of mortgages on Hawaiian Home Lands insured 
pursuant to section 247 of the National Housing Act.
203.43j  Eligibility of mortgages on Allegany Reservation of Seneca 
Nation of Indians.
203.45  Eligibility of graduated payment mortgages.
203.49  Eligibility of adjustable rate mortgages.
203.50  Eligibility of rehabilitation loans.
203.51  Applicability.
* * * * *


Secs. 221.3 and 221.5  [Removed]

    10. Sections 221.3 and 221.5 are removed.
    11. Section 221.20 is amended by revising paragraph (c) to read as 
follows:


Sec. 221.20  Maximum mortgage amount--loan-to-value limitation.

* * * * *
    (c) Definitions. As used in the section, the terms principal 
residence, secondary residence, eligible non-occupant mortgagor, undue 
hardship, and vacation home are defined in Sec. 203.18(f) of this 
chapter.
* * * * *


Secs. 221.25, 221.30, 221.32, 221.35, and 221.45  [Removed]

    12. Sections 221.25, 221.30, 221.32, 221.35, and 221.45 are 
removed.
    13. Section 221.50 is amended by revising paragraph (a) to read as 
follows:


Sec. 221.50  Mortgagor's minimum investment.

    (a) At the time the mortgage on a single-family dwelling is 
insured, a mortgagor other than a mortgagor qualifying as a ``displaced 
family'' (as that term is defined in section 221(f) of the Act) shall 
have paid in cash or its equivalent at least 3 percent of the 
Commissioner's estimate of the acquisition cost of the property.
* * * * *


Secs. 221.57, 221.60, 221.65, and 221.70  [Removed]

    14. Sections 221.57, 221.60, 221.65, and 221.70 are removed.

PART 233--EXPERIMENTAL HOUSING MORTGAGE INSURANCE

    15. Part 233 is removed.

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

    16. The authority citation for 24 CFR 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. 1707(a).


[[Page 60161]]


    17. In part 234, subpart A is revised to read as follows:

Subpart A--Eligibility Requirements--Individually Owned Units

Sec.
234.1  Cross-reference.
234.3  Definitions.
234.17  Mortgagor and mortgagee requirements for maintaining flood 
insurance coverage.
234.26  Project requirements.
234.54  Eligibility of assigned mortgages and mortgages covering 
acquired property.
234.63  Location of property.
234.65  Nature of title.
234.66  Free assumability; exceptions.

Subpart A--Eligibility Requirements--Individually Owned Units


Sec. 234.1  Cross-reference.

    (a) All of the provisions of subpart A of part 203 of this chapter 
concerning eligibility requirements of mortgages covering one- to four-
family dwellings under section 203 of the National Housing Act (12 
U.S.C. 1709) apply to mortgages on individually owned units insured 
under section 234 of the National Housing Act (12 U.S.C. 1715y), except 
the following provisions:

Sec.
203.12  Mortgage insurance on proposed or new construction in a new 
subdivision.
203.14  Builders' warranty.
203.18a  Solar energy system.
203.18c  One-time or up-front mortgage insurance premium excluded 
from limitations on maximum mortgage amounts.
203.38  Location of dwelling.
203.42  Rental properties.
203.43c  Eligibility of mortgages involving a dwelling unit in a 
cooperative housing development.
203.43d  Eligibility of mortgages in certain communities.
203.43f  Eligibility of mortgages covering manufactured homes.
203.43g  Eligibility of mortgages in certain communities.
203.43h  Eligibility of mortgages on Indian land insured pursuant to 
section 248 of the National Housing Act.
203.43i  Eligibility of mortgages on Hawaiian Home Lands insured 
pursuant to section 247 of the National Housing Act.
203.43j  Eligibility of mortgages on Allegany Reservation of Seneca 
Nation of Indians.
203.50  Eligibility of rehabilitation loans.

    (b) For the purposes of this subpart, all references in part 203 of 
this chapter to section 203 of the Act shall be construed to refer to 
section 234 of the Act.


Sec. 234.3  Definitions.

    The terms Act, Beginning of amortization, Commissioner, FHA, 
Insured Mortgage, Mortgage, Mortgagee, Mortgagor, and State, as used in 
this part, are defined in Sec. 203.251 of this chapter. The following 
terms, as used in this part, are defined as follows:
    Bona fide tenants' organization means an association of tenants 
formed by the tenants to promote their interests in a particular 
project, with membership in the association open to each tenant, and 
all requirements of the association applying equally to every tenant.
    Common areas and facilities means those areas of the project and of 
the property upon which it is located that are for the use and 
enjoyment of the owners of family units located in the project. The 
areas may include the land, roofs, main walls, elevators, staircases, 
lobbies, halls, parking space and community and commercial facilities.
    Conversion means the date on which all documents necessary to 
create a condominium under State law (and under local law, where 
applicable) have been recorded.
    Family unit means a one-family unit including the undivided 
interest in the common areas and facilities, and such restricted common 
areas and facilities as may be designated.
    Project means a structure or structures containing four or more 
family units.
    Project mortgage means a mortgage which is or has been insured 
under any of the FHA multifamily housing programs, other than sections 
213(a)(1) and 213(a)(2) of the Act (12 U.S.C. 1715e).
    Restricted common areas and facilities means those areas and 
facilities restricted to a particular family unit or number of family 
units.
    Tenant means the occupant(s) named in the lease or rental agreement 
of a housing unit in a project as of the date the condominium 
conversion documents are properly filed for the project, or as of the 
date on which the occupants are notified by management of intent to 
convert the project to a condominium, whichever is earlier.


Sec. 234.17  Mortgagor and mortgagee requirements for maintaining flood 
insurance coverage.

    The maintenance of flood insurance coverage on the project by the 
condominium association will satisfy the requirements of Sec. 203.16a 
of this chapter if such coverage protects the interest of the mortgagor 
in the family unit. For this purpose, ``the interest of the mortgagor'' 
is defined as insurance coverage equal to the replacement cost of the 
project less land costs.


Sec. 234.26  Project requirements.

    No mortgage shall be eligible for insurance unless the following 
requirements are met:
    (a) Location of family unit. The family unit shall be located in a 
project that the Commissioner determines to be acceptable.
    (b) Plan of condominium ownership. The project in which the unit is 
located shall have been committed to a plan of condominium ownership by 
a deed, or other recorded instrument, that is acceptable to the 
Commissioner.
    (c) Releases. The family unit shall have been released from any 
mortgage covering the project or any part of the project.
    (d) Certificate by mortgagee. The mortgagee shall certify that:
    (1) The deed of the family unit and the deed or other recorded 
instrument committing the project to a plan of condominium ownership 
comply with legal requirements of the jurisdiction.
    (2) The mortgagor has good marketable title to the family unit, 
subject only to a mortgage that is a valid first lien on the family 
unit.
    (3) The family unit is assessed and subject to assessment for taxes 
pertaining only to that unit.
    (e) Conditions and provisions. (1) The Commissioner may require 
such conditions and provisions as the Commissioner determines are 
necessary for the protection of consumers and the public interest.
    (2) An application for mortgage insurance of a unit will not be 
approved if approval would result in less than 80 percent of the FHA-
insured mortgages covering units in the project being occupied by 
mortgagors or co-mortgagors as a principal residence or a secondary 
residence (as these terms are defined in Sec. 203.18 of this chapter).
    (3) In addition to the other requirements of this section, in order 
for a project to be acceptable to the Secretary, at least 51 percent of 
all family units (including units not covered by FHA-insured mortgages) 
must be occupied by the owners as a principal residence or a secondary 
residence (as these terms are defined in Sec. 203.18 of this chapter), 
or must have been sold to owners who intend to meet this occupancy 
requirement.
    (f) Limitations on conversion of rental housing to condominium use. 
With respect to a family unit in any project that was converted from 
rental housing, no insurance will be provided under this section 
unless:
    (1) The conversion occurred more than one year before the 
application for insurance; or
    (2) The mortgagor or comortgagor was a tenant of a unit in the 
rental housing project converted to condominium use; or

[[Page 60162]]

    (3) The conversion of the property is sponsored by a bona fide 
tenants' organization representing a majority of the households in the 
project.
    (g) Projects covered by an insured or Secretary-held mortgage. In 
addition to the requirements contained in paragraphs (a) through (f) of 
this section, projects which are covered by an FHA-insured project 
mortgage, or by a mortgage held by the Secretary, must be in compliance 
with a conversion plan approved by the Commissioner. The conversion 
plan shall provide for:
    (1) The termination by payment in full of the mortgage or by 
voluntary termination of the insurance contract covering any HUD/FHA-
insured or Secretary-held mortgage on the project, unless the 
Commissioner determines that the Commissioner's interests, and those of 
the individuals purchasing the family units, are best served by not 
requiring the termination of the insurance or payment in full of the 
mortgage.
    (2) On release of a family unit from the project mortgage, payment 
shall be made on the outstanding balance of the project mortgage in an 
amount equal to the share of the balance determined by HUD to be 
attributable to the family unit.
    (3) The project mortgagee shall certify that, notwithstanding any 
provisions of the mortgage covering prepayment, no charge is 
contemplated or has been collected for prepayment in full of the 
project mortgage.
    (h) Projects not covered by an insured or Secretary-held mortgage. 
In addition to the requirements contained in paragraphs (a) through (f) 
of this section, projects which are not covered by an insured project 
mortgage or by a Secretary-held mortgage and which have not been 
approved by the Department of Veterans Affairs for its guaranty, 
insurance, or direct loan programs shall meet the requirements of this 
paragraph. Except with the approval of the Commissioner for the purpose 
of constructing or converting the project in phases or stages, any 
special right of the declarant (as declarant and not as a unit owner) 
to do any or all of the following must have expired or must have been 
waived in a recorded instrument:
    (1) Add land or units to the condominium;
    (2) Convert common elements into additional units or limited common 
elements;
    (3) Withdraw land from the condominium;
    (4) Use easements through the common elements for the purpose of 
making improvements within the condominium or within any adjacent land; 
or
    (5) Convert a unit into two or more units, common elements, or into 
two or more units and common elements.
    (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 percent of the total units in the project must 
have been conveyed to the unit purchasers, and at least 51 percent 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 percent 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 percent 
of the total units in the project may be encumbered by FHA-insured 
mortgages. (If endorsement would result in more than 10 percent of the 
units in such a project being encumbered by FHA-insured mortgages, the 
condominium project must be approved under paragraphs (a) through (h) 
of this section.) For projects with between 5 and 30 units inclusive, 
no more than 20 percent of the total units may be encumbered by FHA-
insured mortgages. For projects with four units, only one unit may be 
encumbered by an FHA-insured mortgage under the spot loan procedure of 
this paragraph (i); 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.)


Sec. 234.54  Eligibility of assigned mortgages and mortgages covering 
acquired property.

    The Commissioner may insure under this part, without regard to any 
limitation upon eligibility contained in this subpart (except that the 
property must be located in a condominium project approved under 
Sec. 234.26), any mortgage assigned to the Commissioner in connection 
with payment under a contract of mortgage insurance, or executed in 
connection with a sale by the Commissioner of any property acquired in 
the settlement of an insurance claim under any section or title of the 
Act.


Sec. 234.63  Location of property.

    The mortgage, to be eligible for insurance, shall be on property 
located in a State, as defined in Sec. 203.251 of this chapter, and not 
located on ``Hawaiian home lands,'' as that term is defined in section 
247(d)(2) of the Act.


Sec. 234.65  Nature of title.

    A mortgage, to be eligible for insurance, shall be on a fee 
interest in, or on a leasehold interest in, a one-family unit in a 
project including an undivided interest in the common areas and 
facilities, and such restricted common areas and facilities as may be 
designated. To be eligible, a leasehold interest shall be under a lease 
for not less than 99 years which is renewable, or under a lease having 
a period of not less than 10 years to run beyond the maturity date of 
the mortgage.


Sec. 234.66  Free assumability; exceptions.

    For purposes of HUD's policy of free assumability with no 
restrictions, as provided in Sec. 203.41 of this chapter, the 
definition of Legal restrictions on conveyance in Sec. 203.41(a)(3) of 
this chapter does not include rights of first refusal held by a 
condominium association for a project approved by the Secretary under 
this subpart prior to September 10, 1993.
    18. Section 234.251 is revised to read as follows:

[[Page 60163]]

Sec. 234.251  Definitions.

    The definitions in Sec. 203.251 of this chapter apply to this 
subpart.


Sec. 234.256  [Amended]

    19. Section 234.256 is amended by revising paragraphs (a), (b), 
(e), and (f), to read as follows:
    (a) Selling mortgagor. The requirements for the selling mortgagor 
are set forth in Sec. 203.258(a) of this chapter.
    (b) Purchasing mortgagor. (1) If the dwelling is a principal or 
secondary place of residence, the requirements for the purchasing 
mortgagor are set forth in Sec. 203.258(b)(1) of this chapter.
* * * * *
    (e) Direct endorsement. Requirements for the direct endorsement 
program are set forth in Sec. 203.258(f) of this chapter.
    (f) Substitute mortgagor is defined in Sec. 203.258(f) of this 
chapter.
    20. Section 234.259 is revised to read as follows:


Sec. 234.259  Claim procedure--graduated payment mortgages.

    Section 203.436 of this chapter applies to mortgages under this 
subpart.

    Dated: November 6, 1996.
Stephanie A. Smith,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 96-29925 Filed 11-25-96; 8:45 am]
BILLING CODE 4210-27-P