[Federal Register Volume 63, Number 68 (Thursday, April 9, 1998)]
[Rules and Regulations]
[Pages 17654-17656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9419]



[[Page 17653]]

_______________________________________________________________________

Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 206



Home Equity Conversion Mortgage Insurance; Right of First Refusal 
Permitted for Condominium Associations; Interim Rule

  Federal Register / Vol. 63, No. 68 / Thursday, April 9, 1998 / Rules 
and Regulations  

[[Page 17654]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 206

[Docket No. FR-4267-I-01]
RIN 2502-AG93


Home Equity Conversion Mortgage Insurance; Right of First Refusal 
Permitted for Condominium Associations

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

ACTION: Interim rule.

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

SUMMARY: This interim rule removes, for the Home Equity Conversion 
Mortgage (HECM) insurance program only, the current restriction on FHA 
mortgage insurance for a dwelling unit in a condominium project where 
the condominium association has a right of first refusal to purchase 
units that are offered for sale. As a result of this change, some 
condominium units in projects may be approved for the HECM program.

DATES: Effective Date: May 11, 1998.
    Comment Due Date: June 8, 1998.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, 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: John J. Coonts, Director, Office of 
Insured Single Family Housing, Room 9266, Department of Housing and 
Urban Development, 451 Seventh Street, SW, Washington, DC 20410, 
telephone (voice) (202) 708-3046. (This is not a toll-free number.) 
Hearing-impaired or speech-impaired individuals may access the voice 
telephone listed by calling the Federal Information Relay Service 
during working hours at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

    This interim rule addresses a difficult area that has been the 
subject of prior FHA rulemaking and involves balancing competing 
policies. These policies relate to the extent to which property subject 
to an FHA-insured mortgage must be freely transferable without 
restrictions. The interim rule makes one limited refinement to current 
FHA policies.
    FHA published a final rule on September 17, 1996 (61 FR 49033) to 
add 24 CFR 206.45(e) 1. It generally bars Home Equity 
Conversion Mortgage (HECM) insurance for a home that is not freely 
marketable, with the exception of restrictions on conveyance that are 
permitted for other FHA programs by 24 CFR 203.41 (for property other 
than condominium units) or 24 CFR 234.66 (for condominium units.) The 
FHA policy permits certain restrictions that facilitate affordable 
housing programs, and a limited number of other restrictions, such as a 
limitation of housing to elderly residents when consistent with the 
Fair Housing Act and State and local non-discrimination laws.
---------------------------------------------------------------------------

    \1\ A typographical error in the final rule, which has been 
corrected, designated the new provision as Sec. 203.47(e). The 
proposed rule had correctly indicated that the new provision would 
be Sec. 203.45(e).
---------------------------------------------------------------------------

    The FHA policy was codified, for programs other than the HECM 
program, as a regulation in 1993 (new 24 CFR 203.41 and 234.66 were 
added) to incorporate administrative policies on permissible 
restrictions on conveyance that FHA developed in the preceding decades 
(58 FR 42649, August 11, 1993 (final rule) and 56 FR 58762, November 
21, 1991 (proposed rule)).
    One provision of the regulation generally prohibited mortgage 
insurance on property for which another party held a right of first 
refusal, in part because such a right could make more difficult an 
expeditious sale at fair market value by a mortgagor in financial 
distress. A delay in the sale of a property, or inability to sell at a 
price that would cover the mortgage debt, could result in a mortgage 
default entitling the mortgagee to foreclose and claim insurance 
benefits from HUD. Similarly, rights of first refusal and other 
restrictions on conveyance can increase the difficulty to FHA in 
marketing an acquired property expeditiously at fair market value, 
thereby increasing FHA's holding costs and decreasing its ultimate 
recovery. FHA's policies on rights of first refusal and other 
restrictions on conveyance also recognized the potential that the right 
could be improperly used for discriminatory purposes. The 1991 proposed 
rule would have permitted only rights of first refusal that would be 
exercised in the context of an affordable housing program by a public 
body or an eligible non-profit organization (or an assignee who would 
occupy the property) within a reasonable time after the event 
permitting exercise of the right (i.e., a bona fide purchase offer by 
another person) occurred. Also, the right had to permanently terminate 
if mortgage assignment to HUD, foreclosure, or a deed in lieu of 
foreclosure took place.
    In response to a public comment stating that this exception was too 
narrow, the 1993 final rule added a sentence that authorized HUD to 
approve an individual or organization who was not a public body or 
eligible non-profit organization to hold a right of first refusal under 
the same conditions. As explained in the rule preamble, this change was 
to accommodate ``unusual situations,'' such as employer homebuyer 
assistance to low- or moderate-income employees in areas with little or 
no affordable housing, when the employer would want to be able to 
continue to limit the homeownership to employees needing assistance. 
HUD stated (58 FR 42647):

    This provision is not intended to permit condominium 
associations to have rights of first refusal, and HUD approval 
should not be requested for rights held by a condominium 
association, or rights held by others if a condominium is not 
involved in an affordable housing program.

    FHA has long been aware that condominium organizational documents 
frequently grant to the condominium association a right of first 
refusal to purchase the unit of a condominium unit owner who offers a 
unit for sale, and that prohibiting FHA insurance in such cases can 
exclude some of the condominium market (particularly existing projects 
not originally conceived as attracting a market likely to use FHA 
programs). From 1981 until 1993, when 24 CFR 234.66 took effect, FHA 
administrative policy permitted rights of first refusal for existing 
condominium projects that otherwise were acceptable for FHA mortgage 
insurance. HUD pointed this out in its rule preamble (56 FR 58764) but 
clearly indicated that it proposed to reverse this policy except for 
the ``grandfathering'' under Sec. 234.66 of condominium projects 
already approved by HUD.
    When the proposal to change policy was published for public comment 
in 1991, the HECM program was operating at a very low volume. Any 
special concerns that might be relevant to the program if 24 CFR 203.41 
and 234.66 were to be applied to the HECM program were not taken into 
consideration because the 1993 rule did not apply at all to the HECM 
program. Although no rule barred HECM mortgage insurance in 
condominiums

[[Page 17655]]

with rights of first refusal, it was barred as a practical matter 
because Sec. 206.51 of the HECM program regulations restricted the HECM 
program to condominium projects approved by FHA and FHA did not approve 
any projects solely for the HECM program.
    HUD proposed in 1996 to formally apply to the HECM program the 
general policies regarding restrictions on conveyance (see 61 FR 21918, 
May 10, 1996). HUD stated in the rule preamble:

    While HUD does not have the same concerns about restrictions on 
conveyance 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 project 
possesses a right of first refusal (unless the condominium project 
received written approval from HUD prior to September 10, 1993). HUD 
believes there may be a number of successful 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 [adopted in final form on 
May 29, 1996, 61 FR 26984] 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 amendment 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. (61 FR 21921)

No public comments were received that generally opposed the application 
of Sec. 234.66 in its entirety, but one commenter did--in the context 
of discussing extension of the HECM program to cooperatives--oppose 
applying the restriction against rights of first refusal to 
condominiums in the HECM program. As stated at 61 FR 49031:

    Comment: * * * 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 cooperatives 
is inactive. Cooperative units, therefore, are not eligible for the 
HECM program. * * *

HUD received no other comments indicating that the proposed rule would 
cause any specific problems and the proposed rule was adopted without 
change in this regard. The final rule and preamble did not address the 
commenter's remarks on the value of rights of first refusal for 
condominiums in the HECM program, except through silence and failure to 
make any change in the final rule to permit rights of first refusal.

Reason for Change

    This rulemaking will allow an eligible owner of a condominium unit 
to obtain a HECM when a right of first refusal would have otherwise 
precluded the elderly homeowner from obtaining HECM financing.
    It has come to FHA's attention that in several recent instances an 
elderly homeowner living in a condominium has attempted to obtain a 
HECM loan but was precluded from doing so because the condominium 
association held a right of first refusal. As discussed above, FHA has 
previously considered the HECM program separately from other FHA single 
family programs with regard to the application of general policies 
against restrictions on conveyance, and expressed specific concern 
about the application of the ban on rights of first refusal held by 
condominium associations.
    In addition to the concerns expressed above, it is unlikely that 
many HECM applicants are living in condominiums that were established 
with the intent of qualifying the units for traditional FHA mortgage 
insurance. FHA programs are typically used to help finance the purchase 
of condominium units for first-time homebuyers and others who are 
unable to afford the larger downpayment required for other mortgage 
alternatives. Particularly in the case of a condominium project 
specifically designed for occupancy by the elderly, a condominium 
developer or person who converted a rental building to condominium 
ownership would have been unlikely to have avoided providing a right of 
first refusal for the condominium association if that was a common 
practice in the area, as frequently is the case. Thus, the FHA policy 
regarding rights of first refusal by condominium associations can have 
a disproportionately adverse effect, although unintentional, when 
applied to the HECM program.
    HUD is again seeking public comment on whether, on balance, it is 
preferable to accept these risks rather than to deny access to the HECM 
program to a substantial proportion of elderly owners of condominium 
units. Because FHA has previously sought public comment on this issue 
and received no comment supporting the restriction of rights of first 
refusals for condominiums in the HECM program but did receive an 
opposing comment, and because there have been actual instances recently 
identified in which mortgage insurance has been unavailable under 
current policy but which could have been acceptable to HUD, HUD 
considers it appropriate to refine its policy on an interim basis 
pending consideration of any further public comments on the subject. 
This is a minor change to the basic and continuing HUD policy that 
restrictions on conveyance for all FHA single family programs, 
including the HECM program, should be severely limited, and condominium 
rights of first refusal should ordinarily be covered by those 
limitations.
    Condominium associations are not permitted to exercise their rights 
of first refusal to engage in discriminatory practices when an elderly 
homeowner, or the homeowner's heirs, dispose of the property. The 
Department will use all of its enforcement authority at its disposal if 
discriminatory practices occur as a result of the exercise of a right 
of first refusal.

Effect of Change

    Section 206.51 of the HECM program regulations requires that the 
condominium project be acceptable to HUD (other than spot loans meeting 
the requirements of Sec. 234.26(i)), but it does not mandate project 
approval standards identical to those used in the basic FHA program for 
mortgage insurance on condominium units under section 234(c) of the 
National Housing Act (Sec. 234.26). To date, HUD administrative policy 
has been to permit HECMs (other than spot loans) only for condominium 
units in projects that were accepted for the section 234(c) program. As 
a result of this rule change, some condominium projects may be approved 
for the HECM program but not for the section 234(c) program. HUD will 
issue appropriate administrative instructions concerning the lists of 
FHA-approved condominiums.
    The rule change also affects HECM spot loans. They will now be 
permitted in projects that have not received FHA

[[Page 17656]]

approval, subject to the general rules limiting spot loans, if no 
restrictions on conveyance barred by Sec. 203.41 apply to the unit 
other than a right of first refusal for the condominium association.

Other Matters

Justification for Interim 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). The Department finds that good 
cause exists to publish this rule for effect before it receives and 
completes consideration of public comments, because the public was 
previously afforded an opportunity to comment on the precise issue 
involved in this interim rule, and the only relevant comment supported 
the position adopted in this interim rule. In addition, the Department 
now has specific examples regarding the adverse effect of the current 
rule on potential mortgagors under the HECM program which it lacked 
when evaluating the previous rulemaking. After the previous rulemaking, 
the potential adverse effect of the policy in the current rule was 
expanded due to adoption of the ``spot loan'' procedure which opened up 
the HECM program to condominiums that are not eligible for project 
approval under the section 234(c) program. This increased the adverse 
effect of the Department's previous handling of the issue and is 
additional information that causes the Department to consider its 
rulemaking and adjust the result in a minor but specific manner.
    This interim rule should have no adverse effect on those who had 
the opportunity to comment in previous rulemaking. It will, however, 
immediately benefit others by expanding the available means through 
which mortgagees and mortgagors can obtain the benefits of FHA mortgage 
insurance for a HECM on a dwelling in a condominium unit. In the 
interest of obtaining the fullest participation possible in determining 
the proper means of administering the HECM program, the Department 
again invites public comment on the policy presented in interim rule. 
The comments received within the 60-day comment period will be 
considered during development of a final rule that ultimately will 
supersede this interim rule.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this interim rule, and in 
doing so certifies that this interim rule will not have a significant 
economic impact on a substantial number of small entities. This rule 
removes the current restriction on FHA mortgage insurance for a 
dwelling unit in a condominium project where the condominium 
association has a right of first refusal to purchase units that are 
offered for sale. Small entities are specifically invited, however, to 
comment on whether this rule will significantly affect them, and 
persons are invited to submit comments according to the instructions in 
the DATES and COMMENTS sections in the preamble of this interim rule.

Environmental Finding

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). 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 General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
7th Street S.W., Washington, D.C. 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 interim 
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 interim rule that 
would affect the relationship between the Federal government and State 
and local governments.

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 interim 
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.

Catalog

    The Catalog of Federal Domestic Assistance number for the Home 
Equity Conversion Mortgage Program is 14.183.

List of Subjects in 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 for part 206 continues to read as follows:

    Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).

    2. Section 206.45(e) is revised to read as follows:


Sec. 206.45  Eligible properties.

* * * * *
    (e) Restrictions on conveyance. 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, except 
that a right of first refusal to purchase a unit in a condominium 
project is permitted if the right is held by the condominium 
association for the project.

    Dated: February 20, 1998.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 98-9419 Filed 4-8-98; 8:45 am]
BILLING CODE 4210-27-P