[Federal Register Volume 64, Number 57 (Thursday, March 25, 1999)]
[Rules and Regulations]
[Pages 14572-14574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7345]



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Part VII





Department of Housing and Urban Development





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24 CFR Parts 203 and 234



Builder Warranty for High-Ratio FHA-Insured Single Family Mortgages for 
New Homes; Rule

  Federal Register / Vol. 64, No. 57 / Thursday, March 25, 1999 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 234

[Docket No. FR-4288-I-01]
RIN 2502-AH08


Builder Warranty for High-Ratio FHA-Insured Single Family 
Mortgages for New Homes

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

ACTION: Interim rule.

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SUMMARY: This interim rule permits FHA insurance for a mortgage on a 
new home to exceed a 90 percent loan-to-value ratio if the home is 
covered by a 1-year builder's warranty that meets the requirements of 
HUD regulations. Recently-enacted legislation has increased FHA's 
flexibility to set the conditions for insured mortgages on new homes.

DATES: Effective date: April 27, 1999. Comment due date: May 24, 1999.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Rules Docket Clerk, Office of General Counsel, 
Room 10278, Department of Housing and Urban Development, 451 Seventh 
Street, SW, Washington, DC 20410. Communications should refer to the 
above docket number and title. 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: Vance Morris, Director, Home Mortgage 
Insurance Division, Room 9266, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410, (202) 708-
2700. (This is not a toll free number.) For hearing- and speech-
impaired persons, this number may be accessed via TTY by calling the 
Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background Information

    Before a recent change, section 203(b)(2) of the National Housing 
Act (NHA) permitted HUD to provide FHA insurance for a high-ratio 
single family mortgage (i.e, a mortgage with a loan-to-value ratio 
exceeding 90% of appraised value) for a new home if any one of several 
conditions stated in section 203(b)(2) of the NHA was met: either the 
property was approved for insurance by HUD or the Department of 
Veterans Affairs before the beginning of construction, or the home was 
covered by a consumer protection or warranty plan acceptable to the 
Secretary. In HUD's regulations in 24 CFR 203.200-.209, HUD sets forth 
requirements for a 10-year warranty plan that would be considered 
acceptable. (In this preamble, ``new construction'' or ``new home'' 
refers to any home that was completed earlier than 1 year before the 
date of the application for mortgage insurance.)
    Section 212 of the Departments of Veterans Affairs and Housing and 
Urban Development, and Independent Agencies Appropriations Act, 1999, 
amended section 203(b)(10) of the NHA to extend nationwide through 
September 30, 2000, a simplified downpayment calculation applicable in 
the prior two years in Alaska and Hawaii. The new calculation applies 
``[n]otwithstanding any other provision of this subsection.'' This 
``subsection'' includes section 203(b)(2). HUD has considered whether 
this ``notwithstanding'' language supersedes only some of the loan-to-
value provisions in section 203(b)(2) of the NHA--i.e., the loan-to-
value maximum ratios applicable to mortgages that could have been 
insured as high-ratio (over 90%) mortgages under previous law--or 
whether the ``notwithstanding'' language may also be interpreted as 
superseding the 90% ratio limitation that is otherwise applicable to 
new construction mortgages that do not meet any of the conditions cited 
above. HUD has adopted the broader view of the ``notwithstanding'' 
language and concludes that the National Housing Act now permits HUD to 
insure new construction mortgages with loan-to-value ratios exceeding 
90% despite the absence of prior approval or any warranty. However, 
section 203(b)(10) does not preclude HUD from imposing additional 
reasonable conditions for high-ratio new construction mortgages through 
regulations. In addition, HUD was already considering changing its 
warranty policy regardless of any change in legislation. HUD was 
considering reducing the length of the term of a warranty required for 
a high-ratio mortgage, and permitting a builder to provide the 
warranty.
    HUD has decided that each high-ratio new construction mortgage 
should be accompanied by a builder warranty that provides sufficient 
protection for the public and the mortgagors, and that HUD already has 
an adequate requirement in the first-year warranty requirement imposed 
by HUD Handbook 4145.1 REV-2, paragraph 3-18.1 That 
paragraph provides that whenever a mortgage for a new home will exceed 
a 90 percent loan-to-value ratio, a builder must sign Form HUD-92544 
which states in part:

    \1\ Note that Form HUD-92544A referenced in that paragraph was 
subsequently combined with Form HUD-92544, ``Warranty of Completion 
of Construction'', which is available through the Internet at http:/
/www.hudclips.org/subscriber/html/forms.htm.
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    The undersigned Warrantor further warrants to the Purchaser(s)/
Owner(s) or his/her (their) successors or transferees, the property 
against defects in equipment, material, or workmanship or materials 
supplied or performed by the Warrantor or any subcontractor or 
supplier at any tier resulting in noncompliance with standards of 
quality as measured by acceptable trade practices. This warranty 
shall continue for a period of one year from the date of original 
conveyance of title to such Purchaser(s) or from the date of full 
completion of each of any items completed after conveyance of title. 
The Warrantor shall remedy, at the Warrantor's expense, any 
defect(s) of equipment, material, or workmanship furnished by the 
Warrantor. Warrantor shall restore any work damaged in fulfilling 
the terms and conditions of this warranty.

    Form HUD-92544 has been approved by the Office of Management and 
Budget (see Paperwork Reduction Act Statement below.)

This Interim Rule

    HUD is revising current 24 CFR 203.14 to conform to this broad 
warranty requirement for the first year of occupancy. The current text 
of Sec. 203.14 generally follows the structure and content of section 
801 of the Housing Act of 1954 (12 U.S.C. 1701j-1), which is narrowly 
focused on warranting that construction is in substantial conformity 
with the plans and specifications that served as the basis for the pre-
construction appraisal, but HUD's actual first year warranty 
requirements are considerably broader. The revised Sec. 203.14 would 
also apply to FHA single family programs other than the basic section 
203 programs through existing cross-references in program regulations. 
HUD has amended the cross-references for condominium unit mortgages in 
24 CFR 234.1 so that Sec. 203.14 is no longer excluded from the 
sections incorporated by cross-reference. HUD has also made a necessary 
conforming change to Sec. 203.18(a)(3), to replace the current text 
that was included in a final rule also published in today's Federal 
Register (with an effective date one day earlier than this interum 
rule).
    As HUD strives to achieve its objectives of expanding homeownership 
opportunities, it is continuously seeking

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to develop approaches and products that will facilitate this effort. 
HUD believes that the comprehensive 1-year builder warranty provides 
valuable consumer protection and should continue to be required even 
without any specific statutory requirement. HUD interprets new section 
203(b)(10) as making the 10-year warranty plan approach unnecessary as 
long as section 203(b)(10) is applicable, however, and HUD is therefore 
removing 24 CFR 203.200-.209. If section 203(b)(10) expires in the 
future without being replaced with an equivalent provision, so that 
section 203(b)(2) once again prevents insurance of high-ratio new 
construction mortgages in the absence of prior approval or a warranty 
plan acceptable to HUD, HUD expects to continue to accept compliance 
with the 1-year builder warranty requirement in this rule as compliance 
with the section 203(b)(2) requirement for an acceptable warranty plan. 
This change is consistent with longstanding industry practices and 
requirements. HUD replaced its archaic and onerous requirements with a 
process that relies on local building codes and inspections and 
adherence to national building construction standards. Consequently, 
the one year warranty requirement is congruent with these efforts.
    The quality of housing and building technology has improved 
substantially over the years. Limiting the warranty requirements for 
new homes to the comprehensive 1-year builder warranty should increase 
homeownership by making the FHA program more widely accessible for new 
homes, thereby enhancing the level of consumer protection for new homes 
with marginal if any increases in costs to the consumer. No adverse 
impact on the FHA insurance funds is expected because the quality of 
the additional newly-constructed homes that may qualify for FHA 
insurance under the interim rule is likely to exceed the quality of 
existing homes which already qualify for high-ratio mortgages without 
special warranty requirements.

Justification for Interim Rulemaking

    HUD ordinarily provides an opportunity for the public to comment on 
HUD rules before they take effect in accordance with HUD's regulations 
in 24 CFR part 10. However, 24 CFR 10.1 permits HUD to dispense with 
notice and public procedures--through either an interim or a final 
rule--if HUD determines that notice and public procedure are 
impracticable, unnecessary or contrary to the public interest. In this 
case, HUD has determined that the rule should take effect as an interim 
rule--before the public comment period has ended--because the rule is 
an important part of the implementation of the downpayment 
simplification statute.
    Congress intended prompt implementation of the downpayment 
simplification and authorized it only for a limited time. Downpayment 
simplification has already been implemented for all existing homes 
through Mortgagee Letter 98-29 and a recent conforming final rule. 
Implementation of downpayment simplification for new homes is 
appropriately accomplished through rulemaking, instead of simply 
through a Mortgagee Letter, because of the discretion HUD is exercising 
in its interpretation of the scope of the temporary ``notwithstanding'' 
language of section 203(b)(10) of the NHA and the permanent language of 
section 203(b)(2) of the NHA, and in HUD's consequent administrative 
determination of the appropriate scope of warranty protection that 
should be provided to purchasers of new homes with FHA-insured 
mortgages.
    HUD believes that there should continue to be a distinction between 
the requirements for new and existing homes that receive insurance for 
high ratio mortgages. It is not appropriate to implement section 
203(b)(10) by completely dispensing with any warranty requirement for 
new homes, and the existing statutory 1-year builder warranty 
requirement in section 801 of the Housing Act of 1954 (see current 24 
CFR 203.14) is triggered only if the builder seeks pre-construction 
approval for a home, which the builder would have no incentive to do if 
high-ratio mortgages were otherwise available for new construction. 
Therefore, this rule is needed to fill a gap in warranty requirements 
that otherwise would result if HUD simply implemented section 
203(b)(10) for new construction without additional non-statutory 
regulatory requirements. Although the 1-year builder warranty 
requirements of this interim rule currently appear in a handbook, they 
take on added importance in light of downpayment simplification and it 
is important to present the requirements in regulatory form without 
delay.
    If this extra level of consumer protection were provided only after 
the completion of full notice and comment rulemaking, however, the 
public would lose much of the benefit of section 203(b)(10) for new 
homes during the limited period section 203(b)(10) is authorized. Such 
a delay would be contrary to the public interest because it would 
lessen the availability of insured financing for new homes and reduce 
the choice of housing to many low- and moderate-income families, in 
conflict with the Congressional purposes behind the nationwide attempt 
to fix downpayment requirements that have been widely perceived as 
unnecessarily confusing and burdensome. Congress expects HUD to use the 
temporary authority for nationwide downpayment simplification to gain 
sufficient experience to support an evaluation of the benefits and 
drawbacks of continuing nationwide downpayment simplification on a 
permanent basis. Any substantial delay in full implementation of 
nationwide application--including simplification of requirements for 
high-ratio new construction--would limit the experience needed to 
support an evaluation.
    In this interim rule HUD is adding no new burdens on builders or 
lenders with respect to the 1-year warranty for new homes currently 
required by handbook. HUD will consider all public comments received on 
this interim rule before issuing a final rule.

Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements contained in Sec. 203.14 of 
this rule have been approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520) and assigned OMB control number 2502-0059. 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.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
has been 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. 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.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
doing certifies that this rule does not have a significant economic 
impact on a substantial number of small entities. Only 13

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warranty companies are now approved to provide a 10-year warranty plan 
for homes with FHA-insured mortgages. The demand for 10-year warranties 
may drop considerably once the warranty no longer helps to qualify a 
home for a high-ratio FHA-insured mortgage, although some builders may 
continue to offer such warranties as a marketing tool. The small 
universe of warranty companies that may be affected, however, is 
insufficient to support a conclusion that there will be a substantial 
impact on small business. Small businesses are specifically invited, 
however, to comment on whether this interim rule will significantly 
affect them, and to make any recommendations on alternatives for 
compliance the requirements of this rule. Comments should be submitted 
in accordance with the instructions in the DATES and ADDRESSES sections 
in the preamble of this interim rule.

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 would 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 would result from this proposed rule 
that affect the relationship between the Federal Government and State 
and local governments.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for principal FHA 
single family mortgage insurance is 14.117. This interim rule would 
also apply through cross-referencing to FHA mortgage insurance for 
condominium units (14.133).

List of Subjects

24 CFR part 203

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

24 CFR part 234

    Condominiums, Mortgage insurance, Reporting and recordkeeping 
requirements.
    Accordingly, 24 CFR parts 203 and 234 are amended to read as 
follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715u; 42 U.S.C. 
3535(d).

    2. Section 203.14 is revised to read as follows:


Sec. 203.14  Builders' warranty for initial year of occupancy.

    If the property was not completed more than 1 year before the date 
of the mortgage insurance application and the loan-to-value ratio for 
the mortgage exceeds 90% in accordance with Sec. 203.18, the builder or 
other seller must provide to the mortgagor a 1-year warranty that:
    (a) Meets the requirements of section 801 of the Housing Act of 
1954, if applicable;
    (b) Warrants against defects in equipment, material or workmanship 
resulting in noncompliance with standards of quality as measured by 
acceptable trade practices;
    (c) Is enforceable by the original purchaser of the property and 
any successor owners during the initial year of occupancy; and
    (d) Otherwise is acceptable in form and content to the Secretary.

    (Approved by the Office of Management and Budget under control 
number 2502-0059).

    3. Section 203.18 is amended by revising paragraph (a)(3) to read 
as follows:


Sec. 203.18  Maximum mortgage amounts.

    (a) * * *
    (3) If the dwelling was completed 1 year or less from the date of 
the mortgage insurance application, an amount equal to 90 percent of 
the appraised value, unless the dwelling is covered by a builder 
warranty meeting the requirements of Sec. 203.14;
* * * * *


Secs. 203.200-203.209 [Removed]

    4. Sections 203.200-203.209 are removed.

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

    5. The authority citation for part 234 is revised to read as 
follows:

    Authority: 12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d).
    6. Section 234.1(a) is revised to read as follows:

Sec. 234.1  Cross-reference.

    (a) Incorporation of part 203 provisions; exclusions. 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.
203.18a  Solar energy system.
203.18c  One-time or up-front mortgage insurance.
203.38  Location of dwelling.
203.42  Rental properties.
203.43c  Eligibility of mortgages involving a dwelling 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.
* * * * *
    Dated: March 4, 1999.
William C. Apgar,
Assistant Secretary for Housing.
[FR Doc. 99-7345 Filed 3-24-99; 8:45 am]
BILLING CODE 4210-27-P