[Federal Register Volume 67, Number 162 (Wednesday, August 21, 2002)]
[Proposed Rules]
[Pages 54308-54310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21228]



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Part III





Department of Housing and Urban Development





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24 CFR Part 203



Amendments to the Section 203(k) Rehabilitation Loan Insurance Program; 
Proposed Rule

  Federal Register / Vol. 67, No. 162 / Wednesday, August 21, 2002 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4701-P-01]
RIN 2502-AH73


Amendments to the Section 203(k) Rehabilitation Loan Insurance 
Program

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend HUD's regulations for the 
Section 203(k) Rehabilitation Loan Insurance Program (203(k) Program). 
The 203(k) Program is the Federal Housing Administration's (FHA's) 
primary program for the rehabilitation and repair of single family 
properties. First, the proposed rule would limit 203(k) rehabilitation 
loan insurance to one-unit structures. The proposed rule would also 
establish a cap on the total cost of rehabilitation. The dollar amount 
of the rehabilitation could not exceed 20 percent of the FHA statutory 
single family mortgage limit for a one-unit structure in a ``high cost 
area.'' These changes would simplify the 203(k) Program for both 
lenders and homebuyers, and strengthen HUD's capacity to safeguard the 
FHA Insurance Fund.

DATES: Comments Due Date: October 21, 2002.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed 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: Vance T. Morris, Director, Office of 
Single Family Program Development, Room 9266, U.S. Department of 
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 
20410-8000; telephone (202) 708-2121 (this is not a toll-free number). 
Hearing- or speech-impaired individuals may access this number via TTY 
by calling the toll-free Federal Information Relay Service at (800) 
877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--The Section 203(k) Rehabilitation Loan Insurance 
Program

    Section 203(k) of the National Housing Act (12 U.S.C. 1709(k)) 
authorizes HUD to insure loans for the purchase and/or rehabilitation 
and repair of residential properties. The 203(k) Program is HUD's 
primary program for the rehabilitation and repair of single family 
properties. Section 203(k) loan insurance enables homebuyers and 
homeowners to finance both the purchase (or refinance) of a house and 
the cost of its rehabilitation through a single mortgage. The 
regulations implementing the 203(k) Program are located in 24 CFR 
203.50 and 24 CFR 203.440 through 203.495. HUD's Office of Housing--
Federal Housing Administration (FHA) administers the Program.
    The 203(k) Program fills a unique and important role for 
homebuyers. In the conventional loan market, a homebuyer who purchases 
a home that is in need of repair or modernization usually has to follow 
a time-consuming and costly process. The homebuyer must obtain 
financing to purchase the dwelling, additional financing for the 
rehabilitation work, and a permanent mortgage after rehabilitation is 
completed to pay off the interim loans. The interim acquisition and 
improvement loans often have relatively high interest rates and short 
repayment terms. The 203(k) Program was designed to address this 
situation. Under this program, a homebuyer may obtain a single loan, at 
a long-term fixed (or variable) rate, to finance both the acquisition 
and rehabilitation of the property.
    The extent of the rehabilitation covered by 203(k) loan insurance 
may range from relatively minor (though a minimum of $5,000 in cost is 
required) to virtual reconstruction. For example, a home that has been 
demolished, or will be razed as part of rehabilitation, is eligible 
provided that some of the existing foundation system remains in place. 
Section 203(k) loan insurance can also finance the rehabilitation of 
the residential portion of a property that has non-residential uses.

II. This Proposed Rule

    This proposed rule would make two amendments to HUD's regulations 
for the 203(k) Program. Specifically, the proposed rule would: (1) 
Limit 203(k) rehabilitation loan insurance to one-unit structures; and 
(2) establish a cap on the total cost of the rehabilitation. These 
changes would simplify the program for both lenders and homebuyers, and 
strengthen HUD's capacity to safeguard the FHA Insurance Fund. This 
section of the preamble describes the proposed changes to the 203(k) 
Program.

A. Limit to One-Unit Structures

    Under HUD's regulations at Sec. 203.50(a), the 203(k) Program may 
be used for the rehabilitation of a one- to four-unit structure that 
will be used primarily for residential purposes. In addition to typical 
home rehabilitation projects, this program can be used to convert a 
one-unit structure to a two-, three-, or four-unit structure. An 
existing multi-unit structure can be decreased to a one- to four-unit 
structure. However, the regulations also require that rehabilitation 
loan transactions must constitute an acceptable risk, as determined by 
the Secretary of HUD (see Sec. 203.50(e)).
    FHA statistics show that over the past eleven years, the 203(k) 
Program has experienced unacceptably high default rates for multi-unit 
(i.e., two- to four-unit) properties. The average default rate for 
203(k) multi-unit properties is greater than the average default rate 
for multi-unit properties associated with the Section 203(b) Program 
(HUD's principal single family mortgage insurance program). For 
example, during Fiscal Years 1999 through 2001, the average default 
rate for two-,
three-, and four-unit 203(k) properties was 32.8% greater than the 
average default rate for two-, three-, and four-unit properties under 
the 203(b) Program. To address these excessive default and claim rates, 
the proposed rule would amend Sec. 203.50(e) to provide that the 
Secretary has determined that loan transactions for the rehabilitation 
of two-, three-, and four-unit structures (other than those involving 
the conversion of such structures to one-unit structures) constitute an 
unacceptable risk. This amendment would limit 203(k) loan insurance to 
one-unit structures. The proposed change would also prohibit the 
conversion of one-unit structures to two-, three-, or four-unit 
structures, as well as the expansion of existing two- to four-unit 
structures to sizes larger than a one-unit structure.

B. Cap on Total Cost of Rehabilitation

    Another possible reason for the excessive claim and default rates 
is that the program is complex for both lenders and homebuyers, 
especially first time homebuyers. Since the 203(k) Program is used for 
rehabilitation of a property, financing under the program involves the 
use of contractors, consultants, engineers, and paperwork not required 
under other FHA insurance programs.

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Simplification of the 203(k) Program will assist in reducing the number 
of insurance claims and comply with Congressional mandates to maintain 
the FHA Insurance Fund in a sound actuarial manner.
    One method for reducing the complexity of the 203(k) Program is to 
limit the dollar amount of the rehabilitation. Currently, there is no 
such restriction, although the cost of the rehabilitation must be 
$5,000 or greater and the overall loan amount may not exceed the limits 
prescribed in Sec. 203.50(f). This proposed rule would provide that the 
total cost of the rehabilitation may not exceed 20 percent of the FHA 
statutory single family mortgage limit for a one-unit structure in a 
``high cost area,'' irrespective of location. The FHA mortgage limits 
are established by HUD pursuant to section 203(b)(2)(A) of the National 
Housing Act (12 U.S.C. 1709(b)(2)(A)). HUD announces these mortgage 
limits annually through a Mortgagee Letter, typically in late December 
for effect on January 1st of the following year. The most recent single 
family mortgage limits are set forth in Mortgagee Letter 01-31, issued 
on December 28, 2001. A copy of the Mortgagee Letter may be obtained 
through the HUD Web site at http://www.hud.gov. Under Mortgagee Letter 
01-31, the maximum mortgage amount for a one-unit structure in a ``high 
cost area'' is $261,609. The total cost of 203(k) rehabilitation would 
be capped at 20 percent of this amount, or $52,321. A sampling of data 
available to FHA indicates that the average dollar amount of 
rehabilitation on a 203(k) loan in Fiscal Years 1999 and 2000 was 
approximately $29,000. Accordingly, HUD believes that the proposed 
dollar cap on rehabilitation is appropriate to prevent the 203(k) 
Program from being used for overly complicated and expensive work, 
while continuing to serve homebuyers purchasing a one-unit structure in 
need of moderate rehabilitation.
    The proposed cap would only include costs related to the actual 
rehabilitation of the property and would not include costs such as 
consultant fees, supplemental origination fees, the costs of preparing 
architectural exhibits, and contingency fees. Additionally, the cap 
would also exclude: (1) Rehabilitation costs incurred to improve the 
energy efficiency standards of the home; and (2) six months of mortgage 
payments.

III. Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Department's Rules 
Docket Clerk, Office of General Counsel, Room 10276, 451 Seventh 
Street, SW, Washington, DC 20410-0500.

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 implement section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4223). The Finding of No Significant Impact is 
available for public inspection between the hours of 7:30 a.m. and 5:30 
p.m. weekdays in the office of the Department's Rules Docket Clerk, 
Office of General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary has reviewed this proposed rule before publication 
and by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The reasons for HUD's determination are as follows.
    First, the proposed rule would limit 203(k) rehabilitation loan 
insurance to one-unit structures. Over the last eleven years, 
approximately 80 percent of all 203(k) loans have been made for single 
unit structures. Accordingly, the economic impact on small lenders of 
limiting the program to one-unit structures would not be significant in 
comparison to the total number of 203(k) loans made. In addition, 
although 203(k) loan insurance would no longer be available for the 
rehabilitation of multi-unit structures, there are other FHA mortgage 
insurance products that can be used for the rehabilitation of such 
structures. For example, FHA's Title I program can be used to improve a 
multi-unit structure after purchase. Nothing in this proposed rule 
would preclude lenders participating in the FHA programs from offering 
such alternate mortgage insurance products.
    The proposed rule would also cap the total cost of rehabilitation 
to 20 percent of the HUD single family mortgage limit for a one-unit 
structure in a ``high cost area.'' As noted above in this preamble, the 
average amount of rehabilitation on a 203(k) loan in Fiscal Years 1999 
and 2000 was approximately $29,000. Accordingly, HUD believes that the 
proposed rehabilitation cap of $52,321 is appropriate to prevent the 
203(k) Program from being used for overly complicated and expensive 
work, while continuing to serve the program's primary customer--
homebuyers purchasing a one-unit structure in need of moderate 
rehabilitation.
    Finally, as the HUD mortgage limits increase each year, the dollar 
amount of the proposed cap will also rise. For example, the FHA 
statutory single family mortgage limit for a one-unit structure in a 
high-cost area rose over 9 percent from 2001 ($239,250) to 2002 
($261,609).
    HUD has taken other steps to help ensure that the proposed cap does 
not impose a substantial economic burden on either 203(k) lenders or 
borrowers. For example, the proposed cap would only include costs 
related to the actual rehabilitation of the property and would not 
include costs such as consultant fees, supplemental origination fees, 
the costs of preparing architectural exhibits, and contingency fees. 
Additionally, the cap would not include rehabilitation costs incurred 
to improve the energy efficiency standards of the home and six months 
of mortgage payments.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This proposed rule would not have 
federalism implications and would not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive Order.

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Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) 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 proposed rule would not 
impose any Federal mandates on any State, local, or tribal governments, 
or on the private sector, within the meaning of the Unfunded Mandates 
Reform Act of 1995.

Catalog of Federal Domestic Assistance Numbers

    The Catalog of Federal Domestic Assistance Number for the Section 
203(k) Rehabilitation Loan Insurance program is 14.108.

List of Subjects in 24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR part 203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for 24 CFR part 203 continues to read as 
follows:

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

    2. Amend Sec. 203.50 by revising paragraph (e) and adding paragraph 
(m) to read as follows:


Sec. 203.50  Eligibility of rehabilitation loans.

* * * * *
    (e)(1) The loan transaction shall be an acceptable risk as 
determined by the Secretary.
    (2) The Secretary has determined that loan transactions for the 
rehabilitation of two-, three-, and four-unit structures (other than 
those involving the conversion of such structures to one-unit 
structures) constitute an unacceptable risk.
* * * * *
    (m) Maximum cost of rehabilitation. For purposes of paragraph (f) 
of this section, the maximum cost of the rehabilitation shall not 
exceed 20 percent of the loan dollar amount limitation established by 
HUD pursuant to section 203(b)(2)(A) of the National Housing Act (12 
U.S.C. 1709(b)(2)(A)) for a one-unit structure in a ``high cost area.'' 
This limit does not apply to:
    (1) Costs incurred to improve the energy efficiency standards of 
the property;
    (2) Six months of mortgage payments; and
    (3) Costs not directly related to the physical rehabilitation of 
the property, such as (but not limited to):
    (i) Consultant fees;
    (ii) Supplemental origination fees;
    (iii) The costs of preparing architectural exhibits; and
    (iv) Contingency fees.

    Dated: July 8, 2002.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 02-21228 Filed 8-20-02; 8:45 am]
BILLING CODE 4210-27-P