[Federal Register Volume 70, Number 123 (Tuesday, June 28, 2005)]
[Rules and Regulations]
[Pages 37154-37157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-12610]



[[Page 37153]]

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Part II





Department of Housing and Urban Development





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24 CFR Part 203



Up-Front Mortgage Insurance Premiums for Loans Insured Under Sections 
203(k) and 234(c) of the National Housing Act; Final Rule

  Federal Register / Vol. 70, No. 123 / Tuesday, June 28, 2005 / Rules 
and Regulations  

[[Page 37154]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4749-F-02]
RIN 2502-AH82


Up-Front Mortgage Insurance Premiums for Loans Insured Under 
Sections 203(k) and 234(c) of the National Housing Act

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: HUD charges an up-front mortgage insurance premium (MIP) for 
loans that are obligations of its Mutual Mortgage Insurance Fund, and 
of its general insurance fund only for insurance in connection with 
Section 8 homeownership. However, to date there has been no provision 
for up-front MIPs for loans such as home rehabilitation loans under 
section 203(k) of the National Housing Act (NHA) and condominium unit 
loans under section 234(c) which are obligations of the general 
insurance fund. Recent statutory changes now provide for an up-front 
MIP for those programs. This rule amends HUD's regulations related to 
mortgage insurance to conform the regulations to the recent statutory 
changes. This rule implements the October 7, 2003, proposed rule, with 
the only change made by this final rule being the proposed effective 
date.

DATES: Effective Date: December 27, 2005.

FOR FURTHER INFORMATION CONTACT: James Beavers, Director, Home Mortgage 
Insurance Division, Office of Single Family Housing, Office of Housing, 
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). Persons with hearing or speech impairments may 
access this number through TTY by calling the toll-free Federal 
Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Statutory Background

    Section 207 of the Departments of Veterans Affairs and Housing and 
Urban Development and Independent Agencies Appropriations Act, 2002, 
Public Law 107-73, approved November 26, 2001, (FY 2002 HUD 
Appropriations Act) amended section 203(c) of the NHA to include 
mortgages insured under section 203(k) (rehabilitation loans) and 
section 234(c) (condominium loans) among those mortgages for which HUD 
collects an up-front MIP. This up-front MIP is not to exceed 2.25 
percent of the amount of the original insured mortgage (or not to 
exceed 2.0 percent for a first-time homebuyer who completes an approved 
program of homeownership counseling) at the time of insurance. This 
statutory provision for up-front MIPs in the sections 203(k) and 234(c) 
programs (referred to as simply the 203(k) program and 234(c) program) 
was effective as of November 26, 2001. HUD will only collect up-front 
MIPs for 203(k) and 234(c) loans, however, originated after the 
effective date of this final rule.

II. Regulatory Background

    HUD published a proposed rule on October 7, 2003, (68 FR 58007) to 
amend relevant sections of HUD's regulations in 24 CFR part 203 to 
conform these regulations to the statutory changes. Specifically, HUD 
proposed to amend regulations at 24 CFR 203.284(a) and 203.285(a), on 
up-front MIPs, and Sec.  203.50, on rehabilitation loans under section 
203(k). HUD regulations in part 234, which relate to condominium 
mortgage insurance, incorporate by reference at Sec.  234.255 the 
provisions of Sec. Sec.  203.284 and 203.285, and, therefore, include 
these proposed revisions, a fact that was noted in the preamble of the 
proposed rule (68 FR 58006). The proposed rule provided that the 
transition provisions in 24 CFR 203.284 and 203.285 for older mortgage 
loans would remain as published in the April 1, 2003, edition of title 
24 of the Code of Federal Regulations.

III. Discussion of Public Comments

    The public comment period closed on December 8, 2003. Two public 
commenters submitted comments on the proposed rule, raising several 
issues. Both commenters were trade associations involved with the 
mortgage industry. Their comments are as follows:
    Comment: Up-front MIPs in 203(k) and 234(c) programs should not 
result in an increased MIP payment for Federal Housing Administration 
(FHA) borrowers. This commenter states that, while HUD's statement 
outlines the substitution of an up-front MIP for the current annual 
MIP, ``the proposal does not set forth specific plans for the MIP 
structure for Section 203(k) and 234(c) programs.'' This commenter 
urges HUD to ensure ``that any restructuring of the MIP for these 
programs maintains the MIPs at levels comparable to or below those 
currently charged. MIP changes for these and other FHA programs should 
occur only when a thorough analysis of actual and expected program 
performance shows such increases to be necessary.''
    HUD Response: The current General Insurance (GI) Fund annual 
premium of 50 basis points does not offset the risk of loss from 
condominium and home rehabilitation loans. Therefore, and consistent 
with budget assumptions, HUD plans to begin collecting an up-front MIP 
in addition to the present monthly premium. This up-front MIP 
requirement brings the insurance of loans on condominium units and 
properties in need of rehabilitation in line with FHA's 203(b) program 
that currently requires both a 1.5 percent up-front MIP and .50 percent 
annual MIP collected on a monthly basis. At this time, FHA plans to use 
the same mortgage insurance premium rate for 234(c) and 203(k) loans as 
are used to insure loans in the MMI fund.
    Comment: An up-front MIP could, through amortization over the life 
of the loan, improve affordability for homebuyers. One commenter states 
that it believes that ``affordability could be improved for homebuyers 
* * * if HUD substituted an up-front MIP, which can be financed and 
amortized over the life of a loan, for the annual MIP, which has the 
direct effect of increasing a borrower's monthly payment. In this 
regard, HUD's proposal would provide the same flexibility that helped 
borrowers when the section 203(b) program converted from an annual to 
an up-front MIP.''
    HUD Response: The up-front MIP may be financed into the mortgage 
amount, thereby mitigating the cost to the homebuyer.
    Comment: HUD should also review its regulations regarding non-high-
rise condominiums. One commenter states that although it was not part 
of this proposed rule, HUD should review its regulations regarding non-
high-rise condominiums. ``In many cases, affordably-priced townhome and 
zero lot line communities are subject to significantly different 
requirements if these units are part of a condominium community as 
differentiated from fee simple ownership within a planned unit 
development. These differences result in delays and comparably higher 
costs for buyers who seek FHA-insured financing to purchase 
condominiums.''
    HUD Response: Although HUD's condominium regulations are outside 
the scope of this rule, HUD appreciates the comment and will examine 
these regulations under HUD's America's Affordable Communities 
Initiative, which focuses on identifying and removing barriers (at all 
levels of government) to affordable housing.

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    Comment: HUD should align its policies for the 203(k) and 234(c) 
programs with section 203(b). One commenter states that, while it 
``supports the change to FHA's regulations to reflect the provisions of 
Public Law 107-73 [The Department of Veteran's Affairs, HUD, and 
Independent Agency Appropriation Act for 2002],'' HUD should consider 
transferring the 234(c) program from the General Insurance/Special Risk 
Insurance (GI/SRI) Fund to the Mutual Mortgage Insurance (MMI) Fund and 
modify the calculation and termination policies of the MIP currently 
collected under 203(k) and 234(c) to be consistent with the mortgage 
insurance premium under the 203(b) program. This commenter states that 
the 234(c) program was first placed in the GI/SRI fund due to the fact 
that condominium financing was considered higher risk. While this risk 
profile was justified at one time, condominiums today are well-accepted 
and perform similarly to single family detached and attached housing. 
Moving the 234(c) program to the MMI fund will add greater consistency 
to the program. Aligning the mortgage insurance for 203(k) and 234(c) 
with 203(b) will allow both lenders and FHA to simplify their 
accounting systems.
    HUD Response: The section 234(c) program was established by 
legislation and placed into the GI fund. (See section 234(g) of the 
National Housing Act, 12 U.S.C. 1715y(g)). Moving the Section 234(c) 
program from the GI Fund to the MMI Fund would require enabling 
legislation that HUD will not seek at this time. HUD does agree that 
``aligning the mortgage insurance [premium structure] will allow both 
lenders and FHA to simplify their accounting systems'' and will adopt 
the same rate structure for section 234(c) and section 203(k) mortgages 
as on MMI fund mortgages. Within this context, however, HUD retains the 
flexibility to adjust those rates as needed.
    Comment: The termination provisions for 203(k) and 234(c) MIPs 
should be made similar to those in the 203(b) program. In the 203(b) 
program, MIPs are terminated after the greater of five years or the 
date when the loan-to-value ratio reaches 78 percent. Likewise, 
refinance loans with a term of 15 years or less and an initial loan-to-
value ratio of less than 90 percent do not have an annual MIP. In the 
203(k) and 234(c) programs, MIPs are collected for the life of the 
loan. The 203(k) and 234(c) programs should be made consistent with 
these policies. Such consistency would lower costs to FHA and to 
lenders because they could streamline their systems across programs, 
and this lower cost would translate into lower costs for borrowers.
    HUD Response: HUD agrees with the comment and will adopt unearned 
premium refund and termination of annual premium schedules consistent 
with mortgages insured under the MMI fund. The public should be aware 
that there has been a recent change in the law regarding refunds and 
that HUD may be updating its regulations in this area (see Consolidated 
Appropriations Act, 2005, Public Law 108-447, Title II, Sec.  223).
    Comment: FHA should carefully consider whether an up-front MIP on 
203(k) and 234(c) should be imposed at this time. One commenter states 
that the statute permits, but does not mandate an up-front MIP, and 
that adding an up-front MIP will make the 203(k) and 234(c) programs 
more expensive to borrowers. These programs are important for first 
time and low- or moderate-income borrowers, particularly in areas with 
high home values. In such areas, homes in need of renovation or 
condominium housing are usually the most affordable housing 
opportunities. For borrowers of limited means, such housing is a long-
term prospect that allows them to enjoy the social and financial 
benefits of homeownership. Furthermore, these programs support urban 
areas. For the two-year period ending May 31, 2003, over 85 percent of 
203(k) loans were made in Metropolitan Statistical Areas. Housing 
insured under the 234(c) program is used heavily in urban areas and is 
often the only housing in a city that is within FHA's mortgage limits. 
The lack of an up-front MIP on these programs lowers the cost of 
capital for homebuyers in urban areas and promotes the renovation of 
housing and the construction of multi-unit housing. Imposing an up-
front MIP at this time would not be beneficial to borrowers or to urban 
areas.
    HUD Response: HUD has carefully considered the need to require the 
additional premium, as well as the intent of Congress in enacting the 
legislation calling for the up-front MIP. While HUD is well aware of 
the slightly greater cost to the consumer, the up-front MIP, paid by 
borrowers since 1983 for mortgages insured under the Mutual Mortgage 
Insurance Fund, is financed into the total loan amount thus eliminating 
most additional out-of-pocket expense to the borrower and is amortized 
over the life of the loan. Additionally, maintaining an actuarially 
sound insurance fund is both consistent with congressional mandate and 
necessary to preserve FHA's ability to continue to insure loans for 
underserved homebuyers. Further, over the last decade the average claim 
rate for insured condominium loans was one percentage point greater 
than the rate for MMI funds loans. The average claim rate for all 
insured rehabilitation loans from 1992 to 2000 exceeds the average 
claim rate of MMI fund loans by two and a half percentage points. Since 
the historic claim rates of loans insured under sections 234(c) and 
203(k) are higher than FHA's primary program, the section 203(b) 
program, the risk to the fund is greater, and there is no justification 
for charging lower rates in these programs.
    Comment: The 203(k) program should be reformed before an up-front 
MIP is imposed. An up-front MIP may increase revenues to FHA, but will 
not translate into better performance of the 203(k) program. ``Without 
compensating program and resources changes, adding an [up-front] MIP 
will only further discourage use of the 203(k) program with little 
effect on its performance.'' Imposition of the up-front MIP should be 
part of a comprehensive reform effort, including lifting the investor 
moratorium and applying the up-front MIP to investors only, along with 
other oversight mechanisms.
    HUD Response: Although program reforms for the 203(k) program are 
outside the scope of this rule, HUD appreciates such comments and has 
begun the process of strengthening the rehabilitation mortgage 
insurance program. Planned reforms focus on eliminating incidences of 
fraud and other program abuses, and HUD is not now considering lifting 
the moratorium on investor participation in the 203(k) program. The 
collection of an up-front MIP on 203(k) loans is one step in the 
process of making this program actuarially sound.
    Comment: The rule should have a six-month delayed effective date. 
One commenter states that the rule should not be effective until six 
months after the publication of a final rule. This timeframe will allow 
lenders sufficient time to adjust their systems to accommodate the 
changes. ``Lenders are increasingly finding that, in an age of 
automation, instituting change requires substantive reprogramming.''
    HUD Response: HUD recognizes its responsibility and that of its 
participating lenders to institute systems changes to accommodate the 
collection of an up-front MIP on section 234(c) and 203(k) loans. 
Therefore, HUD will make this rule effective six months after the date 
of publication, providing ample lead time.

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IV. This Final Rule

    Based on the public comments, this final rule implements the 
proposed rule. In response to comments, the effective date is delayed 
until six months after the date of publication of this final rule.

V. 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. Generally, the 
amounts of up-front mortgage insurance premiums are amortized in the 
mortgage and ultimately impose no obligations on businesses.

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled, ``Regulatory Planning and Review''), 
which the President issued on September 30, 1993. At the proposed rule 
stage, data were available for years up to FY 2001. Based on that data, 
the rule was determined to be economically significant because, 
although the current impact of the rule was slightly under $100 
million, the forecasted impact for the years 2003-2005 was over that 
threshold. At the final rule stage, the economic analysis was redone 
with new data available up to FY 2003. The result of this updated 
economic analysis based on more recent data was that both the current 
and forecasted impact (for the years FY 2004 through FY 2006) were 
found to be under $100 million.
    Therefore, this rule was determined significant under E.O. 12866 
(although not economically significant). Any changes made to the rule 
subsequent to its submission to OMB are identified in the docket file, 
which is available for public inspection in the office of the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, 
DC, 20410-0500. The Economic Analysis prepared for this rule is also 
available for public inspection in the Regulations Division. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the docket file by calling the Regulations 
Divisions at (202) 708-3055 (this is not a toll-free number).

Environmental Impact

    This rule involves the establishment of a rate or cost 
determination and related external administrative or fiscal 
requirements that do not constitute a development decision affecting 
the physical condition of specific project areas or building sites. 
Accordingly, under 24 CFR 50.19(c)(6), this rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4331 et seq.).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled, ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on State and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the order are met. This rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local government or preempt state law 
within the meaning of the order.

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 final 
rule does not impose any federal mandates on any State, local, or 
tribal government, or on the private sector, within the meaning of 
UMRA.

Catalog of Federal Domestic Assistance.

    The Catalog of Federal Domestic Assistance number applicable to 
this rule is 14.117.

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.


0
Accordingly, for the reasons stated in the preamble, HUD amends 24 CFR 
part 203 as follows:

PART 203--SINGLE FAMILY HOUSING MORTGAGE INSURANCE

0
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).

Subpart A--Eligibility Requirements and Underwriting Procedures

0
2. Amend 24 CFR 203.50 by adding a paragraph (m) to read as follows:


Sec.  203.50  Eligibility of rehabilitation loans.

* * * * *
    (m) With regard to loans under this section executed on or after 
December 27, 2005, the Commissioner shall charge an up-front and annual 
MIP in accordance with 24 CFR 203.284 or 203.285, whichever is 
applicable.

Subpart B--Contract Rights and Obligations

0
3. Amend 24 CFR 203.284 by revising paragraph (a) introductory text and 
paragraph (b) to read as follows:


Sec.  203.284  Calculation of up-front and annual MIP on or after July 
1991.

* * * * *
    (a) Permanent provisions. Any mortgage executed on or after October 
1, 1994, that is an obligation of the Mutual Mortgage Insurance Fund, 
as well as any mortgage executed after December 27, 2005, which is 
insured under sections 203(k) or 234(c) of the National Housing Act (12 
U.S.C. 1709(k) and 12 U.S.C. 1715y(c)) shall be subject to the 
following requirements:
* * * * *
    (b) Transition provisions; savings provision. Mortgages that are 
obligations of the Mutual Mortgage Insurance Fund and that were insured 
during Fiscal Years 1991-1994, are governed by 24 CFR 203.284(b) as in 
effect on April 1, 2003, (see 24 CFR parts 200-499 revised as of April 
1, 2003).
* * * * *

0
4. Amend 24 CFR 203.285 by revising the first sentence of paragraph (a) 
to read as follows:


Sec.  203.285  Fifteen-year mortgages: Calculation of up-front and 
annual MIP on or after December 26, 1992.

    (a) Up-front. Any mortgage for a term of 15 or fewer years executed 
on or after December 26, 1992, that is an obligation of the Mutual 
Mortgage Insurance Fund, and any mortgage executed on or after December 
27, 2005, to be insured under sections 203(k) and 234(c) of the 
National Housing Act, shall be subject to a single up-front premium 
payment established and collected by the Commissioner in an amount not 
exceeding 2.0 percent of the amount of the original insured principal 
obligation of the mortgage. * * *
* * * * *


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    Dated: June 16, 2005.
Roy A. Bernardi,
Deputy Secretary.
[FR Doc. 05-12610 Filed 6-27-05; 8:45 am]
BILLING CODE 4210-27-P