[Federal Register Volume 76, Number 21 (Tuesday, February 1, 2011)]
[Proposed Rules]
[Pages 5518-5521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2170]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200

[Docket No. FR 5395-P-01]
RIN 2502-AI92


Federal Housing Administration (FHA): Refinancing an Existing 
Cooperative Under Section 207 Pursuant to Section 223(f) of the 
National Housing Act

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

ACTION: Proposed rule.

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SUMMARY: HUD proposes to revise its regulations governing the 
eligibility for FHA insurance of mortgages used for the purchase or 
refinancing of existing multifamily housing projects. Although the 
statutory language authorizing such insurance does not distinguish 
between rental or cooperative multifamily projects, HUD's current 
regulations limit FHA insurance to existing rental projects. Given the 
current crisis in the capital markets and the significant downturn in 
the multifamily market, the Department has determined that this is an 
appropriate time to reconsider this regulatory imposed limitation with 
respect to the mortgage insurance for the refinancing of cooperative 
projects. As mortgage lenders strive to increase capital reserves and 
tighten underwriting standards, the availability of financing for 
multifamily housing has been reduced. FHA mortgage insurance could 
significantly improve the availability of funds and permit more 
favorable interest rates than would otherwise be likely. Accordingly, 
this proposed rule would revise HUD's regulations to enable existing 
multifamily cooperative project owners to obtain FHA insurance for the 
refinancing of existing indebtedness.

DATES: Comment Due Date: April 4, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 10276, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451

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7th Street, SW., Room 10276, Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at  
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Information Relay Service at 800-877-8339. Copies of all 
comments submitted are available for inspection and downloading at 
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Joyce Allen, Director, Office of 
Multifamily Housing Development, Department of Housing and Urban 
Development, 451 7th Street, SW., Room 6134, Washington, DC 20410-8000; 
telephone number 202-708-1142 (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. Background

    Under section 223(f)(1) of the National Housing Act (12 U.S.C. 
1715n(f)(1)) (NHA), FHA is authorized to insure mortgages executed in 
connection with the purchase or refinancing of an existing multifamily 
housing project. The existing multifamily housing project to be 
purchased or refinanced may have been financed originally with 
conventional debt, equity, or FHA insured mortgages. The section 223(f) 
program insures lenders against loss on mortgage defaults and allows 
for long term mortgages (up to 35 years). In general, a project is 
eligible for section 223(f) mortgage insurance if the sponsor can 
demonstrate that there is a definite market demand, and that the 
project is economically self-sufficient.
    HUD's regulations implementing the section 223(f) program are 
codified at 24 CFR part 207 (entitled ``Multifamily Housing Mortgage 
Insurance''). Section 207.1 of these regulations cross references to 
the eligibility requirements for existing projects contained in 24 CFR 
200.24 and makes the eligibility requirements applicable to multifamily 
project mortgages insured under section 24 CFR part 207.\1\ Section 
200.24 provides that ``a mortgage financing the purchase or refinance 
of an existing rental housing project * * * may be insured pursuant to 
the provisions of section 223(f) of the [National Housing] Act * * *'' 
(emphasis added). Thus, while the statutory language of section 223(f) 
authorizes FHA mortgage insurance for existing multifamily housing 
projects, irrespective of whether the project is for rental or 
cooperative housing, HUD's regulations limit section 223(f) financing 
to rental housing.
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    \1\ The regulations codified at 24 CFR part 200 (entitled 
``Introduction to FHA Programs'') set forth, in a single location of 
the Code of Federal Regulations, requirements that are generally 
applicable to FHA programs. Section 207.1 actually cross-references 
to the ``eligibility requirements set forth in 24 CFR part 200, 
subpart A * * *'' Section 200.24 is the relevant eligibility 
provision for existing multifamily projects in subpart A of 24 CFR 
part 200.
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    Given the current downturn in the mortgage lending market, HUD has 
decided to reconsider the regulatory imposed limitation on section 
223(f) mortgage financing to rental projects. A recent HUD report on 
U.S. Housing Market Conditions \2\ indicated that performance in the 
multifamily (five or more units) housing sector continued to be weak in 
the third quarter of 2009. The report further notes that:
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    \2\ 2009 HUD Office of Policy Development and Research, U.S. 
Housing Market Conditions November 2009 p. 4, 5. The report notes 
that in the production sector, building permits, starts, and 
completions all declined. The absorption rate of new rental units 
fell during the third quarter, and the rental vacancy rate increased 
sharply.

    During the years of rapid home price appreciation from 2004 
through 2006 (and possibly into 2008 for multifamily housing) the 
aggressive underwriting standards that characterized the subprime 
home mortgage market were mirrored in the multifamily mortgage 
market. While subprime mortgagees used hybrid adjustable-rate 
mortgages to help borrowers afford higher priced single-family 
homes, some multifamily lenders employed pro-forma underwriting 
based on aggressive estimates of future earnings and 5 to 10 year, 
interest only balloon and other short-term mortgages to support 
rising property prices in similarly overheated multifamily housing 
markets. Some of these mortgages will be due in the next few 
years.\3\
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    \3\ See page 5 of the report referenced in footnote 2.

    Like single-family housing financing, multifamily housing is thus 
facing a credit crunch. Lenders' efforts to increase capital reserves 
and loan committee efforts to tighten underwriting standards both 
reduce the availability of financing for all multifamily housing. 
Credit constraints thus exacerbate trends in an already weak 
multifamily market. FHA mortgage insurance could both improve the 
availability of funds to this sector and permit more favorable interest 
rates than would otherwise be likely. This credit enhancement would 
provide needed support to a market segment which is currently 
experiencing diminished operating cash flows and depreciated collateral 
values.
    The lack of financing is a particular problem for cooperatives. 
Cooperatives contend with legal restrictions on cooperative share 
transfers and many require approval by the board of a cooperative for 
some membership or operational changes. These issues raise concerns 
with traditional financial institutions. In addition, ``affordable'' 
cooperatives, which have low initial purchase prices, limited 
maintenance fees, and a cap on unit resale prices, face further 
challenges because the potential for generating new income through 
turnover of units and additional assessments is low. HUD has received 
inquiries from several existing cooperatives that have expressed an 
interest in refinancing their underlying mortgages. The average age of 
these projects is 35 years.
    Refinancing at the current low interest rates could improve the 
viability of these types of cooperative housing projects in several 
ways. By reducing the servicing cost of their underlying mortgage, 
often substantially due to a high rate when the loan was originally 
made, a board of directors can accomplish a number of desirable goals. 
Shareholders could finance the cost of necessary capital improvement 
projects, such as fa[ccedil]ade restoration or elevator

[[Page 5520]]

renovations. Refinancing would also allow cooperative boards to avoid 
special assessments, a source of unexpected financial stress for many 
residents when doubled up with existing monthly maintenance fees. These 
types of assessments can be particularly painful during economic 
downturns when unemployment is relatively high in some urban areas.
    Facilitating the refinancing of cooperatives through mortgage 
insurance issued under section 223(f) of the NHA would thus help to 
further HUD's mission of preserving affordable housing by assisting 
eligible cooperative projects to obtain refinancing to make necessary 
repairs and/or consolidate more expensive outstanding debt, thereby 
preserving affordable housing stock. Therefore, HUD is currently 
proposing to remove this regulatory limitation in recognition of 
cooperative financing needs.

II. This Proposed Rule

    This proposed rule would revise Sec.  200.24 of HUD's regulations 
to enable owners of cooperative projects to obtain FHA insurance for 
their mortgage loans. Specifically, the proposed rule would amend Sec.  
200.24 to provide that ``a mortgage financing the purchase or refinance 
of an existing rental housing project or refinance of the existing debt 
of an existing cooperative project under Section 207 of the [National 
Housing] Act, or for refinancing the existing debt of an existing 
nursing home, intermediate care facility, assisted living facility, or 
board and care home, or any combination thereof, under Section 232 of 
the [National Housing] Act, may be insured pursuant to provisions of 
Section 223(f) of the [National Housing] Act and such terms and 
conditions established by HUD.'' Extending the section 223(f) mortgage 
insurance program to refinancing of the debt of multifamily cooperative 
housing projects is consistent with HUD's strategic goals of recreating 
a strong housing finance system and promoting affordable, financially 
sustainable multifamily housing options. When combined with judicious 
use of reserves to make capital improvements to maintain the property, 
the credit enhancement provided by this proposed rule will help 
rejuvenate properties and enhance the economic life of multifamily 
cooperative housing projects.

III. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). This proposed rule was determined to be a ``significant 
regulatory action,'' as defined in section 3(f) of the Order (although 
not economically significant, as provided in section 3(f)(1) of the 
Order).
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the docket file by calling the 
Regulations Division at 202-402-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the Federal Information Relay Service at 800-877-
8339.

Regulatory Flexibility Act--Small Business

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
As discussed above, the purpose of the proposed rule is to expand 
eligibility for financing under section 223(f) to enable owners of 
multifamily cooperative housing projects to refinance their existing 
mortgage debt with FHA insurance. Owners of such projects will be able 
to obtain 223(f) financing under the same terms and conditions as 
currently eligible owners of multifamily rental projects. Cooperative 
housing owners will not be subject to any additional procedures or 
required to incur any additional costs.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities. Notwithstanding HUD's determination that this rule will not 
have a significant 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 the preamble to this rule.

Environmental Impact

    A Finding of No Significant Impact (FONSI) 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. 4332(2)(C)). The Finding of 
No Significant Impact is available for public inspection between the 
hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office 
of General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 7th Street, SW., Washington, DC 20410. Due to security 
measures at the HUD Headquarters building, please schedule an 
appointment to review the FONSI by calling the Regulations Division at 
202-708-3055 (this is not a toll-free number). Individuals with speech 
or hearing impairments may access this number via TTY by calling the 
Federal Information Relay Service at (800) 877-8339.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (1) imposes substantial direct compliance costs on state and 
local governments, and is not required by statute, or (2) 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.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (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 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 UMRA.

Paperwork Reduction Act

    The information collection requirements for this proposed rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB 
control number 2502-XXXX. In accordance with the Paperwork Reduction 
Act, an agency may not

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conduct or sponsor, and a person is not required to respond to, a 
collection of information, unless the collection displays a currently 
valid OMB control number.

Catalogue of Federal Domestic Assistance

    The Catalogue of Federal Domestic Assistance Number for the 
principal FHA mortgage insurance program is 14.155.

List of Subjects in 24 CFR Part 200

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

    Accordingly, for the reasons stated above, HUD proposes to amend 24 
CFR part 200 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. 1703, 1709, and 1715b; 42 U.S.C. 3535(d).

    2. Revise Sec.  200.24 to read as follows:


Sec.  200.24  Existing projects.

    A mortgage financing the purchase or refinance of an existing 
rental housing project or refinance of the existing debt of an existing 
cooperative project under section 207 of the Act, or for refinancing 
the existing debt of an existing nursing home, intermediate care 
facility, assisted living facility, or board and care home, or any 
combination thereof, under section 232 of the Act, may be insured 
pursuant to provisions of section 223(f) of the Act and such terms and 
conditions established by HUD.

    Dated: December 20, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2011-2170 Filed 1-31-11; 8:45 am]
BILLING CODE 4210-67-P