[Federal Register Volume 84, Number 158 (Thursday, August 15, 2019)]
[Rules and Regulations]
[Pages 41846-41877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17213]



[[Page 41845]]

Vol. 84

Thursday,

No. 158

August 15, 2019

Part III





Department of Housing and Urban Development





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24 CFR Parts 203, 206, and 234





Project Approval for Single-Family Condominiums; Final Rule

  Federal Register / Vol. 84, No. 158 / Thursday, August 15, 2019 / 
Rules and Regulations  

[[Page 41846]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203, 206, and 234

[Docket No. FR-5715-F-02]
RIN 2502-AJ30


Project Approval for Single-Family Condominiums

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

ACTION: Final rule.

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SUMMARY: This final rule implements HUD's authority under the single-
family mortgage insurance provisions of the National Housing Act to 
insure one-family units in a multifamily project, including a project 
in which the dwelling units are attached, or are manufactured housing 
units, semi-detached, or detached, and an undivided interest in the 
common areas and facilities which serve the project. The rule provides 
for requirements for lenders to obtain approval under the Direct 
Endorsement Lender Review and Approval Process (DELRAP) authority for 
condominiums, and for standards that projects must meet to be approved 
for mortgage insurance on individual units. The rule provides for 
flexibility with respect to the concentration of Federal Housing 
Administration (FHA)-insured units, owner-occupied units, and the 
amount that can be set aside for commercial and non-residential space. 
This will enable HUD to vary these standards, within parameters, to 
meet market needs. This final rule follows a proposed rule published in 
the Federal Register on September 28, 2016.

DATES: The effective date of this rule and the related handbook is 
October 15, 2019.

FOR FURTHER INFORMATION CONTACT: Elissa Saunders, Director, Office of 
Single Family Program Development, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW, Washington, DC 20410-
8000; telephone number 202-708-2121 (this is not a toll-free number). 
Hearing- and speech-impaired persons may access this number through TTY 
by calling the Federal Relay Service at 800-877-8339 (this is a toll-
free number).

SUPPLEMENTARY INFORMATION:

I. Background

    Section 2117 of the Housing and Economic Recovery Act of 2008 (Pub. 
L. 110-289) (HERA) amended the definition of ``mortgage'' in section 
201(a) of the National Housing Act (12 U.S.C. 1707(a)) to provide 
authority for HUD to insure individual condominium units under the 
single-family program under section 203 of the National Housing Act (12 
U.S.C. 1709). At the same time, HERA amended HUD's prior authority for 
condominium units, section 234 of the National Housing Act (12 U.S.C. 
1715y), to require a blanket mortgage for the project. Due to this 
change and other restrictive requirements under section 234, the 
single-family mortgage insurance program under section 203 became the 
primary vehicle for FHA mortgage insurance for units in condominium 
projects.
    Section 2132 of HERA also provided for implementation of section 
2117 by notice. Accordingly, HUD issued mortgagee letters implementing 
the program (2009-46a, 2009-46b, and 2011-03). These were then 
consolidated into the Condominium Project Approval and Processing Guide 
(the Guide), the current operational guideline for the program.
    The Housing Opportunities Through Modernization Act of 2016 (Pub. 
L. 114-201) (HOTMA) became law on July 29, 2016. Title III of HOTMA 
established by statute certain requirements. Among these was a 
requirement that HUD issue a regulation within 90 days from enactment 
(i.e., by October 27, 2016), requiring that any requests for exceptions 
to the limitation on commercial space be processed under either the 
DELRAP or HUD review and approval process (HRAP), and that in 
determining whether to grant the exception, factors related to the 
economy of the local area of the project, or to the project itself, be 
considered. The statute also required HUD, by regulation or less formal 
means, including a mortgagee letter, to establish an owner-occupancy 
requirement, also in the same time frame. If HUD failed to do so, the 
statute provided that the minimum owner-occupancy percentage for a 
project would be 35 percent of all family units, including those not 
covered by an FHA-insured mortgage. On October 26, 2016, HUD issued the 
required mortgagee letter, establishing the general owner-occupancy 
percentage for an existing project at 50 percent, unless certain 
specific indicators were met indicating lower risk, and allowing for 
review by HUD under HRAP, in which case the requirement could be as low 
as 35 percent.
    Title III of HOTMA also provided for changes to HUD's treatment of 
private transfer fees (these are in effect based on statutory authority 
and are not part of this rulemaking).

II. The Proposed Rule

    HUD issued the proposed rule on September 28, 2016 (81 FR 66565), 
both to codify the program, and, based on experience, to offer greater 
flexibilities and efficiencies that would increase participation in the 
program and make it more responsive to changes in the marketplace.

A. DELRAP

    The rule proposed that participants in DELRAP must: Be a Direct 
Endorsement (DE) lender under 24 CFR 203.3: Have a one-year experience 
requirement for all staff participating in DELRAP approvals; have 
originated no fewer than 10 FHA condominium loans; and have an 
acceptable quality control plan. There is also a process for first 
obtaining conditional DELRAP authority before obtaining unconditional 
authority based on performance, and periodic performance monitoring. As 
proposed, HUD can take action based on non-performance, legal or rules 
violations, including any action listed in Sec.  203.3(d), or 
termination of DELRAP authority. The proposed rule also established a 
process for reinstatement.

B. Definitions

    The rule proposed new definitions for a number of terms, including 
Condominium Association (or Association), Condominium Project, 
Condominium Unit, Infrastructure, Single-Unit Approval (SUA), and Site 
Condominium. The definition of Condominium Association makes clear that 
the homeowners who manage the financial and common areas of the 
condominium project are the Condominium Association as meant by this 
rule, regardless of the name used. The proposed definition of 
Condominium Project and Condominium Unit are based on 12 U.S.C. 
1707(a), which is also the usual usage of that term in the industry. 
The proposed definition of Infrastructure, which is related to the 
requirement in Sec.  203.43b(d)(4) of this rule, that the project or 
legal phase be complete and ready for occupancy, includes utilities, 
common elements, and amenities, such as parking lots, swimming pools, 
golf courses, playgrounds and similar items called for in the project 
or legal phase. The proposed definition of Single-Unit Approval is 
approval of one unit, in accordance with Sec.  203.43b(i) of this rule, 
in an unapproved project. The proposed definition of Site Condominium 
is a single-family detached dwelling (without any shared garages or 
attached buildings), including the site and air space, which is

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encumbered by a declaration of condominium covenants or condominium 
form of ownership. Finally, this rule adopts the definition of Rental 
for Transient or Hotel Purposes in section 513(e) of the National 
Housing Act (12 U.S.C. 1731b(e)).

C. Eligibility for Approval

    Section 203.43b(c), as proposed, would require approval by HUD 
(HRAP) or by a mortgagee (DELRAP). Otherwise, the project would have to 
meet the additional requirements for a Site Condominium or for Single-
Unit Approval. To be approvable, the project would have to meet the 
eligibility requirements of Sec.  203.43b(d) of this rule. These 
include: Being primarily residential in nature; consisting entirely of 
dwelling units that are one-family units; being in full compliance with 
applicable laws and local approval requirements with respect to the 
condominium plat and development plans; and being complete and ready 
for occupancy, and not subject to further rehabilitation, construction, 
phasing, or annexation (if the construction consists of legal phases, 
this requirement and the requirements of Sec.  203.43b(e) of this rule 
applies to each phase). In addition, the rule proposed that HUD may 
establish further requirements for eligibility through notices under 
Sec.  203.43b(d)(6), such as insurance requirements, financial 
condition, nature of title, the existence of any pending legal action 
or physical property condition (Sec.  203.43b(d)(6)(i) through (vi)), 
and such other matters as may affect the viability or marketability of 
the project or its units (proposed Sec.  203.43b(d)(6)(xi)).

D. Flexibility

    The rule proposed to grant flexibility in three key areas, to allow 
HUD to respond quickly to changes in market conditions. The three areas 
are the amount of commercial/non-residential space; the maximum 
percentage of FHA-insured units; and the minimum percentage of owner-
occupied units (Sec.  203.43b(d)(6)(vii), (viii), and (ix)). Within 
each range, HUD may from time to time issue a notice establishing a 
particular percentage or percentages. As proposed, the ranges are: For 
commercial space, between 25 and 60 percent of the total floor area; 
for units with FHA-insured mortgages, between 25 and 75 percent of the 
total number of units in the project; and for owner-occupied units, 
likewise between 25 and 75 percent of the total units. Changes in the 
upper and lower limits of the ranges would be published for 30 days of 
public comment (Sec.  203.43b(f)).

E. Legal Phasing

    As proposed, legal phasing only would be permitted as long as the 
phase is fully built out and the dwelling units have a certificate of 
occupancy (CO). Both vertical buildings and detached or semi-detached 
developments would be required to be contiguous (Sec.  203.43b(e)).

F. Reserve Requirements

    Generally, the proposed reserve requirement would be at least 10 
percent of the monthly unit assessments. A lower amount could be deemed 
acceptable by HUD based on a reserve study completed not more than 24 
months before a request for a lower reserve amount is received (Sec.  
203.43b(d)(6)(x)).

G. Exceptions

    The rule provided in proposed Sec.  203.43b(f) (Sec.  203.43b(g) of 
this final rule) that the Secretary may discretionarily grant an 
exception to the requirements found in Sec.  203.43b(d)(6), provided 
that the statutory conditions for exceptions to the commercial space 
requirements enacted under HOTMA and codified under 12 U.S.C. 
1709(y)(2) are met. These are that the request and disposition of the 
request for the exception may be made at the option of the requester 
under the DELRAP or HRAP process; and that in determining whether to 
allow the exception, factors relating to the economy for the locality 
in which the project is located or specific to the project, including 
the total number of family units in the project, shall be considered.

H. Recertification

    The rule proposed to extend the recertification period for an 
approved project from 2 to 3 years, and allow recertification by 
updating previously submitted information, rather than resubmission of 
all information. There would be a window of 6 months before to 6 months 
after the expiration of approval to submit a request for 
recertification.

I. Single-Unit Approval

    The rule proposed in Sec.  203.43b(h) (Sec.  203.43b(i) of this 
final rule) to allow approvals on individual units that are not in 
approved projects and not in projects that have been subject to adverse 
determination for significant issues that affect the viability of the 
project. The project must be complete and ready for occupancy under 
Sec.  203.43b(d)(4), must not be a manufactured home, and must have at 
least five dwelling units. The upper limit on single-unit approvals as 
proposed would be in a range from 0 to 20 percent of the total number 
of units in the project, the exact percentage to be established by HUD 
through notice.

J. Site Condominium

    The rule proposed at Sec.  203.43b(i) (Sec.  203.43(j) of this 
final rule) that for Site Condominiums, insurance and maintenance costs 
must be the responsibility of the unit owner, and that any common 
assessment collected must be restricted for use solely for amenities 
outside the footprint of the individual site.

K. Rehabilitation Loans

    The rule proposed to revise 24 CFR 203.50 to permit FHA insurance 
under the 203(k) program for loans to rehabilitate the interior space 
or install firewalls in the attic of a condominium unit. Such FHA 
mortgage insurance would not cover any exteriors or areas that are the 
responsibility of the Association. The loan limits would be those 
stated in Sec.  203.50(f), and for condominiums that are not 
manufactured homes, townhouses, or Site Condominiums, 100 percent of 
the after-improvement value of the condominium unit.

L. Part 234

    As provided in the proposed rule, part 234 now will apply in cases 
where the project has a blanket mortgage insured by HUD. This part 203 
applies to the more usual condominium configuration, that is, a one 
family unit and undivided interest in the common areas and facilities.

III. This Final Rule

    After further consideration, including careful consideration of 
public comments, HUD has made some changes in this final rule.

A. DELRAP Qualifications

    HUD received multiple comments concerning the proposal to only 
allow staff meeting the experience requirement to use DELRAP authority 
to approve Condominium Projects. Commenters indicated that the proposed 
credential requirements impose a barrier for smaller lenders to fully 
participate in the DELRAP program. Given the comments received, where 
HUD had proposed that all staff involved in DELRAP activities had to 
meet the experience requirements, the final rule revises proposed Sec.  
203.8(b)(1)(iv) to allow participation by staff supervised by personnel 
that meet the experience requirements in

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response to public comments. Also, the proposed rule provided that, to 
be granted unconditional DELRAP authority, a lender would have to 
complete at least five DELRAP reviews. HUD recognized that such a 
requirement may not always be necessary; therefore, this final rule, in 
Sec.  203.8(b)(3), gives HUD the flexibility to reduce this number 
where appropriate, for example, in the case of a DELRAP lender with 
significant experience under the current program. This will ease 
potential burdens on lenders who wish to participate and who have 
qualified supervisor personnel.

B. Definitions

    The definitions in Sec.  203.43b(a) of ``Condominium Project'' and 
``Condominium Unit'' have been reworded and reorganized. Substantively, 
the definition of ``Infrastructure'' is removed and a definition of 
``Common Elements'' is added. In addition to typical items, the 
definition includes a catch-all, ``other areas described in the 
condominium declaration.''
    The definition of ``Site Condominium'' is revised to address the 
problems with air space that the public comments identified, and to 
allow for different Site Condominium arrangements existing in the 
marketplace that can potentially be approved. The inclusion of air 
space in the proposed rule was identified in public comments to 
potentially create conflicts with laws of certain states.

C. Suspension of FHA Case Numbers

    HUD currently monitors FHA insurance concentration for projects 
that are, or have been, FHA approved. With the introduction of the 
Single-Unit Approval process, HUD recognizes the need to enhance the 
insurance concentration tracking mechanism to determine compliance with 
the concertation ranges allowed. A commenter also noted the importance 
of having a reliable tracking system in place and available to the 
public to track percentages of single-unit approvals. In the context of 
the maximum percentage of units with FHA-insured mortgages under Sec.  
203.43b(d)(6)(viii), and in the context of single-unit approvals under 
Sec.  203.43b(i)(2), this final rule adds a statement that ``HUD may 
suspend the issuance of new FHA case numbers for a mortgage on a 
property located in any project where the number of FHA-insured 
mortgages exceeds the maximum.'' The maximum percentages that apply 
will be established by notice. This additional provision to the final 
rule will allow FHA to build a robust process to proactively manage FHA 
insurance concentration while recognizing the need for lenders to 
operationalize the impact of such a requirement early in the loan 
lifecycle so as not to affect the origination process.

D. Secondary Residences

    The proposed rule provided that units occupied as a principal or 
secondary residence as defined under Sec.  203.18(f)(2) would count 
towards the required minimum percentage of owner-occupied units. As 
commenters indicated, the definition established under Sec.  
203.18(f)(2), which establishes the definition for the purpose of 
permitting FHA financing on a secondary residence which requires 
analysis of the lack of affordable rental housing is too restrictive 
and out of scope in the context in which HUD or the DELRAP lender is 
looking at the owner-occupancy level of the project to determine 
whether the project is approved. Thus, solely to calculate owner-
occupancy percentage, this final rule provides that any unit that is 
occupied by the owner as his or her place of abode for any portion of 
the calendar year other than as a principal residence and that is not 
rented for a majority of the calendar year shall count towards the 
total number of owner-occupied units. While such a definition for the 
purpose of calculating owner occupancy for condominium project approval 
is more expansive, the definition in Sec.  203.18(f)(2) will continue 
to be used when determining eligibility of mortgage secured by a 
borrower's secondary residence.

E. Reserve Study

    The proposed rule in Sec.  203.43b(d)(6)(xi) stated that for an 
approvable project to have less than 10 percent of the monthly unit 
assessments in a reserve account, the lesser amount would have to be 
based on a reserve study completed within 24 months of the request for 
the lower amount. The final rule, in Sec.  203.43b(d)(6)(x), enlarges 
this time to 36 months, or, in the case of HRAP, such greater amount of 
time as the Secretary determines. This change conforms with HOTMA's 
requirement that HUD streamlines the recertification process for 
approved properties by considering lengthening the time between 
certifications, see 12 U.S.C. 1709(y)(1).

F. Eligibility for Approval: Financial Condition

    The final rule states that the financial condition component of the 
further approval requirements in Sec.  203.43b(d)(6)(v) includes the 
allowable percentage of units in a project owned by a single owner. 
This comports with current practice in the marketplace and was 
recognized as a key policy consideration to prevent a financial shock 
that may occur in the event of an economic failure by a single owner 
with a large share of units in a complex.

G. Percentage Ranges

    This final rule, following the proposed rule, sets a range within 
which HUD may make specific determinations on minimum owner-occupancy 
percentage, maximum FHA-insured mortgage percentage for project 
approval, maximum FHA-insured mortgage percentage for Single-Unit 
Approval, and maximum percentage of floor area taken by commercial or 
nonresidential space. There is an ability to grant case-by case 
exceptions to any of these ranges under Sec.  203.43b(g). Additionally, 
if HUD determines to adjust the upper or lower limits of these ranges, 
the rule provides for a public comment process under Sec.  203.43b(f). 
HUD may establish multiple limits within a range for owner-occupancy 
and commercial space for differently situated projects. For example, 
the owner occupancy limit may be established differently for newly 
constructed projects, in which a number of units likely would not yet 
have transferred to first owners, and for existing projects, which are 
more likely fully sold.
    This final rule makes some minor changes to the proposed rule 
regarding the percentage ranges of owner-occupants and commercial/
nonresidential space. In the case of the maximum allowed percentage of 
units with FHA-insured mortgages for project approval, this final rule 
makes no change.
1. Owner Occupancy
    The possible range for the minimum level of required owner-
occupancy for project approval is narrowed slightly; the floor is set 
at 30 percent in this final rule. This is in part because under current 
HUD practice, the minimum owner occupancy percentage for new 
construction is 30 percent of the total units, and the lower end of the 
range must be set to accommodate newly constructed projects. In part, 
it provides FHA with additional room to calibrate this requirement to a 
level below that identified in HOTMA (35 percent) as the default, if 
necessary, in response to housing market changes. A 30 percent owner 
occupancy percentage is the

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lowest limit compatible with risk to the Mutual Mortgage Insurance Fund 
(MMIF).
    The upper limit of 75 percent remains unchanged from the proposed 
rule. This upper limit flexibility is necessary to manage risk. Unlike 
Fannie Mae and Freddie Mac (which require 50 percent owner occupancy 
for certain types of projects \1\), HUD cannot require larger down 
payments or higher credit scores, but must manage risk to the MMIF in 
other ways. Depending on future market conditions, flexibility to 
require 75 percent owner occupancy is needed if it is determined that a 
lower owner-occupancy rate is contributing to loan delinquency.
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    \1\ See Fannie Mae Selling Guide, B4-2.2-02: Full Review Process 
(6/5/2018) on investment properties' 50 percent requirement. This is 
available at https://www.fanniemae.com/content/guide/selling/b4/2.2/02.html. A similar requirement for investment property--that at 
least 50 percent of the total number of units in the condominium 
project must have been conveyed to purchasers who occupy their units 
as a primary residence or second home--is at chapter 5701.5(c)(2) in 
the Freddie Mac Single-Family Seller/Servicer guide. This is 
available at http://www.freddiemac.com/singlefamily/pdf/guide.pdf 
(visited 3/18/2019).
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    If HUD determines to change the owner-occupancy threshold within 
these limits, it will examine a variety of market factors. These will 
generally include:
     FHA portfolio analysis of default and claim rates of loans 
with similar attributes across different bands of owner occupancy 
percentages. The bands would be, for example, 10 percent bands of owner 
occupancy percentages.
     Analysis of FHA condominium loans across geographical 
areas segmented by average owner occupancy ratios (e.g., average owner 
occupancy ratios in metropolitan areas versus rural areas).
     Analysis of trends of financial stability of condo 
projects in relation to owner occupancy (e.g., relationship of default 
and claim rates when compared with factors that determine financial 
stability and owner occupancy percentages).
    HUD may consider other relevant factors as well.
2. Maximum Commercial/Nonresidential Space
    This final rule reduces the maximum commercial space percentage 
upper limit to 55 percent of the total floor area. While there was 
substantial support for a 50 percent limit on nonresidential commercial 
space, a number of public comments supported a maximum limit for 
commercial space above 50 percent. There are many potential benefits of 
mixed-use development, and recent real estate trends studies support 
continued demand for these types of projects.\2\ The 55 percent ceiling 
would give HUD future room to grant an exception under HRAP where HUD's 
review shows that a specific case warrants it (or, under DELRAP review 
in the case where the exception is at the request of an eligible party 
and the requester asks for DELRAP review under 12 U.S.C. 
1709(y)(2)(A)), while still maintaining the overall residential 
character of the project.
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    \2\ Real Trends: The Future of Real Estate in the United States 
by Urban Economics Lab and MIT's Center for Real Estate (October 
2017). The study is available at https://mitcre.mit.edu/wp-content/uploads/2017/10/REAL-TRENDS-MIT.pdf (visited 3/18/20190).
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    The lower limit of the range for the maximum allowable commercial 
space remains at the proposed 25 percent. This percentage aligns with 
the historical maximum commercial space allowed in a condominium 
project across the industry. However, mixed-use development is an 
upward trend in the marketplace.\3\ Fannie Mae recently increased the 
maximum percentage of commercial space in a condominium to 35 percent 
from 25 percent,\4\ consistent with this upward trend. This is also 
consistent with the Emerging Trends in Real Estate[supreg] report, 
which states that there is a trend toward mixed-use development with a 
mixture of residential, with retail and other commercial uses.\5\ HUD 
believes that 25 percent of commercial/nonresidential space of the 
projects total floor area sets the historical lowest maximum for a 
mixed-use project that has been used for the program to be successful. 
The maximum percent of commercial/non-residential space will be 
established within this range considering current and projected real 
estate market trends.
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    \3\ Id. at 19 (``Around the globe, `live, work, play' has become 
a fashionable mantra for urbanism and real estate development. This 
trend has spurred the rescue and redevelopment of historical 
neighborhoods. It also has yielded new and denser mixed-use 
developments . . . . The resurgent prominence of quality urbanism in 
the United States is here to stay and will keep on energizing a 
segment of the industry.'').
    \4\ Fannie Mae Selling Guide B4-2.1-03: Ineligible Projects (6/
5/2018). This is available at https://www.fanniemae.com/content/guide/selling/b4/2.1/03.html.
    \5\ PWC and Urban Land Institute, Emerging Trends in Real 
Estate[supreg]: United States and Canada 2019 at 83 (``There also is 
a trend toward redeveloping urban malls by intensifying sites with 
mixed-use properties that combine retail with high-density 
residential, restaurants, community services, green space, and 
experiential attractions. . . .''), available at https://www.pwc.com/us/en/industries/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html (visited 3/18/2019).
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    The data which HUD will consider when changing the specific 
percentage of commercial space allowed for project approval, within the 
permitted range, will generally include:
     FHA portfolio analysis of default and claim rates of loans 
with similar attributes across different bands of commercial/
nonresidential space percentages (e.g., default and claim rates for 
purchase transactions at commercial/nonresidential percentages in 
appropriate percentage bands that HUD will select.
     Analysis of FHA condominium loans across geographical 
areas segmented by average commercial/nonresidential space percentages 
(e.g., average commercial/nonresidential space percentages in 
metropolitan areas versus rural areas).
     Analysis of trends of financial stability of condo 
projects in relation to commercial/nonresidential space percentages 
(e.g., relationship of default and claim rates when compared with the 
percentage of the residential portion of the project financial 
stability and the commercial/nonresidential space percentage).
    HUD may consider other relevant factors as well.
3. Maximum FHA-Insured Concentration for Project Approval
    The final rule makes no change to the 25-to-75 percent range 
proposed for the maximum FHA insurance concentration requirement. The 
upper limit of 75 percent is the maximum risk exposure to the MMIF that 
HUD is willing to accept. At the same time, the range must be wide 
enough to accommodate qualified borrowers in multiple markets where 
access to affordable housing and financing may be difficult.
    In changing the maximum amount of units with FHA mortgage insurance 
for project approval within the allowable range, data points will 
generally include:
     Analysis of FHA market share of condominium loans versus 
market share of non-condo loans.
     Analysis of FHA market share of condominium loans versus 
market share of non-FHA condo loans.
     Analysis of default and claim rates of loans with similar 
attributes across different bands of FHA concentration percentages.
     Analysis of FHA concentration percentages segmented by 
geographical areas.
     Analysis of performance of FHA condo to non-FHA condo 
loans.
    HUD may consider other relevant factors as well.
4. Maximum FHA-Insured Concentration for Single-Unit Approval
    This final rule implements the proposed rule's 0-to-20 percent 
range

[[Page 41850]]

with the addition of an allowance for a de minimis number of units in 
projects with less than 10 units. Section 203.43b(h) has been 
reorganized in this final rule and redesignated as Sec.  203.43b(i). 
The lower limit of 0 percent is set as a risk control measure if, for 
example, evidence shows that SUA loans show a significantly worse 
performance when compared to similar loans in approved projects. Most 
projects do not have a significant proportion of FHA-insured units. 
Under a 20 percent cap, 90 percent of current approved projects could 
have employed a single-unit loan approval. Under a much more 
restrictive 10 percent ceiling, 73 percent of current projects could 
have avoided the project-approval process through single-unit loans. 
Thus, the 20 percent limit would allow HUD great flexibility to allow 
single-unit loans in unapproved projects. This would enable smaller 
condominium projects, for whom applying for project approval might be 
too costly, to have similar access to FHA mortgage insurance as 
currently approved projects.
    In setting or changing the maximum FHA concentration for single-
unit approval, data points that HUD will consider will generally 
include:
     Analysis of SUA loan performance compared to the 
performance of loans made in approved condo projects.
     Analysis of SUA loans across geographical areas and 
further segmentation by average owner occupancy ratios and financial 
stability.
    HUD may consider other factors as well.

H. Phasing, Contiguous/Adjoining Requirement

    Proposed in Sec.  203.43b(d)(6)(x)(B) was a requirement that in a 
detached or semi-detached development, all homes in a phase must be 
adjoining or contiguous. A number of public comments pointed out 
problems with this requirement, and this requirement is removed in this 
final rule. The requirements that all homes in a phase be separately 
sustainable, built out, and ready for occupancy remain. This material 
has been reorganized and is in Sec.  203.43b(e) of this final rule.

I. Site Condominiums

    This final rule revises the definition of Site Condominium in Sec.  
203.43b(a) to include projects consisting of single family detached 
dwellings that do not have shared garages or any other attached 
buildings, as well as single family detached or townhouse-style 
horizontally attached dwellings where the unit consist of both dwelling 
and land. The rule also removes the requirement in proposed Sec.  
203.43b(i) that all common assessments collected would have to be used 
solely for amenities outside the footprint of the individual site; 
however, the requirement that insurance and maintenance costs of the 
individual units must be the sole responsibility of the unit owner 
remains (see Sec.  203.43b(j) of this final rule). When combined with 
the revised definition of Site Condominium, the requirements under this 
rule better accommodates the Site Condominium arrangements that exist 
in the market. Because manufactured home condominiums are processed 
under the HUD review and approval process, the final rule definition 
clarifies that Site Condominiums do not include manufactured homes.

J. Rehabilitation Loans

    This final rule removes the exclusion of condominiums, other than 
Site Condominiums, from the 100 percent of the after-improvement value 
of the unit loan amount restriction (24 CFR 203.50(f)(3)).

K. Home Equity Conversion Mortgages (HECMs)

    This final rule makes technical and clarifying changes to part 206 
to avoid potential confusion as to the insurability of HECM condominium 
loans.

IV. Public Comments and Responses

    This proposed rule was published in the Federal Register on 
September 28, 2016 (81 FR 66565), and the public comment period closed 
on November 28, 2016. HUD received 91 comments by the close of the 
public comment period. Commenters included individuals, mortgage 
companies, banks, trade associations, realtors, and mortgage brokers. 
The following is a summary of the significant issues raised in the 
public comments.
    In addition to the specific issues noted, some commenters expressed 
general support for the rule, citing the increased flexibility and 
opportunities for homeownership.

General

    Comment: HUD's rules are too restrictive and should be loosened to 
allow projects to participate and buyers to have more access to 
affordable housing. Condominiums are currently the strongest and least 
risky part of FHA's portfolio, yet FHA has significantly reduced condo 
approvals since 2009, and provisions in this rule will further decrease 
the FHA's share of the market. Making FHA insurance for condominium 
mortgages more widely available will help first-time homebuyers, 
including millennials, as well as seniors and low-to-moderate income 
buyers. Condominium mortgages perform better than other single-family 
mortgages, so increasing their availability will benefit the housing 
market and the FHA insurance fund.
    HUD Response: HUD recognizes that mortgages secured by condominiums 
currently perform better than non-condominium secured mortgages, while 
noting that prior to FHA's approval process in 2009, the opposite was 
true. In order to achieve the appropriate balance between meeting the 
housing needs of the borrowers FHA's mortgage insurance programs were 
created to serve and to minimize the level of risk undertaken relative 
to the insurance, this rule provides additional flexibility and a basic 
framework for condominium project approval. HUD plans to issue 
additional guidance, with elements that can be changed as the market 
changes. HUD believes this approach will alleviate this concern and 
allow HUD to achieve the right balance as market conditions may change.
    Comment: Many economic analyses are showing a shortage of 
multifamily housing in location-efficient areas and an oversupply of 
detached single-family houses. The closer we get to single-family and 
multifamily projects having the same approval requirements, the more 
efficient our housing market will be, the more we will get out of our 
developed land, the more we will conserve our pristine land, the more 
choices we can provide for people who may not necessarily want to use a 
car for every errand, and the more energy-efficient our cities will be. 
This proposed rule is a good first step, and it should be revised to go 
even further towards normalizing the lending rules.
    HUD Response: HUD believes this rule strikes the correct balance 
between providing flexibility while protecting the Mutual Mortgage 
Insurance Fund and recognizing the difference in ownership of single-
family dwellings that are maintained solely by the owners versus 
condominium ownership that includes maintenance by owners and 
associations.
    Comment: Due to the significance of the changes, there should be a 
12-month implementation period.
    HUD Response: This final rule provides for a 60-day implementation 
timeframe that allows stakeholders to view additional guidance provided 
in HUD handbooks prior to implementation.
    Comment: Commenter states that condominiums are currently the

[[Page 41851]]

strongest and least risky part of FHA's portfolio, yet FHA has 
significantly reduced condo approvals since 2009. This commenter urges 
FHA to ease restrictions on condominiums in many areas.
    Comment: Many families want to purchase their own home and want to 
purchase condos; however, many lenders are not able to support the 
purchase because the condo project is not FHA approved. It would be 
nice to see if FHA could allow more condo projects to be allowed to 
participate in the FHA Home Loan program. It would open doors to those 
that are not able to qualify under conventional home loan terms.
    HUD Response: This final rule provides the framework to establish 
flexibility, with increases and decreases, in applying the rule's 
standards through policy. It also includes the ability to obtain 
Single-Unit approval as an opportunity to provide access to FHA's 
programs in unapproved condominium projects.

The Proposed Flexible Percentage Ranges for Owner Occupancy, 
Commercial/Nonresidential Space, and FHA Concentration

    Comment: HUD states that setting a range would allow FHA to vary 
the specific percentage, at will, that it believes to be responsive to 
market changes. The commenter does not understand the purpose of the 
ranges as it is the specific percentage that will have a more direct 
impact on condominium project eligibility for FHA insurance. While HUD 
proposes to offer the public the opportunity to comment if it considers 
changes to the upper and lower limits of the range, it would not offer 
the same opportunity when resetting the specific percentage within the 
range. The public should also receive notice and an opportunity to 
comment if HUD is considering a change in the specific percentage 
within the range as the specific percentage will have a greater impact 
on buyers and sellers than a change in the range. Further, the 
commenter requests confirmation that the case-by-case exceptions to 
specific limits allowed under the Guide and subsequent Mortgagee 
Letters will remain in effect under the new regulations.
    HUD Response: The purpose of the proposed rule was in part to give 
the public the opportunity to comment on the potential upper and lower 
limits of the ranges for owner occupancy, FHA concentration, and 
nonresidential/commercial space. Thus, the public has had a chance to 
comment on the range of possible choices. In order to correctly 
allocate risk, HUD may potentially have to implement choices within 
these ranges quickly. HUD believes that the comment process adopted in 
the proposed rule balances the need for public involvement in the 
rulemaking with the need for market flexibility. As to any future 
change HUD might make to percentages within the ranges, this preamble 
identifies the factors that HUD will consider at section III.G of this 
preamble. As to the availability of case-by-case exceptions, such 
exceptions are permitted under Sec.  203.43b(g) of this final rule 
(unchanged from Sec.  203.43b(f) of the proposed rule). In the case of 
exceptions to the commercial/nonresidential space percentage, as 
required by statute (12 U.S.C. 1709(y)(2)), exceptions can be granted 
under either DELRAP or HRAP processing at the option of the requester, 
and in determining whether to allow such an exception, factors relating 
to the economy for the locality in which the project is located or 
specific to the project, including the total number of family units in 
the project, shall be considered.
    Comment: A commenter cites the example of Mortgagee Letter 2016-15, 
which will not have significant practical benefit for condominium 
associations. Opportunity for public comment could have prevented such 
an outcome, remedying limitations in this policy update.
    Comment: A commenter generally approves of the flexibility but 
notes that too many changes that create a moving target will frustrate 
board members and community managers.
    HUD Response: This final rule provides the framework to establish 
flexibility in applying the rule's standards through policy. HUD 
strongly believes that establishing the ranges in the regulation 
provides the flexibility it needs to effectively respond to market 
fluctuations while giving the public information about the limits of 
that flexibility. Enabling HUD to respond to market changes will 
benefit condominium communities.
Standards for Flexible Ranges
    Comment: For the flexible ranges on commercial space percentage, 
FHA-insured percentage, and minimum level of owner-occupied units, HUD 
should broadly identify and provide more information on the factors it 
will consider and the criteria for recalculations when determining 
whether to increase or decrease the percentage limit. Knowing the 
factors HUD will consider when determining the percentage of allowable 
commercial space in a condominium project ahead of time will enable 
compliance and can assist homebuilders in designing condominium 
projects that will meet the needs of both commerce and consumers in 
general keeping with HUD's expectations. Also, HUD should provide 
additional clarity on the frequency of adjustments and the amount of 
notice that will be given prior to a change in the range.
    HUD Response: For changes to the applicable owner-occupancy 
percentage and commercial/nonresidential space percentage, factors that 
HUD will consider will include a portfolio analysis of default and 
claim rates of loans with similar attributes across different bands of 
owner-occupancy and commercial/nonresidential space percentages; 
analysis of condominium loans across geographical areas segmented by 
average owner occupancy ratios or average commercial/nonresidential 
space percentages; and an analysis of trends of financial stability of 
condominium projects in relation to each of the factors. For changes to 
the maximum FHA concentration, the analysis would also include analyses 
of FHA market share, analyses of default and claim rates by bands of 
percentages, analysis of FHA concentration percentages segmented by 
geographic area, and analysis of the performance of FHA condominium and 
single-family non-condominium loans. For single-unit approvals, data 
would include an analysis of single-unit approval loan performance 
versus loans in approved condominium projects, and analysis of single-
unit approval loans across geographic areas and segmented by average 
owner occupancy ratios and financial stability. HUD may also consider 
additional data. These data points are also discussed in Section III of 
this preamble.
    Where a statistically significant deviation occurs over an extended 
period of time (typically enough time to identify a trend, which is 
often, but not always, in the 6-month to 1-year range), FHA would then 
consider making a change after factoring in the effects of any change 
in providing credit to borrowers that FHA programs were designed to 
serve and the impact to the MMI Fund. FHA would also look at the level 
of deviation to determine the level of any change. One aspect of 
analysis would be to compare default rates of the relevant factors 
across similar tier bands and make decisions based on those results so 
as to avoid excessive risk to the MMIF as compared to the overall 
market.

[[Page 41852]]

Owner Occupancy

    Comment: While having too few owner-occupants can detract from the 
viability of a project, requiring too many can harm its marketability. 
The ratio based on primary, secondary, or investment property is still 
too high. This will not make it easier to get FHA approval.
    Comment: HUD should increase the minimum owner-occupancy ratio from 
25 percent to 35 percent and should allow condominiums with fully 
funded reserves pursuant to a current reserve study to qualify for the 
exemption. HUD should include Real Estate Owned (REO) units and owner-
occupied units in the ratio. This aligns with Fannie Mae and Freddie 
Mac and protects FHA's ability to play a countercyclical role in times 
of economic distress. Commenter supports the minimum acceptable level 
of owner occupancy at 35 percent.
    Comment: Data indicate that condo borrowers tend to have higher 
FICO scores than non-condo borrowers, and that since 2010 the default 
rate on condos has been lower than for non-condo loans. These facts 
support FHA allowing a lower percentage of owner-occupants. This 
commenter supports Mortgagee Letter 2016-15 allowing 35 percent and 
suggests that HUD should monitor the use of this threshold for existing 
condos to determine if more general application might be possible.
    HUD Response: HUD's final rule provides the framework to establish 
flexibility in applying owner occupancy standards through policy 
guidance as market forces may dictate, as well as address if such 
ratios vary based upon the construction status of the condominium. This 
final rule sets the lower range at which the minimum owner-occupancy 
percentage could be set at 30 percent. This is the current minimum 
occupancy requirement for new construction projects, and the lowest 
limit that HUD believes would protect the MMIF from undue risk. This 
standard does not seem to be having a negative effect on HUD's 
portfolio. Issuing a final rule with standards more restrictive than 
the ones currently in place, without strong justification supported by 
data, will create disturbance in the market, further impact 
development, and restrict access to affordable housing. Further, HUD 
must be able to set a standard that will accommodate recently completed 
and ready for occupancy projects, at which point a typical condominium 
project will not likely have sold all units to home buyers, or even a 
majority of its units.
    Comment: The proposed rule of a sliding owner occupancy rate of 25 
percent to 75 percent would create additional work for the homeowners' 
association (HOA) and would be more harmful for condominium 
developments struggling to increase homeownership rates. One of the 
unfortunate effects of the 2008 housing crisis is the ``death spiral'' 
many condominium developments continue to struggle with. As mortgage 
delinquencies rose, so too did HOA fee delinquencies and foreclosures 
purchased by investors. This happened at the same time HUD tightened 
the FHA condo requirements. As homebuyers discovered more condo 
developments could no longer qualify for FHA financing, more investors 
bought the units to rent. This helped the Condominium Association 
financials, but the result was that more developments could not qualify 
under the 50 percent owner occupancy rule. Associations and homebuyers 
are looking to HUD and the FHA for clear and consistent rules, and only 
a flat 25 percent owner occupancy rate will provide this surety. The 
proposed sliding homeownership scale is anything but clear and 
consistent. Voluntary Associations will be less incentivized to seek 
FHA approval as this will cause more work for them to determine which 
percentage applies to them and if they qualify or not. Even worse, FHA 
requiring stronger financials to get a lower owner occupancy rate 
requirement only further depresses developments in communities that are 
still struggling to recover. This commenter vehemently disagrees with 
HUD's statement that the ``current standard of 50 percent has worked in 
the recent market.'' To the contrary, this standard has led to more 
condo units being sold to investors and pushing their developments 
farther from FHA qualification. The result is the reduced inventory for 
first-time homebuyers that has contributed to declining homeownership 
rates.
    HUD Response: The proposed range is designed to not only address 
current market conditions, but also to give HUD flexibility to act 
quickly to revise the percentage minimum in the future if market data 
indicates that this is necessary. This final rule revises the lower end 
of the standard to 30 percent owner occupancy, the current standard for 
new construction. This gives HUD sufficient room to reduce the 
requirement if analysis of the data indicates that the current minimum 
is too high.
    Comment: A proposed upper limit of 75 percent for a given project 
effectively would prevent homebuilders from completing projects, 
especially in areas of the country with high concentrations of 
investment properties and second homes. This would chill employment in 
construction and lead to negative economic consequences and a lack of 
choice for the consumer. Therefore, HUD should set the permissible 
percentage range between 25 percent and 50 percent.
    Comment: 75 percent would be too high an owner occupancy 
requirement, which would be an extreme outlier and would needlessly 
restrict the ability of owners to lease units, potentially forcing 
owners to sell units at discount prices while further jeopardizing 
consumer access to mortgage credit. HUD should reduce the maximum from 
75 percent to no more than 51 percent. Many associations amended their 
condominium documents to meet the FHA 50 percent requirement; raising 
the percentage above 50 percent would put them out of compliance and 
affect financing options. Amending the condominium documents is 
difficult and expensive. This would impact projects that already spent 
considerable funds meeting the earlier guideline. Dropping the 
percentage to 35 percent will not make a big impact given the 
additional criteria, as few projects will be approved for that rate. 
Seventy-five percent is excessive and could create project delays 
impacting costs that would be passed on to consumers.
    HUD Response: The proposal regarding the range was designed to 
allow HUD to react quickly if future market conditions should warrant 
it. FHA will then establish the maximum limit within this range. Any 
proposed future changes to the range will have advance notice.
    Changes to the acceptable limit within the proposed ranges will be 
driven primarily by performance data for the Mutual Mortgage Insurance 
Fund. Such analysis may include:
     FHA portfolio analysis of default and claim rates of loans 
with similar attributes across different bands of owner occupancy 
percentages.
     Analysis of FHA condominium loans across geographical 
areas segmented by average owner occupancy ratios (e.g., average owner 
occupancy ratios in metropolitan areas versus rural areas).
     Analysis of trends of financial stability of condo 
projects in relation to owner occupancy (e.g., relationship of default 
and claim rates when compared with percent of financial reserves and 
owner occupancy percentages). None of the requirements for owner 
occupancy maximum will require condominium

[[Page 41853]]

association to update or rewrite their legal documents.
    Comment: The restrictions placed on approval for condominium 
projects with below 50 percent owner-occupancy levels are onerous and 
too restrictive. Pursuant to a recent Community Associations Institute 
study,\6\ FHA's current requirement on reserves for projects with 
greater than 50 percent owner-occupancy was one of the leading reasons 
condominium projects were unable to obtain FHA certification. This 
requirement hurts the potential viability of condominium properties. If 
a building cannot be certified by FHA, it is more difficult for sellers 
of condominium units to find eligible borrowers. Often the seller's 
only alternative is to turn the unit into a rental, thus further 
lowering the owner-occupancy ratio.
---------------------------------------------------------------------------

    \6\ Community Associations Institute, ``Survey: Federal Housing 
Administration (FHA) Condominium Project Approval,'' November 2016.
---------------------------------------------------------------------------

    HUD Response: The range provided in Sec.  203.43b(d)(6)(ix) as it 
relates to owner-occupancy in a condominium project refers to a minimum 
requirement that HUD may establish within that range through notice. 
Historically, HUD has been the mortgage insurance provider for many 
first-time homebuyers and establishing a minimum owner-occupancy 
percentage protects the investment of new homeowners. In addition, HUD 
has a fiduciary responsibility to balance policy that promotes 
homeownership while protecting the Mutual Mortgage Insurance Fund. With 
this in mind, HUD's final rule provides the framework to establish 
flexibility in applying this standard through policy guidance as market 
forces may dictate. This final rule sets the allowable minimum 
percentage at 30 percent of the units. There may be times when a 
reduction in the owner-occupancy percentage is an appropriate action 
based on current market conditions and other contributing factors. HUD 
will consider the comments and recommendations when drafting the 
specific policy guidance on condominiums.
Owner-Occupancy Minimum of 50 Percent
    Comment: HUD has provided no measurable rationale for the 50 
percent requirement. In fact, both Freddie Mac and Fannie Mae have no 
such requirement when the property is being purchased as a primary 
residence. All FHA borrowers are purchasing a primary residence; their 
purchase will only help to boost the association's owner occupancy 
ratio. In this instance, an owner/occupancy requirement is 
counterproductive when a property meets all other certification 
requirements related to financial safety and soundness. FHA should 
remove the current owner-occupancy requirement and align with Fannie 
Mae and Freddie Mac policy by allowing lenders to review a condominium 
project in its entirety. Owner-occupancy levels, whether 100 percent or 
0 percent, should be evaluated in conjunction with the project's 
reserves, delinquency rates, etc., to determine a condominium project's 
viability.
    HUD Response: HUD disagrees with the recommendation. HUD insures 
mortgages for properties that are primarily owner-occupied and has a 
statutory fiduciary responsibility to balance policy that promotes 
homeownership while protecting the Mutual Mortgage Insurance Fund. 
Eliminating the owner-occupancy requirement in its entirety solely 
based on the strength of the borrower has proven to be an unsound and 
inoperable financial policy for FHA.
    While Fannie Mae and Freddie Mac (Government Sponsored Enterprises 
or GSEs) do not impose owner occupancy restrictions for condominiums 
when the property being purchased is a primary residence, FHA serves a 
narrower band of borrowers that generally have credit profiles and 
equity positions below those that the GSEs permit. The final rule, 
however, provides the framework to establish flexibility in applying 
this standard through policy guidance as market forces may dictate.
    Comment: The current 50 percent threshold has not been a 
significant barrier to approval, save for limited circumstances such as 
developer-controlled condos or condos located in vacation or resort 
areas. However, greater flexibility would be welcome in this area. 
Lowering the current threshold below 50 percent would have a 
detrimental effect on approvals. The proposed regulation does not 
specify conditions in which FHA would consider raising the occupancy 
threshold from 50 percent to a higher range. Setting the occupancy 
below 50 percent would be detrimental to the commenter's clients. This 
comment supports a flexible range in the 50 percent to 75 percent 
range. Allowing a 50 percent owner/renter ratio is a valid, and sound 
practice. If it is too difficult for people to rent their condominium 
when life changes (i.e., death, divorce, job relocation, new baby, 
etc.), the property values become depressed, which is bad news for 
borrowers and FHA.
    HUD Response: HUD's final rule provides the framework to establish 
flexibility in applying owner occupancy standards through policy 
guidance as market forces may dictate. To preserve flexibility and 
potentially accommodate recently completed projects, this final rule 
allows the possibility of a 30 percent owner-occupant minimum. HUD will 
consider the recommendations when updating future policy guidance.
Owner-Occupancy Minimum Below 50 Percent
    Comment: 25 percent should be the owner occupancy percentage. Even 
lowering owner occupancy from 50 percent to 25 percent, there is still 
a Board of Directors of the owners that will be empowered with running 
the Association to the best of their ability. There is no risk to the 
FHA in making loans to borrowers in these condominium projects. The 
purchasers of these units, if they use FHA financing to purchase, will 
be owner occupants.
    Comment: To stabilize the financial viability and increase purchase 
options for FHA borrowers, two comments support a minimum level of 
owner-occupancy range between 25 and 50 percent, while certain 
exceptions could be made for lower percentages, or for extending the 
range to 75 percent, as proposed by HUD based on criteria dictated in 
ML 2016-15.
    HUD Response: The final rule establishes the owner occupancy range 
that provides the framework to establish flexibility in applying this 
standard through policy guidance as market forces may dictate. The 
comments and recommendations will be considered when updating and 
drafting the specific guidance for owner occupancy.
Owner-Occupancy Requirement in Strong Rental Housing Market Areas
    Comment: HUD should eliminate ownership restrictions and occupancy 
requirements in an area in which rental housing is in strong demand. It 
makes no sense to penalize property owners who have tremendous value in 
their properties (as determined by strong rents and low vacancies) by 
not letting them sell them or finance them. In such areas, a rental 
property is worth a lot because there are so many prospective tenants 
and the rules for owner-occupancy do not work. Such properties may not 
be able to be sold because their value is too high to allow third 
parties to obtain financing.
    Comment: To reduce barriers to obtaining a reverse mortgage, make 
the owner-occupant requirement extremely low or non-existent (commenter 
states

[[Page 41854]]

they are in an area where rentals are highly desired, and it will be 
impossible to meet HUD's owner-occupancy requirement for the building).
    HUD Response: HUD disagrees with the recommendation to eliminate 
owner-occupancy requirements. HUD insures mortgages for properties that 
are primarily owner-occupied and has a fiduciary responsibility to 
balance policy that promotes homeownership while protecting the Mutual 
Mortgage Insurance Fund. Eliminating the owner-occupancy requirement in 
its entirety solely based on the strength of the rental market in an 
area has been proven to be an unsound financial policy in the 
marketplace with respect to both forward and reverse mortgages. The 
final rule, however, provides the framework to establish flexibility in 
applying this standard through policy guidance as market forces may 
dictate.
HOTMA and Owner Occupancy
    Comment: HUD should decrease allowable owner-occupancy limits from 
50 percent to 35 percent without need for additional documentation as 
directed by Congress under the Housing Opportunities Through 
Modernization Act (HOTMA).
    HUD Response: HOTMA directed HUD to ``issue guidance regarding the 
percentage of units that must be occupied by the owners'' by October 
27, 2016, or the 35 percent requirement to which the comment refers 
would have become effective. HUD issued Mortgagee Letter 2016-15 prior 
to the statutory deadline. That mortgagee letter is outside the scope 
of this rulemaking, which provides for a percentage of owner occupancy 
as low as 30 percent.
    However, HUD will consider this comment as well as then-current 
market conditions in future adjustments to the percentage within the 
range of 30 percent to 75 percent allowed by this final rule.
Secondary Residences
    Comment: In prior years, HUD allowed secondary residences to count 
as owner occupied. With issuance of ML 2009-46B and 2011-22, HUD 
allowed a second home to count as owner occupied only if it was a 
secondary residence with an FHA loan under 24 CFR 203.18(f)(2). A 
commenter states that 24 CFR 203.18(f)(2)(iii) relates only to the 
maximum FHA loan amount (24 CFR 203.18 ``Maximum Mortgage Amounts'') 
for a ``second FHA loan'' in the sole event that an owner with an 
existing FHA loan faces ``undue hardship'' and needs to obtain a second 
FHA loan on another unit in certain circumstances.
    Comment: HUD's reference to the definitions of principal and 
secondary homes in 24 CFR 203.18(f)(1) and (2) carries an implication 
that the secondary residence must have an FHA loan on it in order to be 
counted in the owner-occupancy ratio. It does not mean that a unit with 
a conventional second loan (or even a unit that is mortgage free), 
either of which are secondary residences, should not be counted as 
owner occupied. In the recent past, HUD again reversed its decision and 
now allows secondary residences to count as owner occupied (as does 
Fannie Mae). Because of its reference to 24 CFR 203.18(f)(2), it is 
unclear as to what the Proposed Rule's intent is. Please state 
unequivocally and unambiguously that secondary residences count as 
owner-occupied, and/or that all residences which are not investor-owned 
or vacation homes count as owner-occupied, and/or also please state 
separately the definitions cited in Sec. Sec.  203.18(f) (1) and (2) 
and omit (f)(2)(iii).
    Comment: 24 CFR 203.18(f)(2)(iii) relates only to the maximum FHA 
loan amount (24 CFR 203.18 ``Maximum Mortgage Amounts'') for a ``second 
FHA loan'' in the sole event that an owner with an existing FHA loan 
faces ``undue hardship'' and needs to obtain a second FHA loan on 
another unit in certain circumstances.
    HUD should establish a revised owner-occupancy calculation based on 
the number of the minimum allowable investment units rather than based 
on a subdivision of classifications for owner-occupied units, investor 
units, vacation homes, etc. This revised grouping would make it easier 
for lenders to distinguish and track the number of primary, secondary, 
and investor held units. Currently, lenders face significant challenges 
in distinguishing secondary residences from vacation homes and 
investor-owned units, and struggle to accurately validate and monitor 
these units in approved projects. By classifying units as (1) primary 
residences; (2) secondary residences; or (3) investor units, in line 
with GSE industry standards and removing the need to distinguish 
vacation homes from secondary residences, which most associations are 
not equipped to track, lenders will be able to more accurately track 
owner-occupancy levels and FHA will be able to better manage default 
risk in approved projects.
    HUD Response: HUD recognizes the concern with the reference to 
Secondary Residences, which term is unique to FHA insured mortgages. 
FHA had previously addressed this issue in Mortgagee Letter 2015-17 (ML 
15-17), whereby FHA indicated it would consider a property as owner 
occupied provided it was not ``Investor Owned'' for the purpose of 
calculating owner occupancy ratios for Condominium Project approval. 
However, in accordance with the Housing Opportunity Through 
Modernization Act (HOTMA), which was signed into law on July 29, 2016, 
the National Housing Act was amended to require HUD to use properties 
which were either principal residences or Secondary Residences ``as 
such terms are defined by'' HUD (or sold to owners who intend to meet 
such occupancy requirements) to establish HUD's owner occupancy 
requirements. As required by HOTMA, Mortgagee Letter 2016-15 replaced 
the requirements in ML 15-17 with the current percentage standard. 
Currently, HUD's definition of ``Secondary Residence'' is found in 24 
CFR 203.18(f), and, as noted in the comments, has three elements: It is 
(1) part-time abode where the mortgagor typically spends less than a 
majority of the calendar year; (2) not a vacation home; and (3) the 
Commissioner has determined it eligible for insurance to avoid undue 
hardship to the mortgagor. These standards, particularly (3), are 
addressed to eligibility for mortgage insurance in accordance with 
Section 203(g) of the National Housing Act. This rule relates to the 
approval of the project to participate in the mortgage insurance 
program; specifically, the issue of Secondary Residences comes up with 
respect to the owner-occupancy percentage. In the context of project 
approval, as comments noted, (3) does not make sense; it is an 
assessment that will be made if the mortgage on the unit is submitted 
for insurance after the project is approved to participate. 
Additionally, HUD recognizes the exclusion of vacation homes, while 
necessary for the definition found in 24 CFR 203.18(f)(2) to conform 
with the requirement in section 203(g)(1) of the National Housing Act, 
12 U.S.C. 1709(g)(1), is not necessary to calculate owner occupancy 
rates of condominium projects for project approval purposes. For this 
reason, this rule states that for project approval, any unit in which 
the owner resides as his or her place of abode for any portion of a 
calendar year other than as a principal residence, and that is not 
rented for a majority of the calendar year, counts towards the owner-
occupied percentage. Individual mortgages on units in approved projects 
would still have to meet HUD's rules, regulations, and underwriting 
requirements, as applicable, to obtain insurance on their mortgages.

[[Page 41855]]

Percentage Ranges for Commercial/Nonresidential Space

Commenters Stated That HUD Should Not Impose a Limit on the Percentage 
of Commercial/Nonresidential Space
    Comment: The economically optimal mix of residential and commercial 
will differ both by the project and by the community. Any such 
restriction on uses can only reduce the economic value of projects; it 
can never enhance it. For the purposes of underwriting, any limit on 
the mix of uses in a mixed-use project is counterproductive and should 
be eliminated from the proposed rule. Second, from a public health 
perspective, there is a need for more mixed-use projects in our towns, 
cities, and suburbs. Mixed-use developments greatly enhance the 
walkability of neighborhoods, which in turn promotes health and well-
being through more frequent social interactions, more walking, and 
reduced crime. It should not be the role of HUD to place limits on 
mixed-use projects via rulemaking.
    Comment: Mixed-use commercial/residential spaces are the 
cornerstone of traditional small-town America. Preserving the 
`residential characteristics' of a condominium is done at the expense 
of creating a walkable neighborhood. People should be able to apply for 
help to build or renovate residences even if those residences are part 
of a building that is more than 50 percent commercial. Rather than 
protecting the ``residential character'' of condominium projects, the 
focus should be on underwriting standards that are more directly 
related to creditworthiness of the individual. Federal regulations must 
support mixed-use rental housing for affordability and walkability.
    Comment: Commercial space would not harm the project's financial 
viability. Many of the nation's most successful and in-demand mixed-use 
neighborhoods are comprised of such projects. Increased HUD flexibility 
regarding the amount of commercial space in multi-family buildings 
would help to grow and expand mixed-use development efforts, 
specifically in areas targeted for redevelopment. Furthermore, HUD 
should review its criteria for all its programs so that they better 
reflect growing demand for walkable, mixed-use communities; conform to 
the overall goals for mixed-use, sustainable communities outlined in 
the Administration's Sustainable Communities Initiative; and bolster 
rather than stymie local government efforts to preserve and grow the 
stock of affordable housing in neighborhoods that include mixed-use 
buildings.
    HUD Response: HUD agrees that mixed-use developments that combine 
commercial enterprises with residential housing are increasing in 
popularity.\7\ HUD notes that Fannie Mae recently increased its 
allowable commercial space percentage to 35 percent.\8\ With a strong 
demand for residential units in mixed-use projects within and outside 
urban settings, the percent of commercial/nonresidential space becomes 
less concerning if there is no other negative impact on the residential 
character and financial stability of the project.
---------------------------------------------------------------------------

    \7\ Real Trends: The Future of Real Estate in the United States 
by Urban Economics Lab and MIT's Center for Real Estate (October 
2017), at 19. The study is available at https://mitcre.mit.edu/wp-content/uploads/2017/10/REAL-TRENDS-MIT.pdf.
    \8\ Fannie Mae Selling Guide B4-2.1-03: Ineligible Projects (6/
5/2018), available at https://www.fanniemae.com/content/guide/selling/b4/2.1/03.html.
---------------------------------------------------------------------------

    This final rule provides a sufficient range to allow adjustments 
that may be necessary for the foreseeable future. HUD disagrees with 
the suggestion that HUD should not impose any upper limit on the 
percentage of commercial/non-residential space an acceptable project 
may have. HUD insures mortgages for properties that are primarily 
residential in nature and has a fiduciary responsibility to balance 
policy that promotes homeownership while protecting the Mutual Mortgage 
Insurance Fund.
Alternative Suggestions as to the Amount of Commercial Space That 
Should Be Approvable
    Comment: Commenters support the expansion of allowable commercial 
space to the proposed range of 25 percent to 60 percent. This range, 
when combined with a look at local economic factors, would allow more 
associations to qualify for FHA approval without necessarily increasing 
risk. More and more jurisdictions are fostering walkable, transit-
oriented communities that offer a blend of commercial and residential 
space. This change would align FHA with emerging market preferences. A 
commenter notes an example of a mixed-use development that is highly 
vibrant and desirable, but would not be approved by FHA because the 
commercial space exceeds 30 percent.
    Comment: The maximum standard for commercial space should be set 
and maintained at 60 percent of the total floor area in Sec.  
203.43b(d)(6)(vii). Many highly successful mixed-use neighborhoods are 
comprised of a similar commercial space to residential space ratio, and 
there is a real demand nationwide for development of such projects. If 
financing were made more readily available, it would have nothing but a 
positive impact on communities across the nation. This commenter stated 
disagreement with HUD's assessment of potential negative impacts on the 
residential character of mixed-use developments with greater than 50 
percent of total area designated for commercial space.
    Comment: The rule should maintain the current commercial/
nonresidential space requirements, which are consistent with National 
Association of Builders policy that calls for the allowable percentage 
of nonresidential space up to 45 percent. Setting a limit too high 
could impact the residential character of a project and expose FHA-
insured units to risk should a commercial tenant leave the project. 
Mortgagee Letter 2012-18 provides flexibility and HUD should maintain 
these requirements.
    Comment: The commercial space requirement should be set between 25-
50 percent, with specific guidelines to allow exceptions for projects 
with up to 60 percent commercial space. Special consideration is needed 
when a project seeks to use more than 50 percent of a property's total 
floor area for commercial space due to the potential impacts of this 
expanded presence on the characteristics of a residential project.
    Comment: Mixed-use neighborhoods are preferred, and 56 percent of 
millennials and 46 percent of baby boomers prefer to live in areas with 
a mix of retail and housing options (Regional Plan Associations, ``The 
Unintended Consequences of Housing Finance,'' February 2016). Mixed-use 
neighborhoods have held up their value better in the years following 
the Great Recession compared to solely residential neighborhoods. Given 
FHA's mission to promote safe and affordable housing, the current 
policy limiting commercial space hinders efforts to build neighborhoods 
that have a mix of residential housing and businesses with access to 
public transit that HUD has championed. FHA should allow up to 45 
percent commercial space without documentation. Greater levels of 
commercial space should be evaluated holistically along with the 
strength of the project, but should not be capped at a specific 
percentage.
    Comment: To expand the pool of eligible projects, HUD should set 
the minimum range for commercial/non-residential space without 
requiring an exception from the current 25 percent to 35 percent. 
Projects with commercial space of more than 35 percent but less

[[Page 41856]]

than 50 percent may request exemptions pursuant to FHA criteria subject 
to proposed Sec. Sec.  203.43(f)(1) and (2).
    Comment: Increasing the percentage of permissible commercial/
nonresidential space prior to triggering an exception request builds on 
FHA's experience with the exception structure currently enforced in the 
Guide that permits the jurisdictional Homeownership Centers (HOCs) to 
consider and approve exemptions for projects with commercial space that 
exceeds 25 percent but is less than 35 percent of total floor area. 
Protecting a project's residential use and character is not exclusive 
of consumers who view access to a broad array of services within a 
project as a fundamental component of the project's residential use and 
character. Many consumers place a high value on immediate access to 
services. For these consumers, commercial space is a meaningful 
component of enhancing the residential experience and a motivation to 
purchase.
    Comment: An upper limit of 50 percent should be set for the range 
regarding commercial space. A higher percentage threatens the 
residential nature of a project and too closely ties the residential 
viability to the project's commercial success. HUD should continue to 
use the standard of 25 percent while exercising the ability to increase 
that threshold for certain markets or projects as proposed in the 
regulation.
    Comment: It is possible for a project with commercial space 
exceeding 50 percent of total floor area to be successful in certain 
housing markets. Any exceptions granted above the 50 percent limitation 
must appropriately mitigate potential exposure to business cycle risk. 
At this time, it may not be appropriate for FHA to approve condominiums 
in the upper limit of the proposed 60 percent commercial space range--
the agency lacks data and experience concerning the sustainability of 
such projects. This is not the case for projects with 35 percent or 
less commercial space.
    Comment: Older business/residential buildings help entrepreneurs 
live upstairs from their businesses. HUD should lift the minimizing 
constraints of space versus funding. HUD should consider doing a survey 
on said remodeling of old tenements/downstairs businesses. All old 
buildings need new life for sustainable development.
    Comment: Research shows that consumers increasingly place a price 
premium on housing that is near (walking distance of less than .25 
miles) of services, including retail, healthcare, and transportation. 
This research has also shown a correlation between a homeowner's access 
to transportation, employers, and household economic growth. 
Condominium projects with commercial components not only meet consumer 
demand for access to services, but also may improve access to jobs 
leading to greater financial stability for households and the community 
at-large.\9\
---------------------------------------------------------------------------

    \9\ Richardson, Nela, Urban Institute/Core Logic: Demand, Data, 
and Demographics Symposium, Integrated Services and Inclusionary 
Housing for Changing Demographics: Can we build our way out of this? 
(Washington DC, November 2, 2016). Data deck available for download 
at: http://www.urban.org/events/data-demand-and-demographics-symposium-housing-finance-2 (accessed 3/18/2019).
---------------------------------------------------------------------------

    HUD Response: This final rule narrows the upper end of the 
potential allowable commercial space percentage to 55 percent of the 
total floor area. This percentage acknowledges the future potential of 
mixed-use developments while avoiding risk to the MMIF. The range gives 
HUD flexibility to adjust the standards through policy changes as the 
market conditions dictate.
    HUD believes in allowing the development of pedestrian oriented 
communities that offer the convenience of commercial and residential 
space in the same project, so long as the residential character is not 
negatively impacted. Multiple commenters seem to agree with HUD's 
assessment, noting that although they also agree with the expanded 
range of allowable commercial/non-residential space, special 
consideration is warranted when a project seeks to use more than 50 
percent of a property's total floor area for commercial/non-residential 
use. HUD will consider the recommendations submitted through the 
comments when drafting specific policy guidance on this subject.
    Comment: The HOTMA provision allowing lenders to make exceptions to 
the commercial space requirement based on ``factors relating to the 
economy for the locality in which such project is located'' should be 
immediately implemented (the deadline was October 28, 2016).
    HUD Response: This provision was proposed on September 28, 2016 (81 
FR 66565) and is made final by this rule (Sec.  203.43b(g)(2)).
    Comment: Most of the newer condominium projects that have been 
built in the past 5 years in one area include street level commercial 
space. To disqualify the ability of a purchaser to purchase a 
condominium in this building using FHA financing due to current 
commercial space vacancy (assuming this is a temporary short-term 
vacancy) does not make sense. HUD should set this minimum occupancy 
rate of commercial space at 25 percent.
    HUD Response: The rule establishes the range for commercial space, 
but does not impose a restriction on commercial space vacancy. As to 
the percentage, please see the prior response.
    Comment: HUD should clarify that this requirement is not a minimum, 
but an allowable maximum for the addition of commercial space as well 
as the frequency with which FHA will reexamine the commercial space 
requirement, how much notice will be provided to lenders when a change 
is made, and what criteria will be used to determine recalculations. 
Finally, FHA should further define the items that may contribute to 
commercial space to ensure that lenders understand what features will 
fall into this category to aid in the completion of accurate commercial 
space calculations.
    HUD Response: The range provided in Sec.  203.43b(d)(6)(vii) as it 
relates to the commercial/non-residential space in a condominium 
project refers to an allowable maximum, not a minimum requirement. 
Regarding the commenter's request for additional information on 
guidelines, procedures, and items that contribute to commercial space, 
HUD expects to issue future guidance on such issues. Section III of 
this preamble discusses data that HUD will consider when determining a 
change in the percentage of commercial/nonresidential floor area.
Single-Unit Approval and Reserve Requirements
    Comment: Single-unit approvals offer millennials an opportunity to 
own homes, and the elderly to stay independent, especially if the 
reserve requirement could be set lower than that of Fannie Mae, perhaps 
10 percent of the overall budget instead of 10 percent per annum. If 
the project is budgeting properly, it always has the appropriate amount 
to cover its expenses already on hand and it doesn't make sense to put 
in an additional 10 percent each year.
    Comment: HUD should consider an exemption from the reserve 
requirement for single-unit loans where a project has been well-managed 
for decades, while approaching the capital funding issue via special 
assessments. HUD could use appraisers to speak to the historical values 
of units within the complex. If one could determine that the price 
variance is too high to meet a certain standard, then the exemption is 
not granted.

[[Page 41857]]

    HUD Response: This rule does not impose a minimum reserve 
requirement for single-unit approval, but establishes a framework for 
single-unit approval that utilizes the eligibility requirements in 24 
CFR 203.43b(d) as a baseline, which includes requirements for reserves; 
or a subset of these requirements. HUD will consider these comments 
when addressing single-unit approvals in future notices.

FHA Concentration Percentage

    Comment: HUD, through FHA has a responsibility as a steward of the 
program to mitigate risk. Without further clarification as to existing 
risk or the rationale for potentially reducing or expanding the 
concentration limits, it is difficult to provide substantive comment. 
However, HUD is a critical source of funding for buyers in 
condominiums, and HUD should not lower the concentration threshold from 
its current 50 percent level without adequate data to support such a 
contraction in the program. Existing levels should be preserved with 
greater flexibility for increased concentration where appropriate. If 
HUD determines that changes are warranted, HUD should provide 
additional information about the factors that will be considered.
    Comment: 25 percent FHA insured would be too low. HUD should not be 
overly concerned about FHA concentration in projects that are well-
managed and meet all FHA approval criteria. Some limitation is prudent 
risk management. HUD should retain a 50 percent minimum FHA 
concentration limit.
    HUD should maintain its current guidelines to allow for 50 percent 
of the total number of units in a project with some leniency to allow 
for potential cancellations. In many circumstances, HUD has already 
allowed for up to 75 percent FHA financed units in established projects 
based on individual project conditions and the associated risks of this 
flexibility are monitored and mitigated through the recertification 
process. The maximum percentage should be raised to 75 percent. The 
flexibility provided under current guidelines along with the sufficient 
risk mitigation provided through the recertification process remains 
the most effective approach to this calculation for both lenders and 
FHA.
    HUD Response: This final rule implements the FHA concentration 
range that provides the framework to establish flexibility in applying 
this standard through policy guidance as market forces may dictate. HUD 
will evaluate these recommendations when updating policy guidance and 
will consider pertinent data to support any future changes to the 
concentration limit.
    Comment: A commenter recommends that HUD allow an FHA concentration 
up to 100 percent, especially for new construction. In most 
metropolitan areas, the cost of a condominium is significantly less 
than a traditional single-family home. FHA is often the only financing 
available for many buyers, especially first-time or middle-income 
homebuyers who have limited resources for a down-payment. Research 
shows that the time needed to save for an FHA related down payment is 
significantly higher for a single-family home compared to a 
condominium. Purchasing a condominium will allow many FHA borrowers 
faster access to homeownership, helping to build their wealth and 
stabilize their living situation sooner rather than later. A high 
concentration of FHA borrowers means a high concentration of owner-
occupants, which helps the financial soundness of the condominium 
project. FHA does not limit the amount of financing available within a 
neighborhood of single-family structures, nor should FHA limit 
financing within a condominium project. Generally, FHA condominium 
buyers have a stronger financial footing than non-condominium buyers. 
FHA condominium buyers tend to have higher FICO scores than the non-
condominium buyers and higher monthly incomes. In 2016, the average 
monthly income for a condominium buyer was $1,693, versus $1,397 for 
non-condominium buyers.\10\ These are creditworthy borrowers who 
deserve to live in buildings and communities that meet their needs.
---------------------------------------------------------------------------

    \10\ Urban Institute, ``Loosening FHA Restrictions on 
Condominium Financing Makes Sense,'' November 2016, available at 
https://www.urban.org/sites/default/files/publication/85936/loosening-fha-restrictions-on-condominium-financing-makes-sense.pdf.
---------------------------------------------------------------------------

    HUD Response: HUD disagrees with the recommendation to increase the 
maximum allowable FHA concentration percentage to 100 percent. HUD has 
a fiduciary responsibility to balance policy guidance with risk to the 
Mutual Mortgage Insurance Fund. Allowing for a higher FHA concentration 
percentage without careful consideration for additional requirements or 
justification may increase the Government's risk.

Single-Unit Approval

Single-Unit Approval Generally
    Comment: Single-unit approvals should be allowed in buildings that 
do not meet current requirements, for example, if the owner-occupant 
percentage is too low, single-unit approvals could provide a way for 
the development to build up to the required percentage.
    With only 9,866 condominium projects currently on FHA's approved 
list (of 150,000 nationwide), access to condominium units with FHA-
insured mortgages is limited. Allowing single-unit approvals could 
greatly improve access and ``change the trajectory of the FHA 
condominium approval trend line'' to the benefit of condominium 
associations and consumers.
    Comment: Most developments fail to keep their FHA approval because 
it is not in their budget and most do not have the knowledge and 
expertise to keep the project approved. By eliminating this process, 
developers would be able to serve more borrowers that are looking to 
use FHA financing to accomplish their goal of homeownership.
    HUD Response: Single-unit approvals, in the appropriate 
circumstances, can be beneficial, and are retained in this final rule 
as an opportunity to provide access to FHA's programs in this or 
similar situations. The rule establishes requirements to mitigate risk 
to the Mutual Mortgage Insurance Fund, while providing that these can 
be varied in the future as needed.
    Comment: Because of the reluctance of condominium associations to 
become HUD-approved, single-unit approval is imperative. HUD should 
reconsider requiring any complex that shows up on HUD's approval list 
to go through project approval. That will require many of these 
associations to be approached a second time when many of them had a bad 
first experience.
    HUD Response: HUD has a fiduciary responsibility to the Mutual 
Mortgage Insurance Fund that generally precludes allowing single-unit 
loans on any project, although the rule provides a framework for HUD to 
vary single-unit approval requirements as needed to meet market needs.
    Comment: To make single-unit approval as successful as it could be, 
HUD should do away with ``loophole letters,'' because the property 
manager can refuse to provide one and kill the loans that would 
otherwise happen.
    HUD Response: The comment seems to be referring to a questionnaire 
that is sent to the Association. HUD appreciates that obtaining 
information from Condominium Associations can complicate the mortgage 
process, but recognizes that such information may not be obtainable 
through other methods. While this rule does not mandate that any 
specific questionnaire

[[Page 41858]]

be completed by a Condominium Association, this rule provides the 
framework to establish flexibility in applying the proposed standards 
through future policy guidance as market forces may dictate.
    Comment: The current approval process has incentivized condominium 
boards to undertake an examination of the Association finances, state 
of insurance policies, collections, and other factors that are needed 
to obtain approval. This has been beneficial to communities who have 
undertaken this process. Providing an approval process with a lower 
approval threshold will short circuit the larger project approval 
process as boards will forego the time and effort of project approval 
knowing there is a lower barrier for approval elsewhere. This would be 
unfair to the communities which have undertaken project approval and 
provide a dueling set of standards.
    HUD Response: Providing for a limited number of single-unit 
approvals, based on standards appropriate to mitigate against excessive 
risk, should not affect the fairness of the overall project approval 
process. Limiting the number of such approvals in projects provides 
incentive for Associations to continue to pursue the project approval 
process in projects that typically have a larger percentage of FHA 
financing. The increased flexibility to meet market needs and enlarged 
approval period provided by this rule is expected to increase the 
number of eligible mortgages in Condominium projects.
    The lower end of the range, including a 0 percent maximum, is 
available if overly negative effects occur. However, smaller 
condominium projects may simply not have the financial ability or 
expertise to apply for project approval, and a limited number of 
Single-Unit Approvals would give them a path forward to provide FHA 
mortgage-insured housing units. Project approvals will have benefits, 
including a degree of certainty that units will be eligible for 
mortgage insurance; therefore HUD believes those projects with the 
ability to do so will continue to seek project approval.
    Comment: The previous spot loan program led to concerns of abuse. 
This program should have diligent monitoring and adequate system 
enhancements to prevent abuses. Without further guidance and clarity 
regarding lender obligations, the criteria that will be used for unit 
approval verification, and the processes that will be in place to 
monitor and track these unit approvals, this program may result in 
unintended risk to the Mutual Mortgage Insurance Fund, and to borrowers 
seeking sustainable homeownership. FHA should implement a limited 
review process for single-unit approvals and a screen within FHA 
Connection to collect data for FHA on spot approvals to help FHA 
monitor and manage these risks. Based on the current proposal, a 
condominium identification number would not be available for a single 
unit, and without effective monitoring systems, both FHA and 
participating lenders will have significant difficulties determining 
approved unit percentages in an ineligible building. There should be a 
way for the public to track percentages of single-unit approvals. HUD 
should clarify the tracking mechanism to be used to determine 
compliance with the 0-20 percent range allowed.
    HUD Response: HUD agrees that a reliable tracking mechanism is 
needed to determine compliance with the range allowed. As a result, HUD 
has added a provision that ``HUD may suspend the issuance of new FHA 
case numbers for a mortgage on a property located in any project where 
the number of FHA-insured mortgages exceeds the maximum,'' which will 
allow FHA to proactively manage the concentration range. The maximum 
percentages that apply will be established by notice. Also, the 0 
percent possibility provides a safety valve. This final rule provides 
specific criteria for single-unit approval that HUD believes will 
adequately protect the Mutual Mortgage Insurance Fund, while providing 
needed flexibility for HUD to make changes in the future as needed.
    Comment: Single-unit approval should not undermine the project 
approval process and should be limited. While the FHA and industry have 
struggled with encouraging boards to undertake project approval, the 
importance and benefits of approval have become more widely understood 
over the past few years. Adopting a shortcut will undermine the process 
unless more clearly delineated limitations are adopted. If the criteria 
for single-unit approvals is extremely loose, HUD will lose control of 
the process and lenders will turn to single-unit approval as the 
industry standard.
    A comment proposed that single-unit approval would be acceptable 
if:
    (1) The association had held FHA approval which has been expired 
for fewer than 3 years.
    (2) The FHA approval was not withdrawn or rejected for failure to 
meet FHA criteria.
    (3) Other criteria FHA deems appropriate.
    Another comment stated that there should be some leeway and 
suggests that the following common issues should be considered to 
determine what is required for single-unit approval:
     Construction Defect Litigation or repairs in response to 
defect litigation are still in process.
     Owner Occupancy is between 35 percent-50 percent.
     Leasing Restrictions that include: Seasoning Clauses, 
Tenant-Screening, short-term Rentals.
     Co-Insurance is used without 100 percent replacement cost, 
but replacement cost can be validated using Marshall-Swift or other 
acceptable means.
     Bylaws are not signed.
     Status with the Secretary of State is not current.
     Condominium Documents were not created and or filed 
properly at the time of development.
     Transfer fees are in place.
    HUD Response: HUD has considered these suggestions and believes 
that the limitations stated in this final rule are appropriate. Single 
units, to be approved for mortgage insurance, must not be either in a 
project that is already approved, or a project that has been determined 
to have significant issues that affect the viability of the project. 
The unit must meet the general standards for approval stated in the 
rule, or some subset of these standards, or less stringent standards, 
determined by HUD. The unit must be in a completed project that has at 
least 5 dwelling units. HUD plans to issue further guidance under the 
framework provided in this rule.
    Comment: HUD should define and clarify the documentation 
requirements for approvals under the exception for less stringent 
standards.
    HUD Response: The less stringent standards will be determined based 
on experience and conditions at the time.
    Comment: HUD should allow public comment on the specific criteria 
and processes FHA will use to manage single-unit approvals prior to 
implementation. The actual standards and process that FHA adopts are 
critical to the success of single-unit approvals. If a single-unit 
approval system is to be successful, all market participants (including 
lenders, condominium association boards, community managers, community 
management companies, and other professionals who support the community 
association housing model) must have the opportunity to review and 
comment on the procedures and standards to be used.
    Comment: HUD should consider adopting Freddie Mac and Fannie Mae's 
guidelines when it comes to

[[Page 41859]]

condominiums, that is, limited review and full review for ``spot 
approvals'' for condos not listed on the Fannie Mae PERS list. Freddie 
takes the reciprocal of Fannie Mae's PERS approval. Review should be 
similar to the Fannie Mae Condo Project Manager (CPM) review (reviewing 
the budget, delinquencies, litigation, etc.) for the single unit only. 
HUD would benefit from the same level of review as the agencies and set 
the same protocol for certain type that would need HRAP or DELRAP 
approval as Fannie does with PERS. Having FHA, Fannie and Freddie all 
on the same page when it comes to condominium reviews will give more 
flexibility to certain credit type borrowers, along with product 
options.
    If there is no guidance, some lenders may approve anything without 
any type of review and consider the unit acceptable as long as it is 
not on HUD's approved list. Perhaps HUD could have a list of staff 
trained in condominiums within each lender, or only allow DELRAP-
approved lenders to issue Single-Unit Approvals.
    HUD Response: HUD has considered these suggestions and believes 
that the limitations stated in this final rule are appropriate. Single 
units must be in projects that meet eligibility criteria and cannot 
have any significant issues affecting viability. HUD plans to issue 
further guidance under the framework provided in this rule. HUD has 
received a number of comments on criteria for Single-Unit Approval via 
this rulemaking, which it will consider when issuing guidance going 
forward.

Single-Unit Approval and FHA Concentration

    Comment: Is there any relationship between the number of Single-
Unit Approvals and the percentage of FHA-insured loans currently in the 
project?
    HUD Response: Generally, the projects in which SUAs will occur must 
meet the eligibility requirements of Sec.  203.43b(d) and (i), which 
place a limit on the percentage of FHA-insured loans. This rule 
provides that HUD may vary the specific limit, giving HUD the 
flexibility to respond to market needs; the total FHA insurance 
concentration will include all FHA-insured mortgage loans in the 
project, whether counted for SUAs or the overall limit.
    Comment: The FHA concentration range proposed for the SUA process 
is the only factor that raises the possibility of severely restricting 
the program on a broad basis or targeting a sub-set of projects for 
disqualification from the underlying program. FHA now has greatly 
improved risk management due to improvements in data collection and the 
Qualified Mortgage standards (of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act). Currently, condominiums outperform most other 
categories in FHA's book of business and have a lower foreclosure rate, 
which would allow HUD to expand access to credit while protecting the 
insurance fund. A minimum FHA concentration range of 0 percent is 
contrary to this policy goal, and could lead to a practical withdrawal 
of FHA from the condominium market, which would be destabilizing and 
contrary to FHA's countercyclical role in any future crisis to the 
detriment of American homeowners and communities. The lower end of the 
range should be 10 percent.
    HUD Response: HUD recognized the need to establish a limited 
Single-Unit Approval process in its proposed rule and maintains that 
process through this final rule. HUD also recognizes that the 
performance of mortgages secured by condominiums had performed worse 
than other single-family mortgages for a time period prior to the 
elimination of FHA's Spot Approval process and have shown to be prone 
to more volatility than other mortgages. Establishing a range that 
includes 0 percent provides FHA with the necessary flexibility to 
respond to market movements that may put the FHA Mutual Mortgage 
Insurance Fund at risk.
Single-Unit Approval With Home Equity Conversion Mortgages (HECMs)
    Comment: Seniors face difficulty in obtaining HECM loans due to the 
inability or unwillingness of condominium associations to have the 
projects approved by FHA due to the difficulty, time, and expense of 
the project approval process, without a single-unit option. In some 
cases, HECM loans are the only way seniors can stay in their home in 
retirement, or need the cash flow. A single-loan approval process would 
make it relatively simple for individual units to be approved. HUD 
should allow Single-Unit Approval for a reverse mortgage in any 
condominium complex that meets the new Single-Unit Approval criteria.
    Eligibility for a HECM loan should be based on individual 
creditworthiness rather than the condominium association. The current 
requirement for whole-project approval is a form of discrimination 
because a detached homeowner who isn't credit worthy can more easily 
get a HECM loan than a highly qualified senior owning a condominium. 
``Overly aggressive'' HUD requirements prevent highly qualified 
borrowers from qualifying for loans, and HUD should go back to spot 
approvals based on appraiser input of marketing data. ``The local 
appraiser's input would properly evaluate the short and long-term 
viability of the project.''
    When HUD ended spot approvals, HECM loans became inaccessible to 
many seniors. HUD should clearly include HECM loans within the Single-
Unit Approval process. The policy that HECM loans are not eligible has 
to do with consistency with the prior policy of terminating spot loan 
approvals. The program currently prevents highly qualified borrowers 
from qualifying for loans and fulfilling the objective of the HECM 
program. It is a form of discrimination.
    HUD Response: While HUD does not agree that either a lack of 
single-unit loan approvals for HECMs or a general requirement for 
project approval are forms of discrimination, the availability of 
Single-Unit Approvals under this final rule should make HECM loans in 
condominium projects more widely available while recognizing the 
difference in ownership of single-family dwellings that are maintained 
solely by the owners versus condominium ownership that includes 
maintenance by owners and associations.
    HECM mortgages may include condominium loans (see the definition of 
``mortgage'' in 24 CFR 206.3) and are eligible for mortgage insurance 
if the project is acceptable to the Commissioner (24 CFR 206.51). For 
HECMs, as for forward mortgages, a condominium loan is approvable for 
insurance if it satisfies eligibility requirements and is: (1) Located 
in a project that is acceptable to the Commissioner as described in 
Sec.  203.43b(d) of this rule, (2) for a single condominium unit 
located in a project that is acceptable to Commissioner as described in 
Sec.  203.43b(i) of this rule, or (3) for a site condominium project 
that is acceptable to Commissioner as described in Sec.  203.43b(j) of 
this rule. The requirements of Sec.  203.43b of this rule establish the 
standards for a project that is acceptable to the Commissioner.
    Comment: Condominium associations often are not interested in 
becoming HUD-approved, and therefore they could not obtain a reverse 
mortgage. This is a common situation (one commenter stated that only 6-
8 percent of condominium projects are HUD-approved), resulting in an 
underserved market.
    Some commenters stated that seniors were being discriminated 
against, and that seniors in condominiums unfairly lack the same 
opportunities provided to those who live in single- family homes, even 
if the condominium owners are more creditworthy. These commenters

[[Page 41860]]

sought the ability to obtain reverse mortgages, which would allow 
seniors to live near relatives but keep their independence, and stated 
that there should be an easier way than getting the entire project 
approved. This rule would ``re-open doors in a fiscally responsible 
manner for many people that have been closed for too long.''
    A senior with a tax lien against a mortgage-free condominium unit 
would likely not be able to pay the taxes past due without a HECM loan. 
Some housing markets have become so expensive that even small condos 
are out of reach of many seniors if they are not able to use a reverse 
mortgage. Many seniors already in a condo need to access their equity 
for everyday living, medical and other expenses and long-term care. 
When some large banks left the reverse mortgage industry, the market 
lost their dedicated in-house condominium departments, which worked 
solely on getting condominium projects approved. More and more 
condominium associations do not want to go through the time and expense 
of getting approved. Single-unit loans should come back so that older 
Americans can enjoy staying in their home in retirement.
    HUD Response: The Single-Unit Approval process under this rule is 
expected to make units more easily available, including for HECM loans.
    Comment: HUD should allow a certain percentage of Single-Unit 
Approvals for reverse mortgages in any complex, or, in the alternative, 
HUD should consider wiping the project approval database for any 
complex without a status change in 2 years.
    HUD Response: HUD does not believe allowing a certain percentage of 
Single-Unit Approvals solely for HECM loans in all projects would be 
consistent with its fiduciary duty to the Mutual Mortgage Insurance 
Fund. HUD believes that making the determination of how many units 
would be Single-Unit Approvals based on specific factors, experience, 
and with flexibility to change in response to future market conditions 
is the correct approach. For the same reason, HUD would not agree to 
wipe the approval database at any periodic intervals.
    Comment: The ability to apply for a HECM loan based on individual 
viability rather than blanket rules applicable to a whole complex is 
much more democratic and would logically help the economy and give more 
people cash flow. Allowing single-unit loans will also help the values 
of these condominium projects.
    HUD Response: HUD has a fiduciary responsibility to the Mutual 
Mortgage Insurance Fund that generally precludes allowing single-unit 
loans without considering the project. The rule provides a framework 
for HUD to provide some Single-Unit Approvals and to vary requirements 
as needed to meet market needs.

Direct Endorsement Lender Review and Approval (DELRAP)

Commenters Questioned the Proposed Staff Experience Requirement for 
DELRAP Approval
    Comment: It is often standard practice for a lender to employ 
junior underwriters with respect to condominium projects who may not 
have at least one year of experience, but who work under the direct 
supervision of a very experienced senior underwriter. Procedures are 
already in place to oversee this current system through FHA's quality 
control reviews. Accordingly, HUD should instead utilize the current 
guideline requirements with respect to this issue, which call for the 
lender to employ staff that have knowledge and expertise in reviewing 
condominium projects. Supervision by a senior underwriter and internal 
quality controls allow for underwriters with less than a year 
experience to work on a project while protecting consumers and the FHA.
    Because each lender is responsible for the outcome of each 
reviewer's actions, it is best left to each lender to determine if/when 
a reviewer is ready to make these important decisions. HUD should make 
no changes to current guidance.
    Comment: HUD should consider if the proposed credentialing process 
constitutes a barrier to entry, depressing the number of lenders 
eligible to process DELRAP approvals. DELRAP serves the useful purpose 
of increasing administrative capacity when there are bottlenecks. Such 
administrative capacity constraints may occur when the market is very 
active or when new regulatory standards are introduced. The reduction 
of DELRAP approvals could have negative implications for FHA's 
countercyclical role in the housing finance system. FHA played a 
critical countercyclical role in the recent financial crisis, making 
mortgage credit available to households, including condominium 
households, and accounting for 26 and 22 percent of condominium unit 
market originations in 2009 and 2010, respectively. Direct Endorsement 
lenders should be provided unconditional approval, with the 
understanding that qualified personnel will process condominium 
approvals, unless or until FHA quality control reviews identify a 
pattern or practice of DELRAP approval violations. Providing a list of 
material deficiencies found would help lenders prevent returning from 
unconditional DELRAP authority to a conditional status, or worse, a 
termination or other action.
    If a Direct Endorsement lender has pattern of negative DELRAP 
outcomes, it would be appropriate for the Department to impose the 
proposed additional requirements to retain DELRAP authority at that 
time. This has the benefit of clearly communicating FHA expectations, 
which will improve the quality of DELRAP approvals and retain the 
efficiency of the DELRAP approval process for FHA in periods of 
economic stability and distress. HUD should review initial DELRAP 
approvals and engage in continued quality assurance reviews. Greater 
Direct Endorsement lender participation resulting from fewer barriers 
to entry in the project approval process, buttressed by the potential 
of penalty for non-compliance, benefits both condominium households and 
FHA.
    HUD Response: This final rule revises Sec.  203.8(b)(1)(iv) to 
clarify that staff members that participate in the approval of a 
Condominium Projects using DELRAP authority must have at least one year 
of experience in underwriting mortgages on condominiums and/or 
condominium project approval or be supervised by staff that meet such 
experience requirement. Also, in appropriate circumstances, such as 
where a lender has significant experience through the existing program, 
this final rule provides flexibility for HUD to reduce the requirement 
of completion of five DELRAP reviews to obtain unconditional DELRAP 
authority.
Other DELRAP Issues
    Comment: There is no specific skill or indication of appropriate 
experience that could prove competency in condominium project approval. 
Skills such as understanding condominium financials and governing 
documents, understanding a reserve study, knowing what a major 
component is and whether a condo project is in sound financial 
condition do not translate to other fields. The most important skills 
would include HOA accounting principles, community management, and 
great attention to detail. The use of project consultants by DELRAP 
lenders would be beneficial in that the DELRAP reviewer would get a 
thorough review and the client would benefit from quick approval. 
Mistaken DELRAP approvals that are later withdrawn do not benefit 
anyone and add to the negative opinion of the process.

[[Page 41861]]

    HUD Response: HUD understands the skills required to review 
condominium project applications for FHA approval may be varied. 
Therefore, this rule provides the minimum requirements for FHA approved 
mortgagees to become DELRAP approved, but neither prohibits nor 
requires the use of project consultants.
DELRAP Submission Process
    Comment: Relating to conditional DELRAP approval, HUD should 
clarify how a lender with conditional DELRAP authority should submit 
its recommended condominium project approvals, denials, and 
recertification's to FHA for its review. An email contact will be 
appreciated to speed up the procedure during conditional DELRAP. It 
would be most efficient, and provide consistency for lenders and for 
FHA, if a centralized submission source and process is established for 
these purposes for consistency. There should be clarification of 
whether the material must be submitted through FHA Connection, a 
homeownership center, or some other avenue.
    HUD Response: The specific submission requirements for conditional 
DELRAP authority will be detailed in Handbook guidance that will be 
issued following this final rule.
DELRAP vs. HRAP
    Comment: Can there be flexibility where either HUD or a DELRAP 
lender approves condominiums? Can the lender choose?
    HUD Response: The final rule establishes the process for 
condominium project approval by either a DELRAP approved mortgagee or 
HUD. With limited exceptions (For example, use of reserve studies over 
36 months old, which requires HRAP under Sec.  203.43b(d)(6)(x) or 
other exceptions that may be contained in guidance) either method may 
be utilized.

Mortgagee Letter (ML) 2016-15

    Comment: HUD should not have issued ML 2016-15 in the middle of 
rulemaking on integrally related topics as mandated by federal 
legislation without further opportunity for interested parties to 
comment.
    HUD Response: HOTMA required HUD to issue guidance within 90 days 
of the date of enactment to establish the required owner occupancy 
percentage for FHA approved projects. The 90-day deadline made it 
inevitable that this guidance would be issued during the overall 
rulemaking process. HOTMA allowed HUD to act by Mortgagee Letter.
    Comment: While supporting a 35 percent owner-occupancy threshold as 
stated in ML 16-15, requiring a 20 percent reserve for capital 
expenditures and deferred maintenance will make this 50 percent owner-
occupancy threshold unusable and mostly non-existent for the majority 
of the condominium projects. Also, the fact that HRAP is required for 
approval below 50 percent ``confuses and undercuts'' the emphasis on 
DELRAP authority as outlined in the rule. Also, the Mortagee Letter has 
a limitation on arrears on association fee payments and requires 3 
years of acceptable financial documents. As part of its proposed 
rulemaking, HUD should allow comments on the Mortgagee Letter.
    Comment: Owner-occupancy of 25 percent is far from generally 
accepted practice and could jeopardize the equilibrium between owner 
occupants and non-owner occupants. However, there are markets that 
could benefit from a flexible standard as proposed, and commenter 
supports a fair regulatory process that would permit a condominium to 
receive approval with an owner-occupancy ratio of less than 50 percent. 
While HUD has, as directed by HOTMA, lowered the owner-occupant rate to 
35 percent, few condominiums will satisfy the conditions to actually be 
approved for that rate. HUD should adopt procedures and standards that 
would result in condominiums actually receiving such an exemption. In 
particular, the requirement for a 20 percent reserve rate is excessive 
and unnecessary. Providing an incentive to over-fund reserves could be 
destabilizing, and may have significant unintended tax consequences, 
particularly for associations using IRS form 1120. Any association that 
has fully funded reserves pursuant to a current reserve study should be 
considered as having satisfied the reserve requirement.
    Comment: HUD followed the letter of HOTMA by allowing the owner 
occupancy requirements to be as low at 35 percent, but it did not meet 
the spirit of the law when it added the conditions that many have said 
are onerous and unlikely to be met by many condominium projects. 
Congress called for a lower limit to increase the number of 
condominiums that qualify for FHA approval, thereby increasing the 
number of units available to home buyers and renters. As mentioned 
above, condominium units are a particularly important homeownership 
option for first-time and low- to moderate-income home buyers, i.e., 
HUD's target consumers. However, the addition of tighter eligibility 
requirements when the owner occupancy rate is below 50 percent 
essentially eliminates the potential of a significant increase in 
Condominium Associations able to qualify for approval. HUD should 
remove the onerous conditions for the 35 percent owner occupancy rate 
established in ML 2016-15, including prohibiting the DELRAP option, 
requiring replacement reserves for capital expenditures and deferred 
maintenance of 20 percent of the condominium budget, and not more than 
10 percent of total units more than 60 days past due. Per the intention 
of HOTMA, the owner occupancy rate for all HUD-approved condominiums 
should be 35 percent. The comment also requests confirmation that HUD 
will maintain its current owner-occupancy requirement of 30 percent for 
existing projects less than 12 months old.
    HUD Response: HOTMA mandated certain requirements that HUD must use 
to determine owner occupancy but did not mandate the actual owner 
occupancy percentage that HUD could issue through guidance, leaving HUD 
with discretion. HUD acted based on its experience and in accordance 
with its fiduciary duty to the Mutual Mortgage Insurance Fund. The 
final rule provides the framework to establish flexibility in applying 
this standard through policy guidance as market forces may dictate. HUD 
notes that HOTMA requires HUD to base such owner occupancy percentage 
on units occupied by the owners as a principal residence or a secondary 
residence or sold to owners who intend to meet such occupancy 
requirements, which would preclude a blanket inclusion of REO units, or 
any vacant unit not sold to an owner who intends to occupy the unit as 
a place of abode for at least a portion of the calendar year and does 
not rent the unit for a majority of the calendar year.
    HUD will consider these comments when issuing such policy guidance. 
Such guidance will address the specific owner occupancy ratios 
necessary as well as address if such ratios vary based upon the 
construction status of the condominium.

Reserve Requirement

    Comment: A 10 percent reserve requirement is excessive, and HUD 
should consider lowering this amount. If an association has insurance 
in place for hazards with 100 percent replacement cost, then ostensibly 
the building would be covered for any major hazards or emergencies. 
Further, as outlined below, if the association gathers and holds 10 
percent of its annual assessment income each year, requiring a reserve 
account to be funded with at least 10 percent of the monthly 
assessments could have the effect and

[[Page 41862]]

probability of increasing sums held in the reserve account, and thus 
also increasing the amount of fidelity insurance required under the 
Guide.
    Comment: Most people buying condominium units are not looking into 
reserves before buying. The greater risks of collateral declining in 
value are pending legal action due to faulty construction; lack of a 
track record for a new project; and a high percentage of rentals.
    HUD Response: This rule establishes a reserve requirement of 10 
percent of the monthly unit assessments, but provides for a lower 
reserve amount, based on a reserve study completed within 36 months, or 
such greater amount of time as determined by the Secretary under the 
HRAP review process.

Required Recertification Timeframe

    A number of commenters supported extending the time for 
recertification.
    Comment: Condominium approvals should be extended from 2 to 3 
years, making it easier to submit and get condominium approvals and 
allowing for more flexible guidelines. Many condominium associations 
prohibit rentals and without FHA financing opportunities, it makes them 
more difficult to sell, and thus creates plummeting values. This often 
creates a scenario where condominium owners stop making mortgage and 
association payments and creates hardships on the association to where 
the repairs and other amenities are compromised.
    Comment: Extending the provision to a 3-year period would reduce 
costs to associations in obtaining FHA approvals.
    Comment: A project may experience a number of financial or legal 
changes during the 3-year period. Special assessments are frequently 
imposed. If HUD extends the approval period, it is strongly recommended 
that HUD provide examples of what constitutes ``fails to comply with 
any requirement for approval.''
    Comment: The change to 3 years will decrease submission burdens on 
lenders and review burdens on HUD. HUD should further memorialize the 
lenders' obligation to report known changes in circumstance through 
explicit language in the final rule. This language should mirror 
current guidelines that require lenders to report any known litigation, 
budget deficiencies, changes to association documents that may not 
align with eligibility requirements, and excessive homeowners' 
association delinquencies that place the property in financial distress 
as soon as they are made known to a lender throughout the 3-year 
approval period. A clear provision of lender reporting requirements and 
reporting processes will contribute to decreased risks for both lenders 
and HUD.
    Comment: This change will result in an increased number of projects 
approved and available for FHA lending with only a marginal increase in 
the potential for significant change since the project's approval. It 
will also potentially improve the customer experience as well as 
decrease costs to the condominium industry by reducing the need for re-
approvals.
    Comment: Two commenters state that the time between renewal of FHA 
condominium approval should be 5 years, not the current 2 years or the 
proposed 3 years. One commenter states that HUD and the FHA need to 
take into consideration how the small volunteer HOA's will implement 
the final rule. While a large HOA managed by a professional company can 
easily meet the short renewal period because that is what they are paid 
to do, every requirement acts as a disincentive for the small HOAs. 
Renewing the approval every 3 years as proposed will have little or no 
positive impact. The unintended consequence of the current rule has 
been to limit housing inventory and hurt first-time homebuyers. One 
commenter states that the process is daunting, the average cost of 
obtaining the appropriate documents and legal opinions related to the 
certification process can range between $1,500 and $3,000. A 5-year 
approval period, rather than the proposed 3 years, would be ideal for 
reducing the burden to the condominium associations and entice many 
more buildings to apply for FHA approval, while still maintaining 
safety and soundness.
    HUD Response: HUD agrees with the comments supporting a 3-year 
timeframe, and this final rule retains the approach provided in Sec.  
203.43b(g)(3) of the proposed rule (Sec.  203.43b(h)(3) of this final 
rule) where projects may be approved for a period of 3 years from the 
date of placement on the list of approved condominiums. As noted by the 
commenters, the benefits of increasing the project approval period by 1 
year far exceed the potential risks of changes to the project's 
requirements for approval while limiting the period beyond 3 years, 
which would run too great a risk of detrimental changes to the project. 
This final determination was based on FHA-insured condominium 
performance, consideration of risk to the Mutual Mortgage Insurance 
Fund, positive impact in the industry, and increase in affordable 
housing opportunities.
    As to the comments regarding failure to comply with requirements 
for approval and a lenders obligation to report any changes, this rule 
establishes the framework for approval requirements and establishes the 
recertification timeframes, but does not specify the format for 
recertification requests. HUD plans to issue additional guidance 
regarding the recertification process as well as lenders 
responsibilities to monitor requirement on a ``loan level.''
Objections To Extending the Recertification Timeframe
    Comment: Three years is too long for an approval or 
recertification. HOA's change their budgets every year and they don't 
always keep the reserves at 10 percent. Litigation and delinquencies 
can also be a cause for concern. Fannie Mae approvals expire every 6 
months. Commenter suggests staying with the 2-year requirement.
    Comment: The exiting 2-year recertification provides a minimal 
stop-gap to discover projects that are not in compliance. Fannie Mae 
effectively requires a lender to perform a full review of a project 
every 6 months for compliance. HOA financials show that it is not 
untypical to see issues such as the minimum requirement for reserve 
funds not being enforced; reserves have not been transferred on a 
regular monthly basis from the operating account to the reserve 
account; reserve funds have been used for purposes other than allowed; 
special assessments; et al. This presents a significant risk to the FHA 
insuring program if a unit is foreclosed and becomes a HUD REO, and the 
HOA financial condition poses a risk.
    HUD Response: HUD has decided to retain the approach proposed in 
Sec.  203.43b(g)(3) in the final rule where projects may be approved 
for a period of 3 years from the date of placement on the list of 
approved condominiums (see Sec.  203.43b(h)(3) of this final rule). 
This determination was based considering the public comments received, 
FHA-insured condominium performance, risk to the Mutual Mortgage 
Insurance Fund, positive impact in the industry, and increase in 
affordable housing opportunities. However, HUD will take the specific 
comments and recommendations regarding managing project renewals under 
consideration when drafting future policy guidance.
    Comment: Does a condo project have to meet the eligibility 
requirements only at the time of approval, or does it have to meet them 
continuously going forward?

[[Page 41863]]

    HUD Response: The final rule establishes the eligibility 
requirements that must be met at time of approval and then continuously 
going forward. HUD will provide clarity regarding a mortgagee's 
responsibility to monitor approval requirements beyond the time of 
approval in future policy guidance.
    Comment: One commenter stated that there are both positives and 
negatives. Negatives: With a 3-year process, more eligibility issues 
may develop. Staying in compliance is more likely with a 2-year 
recertification. Also, the cost would be more likely to stay in budget. 
With a 2-year process, Board Members and Community Managers are more 
likely to be familiar with the process and maintain certification. A 3-
year recertification will require additional education of new board 
members. Positives: Potential cost savings, although it will be 
minimal; more projects would be FHA certified at a single time.
    HUD Response: HUD recognizes the positive and negative factors 
stated by the commenter and believes that the reduced burden associated 
with a 3-year recertification process outweigh the effects related to 
Board Members' knowledge of the process.
    Comment: Commenter seeks additional public input on the 
recertification process and for HUD to ensure that recertification 
burdens are eased through simplified procedures and the use of 
technology that facilitates providing FHA information required for 
recertification.
    HUD Response: HUD will take this comment under consideration for 
future policy guidance and technology developments.

Legal Phasing

    Commenters expressed concerns about the potential financial impact 
on projects by requiring that phases for detached and semi-detached 
developments must consist of groups of adjoining or contiguous homes.
    Comment: Fannie Mae will sometimes allow non-contiguous 
developments (e.g., two parcels separated by a school) if there are not 
common recreational facilities located on one parcel for which the unit 
owners would be required to travel to the other parcel having the 
facilities.
    Comment: HUD has not offered sufficient justification to limit 
project approval based on phase location. This policy would deny 
consumers access to FHA-insured mortgages. It is appropriate that 
builder determine which phases will be declared and constructed based 
solely on the builder's assessment of market demand and sales. However, 
the Department proposes to deny approval for phases that are not 
contiguous to previously completed phases. This will not provide 
significant consumer or taxpayer protections. If such decisions are to 
be regulated, it should be by state and local governments. Proposed 
Sec.  203.43b(d)(6)(x) (Sec.  203.43b(e) of this final rule) should be 
removed.
    Comment: There is a potential financial impact on projects by the 
requirement that phases must, for detached and semi-detached 
developments, consist of ``groups of adjoining or contiguous homes.'' 
HUD should be aware that buildings are often built out of order for 
marketing purposes, so to require they be built in contiguous order 
would eliminate FHA financing opportunities for many purchasers, 
especially in geographic markets that do not allow for legal phasing. 
Also, does this requirement mean that legal phases must be contiguous 
in their order of construction and approval? The phases should be 
approved even if the units are completed out of contiguous order. HUD 
should remove the requirement for contiguous units or buildings for 
lateral (non-vertical) developments.
    Comment: The FHA should limit the need for contiguous criteria to 
only vertical buildings, as requirements for builders to construct 
buildings in a specific order may limit the ability of a builder to 
make their projects available to borrowers in a timely manner. This 
would limit supply and consumer choice.
    HUD Response: HUD agrees with the comments and has revised this 
final rule to allow non-contiguous development for detached or semi-
detached buildings. If the project is complete to the extent that all 
units in the completed legal phase are ready for occupancy, the 
viability of the detached or semi-detached project is not determined by 
the contiguous development of the buildings.
Legal Phasing, Under-Construction Projects, and Other Related Matters
    Comment: The language regarding approval of legal phases is 
ambiguous. Whether an entire condominium project can be approved when 
only the initial phase is fully complete or whether the entire 
condominium project must be fully complete should be clarified. If the 
initial legal phase is complete and approved, does each subsequent 
legal phase need to be submitted separately for approval? The current 
practice is that the approval for the initial phase would be amended 
with the recorded documents for the subsequent phases. Will this 
practice continue under the new regulations? If not, condominium 
developers have indicated that a process requiring separate approval of 
each completed legal phase would cause them to abandon the FHA market.
    HUD Response: HUD has clarified in this rule that individual legal 
phases may be approved independently without the need for the entire 
condominium project to be fully complete. The establishment of the 
ability to independently approve phases ensures the ability to perform 
such approval on separate phases by multiple DELRAP mortgagees or by 
HRAP without the need to amend a current approval performed by another 
reviewer. Conversely, the rule does not prohibit such approval on 
separate phases by the same DELRAP mortgagee or by HRAP where the 
existing information on separate phases could be used in the approval 
process of the subsequent phases.
    Comment: Requiring a legal phase to be completed will require a 
separate budget for the initial phase, and a cumulative budget for each 
subsequent phase, which is a practice required in California for phased 
developments. Under this practice, the regular monthly assessments for 
the first and initial phase(s) can (will) be substantially higher than 
that of the subsequent phase unit owners. This can affect the loan/
payment qualifications for the initial buyers. If this rule is adopted, 
there should be allowed a provision for the developer to provide 
bonding to subsidize the initial phases of development in order to 
provide a maximum assessment to the initial phase(s) unit owners (e.g., 
a maximum assessment guarantee). This is also practiced in California 
and serves to minimize the initial phase(s) buyers needing to qualify 
for a mortgage based on the higher monthly assessments.
    HUD Response: This final rule provides the framework to establish 
flexibility in applying the rule's standards through policy (including 
standards for financial condition). Based on HUD's experience, the 
concern with monthly assessments in new developments, including those 
that are built in legal phases, is that they are usually subsidized by 
the developer as an incentive to the buyers. Additionally, any 
potential considerations regarding underwriting of borrowers is outside 
the scope of this rule. HUD, however, will consider these 
recommendations when updating future guidance.
    Comment: The word ``project'' should be removed and only the term 
``phase'' should be used to provide the greatest level of transparency/
clarity possible.

[[Page 41864]]

    HUD Response: To clarify proposed Sec.  203.43b, proposed paragraph 
(d)(6)(x) is moved to a new top-level paragraph (e) in this final rule, 
and slightly reworded to more properly state the relationship between 
projects and phases, and other paragraphs are redesignated accordingly.
    Comment: Clarification is needed regarding what ``sufficient 
numbers'' (of units in phases to be separately sustainable) means. 
Under current guidance, phases are appropriately permitted in segments 
as small as a single building. Increasing the number of units to be 
included within a legal phase may be detrimental to economic viability 
of the planned development and may not be in alignment with local 
building restrictions. If a legal phase is mandated to require a 
greater number of units, and as further stated in proposed Sec.  
203.43b(d)(6)(x)(B), the units must be built and have a certificate of 
occupancy, the developer will endure a significant financial hardship 
by carrying inventory for units that cannot be financed, or it will 
lead to fewer opportunities for purchasers who would benefit from FHA 
financing. HUD should provide more clarity on sufficient numbers of 
units that allows for several units that matches local ordinance or 
that aligns with the developer's marketing plan.
    Comment: The current phasing guidelines should remain as-they are, 
specifically for new construction projects to ensure optionality and 
choice for the FHA borrower.
    HUD Response: This final rule retains the proposed ability to 
provide project approval on phases without the need for approval of the 
entire proposed or under construction project (this provision is Sec.  
203.43b(e) of this final rule). A completed phase is built out, ready 
for occupancy, and independently sustainable. The statement that there 
must be ``sufficient numbers'' has been removed in this final rule 
because that quantity may vary in individual cases. The comments and 
recommendations will be considered when updating and drafting the 
specific guidance and procedures for determining independent 
sustainability in future guidance.
    Comment: There is a need for additional clarity on what criteria 
would make a legal phase eligible due to varying state law definitions 
of what constitutes a phase, whether one legal phase or all phases must 
be complete prior to approval, and what constitutes a sufficient number 
of units to be considered separately sustainable.
    Comment: It is unclear as to how amenities would be treated. For 
example, it is common in construction projects to delay construction of 
an amenity (such as a clubhouse) until a certain number of phases have 
already been completed. There is a concern that the provision, as 
currently drafted, would require that all such amenities be completed 
before project approval could be obtained, impacting standard building 
practices and increasing costs for builders and consumers. Furthermore, 
commenter notes that tying project approvals to completion of a legal 
phase could be burdensome and problematic from a state law perspective. 
There is a patchwork of state laws concerning how to properly effect 
legal phasing, with varying levels of difficulty depending on the state 
in question. This would mean that it would be a lengthier and more 
expensive process to obtain project approval in some states rather than 
others, which would negatively impact consumers in those states.
    HUD Response: Under Sec.  203.43b(e) of this final rule, a complete 
legal phase is one that is available for occupancy (whatever that 
requires under local law in terms of amenities and other elements) and 
self-sustaining. This regulation would not alter the existing effect of 
State processes on consumers.
``Infrastructure'' and Phasing
    Comment: The word ``infrastructure'' as it relates to legal phase 
approval is somewhat vague. Although a legal phase may not include the 
building of a common amenity, that legal phase typically has an 
undivided interest in common amenities that may be proposed in other 
legal phases. Are these amenities in other phases thus considered 
infrastructure? Commenter states that HUD should define the term 
``infrastructure.''
    HUD Response: HUD agrees with this comment. HUD has simplified the 
requirements specific to phasing and has removed the term 
``infrastructure''. HUD has maintained the requirement for each phase 
to be ready for occupancy and separately sustainable.
    Comment: If this rule for requirement of project or phase 
completion is adopted, a provision should be added to the effect that 
the completion of the infrastructure can be bonded for completion, and/
or to maintain the current guidelines as follows:

    a. A condominium plat or similar development plan and any phases 
delineated therein have been reviewed and approved by the local 
jurisdiction and, if applicable, recorded in the land records; and,
    b. The construction of the project's infrastructure (streets, 
storm water management, water and sewage systems, utilities), and 
facilities (e.g., parking lots, community building, swimming pools, 
golf course, playground, etc.) and buildings containing the 
condominium units has proceeded to a point that precludes any major 
changes.

    Comment: In-lieu-of an Environmental Review, infrastructure 
completion can be evidenced by:

    a. Photos of the project and site to evidence completion status 
of infrastructure (streets, utility stubs to building pads, building 
foundations, buildings completed and under construction); and/or,
    b. City final inspection records; or,
    c. Letter (letterhead) from city stating completion or 
percentage of completion, or stating that the construction of the 
project's infrastructure (streets, storm water management, water and 
sewage system, and utilities) and facilities has proceeded to a 
point that precludes any major changes; or,
    d. Completion bond release.

    HUD Response: HUD has removed the definition of ``Infrastructure'' 
and replaced it with the definition of ``Common Elements''. As a result 
of this change, bonding for completion of infrastructure is not 
addressed in this rule. HUD will consider this comment when updating 
and drafting the specific guidance and procedures that will govern the 
analysis of determining a phase's ability to be separately sustainable.

New Construction

Allow New Construction and Proposed Construction, in Addition to Legal 
Phasing
    Comment: HUD is proposing to remove the requirement of HUD staff 
conducting Environmental Reviews for new projects which do not provide 
evidence that the infrastructure is completed to a point where HUD 
would have no influence. The requirement that the project or legal 
phase be complete prior to submitting for approval will impose a 
hardship not only on the builder, but moreover, on the buyer seeking to 
obtain an FHA loan, because this requirement means that a phase must be 
completed to obtain HUD approval. However, prior HUD approval is 
required before the lender can obtain a case number, and a case number 
is required before the lender can request an FHA appraisal. Lenders 
typically prefer to have a cushion of 60-75 days for the process to 
compete an appraisal and other underwriting functions, all of which are 
required to be completed prior to closing the loan. In the case of this 
proposed rule, although the unit would be completed and ready for 
occupancy, the buyer would be forced to wait significant time after the 
phase is completed, then after it is HUD approved (30-day review for 
HRAP),

[[Page 41865]]

only then could the lender order the case number and then order the 
appraisal, and then complete all required underwriting. This also 
increases the builder's carrying cost (interest) on the construction 
loan, and this will have an impact on housing affordability.
    Comment: The current HUD process of approving under construction, 
phased projects places the responsibility on the lender to determine 
completion, and it should be noted that the FHA lender must include 
evidence of completion in the Insuring Binder (Certificate of Occupancy 
or equivalent). Based on this alone, the FHA Insuring Program would not 
be at risk.
    HUD Response: This final rule maintains the requirement that a 
project or phase be complete and ready for occupancy as a condition for 
approval. HUD recognizes this may impact a small segment of the market 
and possibly delay the time period from completion to sale, but has 
weighed this impact against the overall reduced burden for compliance 
contained in this rule as well as the balance required to ensure 
appropriate risk controls to protect the Mutual Mortgage Insurance 
Fund. HUD constantly monitors its requirements to ensure the right 
balance is achieved between serving the market FHA mortgages are 
designed to service and protecting the MMIF. HUD will take these 
comments under advisement in this manner.
    Comment: It is not clear what the definition of ``complete'' is. 
Often amenities such as recreation centers aren't begun until a certain 
number of units are presold. Requiring adjustments to this practice in 
effect will not just impact condominium approval, but will require a 
re-evaluation of standardized and generally accepted building process 
timelines across the country.
    HUD Response: A project or phase must be complete and ready for 
occupancy as demonstrated by the certificate of occupancy, or its 
equivalent, and includes completion of all the common elements of the 
project, and not subject to further rehabilitation, construction, 
phasing, or annexation, except in cases where the project is seeking 
approval for a legal phase. If a phase, it must be self-sustaining.
    Comment: HUD's practice of allowing FHA loans on units in a 
completed building in a legal phase containing multiple buildings (two 
or more) does conflict with Fannie's Mae's requirement that all 
buildings in a legal phase must be completed (although Fannie Mae does 
offer a process to allow construction phasing via PERS Application). 
FHA should continue to allow FHA closings on such buildings when other 
buildings in the phase have not yet been completed. Moreover, some 
governmental authorities do not allow or otherwise recognize legal 
phasing.
    Comment: Although Fannie Mae requires a phase to be completed, this 
does not hamper the appraisal process. A lender can order a 
conventional appraisal regardless of whether the project is seeking 
Fannie Mae approval or otherwise.
    HUD Response: This final rule makes legal phasing consistent with 
Fannie Mae's policy regarding completion of legal phases, even though 
Fannie Mae has other underwriting requirements that reduces their risk 
of exposure, such as lower loan to value (LTV) parameters for 
condominium loans. However, this rule does not make changes to HUD's 
use of the status at the time of appraisal in determining the 
construction status of a property.
    Comment: The requirement that the project (or initial legal phase) 
be fully completed and the condominium legal documents be fully 
recorded for the condominium to receive FHA approval will create a 
hardship not only on the builder but more importantly on the consumer. 
For the builder waiting for the full completion of construction and the 
recording of the legal documents will push back the processing, 
underwriting, and approval of the FHA loan request by at least a month 
or more. In addition, without FHA approval during the early marketing 
and sales cycle of an under-construction condominium, the builder will 
not be able to advertise the availability of FHA insured loans. This 
will increase the builder's carrying cost on their construction loan by 
delaying closings that could result in added cost to the consumer. 
Also, under the current process the responsibility is on the lender to 
determine completion by requiring that the lender include evidence of 
completion in the Insuring Binder (CO or equivalent) and thus the FHA 
insurance fund would not be put at risk. This proposed rule will have 
an extremely negative effect on the consumer by delaying access to the 
FHA insurance program and to the builders by delaying closing on many 
FHA buyers. HUD should continue its current approval processing 
requirements for new construction condominiums by allowing the 
submission of a project (or initial legal phase) while construction is 
still on[hyphen]going and before the condominium legal documents have 
been recorded.
    Comment: The requirement for completed phases would represent a 
dramatic change in building plans for new construction projects. In 
many instances, this proposal would significantly impact current 
industry practices in place for the installation of building amenities 
and the timing of project eligibility and approval. By requiring 
``completion,'' borrowers, lenders, and builders would experience 
sizeable impacts due to delays in approvals and closings due to the 
feasibility of construction. This will ultimately make it more 
difficult for an FHA borrower to obtain a unit in a new construction 
project. HUD should allow lenders to continue with the current practice 
of approving proposed or under construction projects, despite the 
possible need for additional environmental reviews, and maintain its 
current guidelines. Should HUD remain concerned regarding risk 
management issues, HUD should require a bond or letter of credit from 
the builder to assure completion.
    HUD Response: HUD recognizes that the completion requirement may 
impact a small segment of the market and possibly delay the time period 
from completion to sale, but has weighed this impact against the 
reduced burden for compliance of projects overall contained in this 
rule as well as the balance required to ensure appropriate risk 
controls to protect the Mutual Mortgage Insurance Fund (MMIF). HUD 
constantly monitors its requirements to ensure the right balance is 
achieved between serving the market FHA mortgages are designed to 
service and protecting the MMIF. HUD will take these comments under 
advisement in this manner.
    Comment: As soon as the Certificate of Occupancy is approved by the 
local government agency, the lender should be able to start the FHA 
permanent financing for potential purchasers. This proposed rule will 
affect the mortgage industry since: Mortgage Applications are worked 
with potential purchasers 60 days before the Certificate of Occupancy 
is given by the state government (on walk-ups, this will delay the 
process and clients who otherwise could move to their new homes); an 
interim financing loan for the construction of walk-ups project 
(multiple low rise) is based on a peak (maximum loan disbursement 
before repayment starts), and if there is no repayment on the mortgage 
the builder cannot continue the construction and cannot sell the units.
    HUD Response: HUD recognizes that the completion requirement may 
impact a small segment of the market including ``walk-up'' projects and 
possibly delay the time period from completion to sale; however, HUD 
has weighed this impact

[[Page 41866]]

against the reduced burden for compliance of project overall contained 
in this rule as well as the balance required to ensure appropriate risk 
controls to protect the Mutual Mortgage Insurance Fund.
    Comment: A commenter states that they are unable to understand how 
the elimination of the environmental review only for HRAP applications 
compensates for the total prohibition of project approvals, HRAP and 
DELRAP, on proposed and under construction projects. If an 
environmental review is not required for an approval by a Direct 
Endorsement Lender, why is it necessary for a HUD review and approval? 
If HUD believes the environmental review is a burden on its staff, it 
seems it could be eliminated or used in more restricted circumstances. 
Not having FHA approval until completion may cause builders and 
developers to abandon the market. The advantages of allowing proposed 
and under construction projects to be approved, and the ability for 
developers to pre-sell units to FHA borrowers, prior to being fully 
complete far outweigh any disadvantages of environmental reviews that 
HUD may perceive. HUD should withdraw the proposed prohibition and keep 
the current requirements for proposed and under construction projects.
    Comment: Condo approvals are too restrictive, resulting in 
decreasing condo approvals. Provisions in the proposed rule will 
further decrease FHA's share of the condo market. Specifically, the 
proposed changes to proposed and under construction approvals and Site 
Condominiums could result in developers leaving the FHA market to the 
detriment of FHA borrowers.
    HUD Response: This final rule continues to allow for approval of 
completed legal phases, but does not permit approval of phases that are 
proposed or under construction. HUD constantly monitors its 
requirements to ensure the right balance is achieved between serving 
the market FHA mortgages are designed to service and protecting the 
Mutual Mortgage Insurance Fund. HUD will take these comments under 
advisement in this manner and will continue to assess the impact of 
this requirement as well as any impacts related to new construction 
projects in relation to environmental requirements in 24 CFR part 50. 
However, HUD believes that this rule will increase participation in the 
program due to the added flexibility it provides to address future 
market changes.
    Comment: A commenter states that the requirement for completion 
often results in a senior waiting months to close on a HECM unit until 
the landscaping can be completed, weather permitting. In the meantime, 
seniors often have a greater expense as they have to continue renting 
until they can move into their new home or live with friends or 
relatives causing significant stress. The current regulations 
discriminate against seniors based on where they live. This is a 
problem with condominiums, Site Condominiums, and new single-family 
homes in cold weather states. If the landscaping is the only issue, 
then there needs to be an exception. This issue needs to be resolved 
quickly.
    HUD Response: Substantive changes to the HECM program, as well as 
local law regarding real estate closings, are beyond the scope of this 
rulemaking. Single-Unit approvals and project approvals require that 
the unit be in a project that is complete under Sec.  203.43b(d)(4), 
that is, complete and ready for occupancy. If local standards do not 
require that landscaping be completed in order for the project to be 
occupied, the project, or single units in the project, may be eligible 
if meeting the requirements of this rule.
    Comment: There are concerns about the rule permitting only legal 
phasing and requiring each phase to be separately sustainable due to 
implications for new construction and FHA borrowers seeking units, 
resulting in substantial closing delays. Without pre-approvals that are 
currently issued for ``under-construction'' or proposed construction 
projects, a lender would not be able to order a case number until a 
project is approved, subsequently delaying the processing of a loan 
application and resulting in significant closing delays of up to 60 
days. This will ultimately limit the choices for low-to-moderate income 
borrowers, leaving them at a disadvantage if they are seeking new 
construction units.
    Comment: The requirement that all infrastructures be complete prior 
to approval of the phase/project is a significant departure from 
previous practice that may limit the usage of the program. Presently, 
approvals may be made in the framing stage of building and this new 
requirement could be an unnecessary and burdensome requirement. Without 
the ability to secure approval prior to completion, builders will be 
unable to market during construction and gain the necessary mortgage 
approvals until the final inspection for the phase/project has been 
completed and certified. This places an additional requirement upon 
builders and borrowers not present in the FHA program today as well as 
other agencies' programs.
    Comment: Requiring all buildings in a phase to be completed will 
delay closings. The requirement for completed phases will cause a delay 
of 30-45 days for HUD approval, with an additional 15-30 days for 
processing and underwriting of the loan, creating negative consequences 
for consumers and increasing the builder's expenses in carrying 
interest on the construction loan, reflected in higher home prices. 
This change will not provide any benefits to the FHA insurance fund and 
will only negatively impact consumers and homebuilders.
    HUD Response: This final rule maintains the requirement that a 
project, or phase, be complete and ready for occupancy as a condition 
for approval. HUD recognizes this may impact a small segment of the 
market and possibly delay the time period from completion to sale but 
has weighed this impact against the reduced burden for compliance of 
project overall contained in this rule as well as the balance required 
to ensure appropriate risk controls to protect the Mutual Mortgage 
Insurance Fund (MMIF). HUD constantly monitors its requirements to 
ensure the right balance is achieved between serving the market FHA 
mortgages are designed to service and protecting the MMIF. HUD will 
take these comments under advisement in this manner.
    Comment: These provisions, if enacted, will unnecessarily delay a 
consumer's ability to close on and take possession of their 
condominium. Under the proposed regulations, a lender would not be able 
to order a case number or an appraisal until the project or legal phase 
is completed and the condominium documents have been recorded. The rule 
could delay closing by several months. It would also result in the 
builder having to hold onto inventory longer than anticipated, which 
would increase the costs to the builder and ultimately to the consumer. 
Equally troubling is the fact that homebuilders often rely upon a 
certain amount of presold condominiums in order to qualify for 
financing to construct the condominiums. The inability to obtain 
approval for the project or phase prior to construction and recordation 
of the condominium documents could, in fact, chill construction of new 
condominium projects altogether.
    Comment: The ability to approve condominium projects prior to 
completion benefits both home buyers and home builders. The approval of 
a

[[Page 41867]]

proposed or under construction condominium project allows a mortgage 
application to be processed while the condominium unit is being 
constructed and decreases the time required to close the loan after a 
unit is completed. Prohibiting the approval of proposed and under 
construction projects means that a lender will not be able to order an 
appraisal and begin processing a mortgage loan application until the 
first phase of the condominium is completed. This is because a lender 
cannot request a case number and order an appraisal for a mortgage loan 
application until a condominium project has received a Project ID 
Number, which is not assigned until a project has been approved. This 
revision to the current process will result in significant delays, 60 
days or longer, in the purchase and settlement of condominium units 
whose buyers are seeking FHA-insured financing. Developers may not be 
willing to offer FHA-insured mortgage loans to buyers prior to approval 
of a project since they cannot begin processing the mortgage 
application and the condominium may ultimately not be approved for 
months, if at all. The result will likely mean fewer condominium 
projects submitted for FHA-approval and home buyers interested in 
purchasing units in new condominium projects will not have FHA 
insurance as a financing option. Builders will not be incented to seek 
FHA approval for new construction condominiums if they can have their 
under-construction projects approved for conventional financing using 
Fannie Mae or Freddie Mac programs. FHA-insured loans will be at a 
significant disadvantage to the Fannie Mae and Freddie Mac conventional 
financing programs. This could prove a disadvantage to homebuyers who 
may need the advantages of FHA-insured financing, which include a 
higher debt-to-income ratio, smaller down payment, and less-than-
perfect credit requirements.
    Comment: The policy of approving only completed projects or phases 
will restrict access to FHA-insured mortgages for consumers seeking to 
purchase new construction condominium units. Further, FHA may be 
inappropriately influencing the market-based decisions of its private 
enterprise partners. Consumers benefit from this earlier review and 
approval as lenders are able to process loans, allowing consumers to 
close in a timely manner. This advance submission and approval process 
protects the Fund and taxpayers as a mortgage may not be endorsed until 
the fully recorded legal documents have been provided to FHA and 
acknowledged in relevant systems as having been received. The proposed 
rule will disrupt this process and introduce inefficiencies and delays 
for consumers. The proposed policy change will place consumers seeking 
to obtain FHA-insured mortgage credit at a market disadvantage, lead 
such consumers to more expensive mortgage loans and will delay closings 
for an undefined policy benefit. The potential for delayed closings 
will also alter builder business decisions, which may have unintended 
consequences for consumers. It is well established there is a lack of 
affordably priced housing available to lower and moderate-income 
households. It seems counter to federal and state policymaker efforts 
to increase the supply of affordable homes to limit consumer access to 
FHA-insured mortgages and alter the business economics of the builder 
industry. HUD should remove Sec.  203.43b(d)(4).
    Comment: The proposed rule may impose an unduly high burden on new 
construction with the requirement that the project phase be ``complete 
and ready for occupancy, including completion of the infrastructure of 
the project or legal phase, and not subject to further rehabilitation, 
construction, phasing, or annexation, except to the extent that 
approval is sought for legal phasing in compliance the requirements of 
proposed (d)(6)(x) of this section'' (Sec.  203.43b(e) in this final 
rule). New construction projects do not always fully incorporate the 
common elements of a project until there are sufficient residents 
within the project to sustain those features. Necessitating the 
absolute completion of all common elements would substantially limit 
the ability for purchasers to obtain FHA financing until the project is 
well established. Commenter believes that the current requirement that 
common elements be ``substantially complete'' is sufficient and should 
be maintained.
    HUD Response: This final rule continues to allow for approval of 
completed legal phases but does not permit approval of phases that are 
proposed construction or under construction. HUD recognizes this may 
impact a small segment of the market and possibly delay the time period 
from completion to sale, but has weighed this impact against the 
reduced burden for compliance of a project overall contained in this 
rule as well as the balance required to ensure appropriate risk 
controls to protect the Mutual Mortgage Insurance Fund. HUD continues 
to assess the impact of this requirement as well as any impacts related 
to new construction projects in relation to environmental requirements, 
24 CFR part 50.

Site Condominiums

    Comment: Site Condominiums should not be placed into the proposed 
approval process. HUD should maintain the definition and approval 
process currently in place.
    HUD Response: This final rule maintains and expands the definition 
of ``Site Condominium.'' This final rule is more inclusive of 
additional configurations of Site Condominiums that exist in the 
market. Site Condominiums must meet the definition in Sec.  
203.43b(a)(7) and the basic requirements of Sec.  203.43b(d)(1)-(5). 
Insurance and maintenance costs must be the responsibility of the owner 
as provided in Sec.  203.43b(j).
    Comment: HUD's current definition of a Site Condominium should 
include the provisions relating to insurance, maintenance, and common 
assessments.
    Comment: Insurance and maintenance costs must be the sole 
responsibility of the owner with respect to Site Condominiums, and any 
common assessments collected must be restricted to use solely for 
amenities outside of the footprint of the individual site. Site 
Condominiums generally do not have master insurance policies associated 
with the condominium itself; therefore, this would be consistent with 
industry and market practice.
    HUD Response: HUD believes that the revised definition of Site 
Condominium in 24 CFR 203.43b(a) combined with the separate regulatory 
requirements for unit owners in 203.43b(j) provides the correct balance 
in addressing Site Condominiums based upon the market's reaction of 
treatment of such properties as a potential substitute for other 
detached dwellings.
    Comment: Certain provisions of the definition should be clarified: 
(1) The word ``site'' is interpreted variously. The comment recommends 
the inclusion of the word ``land.'' (2) Many condo plans limit 
ownership interests in land and air space by creating three-dimensional 
envelopes or modules. These envelopes or modules may be created in 
relation to sea level. The unit owner's interest remains within the 
envelope or module, and is, thus, limited. The areas outside of the 
envelope or module is considered common area. HUD's current definition 
suggests unlimited ownership of air space and land and does not 
consider the typical legal construction of such areas.
    Comment: Various HOC reviewers and mortgagees interpret HUD's Site 
Condominium language to mean

[[Page 41868]]

``ownership of air space and land that generally limits some other 
use.'' Obviously, this interpretation differs from the literal 
language. We recommend that HUD clarify by adding words such as 
``unlimited'' or ``at least X above sea level'' or some other language 
that makes clear what HUD intends when envelopes or modules limit 
ownership.
    Comment: HUD's failure to provide comprehensive guidance on Site 
Condominiums results in an uneven playing field among mortgagees.
    Comment: Under prior 2009 HUD guidance, a detached condo unit was 
simply defined as a completely freestanding structure. In 2011, HUD 
then defined a Site Condominium and required certain characteristics 
(e.g., insurance, maintenance) including the unit must include the 
ground (to the center of the earth) and the air space (to infinity), 
without restrictions. HUD further recognized the insurance issue with 
the ground restriction and issued an Insurance Waiver. Some states such 
as California allow the unit site ownership to extend below the ground 
surface and/or the air space above the structure to be limited, such as 
50 ft. below and/or 50 ft. above the structure. The areas beyond these 
limits are common area and/or association property. The requirement 
that there can be no restriction or limit on the ground beneath and the 
air space above a structure serves no purpose and this would not 
jeopardize the FHA insuring program.
    HUD partially recognized this matter in its issuance of the 
Insurance Waiver, which allowed the unit owner to be responsible for 
insurance if there was a limit on the ground beneath the structure or 
if it is common area. However, the Insurance Waiver does not take into 
equal consideration the air space above the structure. This may have 
been an oversight in drafting the Insurance Waiver. If the current 
definition of a Site Condominium will remain intact, we would propose 
that the Insurance Waiver be revised and codified to the extent of 
allowing the air space above a unit to likewise be deemed as common 
area.
    Comment: HUD's requirements are too strict; HUD should mirror 
Fannie Mae's guidelines. Fannie Mae does not require that detached 
condos must include the air space above and the ground beneath the 
structure. Likewise, the Department of Veteran's Affairs (VA) does not 
place such restrictions or otherwise define Site Condos for 
eligibility. Both attached and detached condos require VA approval. The 
waiver was issued to expand project eligibility for those projects 
where the legal governing documents required that obtaining and 
maintaining the insurance was the responsibility of the unit owner.
    HUD Response: This final rule revises the Site Condominium 
definition under Sec.  203.43b(a)(7) to remove the consideration of the 
type of air or land ownership for detached units as well as to address 
land ownership requirements for townhouse style projects. HUD believes 
this change will substantially reduce or eliminate the need for such 
Insurance Waivers and provides the correct balance in addressing Site 
Condominiums based upon the market's reaction of treatment of such 
properties as a potential substitute for other non-condominium 
ownership style dwellings.
Air Space Common Area and Site
    Comment: Section 1.8.1 of the Guide, because of the inclusion of 
air space, which may not be a common area, in the definition of Site 
Condominium, conflicts with California law with the result that in 
California, Site Condominiums are not exempt from full project review, 
unlike Site Condominiums generally. This will increase costs and time 
to obtain approval and could cause developers to stop offering FHA 
financing. Under California law and that of some other states, there is 
an ``air space common area'' requirement for detached Site Condominiums 
that include a residence, yard, and other improvements that are wholly 
owned, maintained, and insured by the buyer. The vertical and 
horizontal boundaries will have no bearing on a detached condominium's 
value, nor do they have an impact on the use of the condominium by its 
owner. Lower vertical boundaries are typically placed well below the 
earth's surface, and upper vertical boundaries are placed at elevations 
above the unit that could be of no possible use or benefit to the unit 
owner. The three-dimensional separate interest is not created to limit 
use of any area; it is simply created to comply with California law. A 
condominium unit that fails to identify its vertical limits, as HUD 
appears to require for a Site Condominium, may be a violation of the 
California Subdivision Map Act.
    HUD has previously allowed detached condominiums with this air 
space common area to qualify as exempt from full condominium project 
approval under the Guide. HUD's change of interpretation of section 
1.8.1 of the Guide is troubling, as California detached condominiums 
look and function like a traditional single-family detached residential 
project where the homeowner wholly owns, maintains, and insures his or 
her residence as well as all other improvements within the footprint of 
the detached condominium unit. Neither Fannie Mae nor VA have such an 
air space requirement. The air space common area, and boundaries placed 
below the earth's surface, require no maintenance and do not impair the 
project's ability to function like a single-family detached project. It 
is not clear how including air space and indefinite lower boundaries as 
a common area would create a risk for the insurance fund. The fact that 
master insurance policies associated with the Site Condominiums 
generally do not exist supports removal of the ``site and air space'' 
component.
    Commenters suggested removing ``site and air space'' from the 
definition of ``Site Condominium'' in Sec.  203.43b(a)(7), and other 
revisions. HUD will be better served because fewer single-family 
detached projects will have to be submitted for full project approval. 
Homeowners will be better served by allowing the individual homeowners 
to obtain insurance on their single-family homes instead of an 
association policy required under full HUD-FHA approvals. The mention 
of ``air space'' is not typical in the industry and any risk should 
already be addressed by FHA's requirement that all state and local 
ordinances be followed.
    One commenter suggests adding to the end of the proposed 
definitions of ``Condominium Unit'' and ``Site Condominium'' the 
following: ``(as defined under any applicable local laws or statutes 
governing the creation of common area or limited common area)''. 
Another comment suggests revising the definition as indicated:

[[Page 41869]]

[GRAPHIC] [TIFF OMITTED] TR15AU19.016

    Another comment suggests:

    Site Condominium means a single family detached dwelling (which 
does not have a shared garage or any other attached building, 
including such improvements as archways, or breezeways), which is 
encumbered by a declaration of condominium covenants or condominium 
form of ownership, and which consists of the entire structure and no 
part of the dwelling or structure, or any other improvement 
considered to be a part of the condominium unit is considered to be 
a common area or limited common area (as defined under any 
applicable local laws or statutes governing the creation of common 
area or limited common area). Such Site Condominium may have upper 
and lower vertical boundaries to the extent required to comply with 
applicable State law provided that all structural improvements of 
the Site Condominium are contained within such upper and lower 
vertical boundaries.

    HUD Response: HUD agrees with the commenters and has revised the 
Site Condominium Definition under Sec.  203.43b(a)(7) to include its 
easily determined physical attributes and land ownership attributes 
without the consideration of air space. These revisions allow more 
configurations of Site Condominiums to be eligible. In addition, Sec.  
203.43b(j) of this final rule (Sec.  203.43b(i) of the proposed rule) 
has been revised to require only that insurance and maintenance costs 
of the individual units must be the sole responsibility of the unit 
owner for Site Condominiums, without stipulating any additional 
requirements for use of assessments. Hence the rule avoids potential 
conflicts with local law and is clearer for the public. Accordingly, 
future guidance will reflect this new policy.
Site Condominiums--Appraisal Reporting
    Comment: HUD should direct lenders to accept the 1004/70 URAR 
Appraisal Form for Condominiums. While the Legal Description indicates 
these properties as being Condominiums, most are marketed as, perceived 
as, utilized as, Single Family Homes, with front, side and back yards, 
no shared walls, and often no shared maintenance other than ``common 
areas,'' i.e., parks, trails, bike paths, etc. The Properties are being 
Listed/Marketed as Single-Family Homes and more often indicated as 
having defined Lot Sizes. This recent phenomenon is a result of 
developers looking for ways around county platting requirements that 
slow the development/building process. This hybrid property has all the 
attributes of a Planned Unit Development or single-family home, yet as 
it is legally a condominium and lenders are requiring the appraisal 
report be developed on Form 1073/465. Form 1073/465 encompasses the 
attributes of developments where the owners have shared ownership 
responsibilities that include site maintenance, exterior structural 
maintenance, and shared structural liabilities, none of which apply to 
the single-family Condominium or Site Condominium. Until the lending 
community, and more specifically Fannie Mae/Freddie Mac, address this 
new Property Type, the only current form that can accurately address 
the attributes of the Site Condominium is the 1004/70 URAR. 
Furthermore, the use of the Condominium Form 1073/465 could be 
misleading to the reader expecting a property that adheres to the more 
traditional condominium regime.
    One commenter stated that he uses the following language in 
appraisal reports: ``An Extraordinary Assumption is made that the use 
of the 1073/465 Form will not be misleading. In developing this report 
and the Opinion of Value, this Appraiser has utilized a Hypothetical 
Condition that the Subject is Single Family Residential to best 
represent the Markets Perception of the Subject''. As these properties 
become more prevalent, there is a need for a clear directive to the 
Lending/Appraisal community. Until the GSEs can address the issue of 
this hybrid property type by developing a new form that encompasses the 
unique character of these properties, HUD should direct lenders to 
accept the 1004/70 URAR as the standard appraisal form for these 
entities.
    HUD Response: The practices associated with appraisal of Site 
Condominiums are outside the scope of this rule; however, HUD will take 
this comment under consideration for future policy guidance.

Free Assumability and Private Transfer Fees

    Comment: 24 CFR 203.41 currently prohibits mortgage insurance if a 
mortgaged property is subject to an affordability covenant that 
survives foreclosure or certain foreclosure alternatives. The nation is 
experiencing a growing housing affordability crisis, particularly in 
housing markets where condominium projects may play a productive role 
in meeting this need. The affordability crisis is leading many 
jurisdictions to require an affordability component in new condominium 
projects and multi-family rental housing developments, reserving units 
for sale or rent at affordable prices. FHA should work with local 
governments and developers to approve all units in such condominium 
projects. Fannie Mae and Freddie Mac are currently supporting access to 
affordable homeownership by accepting delivery of loans subject to an 
affordability covenant that survives foreclosure. FHA should join this 
effort and amend Sec.  203.41 to permit FHA insurance for mortgages 
secured by a condominium unit subject to a covenant designating the 
unit as an affordable housing unit where the covenant survives 
foreclosure.
    HUD Response: Such a consideration would encompass a review of such 
a requirement across all programs affected by 24 CFR 203.41 and not 
limited to only Condominium Projects, and therefore is beyond the scope 
of this rulemaking. However, current guidance addressing permissible 
restrictions on conveyance for condominiums remains in effect.
    Comment: Section 301 of the Housing Opportunity Through 
Modernization Act of 2016 (HOTMA) mandates that with respect to 
mortgage insurance for

[[Page 41870]]

condominiums, HUD shall utilize the guidelines developed by the Federal 
Housing Finance Agency (FHFA) regarding private transfer fees. Two 
comments strongly support this provision which brings consistency and 
clarity regarding private fees across the industry. Therefore, HUD 
should confirm whether this provision is self-effectuating. If HUD 
believes that it needs to take action to effectuate this provision, HUD 
should do so swiftly, in order to avoid unnecessary confusion in the 
industry. Furthermore, HUD should consider applying these FHFA private 
transfer fee standards across all of HUD's programs, including, but not 
limited to, single-family mortgage insurance (for all FHA programs). 
This will provide one standard for the treatment of private transfer 
fees throughout the industry, reducing unnecessary complexity and 
confusion to the consumer's benefit. Lacking direction from HUD, the 
industry is subject to inconsistent application of guidelines between 
lenders which can negatively impact consumers due to unnecessarily 
limiting products and/or lender availability in certain communities.
    Comment: The immediate adoption of FHFA's rule will provide 
consistent guidelines for the industry and will for expansion of 
eligible projects, so long as the private transfer fees are to the 
benefit of the borrower (i.e., maintenance fees). The Mortgage Bankers 
Association believes that this change will create clearer and 
consistent guidelines across agencies, making it easier for lenders and 
FHA to serve the FHA borrower.
    Comment: Private transfer fees that simply provide income to the 
developer or another entity are problematic. However, there are many 
private transfer fees that support the condominium facilities or 
provide tangible benefits to the homeowner. Acceptable of these 
``good'' transfer fees, but rejection of the ``bad'' transfer fees is 
the standard employed by the FHFA. HOTMA requires HUD to adopt the 
``existing standards of the FHFA relating to encumbrances under private 
transfer fee covenants.'' The commenter agrees with HUD that this 
provision is immediately effective.
    Comment: This rule should address transfer fees as it is a 
requirement by HOTMA. HUD should either revise 24 CFR 203.41 in this 
rulemaking, even if another 30-day comment period is immediately 
effective.
    HUD Response: Section 301 of HOTMA on private transfer fees is 
self-implementing. HUD may consider issuing a regulation on this 
subject in the future.

Leasing of Units

    Comment: Limiting short-term leases may promote the residential use 
and character of a condominium project and the commenter recommends 
that HUD revise regulations at 24 CFR 203.41 to incorporate permissible 
leasing restrictions currently provided in section 1.8.9 of the 
Condominium Project Approval and Processing Guide.
    Comment: HUD should reconsider its blanket objection to Association 
review of leases. Without prior notice or approval, a condominium board 
has no ability to enforce leasing restrictions to ensure the project 
continues to meet FHA owner occupancy requirements. Condominium boards 
have an ongoing interest in maintaining FHA approval criteria and FHA's 
general view that any condominium where the board has either direct or 
indirect approval authority of a lease is contrary to this interest. In 
taking this position, FHA is elevating one-unit owner's interest above 
the interests of all other owners. Allowing a well-defined and limited 
authority to act in a manner that preserves FHA approval benefits 
owners and consumers. HUD should revise regulations at 24 CFR 203.41 to 
provide a limited prior approval of leasing by a condominium 
association board to the extent exercise of such authority will retain 
the condominium's project compliance with FHA owner occupancy 
requirements.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance. Such a consideration 
should encompass a review of such a requirement across all programs 
affected by 24 CFR 203.41 and not limited to only Condominium Projects, 
and therefore is beyond the scope of this rulemaking.

Right of First Refusal

    Comment: One of the main reasons for condo non-approval in Florida 
has been the insertion of language stating that the condo board has the 
right to reject potential tenants and purchasers. Since 2013, there has 
been a zero-tolerance policy for any right of first refusal (the 
commenter states that this is based on the Fair Housing Act). This has 
resulted in condos with good financials being denied approval. It is 
difficult to change a condo's governing documents. Fannie and Freddie 
do not have this issue. The condominium board could sign a 
certification that it does not utilize the objectionable provisions. In 
the instance of a spot approval, assuming that the condo met usual 
financial and insurance guidelines a potential solution would be to 
waive any concern regarding the first refusal issue. This would help 
increase the supply of affordable housing.
    Comment: Since 2013, the Atlanta HOC has taken the position that 
the condominium associations have to change their governing documents 
to remove the right of first refusal. Changing the bylaws for a 
condominium association of any size can only be accomplished once a 
year at the time association board elections are held. Doing so entails 
significant expense, including substantial legal fees and costs that 
are eventually borne by the individual unit owners through increased 
assessments to maintain the association budget. Also, while the legal 
structure of some condominium associations may vary, most require the 
affirmative vote of 100 percent of all owners to agree to modify the 
bylaws, which is impractical in a community of any size. Many Florida 
condominium association boards are willing to execute a formal and 
binding certification on an annual basis that the association does not 
and will not utilize any of the right of first refusal provisions in 
its charter. In this way, such associations would not be required to 
amend their charters if a resident desires FHA financing. Therefore, 
the final rule should clarify that boards of Florida condominium 
associations whose charters contain rights of first refusal may execute 
a formal and binding certification on an annual basis that the 
association does not and will not utilize any of the right of first 
refusal provisions, so that units can be approved for FHA-insured 
financing.
    Comment: Approximately 75 percent of the condominiums in Florida 
have a right of first refusal, which is major obstacle to HECMs. There 
is less than a one percent chance of getting these lease restrictions 
changed. HUD should drop this leasing language as part of its SUA 
process.
    HUD Response: HUD does not address rights of first refusal in this 
rulemaking; however, the existing guidance permitting the right of 
first refusal for condominium project approval will be continued in 
effect. HUD will address rights of first refusal generally in a future 
rulemaking, as this topic is outside the scope of this rulemaking.

Approval by the State

    Comment: If a project meets the requirements of the relevant State 
oversight agency, that should be sufficient for approval. There could 
be a document covering single-unit loans

[[Page 41871]]

to determine the current operating status of the project.
    Comment: HUD should insure loans in condominium projects approved 
by the Department of Business and Professional Regulation (DBPR) in 
each State of the U.S. In Florida, this could be accomplished by HUD 
officials working with officials at the Division of Condominiums, Time 
Shares and Mobile Homes which is a Division within the DBPR. After HUD/
FHA is assured that the State requirements for condominium approval are 
sufficient, an identification number issued by the State could be used 
for loan processing. Compliance with Fair Housing laws will be the 
responsibility of all parties to the real estate transaction such as 
the Realtor, Lender, Condominium Association Board, etc.
    HUD Response: HUD disagrees with the recommendation of insuring 
loans in condominium projects that are approved by the state agency 
responsible for regulating condominiums in every state. By HUD adopting 
national standards for condominium project approvals, industry members 
would benefit from clear, consistent, and enforceable standards that 
would reduce confusion and increase efficiency in the market. In 
addition, the condominium standards and processes that will be 
established through this rule are similar to the conventional market's 
processes, and HUD believes that such consistency will have the least 
impact on the industry.

Lender Liability Post-Approval

    Comment: If a lender that obtains DELRAP approval under the new 
guidelines approves a condo are they later liable for loans approved by 
another lender? This example would assume that Lender A properly 
approves a condo project and that all documentation is in order. Lender 
B later underwrites an FHA loan in this project and their underwriting 
is faulty--the loan goes into default and causes a claim to the MMI 
fund. In this example, is lender A still liable? Clarity around this 
issue would be welcome as making lenders liable for underwriting errors 
beyond their control would cause many of them to rethink DELRAP 
approval.
    HUD Response: Based on the commenter's example, Lender A would not 
be liable for Lender B's faulty underwriting of an FHA loan. A lender 
with DELRAP approval that approves a condominium in accordance with the 
new guidelines does not have loan-level liability for another lender's 
underwriting errors. Of course, each case is different and would have 
to be assessed on its own merits.

Condominium Associations Unwilling To Cooperate With Project Approval

    Comment: A commenter, a reverse mortgage loan originator, provides 
an example of a client living in an upscale condominium in town. The 
owner has a tax lien certificate against her mortgage free condominium 
unit for 2015 property taxes that are past due, and it is unlikely that 
she will be able pay the 2016 property taxes as well. The commenter and 
owner have both tried for months to get the condo association to help, 
but the process has stopped. The commenter states that it will be a 
shame that this senior will eventually have to vacate her residence and 
lose the lifestyle she is accustomed to because of those in power are 
not willing to help. There has to be a better way.
    Comment: Many formerly FHA approved condominium projects have 
expired and associations do not or cannot get the projects re-approved. 
This limits the supply of housing to first-time buyers who require FHA 
loans to purchase a new condominium effectively locking them out of 
many homes and limiting their housing options. HUD is to be applauded 
for taking concrete steps to solve this problem. Further, we urge HUD 
to adopt Fannie Mae and Freddie Mac approval processes. This will 
create a more uniform and fair condominium approval process across the 
home mortgage spectrum. It will allow low- and moderate-income home 
buyers access to more financing options that currently exist.
    HUD Response: HUD appreciates the comment. The final rule includes 
the ability to obtain Single-Unit approval in an unapproved condominium 
project as an opportunity to provide access to FHA's programs in this 
or similar situations.

Insurance Requirements

    Comment: One commenter stated that there is no reason to continue 
the requirement for a fidelity bond of 3 months' aggregate assessments 
plus reserve funds, unless state law mandates required coverage. In 
today's practice, most condominium association dues are directly 
deposited electronically into an FDIC-insured bank account, and such 
accounts are insured up to $250,000. Given this expedited and more 
secured cash flow based on more prevalent and modern electronic payment 
practices, in our view, there is no reason to continue the requirement.
    HUD Response: Although fidelity insurance is not specifically 
addressed in this final rule, it would be covered under the general 
insurance requirements under Sec.  203.43b(d)(6)(iii). HUD appreciates 
the comment but disagrees with commenter's overarching recommendation 
to eliminate the requirement for fidelity insurance (which insures 
against losses for fraud or dishonesty) based upon the prevalent use of 
direct deposit into an FDIC insured accounts, which are insured against 
loss due to bank failure. Accordingly, HUD has implemented the 
aforementioned section of the final rule as proposed.
    Comment: We note that the Insurance Waiver is not included as part 
of the Proposed Rules. Will the Insurance Waiver currently in effect, 
and due to expire on January 5, 2017, be codified as part of the 
Proposed Rules and/or appear permanently as part of the Single-Family 
Housing Policy Handbook 4000.1?
    HUD Response: This final rule does not provide for specific 
standards, but for a framework to establish HUD's specific requirements 
through policy. HUD will consider this comment when drafting further 
policy guidance.

Exceptions Under Proposed Sec.  203.43b(f) Generally

    Comment: HUD should clarify the process by which exceptions are 
requested and approved and provide additional guidance on the limits of 
the Secretary's exception authority, if not in the rule itself then in 
guidance. This will prevent situations where condominium associations 
surmise the project will not meet all approval standards and, 
therefore, decline to seek project approval, and limit instances where 
associations incur additional expenses to get into full compliance when 
they would have been eligible for an exception. Clear guidance will 
also ease processing burdens by limiting exception requests where HUD 
will not approve. Clear guidance will indicate that FHA is a reliable 
partner. Therefore, HUD should provide a standardized exception request 
process that clearly identifies the approval criteria for which an 
exception will be contemplated, and publish clear guidance concerning 
the exception process and provide examples and reasonable conditions 
that may result in approval of an exception request.
    HUD Response: HUD appreciates the recommendations and will clarify 
exception process requirements in the policy handbook that will be 
issued as a result of this final rule. However, HUD believes the rule 
addresses the factors

[[Page 41872]]

that must be considered in determining whether to grant an exception 
while contemplating that such exceptions will be considered on a case 
by case basis which precludes the use of any one standard.

Implementation Timeframe

    Comment: A 12-month implementation period will be needed given 
multiple significant industry compliance changes.
    HUD Response: This final rule provides for a 60-day implementation 
timeframe that allows stakeholders to view additional guidance provided 
in HUD handbooks prior to implementation.

V. Findings and Certifications

Information Collection Requirements

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance 
with the Paperwork Reduction Act, 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 currently valid OMB control number.
    The information collection requirements of this rule revise a 
currently approved information collection (OMB Control No. 2502-0610). 
This information collection reorganizes and consolidates, in a less 
burdensome and more user-friendly format, the information currently 
required in form 96027, Condominium Project Approval Document/
Checklist; form 96028, Condominium Project Annexation Checklist; 96017, 
Program Certification; form 96018, Loan Level certification; and form 
96019, Pre-Sale certification.
    The burden of the information collections is estimated as follows:

----------------------------------------------------------------------------------------------------------------
 Current information collection  (OMB        New information       Burden hours    Burden hours
        approval No. 2502-0610)                collection            (current)         (new)        Net change
----------------------------------------------------------------------------------------------------------------
Package preparation...................  ........................            2.00            1.00           -1.00
Package review........................  ........................            1.00            1.00            0.00
935.2c AFFH Plan......................  ........................            6.00            3.00           -3.00
92541 Builder's Certification.........  ........................            0.10            0.10            0.00
92544 Warranty of Completion of         ........................            0.03            0.03            0.00
 Construction.
96029 Condominium Rider...............  ........................            0.10            0.10            0.00
96017 Program Certification/Project     ........................            0.10            0.00           -0.10
 Certification.
Loan level certification..............  ........................            0.30            0.00           -0.30
Pre-sale certification................  ........................            1.00            0.00           -1.00
96027 Condominium Project Approval      ........................            1.00            0.00           -1.00
 Cover Document/Checklist.
96028 Condominium Project Annexation    ........................            0.30            0.00           -0.30
 Checklist.
                                        Model FHA Condominium     ..............             .75             .75
                                         Loan Level/Single-1
                                         Unit Approval
                                         Questionnaire.
                                        Model HRAP-DELRAP FHA     ..............               1               1
                                         Condominium Project
                                         Approval Questionnaire.
                                       -------------------------------------------------------------------------
    Total.............................  ........................           11.93            6.98           -4.95
                                       -------------------------------------------------------------------------
        Total hours per annum.........  ........................          90,660          22,000         -68,660
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to: (1) Evaluate whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information will 
have practical utility; (2) Evaluate the accuracy of the agency's 
estimate of the burden of the proposed collection of information; (3) 
Enhance the quality, utility, and clarity of the information to be 
collected; and (4) Minimize the burden of the collection of information 
on those who are to respond, including through the use of appropriate 
automated collection techniques or other forms of information 
technology, e.g., permitting electronic submission of responses. 
Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number (FR-5563) and must be sent 
to:

HUD Desk Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, Fax: (202) 395-6947; and
Reports Liaison Officer, Office of Public and Indian Housing, 
Department of Housing and Urban Development, Room, 451 7th Street SW, 
Washington, DC 20410.

    Interested persons may submit comments regarding the information 
collection requirements 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 website 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.

Executive Order 13771

    Executive Order (E.O.) 13771, entitled ``Reducing Regulation and 
Controlling Regulatory Costs,'' was issued on January 30, 2017. This 
final rule is considered an E.O. 13771 deregulatory action. Details on 
the estimated cost savings and deregulatory effect of this proposed 
rule can be found below in the Summary of Regulatory Impact, Benefits, 
and Costs, and in the separate Regulatory Impact Analysis.

[[Page 41873]]

Summary of Regulatory Impact, Benefits, and Costs
    This rulemaking addresses a market failure that occurs when lenders 
ration credit instead of charging the appropriate risk premium; that 
is; when lenders consider denying a loan to be a superior business 
decision than raising prices. In the mortgage insurance market, such a 
market failure occurs when borrowers are willing to buy insurance at an 
actuarially fair price, but suppliers cannot sell at the cost of 
providing the insurance. One reason this occurs is lack of information. 
Adverse selection occurs because borrowers who are attracted to higher 
LTV loans are less able to withstand financial shocks. However, even 
with information about the household's resources, it is difficult for 
private insurers and lenders to predict the probability of default, 
which depends on trends in financial and real estate markets. This can 
cause a contraction of supply such that the equilibrium market response 
is an undersupply of credit and limitation of housing choices. In such 
periods, low-income households wishing to buy affordable homes, such as 
condominiums, would be the first to be excluded from the market.
    FHA's role with respect to market failure due to an undersupply of 
credit is a countercyclical one. FHA serves to reduce market 
imperfections due to information asymmetry. When risk increases in the 
presence of information asymmetries, lenders ration credit (withdraw 
from the market) as opposed to adjusting interest rates. FHA provides a 
buffer in such circumstances; FHA's market share varies inversely with 
the ease of credit. Greater access to credit can be considered a 
benefit.
    Mortgage insurance is required for high LTV loans. FHA provides 
mortgage insurance at average cost to qualified borrowers. FHA does not 
crowd out or replace the private sector, but instead fulfills unmet 
demand for mortgage insurance when private insurers withdraw from the 
market. Similarly, FHA's market share declines when there is less 
uncertainty in the real estate and mortgage markets.
    Condominiums provide an affordable homeownership option for 
borrowers who may qualify for FHA mortgage insurance in high-cost or 
dense areas. Evidence suggests that there is an imbalance in FHA's 
treatment of condominiums in relation to single-family housing. 
Creating a level playing field is important in facilitating consumer 
choice, especially in the housing market where spending on housing 
represents a large proportion of a household's budget. Any 
distortionary regulatory costs that do not serve a greater public 
purpose reduce social welfare.
    The proportion of FHA-approved condominiums relative to the 
estimated size of the condominium market in the United States provides 
an indicator of the need for FHA guidance that simplifies the FHA 
condominium project approval process. In 2001, 8.4 percent of FHA loans 
were for condos, but the share has dropped since then, reaching its low 
of 2.1 percent of all FHA loans in the most recent complete year of 
2018.
    The rule addresses this market failure by deregulating some of the 
more burdensome aspects of the approval process to allow more 
condominium units to be purchased with FHA-insured mortgages. The rule 
will reduce the compliance costs of condominium lending. Analysis 
shows, however, that this will be a limited effect which will not 
result in an outsized market share for FHA. It is extremely unlikely 
that the maximum volume would exceed the historic peak of 73,000 loans 
in 2010, so that could be regarded as the potential upper limit. HUD 
would not expect the equilibrium share of condo loans to be greater 
than the market average given by FNMA's condo share of 10 percent, 
which would require an increase of 71,000 condo purchase loans. More 
likely, the rule is expected to have a moderate effect on volume with a 
maximum impact ranging from 20,000 to 60,000 loans.
    The deregulatory changes to the program, while burden reducing, are 
not so great as to significantly change the nation's housing choices. 
The measurable expansionary impacts of the rule are small relative to 
the market, where annual combined cooperative and condominium sales are 
about 600,000 units and are counterbalanced to a degree by risk-
management strategies (such as the requirement for review by HUD or 
qualified, experienced DELRAP lenders). Also, some FHA condominium 
borrowers will substitute from FHA single-family homes.
    This rule will result in savings from increasing the periodicity of 
approval from 2 to 3 years equal to $1.5 million annually. Reducing 
environmental reviews could save as much as $2.1 million annually. 
Quantified costs reductions are therefore about $3.6 million annually. 
The costs of requiring project approvals are an estimated paperwork 
burden cost of $2.7 million annually. The overall quantified cost 
savings of this rule are therefore about $900,000 annually. There is 
also a non-monetized benefit of increased policy flexibility. By 
adjusting to market conditions, FHA will be able to strike the correct 
balance between providing affordable housing and risk management.

Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). This rule was determined to be a 
``significant regulatory action,'' as defined in 3(f) of the order 
(although not an economically significant regulatory action, as 
provided under section 3(f)(1) of the order). The docket file 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, 
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, an advance appointment to review the public 
comments must be scheduled 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 Relay Service at (800) 877-8339. The Regulatory Impact Analysis 
(RIA) prepared for this rule is also available for public inspection in 
the Regulations Division and may be viewed online at 
www.regulations.gov, under the docket number above.

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 the private sector. This rule does not impose 
any Federal mandate on any state, local, or tribal government or the 
private sector within the meaning of UMRA.

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, 
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 online at www.regulations.gov. The Finding of No 
Significant Impact is also available at for public inspection during 
regular business hours in the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 Seventh 
Street

[[Page 41874]]

SW, Room 10276, Washington, DC 20410-0500. Due to security measures at 
the HUD Headquarters building, please schedule an appointment to review 
the Finding 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 Relay 
Service at (800) 877-8339.

Regulatory Flexibility Act

    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.
    This rule establishes regulations for single-family mortgage 
insurance of condominium units pursuant to 12 U.S.C. 1707 and 1709. 
However, HUD has been providing mortgage insurance for this purpose 
pursuant to statute and the Condominium Approval and Processing Guide 
published in 2011.
    The rule codifies requirements for DELRAP lenders, many of which 
are small entities. However, it is worth noting that many of these 
lenders are likely affiliated with much larger financial institutions, 
based on the names associated with the IDs. Of the few thousand unique 
originating mortgagee IDs in each year from 2001 to 2018, the median 
number of mortgages is always under 100. Additionally, for originating 
mortgages from 2012 through 2018, the median number of condo mortgages 
is exactly 1 in each year. While this data may seem to make a strong 
case for the prevalence of small entities, these entities likely have 
resources at their disposal that are not available to a typical small 
entity in other industries.
    To be qualified for Direct Endorsement authority, a mortgagee must 
satisfy the following characteristics: Possess at least one year of 
experience in condo loans; have made at least 10 FHA approved condo 
loans; possess a quality control plan; and participating staff must 
possess or be supervised by those with prior experience. All of these 
requirements would be easier to meet by larger firms with greater 
capacity. Nonetheless, small firms that have at least occasional 
experience should be able to satisfy the requirements without undue 
burden. The ability to have staff supervised by those with experience 
in lieu of requiring all participating staff to have experience will 
substantially lessen the impact to small firms. Additionally, approval 
as a DELRAP lender is not required in order to perform any of the 
functions of a DE Lender including the ability to originate mortgages 
under Single Unit Approval or on units in projects approved under, HRAP 
or DELRAP authority of another lender.
    Other elements of the rule lift regulatory burdens. First, allowing 
Single-Unit Approval enables small lenders business opportunities 
without the cost of seeking approval for an entire condominium project. 
HUD estimates that project approval will take approximately 3 hours at 
$64/hour, for a total cost of about $192 per project. Single-unit 
approval is estimated to take approximately 1.5 hours, also at $64 per 
hour, for a total of about $96 per unit.
    Second, by providing that only completed projects may be approved, 
this rule eliminates the need for HUD to require an environmental 
review as a condition of approval. If the rule had allowed approvals of 
uncompleted new construction projects, in the case of DELRAP 
processing, lenders, including small lenders, would have been 
responsible for ensuring that environmental reviews were completed 
according to applicable State and local requirements. Thus, the rule 
eliminates a potential cost with respect to those condominium projects 
approved through DELRAP. Based on the costs to the government of an 
environmental review, HUD estimates the potential costs that would be 
saved per project reviewed as follows. The fixed cost for an 
environmental review, including travel per review, is approximately 
$500. The average number of staff hours per review is 16 hours, and the 
labor cost per review is $64 per hour, for a total labor cost of $1,024 
per review. The total labor and fixed costs that would be saved are 
$1,524 per review.
    Also, participation in condominium insurance, like HUD's other 
mortgage insurance programs, is purely voluntary.
    Therefore, the undersigned certifies that this rule does not have a 
significant economic impact on a substantial number of small entities.

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 Executive Order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the Executive Order.

Catalog of Federal Domestic Assistance Number

    The Catalog of Federal Domestic Assistance number for 24 CFR parts 
203 and 234 is 14.117.

List of Subjects

24 CFR Part 203

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

24 CFR Part 206

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

24 CFR Part 234

    Condominiums, Mortgage insurance, Reporting and recordkeeping 
requirements.

    For the reasons stated in the foregoing preamble, HUD amends 24 CFR 
parts 203, 206, and 234 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for part 203 is revised to read as follows:

    Authority:  12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u, 
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).

Subpart A--Eligibility Requirements and Underwriting Procedures

0
2. Add Sec.  203.8 before the undesignated center heading 
``Miscellaneous Regulations'' to read as follows:


Sec.  203.8  Approval of mortgagees for Direct Endorsement Lender 
Review and Approval Process (DELRAP).

    (a) General. Each mortgagee that chooses to participate in the 
review and approval of Condominium Projects, as set forth in Sec.  
203.43b, must be granted authority to participate in the Direct 
Endorsement Lender Review and Approval Process (DELRAP).
    (b) DELRAP Authority--(1) Eligibility. To be granted DELRAP 
authority, as described in Sec.  203.43b, a mortgagee must be 
unconditionally approved for the Direct Endorsement program as provided 
in Sec.  203.3 and meet the following requirements:

[[Page 41875]]

    (i) Have staff with at least one year of experience in underwriting 
mortgages on condominiums and/or Condominium Project approval;
    (ii) Have originated no fewer than 10 condominium loans in projects 
approved by the Commissioner;
    (iii) Have an acceptable quality control plan that includes 
specific provisions related to DELRAP; and
    (iv) Ensure that staff members that participate in the approval of 
a Condominium Project using DELRAP authority meet the above 
requirements in paragraph (b)(1)(i) of this section or are supervised 
by staff that meet such requirements.
    (2) Conditional DELRAP Authority. Mortgagees will be granted 
conditional DELRAP authority upon provision of notice to the 
Commissioner of the intent to use DELRAP. Mortgagees with conditional 
DELRAP authority must submit all recommended Condominium Project 
approvals, denials, and recertifications to FHA for review. If FHA 
agrees with the mortgagee's recommendation, it will advise the 
mortgagee that it may proceed with the recommended decision on the 
Condominium Project.
    (3) Unconditional DELRAP Authority. Mortgagees will be granted 
unconditional DELRAP authority after completing at least five (5) 
DELRAP reviews, or such lower number of DELRAP reviews as HUD may 
specify, to the satisfaction of HUD, and may then exercise DELRAP 
authority to approve projects in accordance with requirements of HUD.
    (c) Reviews. HUD will monitor a mortgagee's performance in DELRAP 
on an ongoing basis.
    (1) If the review shows that there are no material deficiencies, 
subsequent project approvals, denials, or recertifications may be 
selected for post-action review based on a percentage as determined by 
the Commissioner.
    (2) If the review shows that there are material deficiencies in the 
mortgagee's DELRAP performance, the mortgagee may be returned to 
conditional DELRAP status.
    (3) If additional reviews continue to show material deficiencies in 
the mortgagee's DELRAP performance, the mortgagee's authority to 
participate in DELRAP may be terminated or other action taken against 
the mortgagee or responsible staff reviewer.
    (d) Termination of DELRAP Authority. (1) HUD may immediately 
terminate the mortgagee's authority to participate in DELRAP or take 
any action listed in 24 CFR 203.3(d) if:
    (i) The mortgagee violates any of the requirements and procedures 
established by the Secretary for mortgagees approved to participate in 
DELRAP, the Direct Endorsement program, or the Title II Single Family 
mortgage insurance program; or
    (ii) HUD determines that other good cause exists.
    (2) Such termination will be effective upon the date of receipt of 
HUD's notice advising of the termination.
    (3) Notwithstanding any provisions of this section, the 
Commissioner reserves the right to take administrative action, 
including revocation of DELRAP authority, against any mortgagee and 
staff reviewer because of unacceptable performance. Any termination 
instituted under this section is distinct from withdrawal of mortgagee 
approval by the Mortgagee Review Board under 24 CFR part 25.
    (e) Reinstatement. A mortgagee whose DELRAP authority is terminated 
under this section may request reinstatement if the mortgagee's DELRAP 
authority has been terminated for at least 6 months. In addition to 
addressing the eligibility criteria specified in paragraph (b)(1) of 
this section, the application for reinstatement must be accompanied by 
a corrective action plan addressing the issues that led to the 
termination of the mortgagee's DELRAP authority, along with evidence 
that the mortgagee has implemented the corrective action plan. The 
Commissioner may grant conditional DELRAP authority if the mortgagee's 
application is complete and the Commissioner determines that the 
underlying causes for the termination have been satisfactorily 
remedied. The mortgagee will be required to complete successfully at 
least five DELRAP reviews in accordance with paragraph (b)(2) of this 
section in order to receive unconditional DELRAP authority as provided 
in paragraph (b)(3) of this section.

0
3. In Sec.  203.17, revise paragraph (a)(1) to read as follows:


Sec.  203.17  Mortgage provisions.

    (a) * * *
    (1) The term ``mortgage'' as used in this part, except Sec.  
203.43c, shall have the meaning given in Section 201 of the National 
Housing Act, as amended (12 U.S.C. 1707).
* * * * *

0
4. Add Sec.  203.43b to read as follows:


Sec.  203.43b  Eligibility of mortgages on single-family condominium 
units.

    (a) Definitions. As used in this part:
    (1) Condominium Association (Association) means the organization, 
regardless of its formal legal name that consists of homeowners within 
a Condominium Project for the purpose of managing the financial and 
common-area assets.
    (2) Condominium Project means the project in which one-family 
dwelling units are attached, semi-detached, detached, or manufactured 
housing units, and in which owners hold an undivided interest in the 
Common Elements.
    (3) Condominium Unit means real estate consisting of a one-family 
dwelling unit in a Condominium Project.
    (4) Common Elements means the Condominium Project's common areas 
and facilities including: Underlying land and buildings, driveways, 
parking areas, elevators, outside hallways, recreation and landscaped 
areas, and other elements described in the condominium declaration.
    (5) Rental for Transient or Hotel Purposes shall have the meaning 
given in section 513(e) of the National Housing Act (12 U.S.C. 
1731b(e)).
    (6) Single-Unit Approval means approval of one unit in an 
unapproved Condominium Project under paragraph (i) of this section.
    (7) Site Condominium means:
    (i) A Condominium Project that consists entirely of single-family 
detached dwellings that have no shared garages or any other attached 
buildings; or
    (ii) A Condominium Project that:
    (A) Consists of single family detached or horizontally attached 
(townhouse) dwellings where the unit consists of the dwelling and land; 
and
    (B) Is encumbered by a declaration of condominium covenants or 
condominium form of ownership and does not contain any manufactured 
housing units.
    (b) Eligibility. A mortgage secured by a Condominium Unit shall be 
eligible for insurance under section 203 of the National Housing Act if 
it meets the requirements of this subpart, except as modified by this 
section.
    (c) Approval required. To be eligible for insurance under this 
section, a Condominium Unit must be located in a Condominium Project 
approved by HUD or a DELRAP mortgagee approved under Sec.  203.8, or 
meet the additional requirements for approval as a Site Condominium or 
Single-Unit Approval.
    (d) Condominium Project Approval: Eligibility Requirements. To be 
eligible for Condominium Project approval, the Condominium Project 
must:
    (1) Be primarily residential in nature and not be intended for 
rental for Transient or Hotel Purposes;
    (2) Consist of units that are solely one-family units;
    (3) Be in full compliance with all applicable Federal, State, and 
local laws

[[Page 41876]]

with respect to zoning, Fair Housing, and accessibility for persons 
with disabilities, including, but not limited to, the Fair Housing Act, 
42 U.S.C. 3601 et seq., Section 504 of the Rehabilitation Act, 29 
U.S.C. 794, and the Americans with Disabilities Act, 42 U.S.C. 12101 et 
seq., where relevant;
    (4) Be complete and ready for occupancy, including completion of 
all the common elements of the project, and not subject to further 
rehabilitation, construction, phasing, or annexation, except to the 
extent that approval is sought for legal phasing in compliance with the 
requirements of paragraph (e) of this section;
    (5) Be reviewed and approved by the local jurisdiction with respect 
to the condominium plat or similar development plan and any phases; if 
applicable, the approved plat or development plan must have been 
recorded in the land records of the jurisdiction; and
    (6) Meet such further approval requirements as provided by the 
Commissioner through notices with respect to:
    (i) Nature of title to realty or leasehold interests;
    (ii) Control over, and organization of, the Condominium 
Association;
    (iii) Minimum insurance coverage for the Condominium Project;
    (iv) Planned or actual special assessments;
    (v) Financial condition of the Condominium Project, including, but 
not limited to, the allowable percentage of units owned by a single 
owner or group of related owners;
    (vi) Existence of any pending legal action, or physical property 
condition;
    (vii) Acceptable maximum percentages of commercial/non-residential 
space, which must be within a range between 25 and 55 percent of the 
total floor area (which range may be changed following the procedures 
in paragraph (f) of this section), with the specific maximum and 
minimum percentages within that range to be established by HUD through 
notice, provided that such commercial/non-residential space does not 
negatively impact the residential use of the project or create adverse 
conditions to the occupants of individual condominium units.
    (viii) Acceptable maximum percentages of units with FHA-insured 
mortgages, which must be within a range between 25 and 75 percent of 
the total number of units in the project (which range may be changed 
following the procedures in paragraph (f) of this section), with the 
specific maximum percentage of units with FHA-insured mortgages within 
that range to be established by HUD through notice. HUD may suspend the 
issuance of new FHA case numbers for a mortgage on a property located 
in any project where the number of FHA-insured mortgages exceeds the 
maximum insurance concentration established by HUD.
    (ix) Acceptable minimum level of owner occupancy, which shall 
include units occupied as a principal or secondary residence or sold to 
an owner who intends to meet such occupancy requirements. Such 
acceptable minimum levels shall be within a range between 30 and 75 
percent of the total number of units in the project (which range may be 
changed following the procedures in paragraph (f) of this section), 
with a specific minimum percentage to be established by HUD through 
notice. For the sole purpose of calculating the owner-occupancy 
percentage under this paragraph, any unit that is occupied by the owner 
as his or her place of abode for any portion of the calendar year other 
than as a principal residence and that is not rented for a majority of 
the calendar year shall count towards the total number of secondary 
residences.
    (x) Reserve requirements, provided the reserve account is funded 
with at least 10 percent of the monthly unit assessments, unless a 
lower amount is deemed acceptable by HUD based on a reserve study 
completed not more than 36 months before a request for a lower amount 
is received, or such greater amount of time as determined by the 
Secretary under the HUD review and approval process.
    (xi) Such other matters that may affect the viability or 
marketability of the project or its units.
    (e) Phases of a project are approvable, provided that only legal 
phasing is used. Individual phases must be separately sustainable as 
required by HUD, so that the insurance fund is not put at undue risk. 
In determining whether to accept legal phasing, HUD will assess the 
potential risk to the insurance fund and other factors that HUD may 
publish in notices. Phases must meet HUD's requirements for approval in 
paragraph (d) of this section and must at a minimum be:
    (1) In a vertical building, contiguous, with all units built out 
and having a certificate of occupancy; or
    (2) In a detached or semi-detached development, where all homes in 
the phase are built out and have a certificate of occupancy;
    (f) The Secretary will publish any generally applicable change in 
the upper and lower limits of the ranges of percentages in paragraphs 
(d)(6)(vii) through (ix) of this section in a notice published for 30 
days of public comment. After considering the comments, the Department 
will publish a final notice announcing the new overall upper and lower 
limits of the range of percentages being implemented, and the date on 
which the new standard becomes effective.
    (g) The Secretary may grant an exception to any specifically 
prescribed requirements within paragraph (d)(6) of this section on a 
case-by-case basis in HUD's discretion, provided that:
    (1) In the case of an exception to the approval requirements for 
the commercial/nonresidential space percentage that HUD establishes 
under paragraph (d)(6)(vii) of this section, any request for such an 
exception and the determination of the disposition of such request may 
be made, at the option of the requester, under the Direct Endorsement 
Lender Review and Approval process or under the HUD review and approval 
process through the applicable field office of the Department; and
    (2) In determining whether to allow such an exception, factors 
relating to the economy for the locality in which the project is 
located or specific to the project, including the total number of 
family units in the project, shall be considered. A DELRAP lender, in 
determining whether to grant a requested exception, shall follow any 
procedures that HUD may establish.
    (h) Application for Condominium Project approval and Renewal of 
Approval. (1) In order to become approved, an application for 
Condominium Project approval, in accordance with the requirements of 
the Commissioner, must be submitted to either HUD or a DELRAP 
mortgagee, if consistent with the mortgagee's DELRAP approval.
    (2) The application will be reviewed and if all eligibility 
criteria have been met, the Condominium Project will be approved and 
placed on the list of HUD-approved Condominium Projects.
    (3) Unless otherwise specified in writing by HUD, Condominium 
Projects are approved for a period of 3 years from the date of 
placement on the list of approved condominiums. HUD may rescind a 
Condominium Project's approval at any time if the project fails to 
comply with any requirement for approval.
    (4) Eligible parties may request renewal of the approval of an 
approved Condominium Project by submitting a request for 
recertification no earlier than 6 months prior to expiration of the 
approval or no later than 6 months after expiration of the approval. 
HUD shall

[[Page 41877]]

specify the format for the recertification request, which shall allow 
the request to be supported by updating previously submitted 
information, rather than resubmission of all information. However, if 
the request for recertification is not submitted within 6 months after 
the expiration of the Condominium Project's approval, a complete, new 
approval application is required.
    (i) Single-Unit Approval--(1) Single-Unit Approvals. Mortgagees 
must ensure that the Condominium Unit is located in a Condominium 
Project that meets the eligibility requirements for approval as set 
forth in paragraph (d) of this section as modified by this paragraph, 
except that HUD may provide that Single-Unit Approvals may be approved 
by meeting a subset of these standards, or less stringent standards, as 
stated by notice. In addition, a unit may be eligible for Single-Unit 
Approval if it:
    (i) Is not in a Condominium Project that is on the list of FHA-
approved Condominium Projects; and
    (ii) Is not in a project that has been identified by HUD as subject 
to adverse determination for significant issues that affect the 
viability of the project; and
    (iii) Is in a project that is complete under paragraph (d)(4) of 
this section;
    (iv) Is not a manufactured home; and
    (v) Is in a project that has at least five (5) dwelling units.
    (2) Limit on Single-Unit Approvals. HUD may suspend the issuance of 
new FHA case numbers for mortgages in Condominium Projects with Single-
Unit Approvals where the number of FHA-insured mortgages exceeds the 
maximum insurance concentration established by HUD. Such acceptable 
maximum insurance concentration shall be within a range between 0 to 20 
percent of units with FHA-insured mortgages for Condominium Projects 
with 10 or more units, with the exact percentage within that range to 
be determined by HUD through notice; or shall not exceed two FHA-
insured mortgages for Condominium Projects with fewer than 10 units.
    (j) Site Condominium. Site Condominiums must meet all of the 
requirements of paragraphs (d)(1) through (d)(5) of this section for 
approval, except that insurance and maintenance costs of the individual 
units must be the sole responsibility of the unit owner.

0
5. In Sec.  203.50, revise paragraphs (a)(1) and (f) to read as 
follows:


Sec.  203.50  Eligibility of rehabilitation loans.

* * * * *
    (a) * * *
    (1) The term rehabilitation loan means a loan, advance of credit, 
or purchase of an obligation representing a loan or advancement of 
credit, made for the purpose of financing:
    (i) The rehabilitation of an existing one-to-four-unit structure 
which will be used primarily for residential purposes;
    (ii) The rehabilitation of such a structure and refinancing of the 
outstanding indebtedness on such structure and the real property on 
which the structure is located;
    (iii) The rehabilitation of such a structure and the purchase of 
the structure and the real property on which it is located; or
    (iv) The rehabilitation of the interior space of a condominium 
unit, as defined in Sec.  203.43b, excluding any areas that are the 
responsibility of the Association; and
* * * * *
    (f) The loan may not exceed an amount which, when added to any 
outstanding indebtedness of the borrower that is secured by the 
property, creates an outstanding indebtedness in excess of the lesser 
of:
    (1)(i) The limits prescribed in Sec.  203.18(a)(1) and (3) (in the 
case of a dwelling to be occupied as a principal residence, as defined 
in Sec.  203.18(f)(1));
    (ii) The limits prescribed in Sec.  203.18(a)(1) and (4) (in the 
case of a dwelling to be occupied as a secondary residence, as defined 
in Sec.  203.18(f)(2));
    (iii) Eighty-five (85) percent of the limits prescribed in Sec.  
203.18(c), or such higher limit, not to exceed the limits set forth in 
Sec.  203.18(a)(1) and (3), as the Secretary may prescribe (in the case 
of an eligible non-occupant mortgagor as defined in Sec.  
203.18(f)(3));
    (iv) The limits prescribed in Sec.  203.18a, based upon the sum of 
the estimated cost of rehabilitation and the Commissioner's estimate of 
the value of the property before rehabilitation;
    (2) The limits prescribed in the authorities listed in this 
paragraph (f), based upon 110 percent of the Commissioner's estimate of 
the value of the property after rehabilitation; or
    (3) For any Condominium Unit that is not a Site Condominium (as 
defined in Sec.  203.43b), 100 percent of the after-improvement value 
of the Condominium Unit.
* * * * *

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

0
6. The authority citation for part 206 continues to read as follows:

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


0
7. Revise Sec.  206.51 to read as follows:


Sec.  206.51   Eligibility of mortgages involving a dwelling unit in a 
condominium.

    If the mortgage involves a dwelling unit in a condominium, the 
project in which the unit is located must be acceptable to the 
Commissioner as set forth in 24 CFR 203.43b.

0
8. In Sec.  206.131, revise paragraphs (c)(3) and (d) to read as 
follows:


Sec.  206.131  Contract rights and obligations for mortgages on 
individual dwelling units in a condominium.

* * * * *
    (c) * * *
    (3) To the condition of the property as of the date the assignment 
is filed for record. For units in projects with mortgages insured under 
24 CFR part 234, Sec.  234.275 of this chapter concerning the 
certification of condition applies.
    (d) Condition of the multifamily structure. In projects with 
mortgages insured under 24 CFR part 234, the provisions of Sec.  
234.270(a) and (b) of this chapter concerning the condition of the 
multifamily structure in which the property is located shall be 
applicable to mortgages insured under this part which are assigned to 
the Commissioner.

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

0
9. The authority citation for part 234 continues to read as follows:

    Authority:  12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d).

Subpart A--Eligibility Requirements--Individually Owned Units

0
10. Add Sec.  234.2 to read as follows:


Sec.  234.2  Savings clause.

    HUD's regulations at Sec.  203.43b of this chapter govern approval 
of real estate consisting of a one-family unit in a multifamily 
project, and an undivided interest in the common areas and facilities 
which serve the project, except where the project has a blanket 
mortgage insured under section 234(d) of the National Housing Act, 12 
U.S.C. 1715y(d) (section 234(d)). Where the project has a blanket 
mortgage insured by HUD under section 234(d), this 24 CFR part 234 
applies to the approval of a one-family unit in such project.

    Dated: August 6, 2019.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2019-17213 Filed 8-13-19; 8:45 am]
 BILLING CODE 4210-67-P