[GHM-0062 (Index
3.200)](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0062LOPS.doc)

Transfers of Mortgages\--Participation\[FOIA Exemption 6: Names of
Private Parties

Withheld\]

Legal Opinion: GHM-0092

Index: 3.200, 3.220, 3.295, 3.300

Subject: Transfers of Mortgages\--Participation

\[FOIA Exemption 6: Names of Private Parties Withheld\]

November 29, 1993

, Esq.

Suite

Street

Charlotte, North Carolina

Dear Mr. :

This letter responds to your inquiry to the HUD General

Counsel, dated October 12, 1993, regarding paragraph 1-33 of

Handbook 4435.01 REV-1, Project Construction and Servicing Before

Final Closing, which paragraph deals with the assignment of

insured mortgages. You request confirmation that the provisions

of paragraph 1-33 apply only to HUD-insured mortgages on projects

prior to the completion of construction. I cannot provide such

confirmation because certain provisions of paragraph 1-33, such

as paragraph 1-33(B), deal with the subject of the assignment of

insured mortgages after full disbursement. The Department,

however, recently has become aware that some of the specific

guidance within two portions of paragraph 1-33 of

Handbook 4435.01 REV-1 are not correct as presently written.

These errors, which appear within subparagraph\'s 1-33(B) and

1-33(D), are discussed in more detail below. I trust that the

clarification contained herein about paragraph 1-33 of Handbook

4435.01 REV-1 will address your concerns with regard to that

Handbook provision.

Paragraph 1-33(B) presently states, among other things, that

the Department\'s Field Office Manager must give written approval

before a mortgagee may transfer an insured mortgage after full

disbursement. This, however, is not consistent with the

Department\'s current regulations, nor with other Handbook

guidance.

The basic provision governing the assignment of insured

mortgages is 24 C.F.R. Section 207.261. Subsection (a) thereof

provides that an approved mortgagee may assign, transfer or

pledge an insured mortgage or a partial interest in an insured

mortgage in accordance with the terms and conditions of that

regulation. Transfers of insured mortgages prior to, and after,

full disbursement are treated differently by 24 C.F.R. Section

207.261. In this regard, 24 C.F.R. Section 207.261(c) provides

that transfers or pledges of insured loans prior to full

disbursement may be made \"only with the prior written approval of

the Commissioner.\" In comparison, 24 C.F.R. Section 207.261(d),

which deals with transfers after full disbursement, does not

mention prior HUD approval.

Rather, it states that:

Transfers after full disbursement may be made only to a

transferee approved by the Commissioner. Upon assumption by

the transferee of all obligations under the contract of

mortgage insurance, the transferor shall be released from

its obligations under such contract. The transfer shall be

reported to the Commissioner on a form satisfactory to the

Commissioner.

Thus, 24 C.F.R. Section 207.261(d) establishes two basic

requirements for transfers of insured mortgages after full

disbursement, namely, that: (1) the transfer be made only to an

FHA-approved mortgagee; and (2) the transfer be reported to the

Department. Paragraph 2-27(a) of Handbook 4350.4, Insured

Multifamily Mortgagee Servicing and Field Office Remote

Monitoring Handbook, affirms this implementation by providing

that whenever there is a sale of a HUD-insured mortgage, HUD

should be advised on Form HUD-92080 within 15 calendar days of

the action. Thus, based on the language of 24 C.F.R.

Section 207.261(d) as well as on its implementation in paragraph

2-27(a) of Handbook 4350.4, after full disbursement a mortgagee

need not receive HUD\'s written approval before it may transfer an

insured mortgage. To the extent that paragraph 1-33 of Handbook

4435.01 REV-1 conflicts with this position, it should not be

followed.

The second issue concerns paragraph 1-33(D) of

Handbook 4435.01 REV-1. Paragraph 1-33(D) presently states that

a mortgagee may transfer a partial interest in an insured

mortgage or pool of insured mortgages under a participation

agreement or arrangement, without obtaining HUD approval, subject

to, among other things, total participation by others not

exceeding 90% before final closing and 95% after final closing.

Paragraph 1-33(D) also provides that, under certain conditions,

the Field Office Manager may approve 100% participation by others

before or after final closing.

The foregoing requirements, as presently set forth in

paragraph 1-33(D), also are incorrect. At one time 24 C.F.R.

Section 207.261 required that, where a mortgagee of record wished

to transfer a partial interest in an insured mortgage without HUD

approval, the mortgagee had to retain at least a 10% beneficial

interest in the insured mortgage up to the time of final

endorsement, and at least a 5% beneficial interest thereafter.

On August 11, 1986, however, the Department amended 24 C.F.R.

Section 207.261 to, among other things, eliminate these

percentage limitations on participation by others in an insured

mortgage. See 51 Fed. Reg. 28699 (Aug. 11, 1986). Accordingly,

24 C.F.R. Section 207.261(e), which deals with transfers of

partial interests under participation agreements, presently reads

as follows:

A partial interest in an insured mortgage or pool of insured

mortgages may be transferred under a participation agreement

or arrangement (such as a declaration of trust or the

issuance of pass-through certificates), without obtaining

the approval of the Commissioner, if the following

conditions are met:

\(1\) Legal title to the insured mortgage or mortgages

shall be held by an approved mortgagee which, for the

purposes of this paragraph (e), shall be referred to as

the principal mortgagee;

\(2\) The participation agreement, declaration of trust

or other instrument under which the partial interest is

transferred shall provide that:

\(i\) The principal mortgagee shall remain mortgagee

of record under the contract of mortgage

insurance;

\(ii\) The Commissioner shall have no obligation to

recognize or deal with anyone other than the

principal mortgagee with respect to the rights,

benefits, and obligations of the mortgagee under

the contract of mortgage insurance; and

\(iii\) The mortgagor shall have no obligation to

recognize or do business with anyone other than

the principal mortgagee or its servicing agent

with respect to rights, benefits, and obligations

of the mortgagor or the mortgagee under the

mortgage.

Paragraph 1-33(D) of the Handbook appears to have been

drafted with the regulation, i.e., section 207.261(e), as it

existed prior to August 11, 1986, in mind. In this regard,

paragraph 1-33(D) does not reflect consideration of that

August 11, 1986 regulation change which, among other things,

removed the percentage limitations on participation by others

from section 207.261(e). Further, in correspondence issued after

such 1986 amendment of section 207.261(e), the Department has

interpreted that section as permitting an FHA-approved mortgagee

to transfer, without prior HUD approval, up to 100% of the

beneficial interest in a HUD insured mortgage provided that the

conditions set forth in subsections 207.261(e)(1) and (2) are

satisfied and that legal title to the insured mortgage, at the

time of the participation, remains with the principal mortgagee

of record.

As presently written, paragraph 1-33(D) conflicts with this

interpretation of the regulation because it does not permit

(without HUD approval) 100% participation interests where the

conditions of subsections 207.261(e)(1) and (2) are met. Thus,

paragraph 1-33(D) should not be followed to the extent that it:

\(1\) mandates that a mortgagee may transfer a partial interest in

an insured mortgage or pool of insured mortgages under a

participation agreement or arrangement, without obtaining HUD

approval, only if the total participation by others does not

exceed 90% before final closing and 95% thereafter; and (2)

requires HUD approval for 100% participation by others before or

after final closing where the conditions of subsections

207.261(e)(1) and (2) are satisfied and legal title to the

insured mortgage, at the time of the participation, remains with

the principal mortgagee of record.

We have consulted with the Office of Housing on this matter.

The Office of Housing has advised us that paragraph 1-33 will be

revised to follow the positions set forth in this letter. In the

interim, for any closings that may arise before the revisions to

paragraph 1-33 are finalized and issued, this letter will serve

to indicate the Department\'s position that paragraph\'s 1-33(B)

and 1-33(D) of Handbook 4435.01 REV-1 are in error and that the

legal positions set forth in this letter should be followed.

Very sincerely yours,

John J. Daly

Associate General Counsel

Insured Housing and Finance