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CHAPTER 3. ELIGIBILITY REQUIREMENTS

3-1. ELIGIBLE MORTGAGEES. To be eligible to apply for and

receive commitments for mortgage insurance under any

R section of the National Housing Act (the Act), a lender

must be an approved mortgagee. For detailed mortgagee\'s

requirements and conditions, lender application

requirements and filing instructions, see Handbook HUD

4060.1, \"Mortgage Approval Handbook.\"

3-2. ELIGIBLE MORTGAGORS. The mortgagor will vary depending on

the Section of the Act that the mortgage insurance

R application falls under.

3-3.CONTROL OF MORTGAGOR. The Secretary\'s control over the mortgagor

will be exercised by a Regulatory Agreement, Form HUD-92466.

This requirement as well as the others set forth in this chapter,

will be discussed with sponsors and explained to them fully at

the initial interview.

3-4.RESPONSIBILITIES AND OBLIGATIONS OF MORTGAGORS. Financing under

the HUD mortgage insurance programs imposes certain

responsibilities and obligations on all mortgagors. The basic

description and outline material indicated below pertain to all

rental housing programs. The most important of these

responsibilities and obligations are:

A.Equal Opportunity in Housing. Federal law and HUD

regulations require that no person, including a mortgagor or

any one acting on a mortgagor\'s behalf, may discriminate

against a person, including denying, withholding or

otherwise making unavailable housing, because of race,

color, religion, national origin, sex, handicap or familial

status.

B.Annual Financial Statements. Mortgagors are required to

keep their books and accounts in accordance with Handbook

HUD-4371.1, Financial Operations and Accounting Procedures

for Insured Multifamily Projects. Mortgagors also are

required to provide annual financial reports meeting the

requirements set forth.

C.Identity of Interest. Mortgagors are required to disclose

\"identities of interest.\" An identity of interest exists

if:

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(3-4) 1. The mortgagor (or any general or limited partner,

shareholder, director, officer, employee or authorized

representative of the mortgagor) has a financial

interest in or contractual arrangement with the

contractor regarding the project, including site

procurement, other than the construction contract or

vice versa.

2.Any general or limited partner, shareholder, director,

officer, employee or authorized representative of the

mortgagor is also a general or limited partner,

shareholder, director, officer, employee or authorized

representative of the contractor or vice versa.

3.The contractor advances funds for any obligation of the

mortgagor, including site procurement, or pays on

behalf of the mortgagor (or provides without cost)

architectural or engineering services except those

required by the construction contract or

owner-architect agreement.

4.The mortgagor (or any general or limited partner,

shareholder, director, officer, employee or authorized

representative of the mortgagor) can directly or

through one or more intermediaries control or influence

the decisions or policies of the contractor, or the

mortgagee, including apparent control or influence over

the decisions or policies, or vice versa.

NOTE: \"Apparent control or influence\" means any

relationship that exists between the mortgagor and

contractor, or mortgagee (or any general or limited partner,

shareholder, director, officer, employee or authorized

representative of the mortgagor and contractor, or

mortgagee) by blood, adoption, or marriage.

5.The mortgagor and contractor at any time enter into any

agreement, contract or undertaking that changes or

cancels any obligation of the other party that is

required by the documents executed at initial

endorsement.

6.The general contractor, subcontractor, material

supplier, equipment lessor or manufacturer of

industrialized housing supplies and pays, on behalf of

the mortgagor, the cost of any

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(3-4) architectural services to the mortgagor, the cost of

any architectural services or engineering services

other than those of a surveyor, general superintendent,

or engineer employed by a general contractor in

connection with its obligations to perform work under

the construction contract.

7.The general contractor, subcontractor, material

supplier, equipment lessor or manufacturer of

industrialized housing takes stock of any interest in

the mortgagor corporation as part of the consideration

to be paid.

8.Any relationship (e.g., family) exists which would give

the mortgagor or general contractor control or

influence over the price of the contract or the price

paid to the subcontractor, material supplier or lessor

of equipment.

NOTE: All questions on identities of interest or situations

not covered above must be submitted in writing to HUD

Headquarters, Office of Insured Multifamily Housing

Development.

D. Working Capital Requirements. The working capital

R deposit shall be an amount equivalent to not less than

2 percent of the mortgage amount of the commitment.

3-5. ELIGIBLE MORTGAGES.

A.Maximum Interest Rate.

1.The interest rate is negotiated between the mortgagor

and the mortgagee.

2.It may be increased or decreased only after

reprocessing and issuing an amended commitment.

3.It may not be increased after initial endorsement

(insurance of advances) or start of construction

(insurance upon completion), except that, where a

mortgage increase is requested, processed and approved,

a higher (or lower) rate may be applied to the amount

of the increase only.

B. Requirement for Level Annuity Monthly Payment (LAMP)

Plan. The mortgage must be self-amortizing and

R provide for equal monthly payments of interest and

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(3-5) principal due the first day of each month (starting 4 months

after project completion) under an amortization plan agreed

to by the mortgagor and lender and acceptable to HUD. See

Appendices 1 and 2.

C. Mortgage Covenants. The mortgage will contain

R covenants which:

1.Prohibit any form of discrimination on the basis of

race, sex, religion, color, national origin or familial

status in connection with the occupancy of the

mortgaged property.

2.Prohibit the use of the mortgaged premises for any

purpose other than that for which it is intended at the

date the mortgage was executed.

3.Prohibit the creation by the mortgagor of liens against

the property superior or inferior to the liens of the

mortgage.

4.Bind the mortgagor to keep the property insured by a

standard policy or policies against fire and such other

hazards as the Director may stipulate.

5.Prohibit transient housing.

D. Mortgage Insurance Premiums. The annual mortgage

insurance premium (MIP) is 0.5 percent per annum

R during the construction period, and 0.5 percent per

annum for subsequent years, of the average outstanding

principal balance of the mortgage.

3-6.MARKETABILITY - RESPONSIBILITY OF FIELD OFFICES TO AVOID

CONDITIONS OF SURPLUS HOUSING.

A.HUD Obligation and Responsibility. HUD has a threefold

obligation and responsibility to maintain a sound mortgage

insurance operation. Foreclosures and acquisitions

resulting from the overextension of building operations in a

soft market are a negation of HUD responsibility:

1.To conserve HUD insurance funds and, indirectly, the

funds of the United States Treasury;

2.To protect the equities that mortgagors have built up

in their projects;

3.To insure sound mortgages, thereby minimizing the

mortgage lender\'s servicing and default problems.

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(3-6) B. HUD Control of Housing Supply. HUD should exercise control

of the mortgage insurance program as to discourage housing

oversupply. Observation of the housing market and the

relationship between the supply and the demand is required

of each FO, if far-reaching adverse consequences of

oversupply are to be avoided.

C.Surplus Housing. It is the responsibility of the FO

Director to employ those measures set out in HUD Handbook

4010.1 \"Definitions, Policy Statements and General Rulings\"

when conditions in any part of his/her jurisdiction indicate

a \"soft\" market or the presence of surplus housing. More

importantly, the Director should use every means at his/her

disposal to avoid the development of such undesirable

conditions in the first place. Prevention of oversupply is

better than attempting to control it after it appears.

D.Rental Housing. Consideration should be given to rental

housing separate from that given to housing built for sale.

It may be that a satisfactory market could exist for rental

projects even though an oversupply of houses for sale is

impending or exists. Conversely, a satisfactory market of

houses for sale may exist even though there may be an

oversupply of apartments in rental projects. Consideration

also should be given to the possibility that offerings for

sale in some cases may be so attractive as to pull tenants

out of rental projects to a substantial degree.

3-7. PROPERTY AND DEVELOPMENT REQUIREMENTS.

A. Project Size. Projects must consist of five or more

S dwelling units, which may be detached, semi-detached,

row houses or multifamily structures.

B.Project Site. The project must be on one site. However,

the site may consist of two or more noncontiguous parcels of

land when HUD finds that the parcels:

1.Physically comprise a readily marketable real estate

entity; and

2.Are within an area limited enough to allow convenient

and efficient management.

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(3-7) C. Real Estate Requirements. Projects must be on real

R estate held or to be held:

1.In fee simple; or

2.Under a renewable lease for not less than 99 years;

3.Under a lease having a period of not less than 10 years

to run beyond the maturity date of the mortgage (This

rule applies only to mortgages insured under Sections

220 and 234(d), which incorporate Section 201 of the

NHA, and Section 221 of the NHA); or

4.Under lease executed by a government agency, or other

lessor approved by HUD, for up to the maximum term the

agency or lessor may enter into, but not less than 50

years from the date the mortgage is executed. (This

rules applies to mortgages insured under Sections 207,

213, 231 and 232).

D.Liens.

R 1. The property must be free and clear of all liens other

than the insured mortgage, except as noted in paragraph

2, below.

2.FO may permit an inferior lien made or held by a

Federal, State or local government agency or

instrumentality, consistent with the applicable HUD

regulations and instructions found in Reference (7) of

the foreword.

E.Property Standards.

1.New construction projects must comply with accepted

local building codes and HUD Minimum Property Standards

(MPS).

2.Rehabilitation projects must comply with local

requirements if they are comparable to one of the three

nationally recognized model codes.

F.Zoning. Projects, including improvements, must comply with

all applicable zoning or deed restrictions.

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(3-7) G. Commercial Areas. Projects must be designed primarily for

residential use but may include commercial and community

facilities to serve the occupants. In general, the

aggregate commercial floor area may not exceed 10 percent of

the gross floor area (20 percent for Section 220) of the

project nor may commercial income exceed 15 percent of the

estimated total gross income of the project (30 percent for

Section 220).

H.Displacement. HUD\'s policy is to minimize displacement of

tenants in its programs. Therefore, if substantial

rehabilitation will cause involuntary displacement of

tenants, HUD must:

1.Require the mortgagor to provide, with its application,

a plan to minimize the effects of displacement.

2.The MHD will determine if the plan conforms to the

Department\'s relocation requirements and that the

mortgagor can carry out the relocation plan financially

and physically.

3-8. AREA ELIGIBILITY.

A.General. HUD must consider all aspects of general

livability and rentability during analysis of the location

(e.g., freedom from adverse environmental conditions,

accessibility to community facilities). The project

location must:

1.Be acceptable for the type of housing proposed and the

market to be served.

2.Meet the requirements of 24 CFR Part 50, Protection and

Enhancement of Environmental Quality and Part 51, HUD

Environmental Criteria and Standards.

B. Flood Hazard Areas. HUD cannot insure in areas

R identified by the Federal Emergency Management Agency

(FEMA) as having special flood hazards unless:

1.The community in which the project is located is

participating in the National Flood Insurance Program

and its regulations (see 44 CFR Parts 59-79); or

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(3-8) 2. It has been less than a year since FEMA\'s designation,

and flood insurance on the structure can be obtained in

compliance with Section 102(a) of the Flood Disaster

Protection Act of 1973 (Public Law 93-234, 42 U.S.C.

4001 et seq.);

3.Flood Insurance is obtained as a condition of approval

of the application; and

4.HUD has complied with Executive Order 11988, Floodplain

Management, and, (where applicable) Executive Order

11990, Wetlands Protection.

C. Coastal Barriers. HUD cannot insure any project in

the \"Coastal Barriers Resources System\" established by

R the Coastal Barriers Resources Act (16 U.S.C. 3501).

D. Military Impact Areas. HUD is prohibited from

R providing mortgage insurance under Title II in

military-impact areas unless demand from nonmilitary

households is sufficient to sustain occupancy in the

insured projects and the market as a whole. Section

238(c) of the National Housing Act authorizes

exceptions to the restriction when certain conditions

are met.

1.Section 238(c) was implemented by a Memorandum of

Understanding between HUD and the Department of

Defense. Mortgages insured pursuant to Section 238(c)

are obligations of the Special Risk Insurance Fund.

2.Mortgage insurance may be provided only if HUD finds

that (a) the benefits to be derived from providing the

insurance outweigh the risk and probable cost to the

Government and (b) the Secretary of Defense certifies

that there are no current plans to close the

installation, or substantially reduce the personnel

assigned to it.

3.The FO can process mortgage insurance applications to

Military Impact Areas pursuant to Section 238(c) only

upon specific approval of the Assistant Secretary of

Housing after the following steps have been taken:

a.The MHD will forward the FO\'s recommendation and

accompanying documentation from the Assistant

Secretary for Housing to the attention of the

Deputy Assistant Secretary for Multifamily

Housing.

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(3-8) b. Projects in military impact areas. A project

located in a military impact area, as determined

by HUD. A military impact area is generally a

small or medium size metropolitan housing market

area or a remote or isolated nonmetropolitan area

where:

(1)Military-connected household comprise 25

percent or more of the total households in

the market area. Military-connected

households include active duty military

personnel, civilian employees of the military

service (Department of Defense) or other

Federal agency at or in support of the

installation, and employees of contractors

and sub-contractors directly associated with

the military installation, and their

dependents. Unaccompanied active duty

military personnel housed in

military-controlled group quarters housing

(barracks, BOQ\'s) are excluded; and

(2)There is concern about the continued

stability of the current level of military

strength and mission at the installation

based on public announcements from the

Department of Defense or the military service

of impending changes; and

(3)The complete reduction of military-connected

households living in nonmilitary rental

housing over a 5 year period, at an annual

average decline of 20 percent, would, taking

into account growth in the civilian economy

and normal changes in the housing inventory,

cause an adverse impact on the private rental

market resulting in an increase in the rental

vacancy rate in the housing market of 10

percent at the end of that period.

4.The Office of Housing, with consultation from the

Office of Policy Development and Research, will review

the request and recommend to the Assistant Secretary

for Housing whether to designate the area as a Military

Impact Area.

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(3-8) 5. The Office of Housing will notify the FO of the

decision and whether it can proceed to offer mortgage

insurance in the area under Section 238(c).

3-9. REQUIREMENTS OF GENERAL CONTRACTORS.

A.Prevailing Wages. The National Housing Act requires:

1\. Payment of no less than the wages prevailing in

S the locality as predetermined by the Secretary of

Labor pursuant to the Davis-Bacon Act (40 U.S.C.

Section 276a-276a-5), to all laborers and

mechanics employed in the construction (including

rehabilitation) of any project, and

2.Compliance with all other related rules and regulations

under Davis-Bacon (See paragraphs 5-10, 11-2, and 13-6

and Handbook 1344.1, Federal Labor Standards Compliance

in Housing and Community Development Programs) and the

Copeland Act (40 U.S.C. Section 276c).

B. Equal Employment Opportunity. HUD must comply with

R Executive Order 11246 and 41 CFR Part 60 regarding

equal employment on Federally-assisted construction

contract. They:

1.Prohibit discrimination because of race, color,

religion, sex or national origin.

2.Require affirmative action to ensure fair treatment on:

employment, upgrading, demotion or transfer;

recruitment or recruitment advertising; layoff or

termination; rates of pay or other forms of

compensation; and selection for training and

apprenticeship.

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