U.S. Department of Housing and Urban Development

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Special Attention of: Notice H 93-14 (HUD)

All Regional Administrators

All Regional Directors of Housing Issued: 03/09/93

All Directors of Housing Development Expires: 03/31/94

All Directors of Housing Management
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All Field Office Managers (Category Cross References:

C Offices), All Field Office Chiefs

(Category D Offices) Mortgagee Letter 93-3, Federal

Register (57 FR 62452, December

30, 1992)

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Subject: Single Family Development and Management Directive

-Revised Section 235(r) Refinance Program

REVISIONS TO THE SECTION 235(r) REFINANCE PROGRAM

On January 8, 1993, Arthur J. Hill, former Assistant

Secretary for Housing-Federal Housing Commissioner, signed

Mortgagee Letter 93-3 (Refinancing Section 235 Mortgages

\- Superseding Mortgagee Letter) that sets forth the revised

procedures for refinancing Section 235 mortgages with new

mortgages insured under Section 235(r) of the National Housing

Act. This letter is currently being printed and distributed to

lenders and HUD Field and Regional Offices.

In the revised program, the lender is required to pay the

refinancing costs and the mortgagors\' cash financial incentive

unless the mortgagors elect to pay the refinancing costs. If the

lender pays these expenses at closing, then the lender can charge

a premium interest rate (Section 235{r} interest rate) for the

life of the mortgage that is higher than the market interest rate

to defray the lender\'s expenses of refinancing a Section 235

mortgage to a Section 235(r) mortgage. When the lender sells the

Section 235(r) mortgage at a price above par value or pools the

Section 235(r) mortgage in a Government National Mortgage

Association (GNMA) security that is above par value, the lender

can recoup these expenses. Mortgagee Letter 93-3 reflects the

changes necessary to implement this premium interest rate

arrangement and method of recoupment for the lender. The old

interest rate arrangement and method of recoupment found in

Mortgagee Letter 91-22 proved to be a disincentive to the lenders

and is replaced by the new arrangement and method in Mortgagee

Letter 93-3.

HUD Field Offices should become familiar with the

instructions set forth in Mortgagee Letter 93-3 and this

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HSIP : Distribution: W-3-1, W-2(H)(A)(Z)(OGC), W-4(H)(OGC), R-1, R-2,
R-3,

R-3-1(H)(RC), R-3-2, R-3-3, R-6, R-6-1, R-6-2, R-7, R-7-1, R-7-2, R-8,

R-8-1

Previous Editions Are Obsolete HUD 21B(3-80)

GPO 871 902

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directive. Offices wishing to comment or who have

recommendations for improvement can write to Bob Falkenstein in

the Office of Insured Single Family Housing at Headquarters or

call him at (202) 708-0740.

SECTION 235(r) POST-ENDORSEMENT TECHNICAL REVIEWS

Section 235(r) mortgages are to be processed and

underwritten by DE lenders and underwriters (NO HUD processing).

These mortgages are subject to a fifty percent (50%)

post-endorsement technical review requirement when the case binder

is sent to the local HUD Field Office for insurance. Field Offices

have the prerogative to increase this percentage up to 100% if

the lender is found to be making processing and/or underwriting

mistakes or miscalculations of the Section 235(r) subsidy (see:

form HUD-93100, Application for Homeownership Assistance Under

Section 235 of the National Housing Act, for computational

instructions). Furthermore, post-endorsement technical reviews

are to be completed within 45 days after the Mortgage Insurance

Certificate (MIC, form HUD-59100) is issued.

OVERPAID ASSISTANCE OF SECTION 235 SUBSIDY

In Section 235(r) refinancing transactions, the subject of

overpaid assistance (overpayments) of Section 235 subsidies comes

up twice. DE underwriters and HUD Field Offices need to be

observant to make sure HUD is paid these overpayments.

Overpayments can occur as follows:

1\. Overpayments Under the Old Section 235 Mortgage :

Mortgagee Letter 93-3 sets forth servicing requirements

when the servicing mortgagee issues and certifies the

Section 235 Payoff Statement. This letter also

contains instructions on how HUD is to be paid

overpayments of Section 235 subsidy.

If the servicing mortgagee indicates that the

overpayments are due HUD, then the application for the

Section 235(r) mortgage is to be rejected by the DE

underwriter and a rejection letter issued citing the

reason for the rejection. A copy of the form HUD

92900WS, Work Sheet, should be sent to the local HUD

Field Office so that it can follow up on the

overpayments due HUD per the instructions set forth in

HUD Handbook 4330.1, REV-3, Chapter 10.

After HUD is paid the overpayments by the servicing

mortgagee then a superseding Section 235 Payoff

Statement should be issued and the application can be

reprocessed. A Section 235(r) application cannot be

approved until HUD has been paid the overpayments.

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Also, overpayments that have been properly advanced to

the old Section 235 mortgage account can be included in

the Section 235(r) mortgage amount. However, this

mortgage amount cannot exceed the original Section 235

mortgage amount as set forth on the Section 235 Payoff

Statement.

2\. Overpayments Under the Section 235(r) Mortgage that are

caused by the DE Underwriter\'s Miscalculation of the

First Year\'s Section 235(r) Subsidy - During the

post-endorsement technical review if it is determined

that the DE underwriter miscalculated the Section 235(r)

subsidy for the first year then the rating should

reflect this error and the correct amount of Section

235(r) subsidy should be computed by the local HUD

Field Office.

The local HUD Field Office must send a letter to the

respective lender citing the correct amount of Section

235(r) subsidy and the requirement that the lender pay

all overpayments plus 7 percent interest if the

interest is chargeable by HUD under 24 CFR 235.361

(Recovery of Assistance Payments) and HUD Handbook

4330.1, REV-3, Administration of Insured Home

mortgages, Chapter 10 (see: Paragraphs 10-28, Causes of

Overpaid Assistance, and 10-29, Repayment of Overpaid

Assistance). A copy of this letter must be sent by the

local HUD Field Office to the Office of Finance and

Accounting at Headquarters (see: Mortgagee Letter 93-3

page 13, for mailing address). Lenders must repay the

overpayments and applicable interest per the

instructions set forth in HUD Handbook 4330.1, REV-3,

Chapter 10.

THE SECTION 235 MORTGAGES DIRECTORY

Lenders and HUD Field and Regional Offices can obtain a

Section 235 Mortgages Directory that contains the mortgagors\'

name (last known mortgagors), property address, FHA case number,

ADP code, endorsement date, original mortgage balance and

interest rate for each mortgage that may be eligible for

refinancing under the Section 235(r) Refinance Program. The

directory is organized by state, zip codes within the state and

the mortgagors\' name. Lenders are required to pay for the

directory (see: Mortgagee Letter 93-3, Section 235 Mortgages

Directory, page 18 and Attachment 8).

Field and Regional Offices who desire the Section 235

Mortgages Directory can contact Elaine Vanderhorst, Insurance

Operations Division, at (202) 708-1994 for hard copies and/or

floppy diskettes.

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CHUMS

CHUMS has a Section 235 data base (\"Active\" cases currently

insured by HUD) that is accessed when the lender calls the local

HUD Field Office and requests a Section 235(r) case number.

To obtain a case number for a Section 235(r) refinancing

transaction, the lender must have the old Section 235 case number

and ADP code. The assignment clerk enters this (old) case number

into CHUMS. CHUMS compares the old case number with the data

base of the active Section 235 mortgages and if there is a match

then a new case number for the Section 235(r) case is generated.

Note: CHUMS performs this check to determine if the old

Section 235 mortgage is insured (i.e., not terminated or a

claim paid). CHUMS does not determine if a subsidy is being

paid or if the Section 235 subsidy is suspended or

terminated. Generally, subsidy verifications (to include

suspensions and terminations of Section 235 subsidy) can

only be verified by the servicing mortgagee, who is required

to certify (via the Section 235 Payoff Statement

requirements) the status of the subsidy.

If the old Section 235 case number is not active (case is

not insured), then a new Section 235(r) case number and ADP code

is not issued, indicating that the mortgage insurance is

terminated, a claim paid or is being processed, or possibly that

the old Section 235 case number is not part of the data base. To

verify the actual status of a Section 235 case number the local

HUD Field Office can access the A-43 System, Mortgage Insurance

In Force File, to cross-verify the case number.

MISCELLANEOUS

1\. Section 235 Secretary-held Mortgages - These mortgages are

not eligible to be refinanced under Section 235(r) because

Secretary-held mortgages are no longer insured by HUD and

the Section 235(r) statutory requirements only allow insured

Section 235 mortgages to be refinanced.

2\. Servicing Reviews by Local HUD Field Offices - Section

235(r) mortgages are to be reviewed like any other Section

235 mortgage when the local HUD Field Office conducts a

servicing review.

Note: Headquarters will be responsible for Section

235(r) origination reviews and servicing reviews of the

larger lenders.

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3\. Form HUD 93100, Application for Homeownership Assistance

Under Section 235 of the National Housing Act - DE and local

HUD Field Office underwriters need to be familiar with the

instructions set forth on this form. DE underwriters will

analyze the mortgagors\' eligibility for the Section 235(r)

subsidy, will compare the subsidy per these instructions and

HUD Handbook 4330.1, REV-3, Administration of Insured Home

Mortgages, Chapter 10, and will execute the form HUD 93100

on HUD\'s behalf.

Local HUD Field Office underwriters will use these

instructions and the handbook for the post-endorsement

technical reviews and recomputing the Section 235(r) subsidy

if in error. If the Section 235(r) subsidy is recomputed,

then the local HUD Field Office must attach a copy of this

recomputation (form HUD 93100) to the letter that is sent to

the lender as set forth above in the section on overpaid

assistance.

4\. Section 235(r) Headquarters Contacts for Local HUD Field and

Regional Offices - The following contacts are available to

local HUD Field and Regional Offices (lenders and Section

235 mortgagors will be referred to the local HUD Field

Offices):

Development Division - Susan Hoyer, (202) 708-2700

Servicing Division - Florence Brooks, (202) 708-1719

SERVICING REQUIREMENTS FOR ALL SECTION 235 MORTGAGES

Accounting for Overpayments of Assistance Payments on Mortgage

Accounts for Section 235 Mortgages, including Section 235(r) :

After a servicing mortgagee has paid HUD the amount of any

overpayments of assistance payments, the servicing mortgagee may

advance this amount against the mortgage account (as any other

advance) and must follow the repayment procedures found in HUD

Handbook 4330.1, REV-3, Chapter 10, Paragraph 10-29, Subparagraph

B, Overpayments Caused by Error, on page 10-68.

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Associate General Deputy Assistant

Secretary for Housing

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\*U.S. G.P.O.:1993-342-362:80043