4550.2

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CHAPTER 6. FINAL ENDORSEMENT

6-1. INTRODUCTION. This Section covers matters arising in the period

immediately prior to the \"finalling out\" of a loan involving

insured advances during construction and also covers the actual

final endorsement procedures. Instructions relating to cost

certification and the cooperation of unsold Investor-Sponsor

projects is included in Reference (9) of the Foreword. For the

relationship between \"initial\" endorsement and \"final\" endorsement,

see the first paragraph of Chapter 4 of this Handbook.

6-2. DOCUMENTS REQUIRED AT FINAL ENDORSEMENT. For the convenience of

HUD personnel, as well as other parties to the transaction, a

check list showing the documents required at final endorsement of

a normal case has been issued as FHA Form 3257-G. To inform the

parties of the documents which will be required in connection with

final endorsement, this check list should be furnished to them

upon request. In order that they may be advised as to specific

requirements and the manner in which the requisite forms are to

be filled in or modified to meet the HUD requirements pertaining

to the type of loan involved, the parties may also be furnished

with a copy of this Handbook.

6-3. TIMING OF FINAL ENDORSEMENT. After completion of construction,

the next step is the final closing of the mortgage insurance

transaction. A 30-day waiting period is stipulated in the

Construction Contract and the Building Loan Agreement to allow

time for clearance of liens. If, however, the mortgagee desires

to close at an earlier date, and if the title company issues a

title policy which is free of liens, closing may take place before

expiration of the 30 days. Completion, for the purpose of final

closing, means that: (1) the project has been completed in

accordance with the drawings and specifications, except for

approved items of delayed completion covered by an acceptable

escrow agreement; and (2) the entire project has been accepted

for occupancy by the local authorities having jurisdiction, by

the lender, and by HUD.

a\. Upon the determination that an advance of mortgage funds will

be the last advance prior to disbursement of the holdback (or

at the time of substantial completion, whichever is earlier),

preparation for final endorsement should begin. The Field

Office will advise the Closing Attorney when the necessary

preliminary determinations have been made and the Field Office

will advise the mortgagor and mortgagee of the instruments

and legal requirements necessary for final endorsement.

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4/73

Page 6-1

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4550.2

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b\. Before endorsement can take place, the requirements

hereinafter set forth must be complied with.

6-4. PROPERTY INSURANCE REQUIREMENTS. Before execution of the

Application for Insurance of Advance of Mortgage Proceeds, FHA

Form 2403, for a final advance, the HUD-FHA Director will ascertain

from the ADTS/CU whether any changes in drawings and specifications

or any appreciable change in the cost of construction of the

project, have occurred during the course of construction which

require a revision of Property Insurance Schedule, FHA Form 2329.

a\. If it is not Necessary to Revise the Previous FHA Form 2329,

no action on the part of the HUD-FHA Director is required

with respect to property insurance.

b\. If a Revision of FHA Form 2329 is necessary, the HUD-FHA

Director will obtain from the ADTS/CU revised and corrected

copies of the form reflecting such changes and, at the time

of execution of FHA Form 2403, will forward duplicate revised

copies to the mortgagee with an appropriate letter notifying

the mortgagee to substitute the revised copies (identifying

such revised form by date) for the previous FHA Form 2329.

c\. In all Cases of Revision of FHA Form 2329, or correspondence

in connection therewith, copies of the revised form and

correspondence will be filed in Washington and duplicate

Dockets.

6-5. INCOMPLETE ON-SITE FACILITIES. It is desirable that all on-site

construction be 100% complete before approval of a final advance

of mortgage proceeds. However, circumstances may make it desirable

that approval of final advance be given before 100% completion

of on-site construction.

a\. Approval of a Final Advance Before 100% Completion of On-Site

Construction. Such approval will be given only in cases in

which minor items of on-site construction are incomplete and

will be coupled with a requirement that funds be placed in

escrow to assure completion of such items. Approval of a

final advance of mortgage proceeds under such circumstances

will be given only in those cases in which:

\(1\) All on-site items in the entire project are completed

except those which qualify as items of delayed completion

as set forth in underwriting architectural procedures;

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4/73 Page 6-2

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4550.2

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(6-5) (2) All off-site utilities such as sewer, water, electrical,

and gas facilities are installed and connected, and the

buildings are served by safe and adequate all-weather

facilities, either permanent or temporary, for the ingress

and egress of pedestrian and vehicular traffic, including

fire apparatus, and all other provisions of the mortgage

insurance contract have been acceptably accomplished or

acceptably assured;

\(3\) The ADTS/CU recommends that funds be placed in escrow

for the completion of minor items because immediate

completion is inadvisable or impossible due to weather

or other conditions beyond control; and

\(4\) When the aggregated estimated cost of completing such

items does not exceed 1% of the principal amount of the

mortgage.

b\. In Order to Enhance Marketability and at the discretion of

the HUD-FHA Director, an escrow may be established to cover

the cost of final finishing interior painting of apartments

without regard to the usual 1% limitation on escrows provided

above. This is conditioned upon the builder being bound to

complete all work covered by the approved plans and

specifications within a fixed period of time not in excess of

one year from the date of final endorsement for mortgage

insurance and without any additional charge either to the

mortgagor corporation or the incoming occupants.

c\. With Respect to Incomplete Items, except landscaping or other

exterior improvements which cannot be completed because of the

season, the amount held in escrow for completion must be at

least twice the estimated cost of completion. In the case of

landscaping, the amount held in escrow must not be less than

the ADTS/CU\'s estimate of the cost of completion. The amount

of any escrow shall be sufficient to assure an incentive to

complete the work, taking into consideration a possible rise

in cost. Such escrow will be held by the mortgagee, or under

the control of the mortgagee, in accordance with the terms of

Escrow Deposit Agreement, FHA Form 2456, and the HUD-FHA

Director will ascertain that the items to be completed are

properly identified by attachment to FHA Form 2403.

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Page 6-3 4/73

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4550.2

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6-6. INCOMPLETE OFF-SITE FACILITIES. A distinction is to be made

between those cases in which the assurance of installation and

completion of any off-site facilities is in the form of a cash

escrow and those cases in which such assurance is in other form.

The HUD-FHA Director will be guided by the following instructions;

a\. Cash Escrow. When the completion and installation of off-site

facilities is assured by a cash escrow, and all off-site sewer,

water, electrical, and gas facilities are completely installed

and connected, and other off-site facilities such as streets,

walks, curbs, and gutters are incomplete but safe; and

adequate facilities for ingress and egress are provided,

approval of the final advance of mortgage proceeds may be

given, but the HUD-FHA Director will require that the escrow

agreement remain in force. The HUD-FHA Director, in such

cases, will diligently pursue the completion of off-site

facilities as assured by the escrow.

b\. Other Forms of Assurance. In those cases in which the

assurance of installation and completion of off-site

facilities is in a form other than a cash escrow, the final

advance of mortgage proceeds cannot be approved. Instead,

the HUD-FHA Director will adhere to the provisions of the

Building Loan Agreement and Construction Contract wherein it

is provided that the 10% holdback will be retained until 100%

completion of off-site facilities.

\(1\) If off-site utilities are completely installed and

connected, and ingress and egress are provided, the

request for the final advance may be treated as an

ordinary application for advance of mortgage proceeds

and may be approved in an amount which, when added to

previous advances of mortgage proceeds, will equal 90%

of the total advances to which the mortgagor will be

entitled at 100% completion. In such cases, FHA Form

2403 will not be treated as approval of a final advance,

nor will the submission of Request for Final Endorsement

of Credit Instrument, FHA Form 2023, be in order.

Instead, following 100% completion of all off-site

facilities, the HUD-FHA Director will require submission

of a new FHA Form 2403 for approval of the final advance,

and subsequent submission of FHA Form 2023.

\(2\) In all such cases of incomplete off-site facilities,

the HUD-FHA Director will endeavor to obtain completion

at the earliest possible time.

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4/73 Page 6-4

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4550.2 CHG

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\(3\) In any case in which the HUD-FHA Director feels that the

retention of the entire 10% holdback is disproportionate

to the cost of the off-site facilities to be completed,

he may forward his recommendations for adjustment to the

Office of Underwriting Standards.

\*

6-7. CHATTEL MORTGAGE OR ATTORNEY\'S CERTIFICATE. Before final

endorsement a chattel mortgage or chattel mortgage certificate must

be submitted. The HUD-FHA Director will forward to the Closing

Attorney a list of easily movable items, such as stoves,

refrigerators, hot water heaters, furniture, venetian blinds and

other items of similar nature, purchased with mortgage proceeds.

Identification of such items by serial number or brand name will

be furnished where possible. The Closing Attorney will be

responsible for securing either a chattel mortgage or certificate.

The HUD-FHA Director will be responsible for furnishing the list \*

of easily movable items.

6-8. FINAL SURVEY OF PROPERTY. A survey is required, made after the

erection of the building, and must show the exact location of all

buildings, water, sewer, gas, and electric mains, and all easements

for such utilities then existing. It must be prepared by a

licensed surveyor who must certify that the project is installed

and erected entirely on the land covered by the insured mortgage

and within the building restriction lines, if any, on said land,

and does not overhang or encroach upon any easement or right-of-way

of others.

6-9. COST CERTIFICATION AS IT APPLIES TO COOPERATIVES.

a\. Cost certification is applicable in Management, Investor and

Non-Profit Sponsor Type cases. It is not applicable in Sales

Type and Existing Construction cases. Reference (10) of the

Foreword is applicable to cooperatives as modified by the

following procedures:

\(1\) Neither the signature of the mortgagor/contractor nor

the accountant\'s certification operates to relieve the

HUD-FHA Director from his responsibility to pass on the

mathematical accuracy and the compliance with prescribed

procedure of FHA Form 2330 and 2330-A. Careful review

of the forms is expected. Differences of opinion may

arise, and careful consideration should be given to the

possibility that such differences stem from sources other

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Page 6-5 11/74

HUD-Wash., D. C.

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4550.2 CHG

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(6-9) than a genuine misunderstanding of the HUD-FHA

instructions or honest differences of opinion. If there

is any reason to suspect that differences arise from causes

other than those cited above, HUD-FHA Directors are

required to request an audit by the Office of the

Inspector General of the mortgagor\'s and/or contractor\'s

books before issuance of FHA Form 2580.

\(2\) Field Office Directors have the right and obligation to

require clarification or breakdown of all or any part of

the cost figures presented, including, but not limited

to legal and organizational expense, general overhead,

equipment rental, and the function of subcontractors or

suppliers when such function is not already well known

to his office. In projects where occupancy has been

attained during the construction period, there is the

possibility that some items properly allocable to operating

the project will be claimed as construction costs.

(i.e., the operation of Investor-Sponsor Projects prior

to passage of title to the purchasing cooperative

corporation.) It is expected that vigilance will be

exercised by the HUD-FHA Director in order that

misclassifications may be detected and corrected.

\(3\) Supplemental statements, certified by an accountant in

\* the same manner as the original statements, will be \*

required for any estimated amounts included.

b\. Reimbursement of Contractor for Expenses Incurred in Consenting

to an Early Start of Construction with HUD-FHA\'s Approval.

\(1\) To induce the contractor to agree to an early construction

start, the mortgagor may enter into an agreement with the

contractor, subject to HUD-FHA approval, to reimburse the

contractor for interest on money borrowed by the contractor

for construction prior to initial endorsement. The

agreement must clearly state that reimbursement shall be

made only to the extent that the mortgagor has funds

available from the amount estimated for interest during

construction.

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11/74 Page 6-6

HUD-Wash., D. C.

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4550.2

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(6-9) (2) The amount of interest certifiable as cost is that amount

incurred by the builder for this purpose between the date

construction started and the date the mortgage is

initially endorsed for insurance. However, the rate of

interest, so certifiable, may not be in excess of the

rate established by HUD-FHA for the insured loan. The

date of the start of construction must have been approved

by HUD-FHA and FHA Form 2415 or 3265 must have been

executed.

c\. Legal, Organizational and Marketing Expense. Reasonable and

necessary legal, organizational and marketing and development

services expense incurred in the organization of the mortgagor,

initial and final closing, and settlement of legal questions

or litigation arising in connection with \"organizing\" the

cooperative project are allowable. The expense in connection

with \"Organizing\" the cooperative, includes the preparation

of the formal documents for \"Development of Mortgagor

Corporation.\" Solicitation for memberships normally involving

the formation of a sales office, printing of brochures,

education of members, advertising, equipping and furnishing of

model units and lobby and other public spaces, salesmen\'s

commissions, etc., is covered by the marketing allowance.

However, insofar as furnishing of model units is concerned,

there should be deducted from the cost thereof any salvage

value of such equipment. Public space furnishings should

remain the property of the cooperative. Each Handbook in the

Cooperative Housing Series covering an approach to organizing

cooperatives will contain more specific information concerning

these fees.

d\. Two Legal and Organizational Expenses in Investor-Sponsor

Cases. In Investor-Sponsor cases two legal and organizational

expenses are involved and should be reflected in FHA Form 2330,

namely, the expenses involving the mortgagor (Investor-Sponsor)

and those involving the cooperative corporation formed to

purchase the project. The Investor-Sponsor, in addition to

constructing the project, has the statutory obligation to use

his best efforts to sell the project to a cooperative and his

expenses in doing so are therefore properly includable. As

pointed out in Reference (9) of the Foreword, if before final

endorsement the legal and organizational sum attributable to

the cooperative has been exhausted by HUD-FHA-approved draws

against same, the Investor-Sponsor may deposit additional

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4/73

Page 6-7

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4550.2

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(6-9) sums with the mortgagee prior to final endorsement for

application against further organizational expenses of the

cooperative (as approved by HUD-FHA) and to the extent that

such additional sums are used for this purpose with HUD-FHA

approval they may be included in cost certification (See

subsequent Section relating to adjustments for undetermined

costs.)

e\. Occupancy During Construction Period in Investor-Sponsor

Cases. The instructions in Reference (9) of the Foreword

should be consulted with regard to the effect of occupancy

income on cost certification.

f\. Care Required in Computing Costs of Investor-Sponsor. In

Investor-Sponsor Projects, it should be borne in mind that

the cost certification not only may affect the amount of the

insurable mortgage but also sets the upper limit at which the

project may be sold to the cooperative and, therefore, a

careful computation of the costs is doubly important. The

HUD-FHA Director will not approve release of any escrowed

funds without a satisfactory certification of the actual cost

of the performance of the work. These costs shall be

determined in accordance with instructions herein except that

an accountant\'s certification will not be required.

g\. Occupancy During Construction Period in Management Type Cases.

In some cases occupancy may be obtained before the cut-off

date for inclusion of interest, taxes, mortgage insurance

premium and property insurance premiums in certifiable cost.

In these cases a statement shall be required showing: (1)

gross occupancy income collected during the period from first

occupancy to the cut-off date and; (2) actual operating

expenses during the same period. Operating expenses for this

purpose shall include advertising expense, sales commissions

paid, a reasonable management fee, and electricity, gas,

water, and operating salaries (maintenance, cleaners,

gardeners, elevator operators, etc.) to the extent they are

not properly included in construction costs on FHA Form 2330

and 2330-A. If this statement produces an excess of income

over operating expense, the excess shall be treated as a

recovery of construction costs and shall be entered on Line

15 of FHA Form 2330 and considered as a disallowance in

Schedule 1, FHA Form 2580, under the caption \"Recovery of

Construction Cost - Net Income during Construction Period.\"

As an alternative to the foregoing, the parties may at their

option deposit the excess income in the Reserve for

Replacements.

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4/73 Page 6-8

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4550.2 CHG

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(6-9) h. Review of Estimated Items. When cost certifications are

reviewed, the Director will determine the estimated items,

if any, and whether or not the mortgagor or contractor have

any claims in process or contemplated which might affect the

actual cost, and will establish an appropriate follow-up

system for obtaining supplemental certifications of the actual

cost of each item. Any payments on the mortgage required by

these certifications will be considered as reductions in,

but not as prepayments to, the insured mortgage.

This application of funds will not be required, however,

unless the substitution of the actual costs for the amounts

estimated in the original certification of costs would have

required a reduction in the insured mortgage.

i\. Adjustments for Undetermined Cost. The mortgage must not

exceed the applicable percentage of actual costs. Any

reductions in estimated costs resulting from the settlement

of escrows required for incomplete work or adjustments of

costs estimated for the purposes of cost certification will

be paid to or retained by the mortgagee for application to

reduction of the mortgage or will be deposited in the Reserve

for Replacements. Such reductions of cost may arise from

refunds, rebates, or discounts; the excess of escrows over

the actual costs of incomplete construction items or legal

and organizational expense; refund of amounts deposited by

the mortgagor as set forth in Mortgagee\'s Certificate, or to

save the mortgagee from loss in connection with the sale of

the mortgage; and any receipts from the settlement of claims

against bonding companies or others which arose in connection

with the completion of the project.

j\. Determination of Maximum Insurable Mortgage. See underwriting

instructions covering FHA Form 2580.

k\. Execution of FHA Form 2580. Upon execution of FHA Form 2580,

the original will be forwarded to the mortgagee and an

executed copy will be forwarded to the mortgagor. One copy

will be placed in the Field Office Docket and one copy in the

Washington Docket.

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Page 6-9 11/74

HUD-Wash., D. C.

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4550.2 CHG

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l\. Mortgage Adjustment Determination. When the supplemental

certification is made of the actual cost of all items for

which estimates were accepted at final endorsement, the Field

Office Director will determine whether or not an adjustment

in the mortgage amount is required. This determination will

be made in accordance with paragraph 6-9.i., above. The Field

Office Director will advise the mortgagee of his findings by

a letter showing the basis of his computation. Copies of this

letter will be forwarded to the mortgagor and to the Office

of Underwriting Standards, for insertion in the Washington

Docket. A copy will also be filed in the Field Office Docket.

6-10. EXCESS MORTGAGE PROCEEDS.

a\. There is a remote possibility that the cash paid out for

completion of a project may be less than the mortgage proceeds.

In such circumstances, the Director will require that any

part of the mortgage proceeds which have not been expended to

pay necessary costs of completing the project will be

deposited in a special account of the mortgagor, from which

disbursements may be made only with the prior written consent

of the Assistant Secretary-FHA Commissioner. This requirement

is stated in Paragraph (4) of the Agreement and Certification,

FHA Form 3305. There will be no objection to the investment

of such funds in obligations of, or full guaranteed as to

principal by, the United States of America, or to their

deposit in institutions whose accounts are insured by the

United States. The establishment of the fund can be avoided

by an immediate reduction of the mortgage at closing, before

establishment of the amortization schedule.

b\. Any request received by the Director for use of these funds

for purposes other than reduction of the mortgage will be

forwarded to the Office of Underwriting Standards, with his

comments and recommendations. The Field Office Director will

be advised as to whether the request may be granted.

c\. The request should indicate whether the mortgage proceeds

exceed the cash paid out for completion solely because there

is a difference between the purchase price of land held for

a period of years and its \"fair market value in fee simple

and as is,\" as determined by HUD-FHA. The request should be

accompanied by full information as to the date of purchase

and purchase price of the land.

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11/74 Page 6-10

HUD-Wash., D. C.

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4550.2

CHAPTER 6, FIGURE 1

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MORTGAGOR\'S CERTIFICATE OF ACTUAL COST

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4/73

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4550.2

CHAPTER 6, FIGURE 1

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4/73

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4550.2

CHAPTER 6, FIGURE 2

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CONTRACTOR\'S

CERTIFICATE OF ACTUAL COST

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4/73

Page 6-13

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4550.2

CHAPTER 6, FIGURE 2

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4550.2

CHAPTER 6, FIGURE 2

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FORM 2330-A WORK SHEET

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4550.2

CHAPTER 6, FIGURE 2

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4/73

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4550.2

CHAPTER 6, FIGURE 3

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MAXIMUM INSURABLE MORTGAGE

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4/73

Page 6-17

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4550.2

CHAPTER 6, FIGURE 3

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DETERMINATION FOR ENTRY FOR LINE 10.

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Page 6-18

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4550.2

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6-11. APPLICATION FOR INSURANCE OF ADVANCE OF MORTGAGE PROCEEDS, FHA

FORM 2403. This is the same form used during the course of

construction for the advance of mortgage proceeds. When the

final advance is in order, the mortgagee, the mortgagor, the

contractor, and the architect will execute the completed form,

and the form will be submitted by the mortgagee in triplicate.

The form shall be accompanied by: (1) a completed Contractor\'s

Requisition, FHA Form 2448; and (2) Contractor\'s Prevailing

Wage Certificate, FHA Form 2403-A.

a\. If no Items of On-Site Construction are Incomplete, the

office will type into the Certificate of Mortgage Insurance,

on FHA Form 2403, in the space provided for the amount of the

escrow deposit, the word \"None.\" If items of on-site

construction are incomplete and an escrow deposit is in order,

attach to FHA Form 2403 an itemized list of incomplete items

and type into the Certificate of Mortgage Insurance, in the

space provided, the amount of the escrow deposit required for

completion of incomplete items.

b\. Following Execution of the Form, the Director will forward

the original to the mortgagee, with attachments listing

incomplete items, if any. An executed copy will be filed in

the Washington Docket, and one copy will be forwarded to the

ADTS/CU for use of the Mortgage Credit Section and eventual

filing in the duplicate docket.

c\. It is the Responsibility of the Mortgagee to submit, in

accordance with the certificate of mortgage insurance, a

completed Request for Final Endorsement of Credit Instrument,

FHA Form 2023, with the credit instrument and any necessary

escrow agreement. It is desirable, however, that the Director,

in forwarding the completed form to the mortgagee, call to the

mortgagee\'s attention such additional submissions as are

required.

6-12. REQUEST FOR FINAL ENDORSEMENT OF CREDIT INSTRUMENT, FHA FORM

2023\.

a\. After Receipt by the mortgagee of Approval of a Final

Advance, this form, executed by the mortgagee and mortgagor,

must be submitted in duplicate. This form should be modified

by changing the final two paragraphs thereof to read as

follows:

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Page 6-19 4/73

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4550.2

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(6-12) (1) \"Attached hereto is a current Financial Statement

which accurately reflects the financial condition

of the undersigned. The books and accounts of the

undersigned have been and are being kept in

accordance with the Uniform System of Accounts

prescribed by the Secretary.

\(2\) \"The undersigned certifies that construction of

the project is complete and that the lien securing

the said mortgage is a good and valid first lien

on the property therein described, that the mortgaged

property is free and clear of all liens other

than that of the subject mortgage, and that the

undersigned does not have outstanding any unpaid

obligations, except as follows:\"

Except for Construction Items which are to be fully paid out

of the final advance, in management and sales type cases,

there should be no outstanding obligations other than the

insured mortgage. This is also the case in investor-sponsored

type cases except that non-negotiable notes are permissible as

provided hereafter in this Handbook. (See Paragraph 6-13.)

c\. As to Items Shown on FHA Form 2023 as Unpaid Construction

Costs, the Field Office Director may in his discretion

require that an amount sufficient to pay all such costs be

held by the mortgagee and disbursed under the supervision of

the mortgagee to the subcontractor\'s materialmen, or other

creditors to whom the sums included in this category are due.

d\. FHA Form 2023 should be Checked Against each Previously

Approved FHA Form 2403 to determine that the date and amount

of each advance are correctly stated and that the total shown

on the FHA Form 2023 equals the total of all advances. If

any error is found, the form will be returned to the mortgagee

with an explanation of the correction required. (The inclusion

of amounts advanced by the mortgagee to the mortgagor from

escrow funds required for completion of the project is a

common source of error, and it is important that such amounts

be excluded from FHA Form 2023.)

e\. The Original of FHA Form 2023 will be filed in the Washington

Docket and one copy in the duplicate Docket.

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4/73 Page 6-20

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4550.2 CHG

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6-13. MORTGAGOR\'S INVESTMENT. The mortgagor\'s investment requirements

are set forth in Reference (1) of the Foreword. The cost of the

project to the mortgagor over and above the mortgage amount (after

any reduction necessitated by cost certification) must have been

fully paid. Deferred notes may be used in Investor-Sponsor cases

provided they follow FHA Form 3249, Deferred Promissory Note.

Deferred notes may not be used in Management Type cases except

\* with prior approval of the Office of Underwriting Standards.

6-14. WORKING CAPITAL.

a\. The Mortgagee shall collect from the mortgagor a Working

Capital Deposit of not less than (2%) of the mortgage amount

to be maintained and disbursed by the mortgagee during the

course of construction to accruals for taxes, mortgage

insurance premiums, property insurance premiums, and such

other payments as may become necessary under the terms of the

mortgage. Disbursements from this deposit may also be made

for the purpose of defraying the mortgagor\'s expenses incidental

to initial occupancy, such as purchase of office equipment

and supplies, maintenance equipment, and administrative

expenses. Commitments require that upon final endorsement,

funds remaining in the deposit will be added to the Reserve

For Replacement. Until such time as the commitment forms have

been revised the remaining funds may, at the discretion of the

Field Office Director, be deposited in the General Operating

Reserve or the Special Working Capital Reserve Account No.

1315\. (See Reference (11) or (12) of the Foreword.)

b\. In the case of Sales Type Projects, the Field Office Director

will satisfy himself that disbursement of the balance of the \*

working capital to the mortgagor for closing costs, or other

purposes, will not have the effect of reducing the members\'

cash equity below that required by the HUD-FHA Regulations.

c\. The Amount Required for Working Capital may be included in

the required 3% down payment only if it has been paid to the

mortgagor corporation by the members thereof.

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Page 6-21 11/74

HUD-Wash., D. C.

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4550.2 CHG

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6-15. MANAGEMENT AGREEMENT. See background discussion under this

heading in Chapter 4, Paragraph 4-35., of this Handbook. In

management type cases, a Management Agreement must have been

approved by the mortgagee and HUD-FHA prior to final endorsement.

This should actually have been accomplished prior to occupancy.

6-16. PERMISSION TO OCCUPY. The permission to occupy procedure

described in Chapter 5, \"Construction Period\" of this Handbook

must have been complied with prior to final endorsement.

6-17. TITLE REQUIREMENTS. The title policy obtained at initial

endorsement pursuant to the requirements set forth in Chapter 4 of

this Handbook must be \"brought down to date\" showing coverage in the

face amount of the loan, all in a manner satisfactory to the

Closing Attorney.

6-18. EVIDENCE OF PUBLIC APPROVALS. To the extent that such approvals

\* may not have been fully obtained in connection with the permission

to occupy procedure, evidence satisfactory to the Field Office

must be submitted to the effect that all buildings and utilities,

on-site and off-site, have been installed and approved by all

necessary governmental authorities and by the Board of Fire

Underwriters. These items include, among other things, gas,

electricity, water, sewerage, public streets, sidewalks and curbing.

6-19. MORTGAGOR\'S ATTORNEY\'S OPINION. The attorney should supplement

his opinion submitted at initial endorsement (described in

Chapter 4 of this Handbook) so as to bring it down to date to

include the final endorsement.

6-20. COMMENCEMENT OF AMORTIZATION. Amortization will start on the date

specified in the mortgage unless a deferment will have been

recommended by the mortgagee and approved in advance by the Office

of Underwriting Standards. \*

6-21. ENDORSEMENT OF CREDIT INSTRUMENT.

a\. The credit instrument will be finally endorsed in an amount

equal to the full amount of all insured advances to the

mortgagor, as shown by the applicable FHA Form 2023, regardless

of whether the final endorsement occurs before or after

the commencement of amortization of the insured mortgage.

b\. The date of final endorsement will be the date the Director

or his agent affixes his signature to the credit instrument.

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11/74 Page 6-22

HUD-Wash., D. C.

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4550.2 CHG

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6-22. ASSURANCE OF PERFORMANCE UNDER GUARANTEE.

a\. The Construction Contract contains a guarantee against latent

defects and faulty workmanship and material for one year from

date of completion. Alternatively, the guarantee may run from

the date of substantial completion. Substantial completion

means that: (1) the project has been completed in accordance

with the drawings and specifications, except for approved

items of delayed completion covered by an acceptable escrow

agreement; (2) the entire project has been accepted for

occupancy by the local authorities having jurisdiction and by

the lender and HUD-FHA; and (3) the mortgage has been finally

endorsed for insurance. The Director will be careful to

avoid any action that might jeopardize the contractor\'s

guarantee.

b\. If Completion Assurance Agreement, FHA Form 2450, was used at

Initial Closing, the Director may, after final endorsement of

the credit instrument, authorize the release of the escrow

funds except for an amount equal to 2 1/2% of the total amount

\* of the construction contract. The retained percentage will \*

be held in the escrow account during the one-year guarantee

period as specified in FHA Form 2450. The escrow provided

for here is separate and apart from any escrow that may have

been provided to assure completion of any incomplete

construction items.

c\. If FHA Form 2452 or an AIA Bond were used, no action is

required.

6-23. WASHINGTON DOCKET.

a\. Preparation of Washington Docket. Immediately on final

endorsement of the credit instrument regardless of whether

any funds are in escrow) the Director will require preparation

of a permanent Washington Docket. The forms and documents to

be filed in it and instructions for its preparation are given

in Contents of Washington Docket, FHA Form 2471.

b\. Each Case Requires Individual Preparation of the Amortization

Schedule by the Comptroller\'s office and also requires

calculations in adjusting mortgage insurance premiums. The

Comptroller\'s office is unable to prepare the amortization

schedule or calculate the adjusted premium until receipt of

the Washington Docket. Delays in handling these matters will

result in misunderstanding on the part of mortgagees. It is

necessary, therefore, that preparation and forwarding of the

Washington Docket be expedited.

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Page 6-23 11/74

HUD-Wash., D. C.

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4550.2 CHG

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(6-23) c. The Closing Attorney. immediately following preparation of

the Washington Docket, it will be forwarded to the closing

attorney. The closing attorney will check the Docket to

determine that it contains the material required by FHA Form

2471 and to determine that the material is in proper legal

form. On determination that the required contents are present

and in proper form, the closing attorney will insert in the

Docket his certificate stating that he has checked the Docket

and that it complies with the requirements of FHA Form 2471.

He will forward one copy of the certification to the Associate

General Counsel for Housing Production, HUD, Washington, D.C.,

He will then forward the docket to the Office of the

Comptroller, Washington, D.C., Attention: Multifamily Mortgage

Branch, with a suitable letter of transmittal. One copy of

\* the transmittal letter will be sent to the Field Office from

which the Docket was received, and one copy to the Office of

Underwriting Standards. The Office of the Comptroller will \*

be responsible for recordation and safekeeping.

d\. After Preparation of the Washington Docket, all remaining

original and duplicate material, except that covered in

Reference (13) of the Foreword will be filed in the Field

Office Docket. The contents of the Field Office Docket are

to remain in chronological order.

e\. A Master Set of Drawings and Specifications, and copies of

all approved construction changes are not included in either

Docket and should be handled as follows:

\(1\) Hold in the Field Office until expiration of the one-year

guarantee period under the construction contract.

\(2\) Then review for completeness and certify on FHA Form

2488\.

\(3\) After review, integrate each set of plans, specifications

and change orders in a tightly rolled bundle with the

plans on the outside. Tie securely with twine at each

end. Paste the FHA Form 2488 securely to one end of the

roll.

\(4\) Forward to the regional Federal Records Center in

accordance with Records Control Schedule, FHA 1, Item 5.

This provides for reasonable accumulations, on a

once-a-year basis.

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11/74 Page 6-24

HUD-Wash., D. C.

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4550.2 CHG

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6-24. MORTGAGE INCREASES, After initial endorsement, no increases in

the mortgage amount may be permitted except with the prior

\* approval of the Office of Underwriting Standards. Where a

commitment for an increase has been so authorized, the procedure

will normally involve the execution of a new mortgage in the

amount of the increase, followed by an agreement consolidating

both mortgages into one aggregate indebtedness.

6-25. MORTGAGE INCREASE - TWO-YEAR OPERATION LOSS. Section 223(d) of

the National Housing Act authorizes the Assistant Secretary

\- FHA Commissioner \"in his discretion and under such terms and

conditions as he may prescribe\" to insure an increase in the

mortgage to cover the excess of certain costs over project income

\"during the first two years following the date of completion of

the project.\" It is expected that this provision will be availed

of only rarely in cooperative housing cases and therefore no

general instructions have been issued. Any specific proposals

should be forwarded by the Field Office Director with his

recommendations to the Office of Loan Management. \*

6-26. CLOSING, INSURANCE UPON COMPLETION.

a\. Introduction. The preparation for closing instructions in

Reference (13) of the Foreword are applicable except as to

the applicable commitment forms. In insurance upon completion

there will be no insured advances during construction nor will

there be any \"closing\" involving the HUD-FHA until construction

has been completed. Since the HUD-FHA has no insurance

liability during the construction period, many of the HUD-FHA

requirements which would be applicable to an insured advances

project will not be involved.

b\. Certificate of Mortgagee, FHA Form 3224 and Mortgagee\'s

Certificate, FHA Form 3224-A. FHA Form 3224 must be

accompanied by the contractor\'s Prevailing Wage Certificate,

FHA Form 2403-A. FHA Form 3224-A is used in Existing

Construction cases and by cooperatives purchasing an

Investor Sponsored project under Section 213.

c\. Property Insurance Requirements (Reference Chapter 5 of this

Handbook.) The Director will ascertain whether the referenced

instructions have been complied with. If they have not been

complied with, he will immediately give the prescribed notice.

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Page 6-25 11/74

HUD-Wash., D. C.

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4550.2 CHG

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(6-26) d. Assurance of Performance Under Guarantee. The commitment

requires evidence that the work is covered by a guarantee

against latent defects and faulty workmanship and materials.

Performance under the guarantee will be assured by any of

the following:

\(1\) FHA Form 3259 Surety Bond Against Latent Defects,

Defective Materials and/or Faulty Workmanship. The

surety and the amount of the bond are the responsibility

of the Director; the form and legal adequacy are the

responsibility of the Closing Attorney. Any surety on

the accredited list of the United States Treasury is

acceptable.

\(2\) A cash escrow equal to 2 1/2% of the principal amount

of the mortgage, to be retained in escrow by the mortgagee

for a period of one year to assure correction of latent

defects, faulty material and workmanship. Request for

Endorsement of Credit Instrument - Certificate of

Mortgagee, FHA Form 3224, contains a representation from

the mortgagee that this 2 1/2% has been retained in such

cases.

e\. Title Evidence. The instructions in Chapter 4, \"Initial

Endorsement\" of this Handbook are applicable.

f\. Leaseholds. The instructions in Chapter 4 \"Initial Endorsement\"

of this Handbook are applicable.

g\. Mortgagor\'s Certificate. The Mortgagor\'s Certificate, FHA

Form 3218 is to be used except in Existing Construction cases

not involving Secretary-approved repairs and cooperatives

purchasing an Investor-Sponsor project under Section 213,

where FHA Form 3218-A is used. The Field Office may in its

discretion require an affidavit from such parties as the

Director may indicate to the effect that all debts (other

\* than the mortgage to be insured) have been paid. No outstanding

obligations other than the insured mortgage should be

permitted except with the approval of the Office of Underwriting

Standards. \*

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11/74 Page 6-26

HUD-Wash., D. C.

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4550.2

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(6-26) h. Basic Project mortgage Insurance Procedures Reference (13) of

the Foreword, are applicable with regard to:

\(1\) Incomplete On-Site Facilities.

\(2\) Incomplete Off-Site Facilities.

\(3\) Public Approvals.

\(4\) Special Conditions.

\(5\) Credit Instruments.

i\. Mortgage.

\(1\) See Chapter 4 \"Amortization Clause\" of this Handbook,

all of which is applicable except that the first sentence

and the words \"thereafter and\" of the second sentence

should be deleted from the quoted amortization clause.

\(2\) The provisions relating to the Building Loan Agreement

are normally deleted. The property description should

be consistent with the plat attached as Exhibit \"A\" to

the Commitment. In Sales Type cases, individual lot

lines should be shown.

\(3\) In insurance upon completion, several possible modes of

procedure may obtain insofar as the nature of the

construction financing is concerned. Under one approach,

construction financing is obtained from a HUD-FHA

approved lender using the HUD-FHA approved forms of Note

and Mortgage. Another procedure (and this is the one

which is most generally encountered) involves construction

financing on conventional paper. Sometimes the sponsors

are able to complete the project without construction

financing of any kind. Any of these procedures is

acceptable from the HUD-FHA standpoints but in any case

the form of Note and Mortgage presented to HUD-FHA for

endorsement must be in the prescribed form.

\(4\) If the mortgage to be insured also served as the

construction mortgage, evidence should be obtained to the

effect that there are no existing defaults thereunder.

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4/73

Page 6-27

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4550.2

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(6-26) j. Chattel Mortgage or Attorney\'s Certificate. There are no

exceptions to instructions (Reference (13) of the Foreword)

other than the substitution of FHA Form 3224 for FHA Form 2434.

k\. Organization of Mortgagor. The basic project insurance

instructions cited above are not applicable. Development of

the Mortgagor Corporation is covered in this Handbook.

\(1\) Certificate of Incorporation.

\(a\) Evidence Required. A certification is required from

the appropriate state corporate issuing official

evidencing the filing of the Certificate of

Incorporation in the form previously approved by

HUD-FHA.

\(b\) Certificate of Domestication. In situations where

the mortgagor has been incorporated in a \"Foreign\"

state, there should be also furnished a certificate

of domestication (sometimes known as a certificate

of authority) by the appropriate official of the

state in which the project is located.

\(2\) By-Laws. These must be duly certified and be in the

form previously approved by the HUD-FHA.

l\. Survey Instructions and Certificate, FHA Form 2457. The

survey must be a final survey and must be accompanied by the

certificate of a licensed surveyor executed on Survey

Instructions and Certificate, FHA Form 2457.

m\. Mortgagor\'s Resolutions Authorizing Mortgage Transaction.

There are no exceptions to Reference (13) of the Foreword.

n\. Building Loan Agreement. It is unlikely that any building

loan agreement will be involved. If one were executed, its

provisions should have been fulfilled and no longer operative

at the time of the HUD-FHA endorsement.

o\. Construction Contracts.

\(1\) \"Lump Sum.\" There is no standard form, but the parties

are required to have inserted the requisite prevailing

wage provisions. The appropriate phraseology is to be

found in Article 9 of the Construction Contract forms,

FHA Form 2442 or 2442-A. The usual payment provisions

may be altered to fit the situation.

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4/73 Page 6-28

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4550.2

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(6-26) (2) \"Cost Plus.\" A \"Cost plus\" contract is required in

management type \"identity of interest\" cases. Therefore,

in addition to prevailing wage provisions, this contract

must contain the cost certification provisions stipulated

in the Agreement and Certification, FHA Form 3305-A. The

parties sometimes use the FHA insured advances Form 2442-A

with the usual payment provisions altered to fit the.

situation.

p\. Evidence of Secretary\'s Beneficial Interest in Mortgagor.

Where the Assistant Secretary-FHA Commissioner\'s control over

the mortgagor corporation will be exercised by preferred stock,

the closing attorney will require delivery from the mortgagor

of evidence of such interest and will deliver to the Director

the appropriate document with his certificate that the form of

the evidence conforms to the legal requirements of the

applicable jurisdiction. On receipt, the Director will require

execution of a stock purchase voucher and forward evidence of

interest with the voucher to the Office of the Comptroller,

Washington. The purchase price of such stock will be \$100.

q\. Supervisory Architect\'s Agreement and Statement.

\(1\) This is an agreement between an architect and the

mortgagor corporation to provide supervisory service

during the construction period. There is no FHA model

form on the subject but the agreement must have been

entered into prior to the commencement of construction

and must contain the following clause:

\"The undersigned architect hereby certifies

that he does not represent any party or

interest in connection with the above-referred-to

housing project other than the

mortgagor corporation and further certifies

that he does not have any financial interest

in the project or the real estate upon which

it is to be constructed other than the fee

he has received or is to receive from the

mortgagor corporation.\"

\(2\) This agreement should be accompanied by a receipt showing

that the architect has been paid in full for his services

and that in the opinion of said architect construction of

the project has been completed in conformity with the

plans and specifications.

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Page 6-29 4/73

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4550.2

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(6-26) r. Sponsor\'s Certification, FHA Form 3227. Sponsor\'s

Certification, FHA Form 3227, must be obtained at the time of

closing. It is the Director\'s responsibility to determine, and

inform the closing attorney as to the individual or individuals

who are to execute this agreement. The purpose of this

certification is to give assurance that all cooperative members

listed have a bona fide intention to reside in the project.

s\. Attorney\'s Comprehensive Opinion.

\(1\) The mortgagor\'s attorney must submit at closing to the

closing attorney, addressed to the mortgagee and to

HUD-FHA, his comprehensive opinion as to the legality of

the entire transaction and legality and adequacy of the

contractual instruments. The nature and scope of this

opinion is the responsibility of the closing attorney.

\(2\) It is required that the following statement be included

in the attorney\'s opinion:

\(a\) \"The undersigned hereby certifies that he

does not represent and has not represented

any party or interest in connection with

the above-referred-to housing project other

than the mortgagor corporation, and further

certifies that he does not have any financial

interest in the project or the real estate

upon which it is to be constructed other than

the legal fee he has received from the mortgagor

corporation.\"

\(b\) \"The undersigned hereby acknowledges receipt

in full of his fee for legal services in

connection with the captioned project. The

undersigned was retained by the mortgagor

corporation prior to the commencement of

construction and states that to the best of

his knowledge, information and belief, the

mortgagor is indebted to no other attorney

for legal services.\"

\(c\) \"All fees and charges necessary to continue

the mortgagor corporation in existence for

at least 1 year from the date hereof have

been paid.\"

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4/73 Page 6-30

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4550.2 CHG

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(6-26) t. Cost Certification. The instructions contained in Reference

\(10\) of the Foreword are applicable to management type and

investor-sponsor type projects except that identity of

interest, in management type cases, is determined in

accordance with Chapter 4 of this Handbook and, in

investor-sponsor cases, Reference (14) of the Foreword.

u\. Determination of Maximum Insurable Mortgage. The instructions

contained in Reference (13) of the Foreword are modified by

excluding all references to advance amortization.

v\. Excess Mortgage Proceeds. The basic project insurance

instructions cited above are applicable. FHA Form 3305-A

will be used instead of FHA Form 3305. Any required referrals

\* to Washington will be to the Office of Underwriting Standards.

w\. Endorsement of Credit Instrument and Collection of First

Mortgage Insurance Premium. There are no exceptions to the

basic project insurance instructions cited above.

x\. Distribution of Closing Documents. There are no exceptions

to basic project insurance instructions cited above except

that headquarters reference should be to the Office of

Underwriting Standards. \*

y\. Revision of Instruments. There are no exceptions to the

basic project insurance instructions cited above except that

headquarters reference should be to the Office of Underwriting

Standards.

z\. List of Closing Instruments. For the convenience of HUD-FHA

personnel as well as other parties to the transaction, the

following check lists showing the documents required for

endorsement of insurance upon completion loans have been

issued:

\(1\) FHA Form 3257-D. This form is applicable to Management

and Sales Type cases under Section 213 and replaces the

form formerly set forth in the Manual.

\(2\) FHA Form 3257-E. This form is used in closing Existing

Construction cases under Section 213(i) of the Act

\- where no advances for improvements are involved.

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Page 6-31 11/74

HUD-Wash., D. C.

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4550.2

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(6-26) (3) FHA Form 3257-F. This form is used at the endorsement

of a loan to a cooperative corporation to enable it to

purchase an Investor-Sponsored project. This is in

effect an insurance upon completion transaction.

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11/74 Page 6-32