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**U. S. Department of Housing and Urban Development**

Washington, D.C. 20410-8000

August 1, 1996

**MORTGAGEE LETTER 96-41**

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Single Family Loan Production - Condominium Units in

Non-FHA Approved Projects; Mortgage Insurance

On May 29, 1996, in 61 FR 26982, the Department issued a

final rule in the Federal Register, permitting the insurance of

mortgages on individual units in condominium projects that have

not been previously approved by the Department. That final rule

established a \"spot loan\" procedure to provide home mortgage

insurance on individual units in condominium projects where there

is little likelihood that the project\'s homeowners association

would make the requisite changes to its legal documents (usually

to benefit one association member) to obtain FHA approval. This

Mortgagee Letter provides further guidance on the use of these

spot loans.

The Department\'s requirements for condominium projects are

set forth in [[24 CFR
234.26]{.underline}](http://a257.g.akamaitech.net/7/257/2422/01apr20051500/edocket.access.gpo.gov/cfr_2005/aprqtr/24cfr234.26.htm)
of the Code of Federal Regulations.

The spot loan provisions add a sub-section (i) to this section

and lists specific criteria that must be met. The new spot loan

regulations also add a new section, [[24 CFR
206.51]{.underline}](http://a257.g.akamaitech.net/7/257/2422/01apr20051500/edocket.access.gpo.gov/cfr_2005/aprqtr/24cfr206.51.htm),
to the Home

Equity Conversion Mortgage (HECM) regulations. The HECM program

incorporates by reference the project requirements set forth in

24 CFR 234.26(i). Therefore, spot loans may be used under both

the Department\'s Section 234(c) and HECM programs. Cooperatives

and planned unit developments (PUDS) are not eligible for spot

loans.

The following requirements must be satisfied before a spot

loan is endorsed:

The condominium project must be complete. There should

be no ongoing or anticipated addition of any units, common

elements, and/or facilities.

Control of the common areas of the project must have

been

turned over to the unit owners association for at least one

year.

-2-

The owners association must provide evidence that the

project has the appropriate hazard, liability and flood

insurance.

Individual units in the project must be owned in fee

simple or be an eligible leasehold interest. The project\'s

legal documents must provide for undivided ownership of

common areas by unit owners. By virtue of this ownership,

unit owners must have the right to use all facilities and

unrestricted common elements.

The project\'s documents should not place any legal

restrictions on conveyance. Any provisions that seek to

limit the free transferability of title is generally

unacceptable. Such restrictions include rights of first

refusal and restrictive covenants. Certain governmental or

nonprofit programs designed to assist in the purchase or

rental of low-or moderate-income housing are exempted from

the restrictions on conveyance provisions. The Department\'s

policy on the free assumability and transferability of

property is set forth in [[24 CFR
234.66]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=99&l=20&s1=234.66$%5Bno%5D&SECT1=TXTHLB&SECT5=CF99&u=../cgi/legis.cgi&p=1&r=0&f=S).

At least 90% of the units in the project must have been

sold.

At least 51% of the units in the project must be owner-

occupied.

No single entity may own more than 10% of the units in a

project. \"Entity\" includes an individual partnership,

corporation, limited liability company, limited liability

partnership, joint venture, investor group or other natural

or legal person qualified to hold an interest in real

property. The 10% restriction does not apply when the

ownership of less than three units would disqualify an

otherwise eligible project.

The Department recognized that the 10% cap on the number

of

units that may secure FHA insured mortgages in a given

project can place a small regime at a disadvantage, since

only a few units will invoke the limit. Accordingly, a two-

tiered system was established. For condominium projects

having more than 30 units, no more than 10% of the units may

have FHA insured loans at any given time. Condominium

projects consisting of 30 units or less, can have up to 20%

of the units encumbered by FHA insured mortgages under the

spot loan rule.

-3-

Mortgage lenders underwriting spot loans must perform

sufficient investigation and analysis to certify that the

condominium project satisfies the eligibility criteria. Under

the regulations, mortgage lenders may employ a wide range

of approaches to ascertain compliance with the spot loan

requirements. Project developers, appraisers, owners,

associations, management companies and real estate brokers are

among the sources of information lenders may use. To the extent

that the Department has information that can be of assistance, it

will provide mortgagees with that information. However, it

remains the lender\'s responsibility to ensure the accuracy of the

information it relies upon in making its certification.

Attachment 1 is a suggested checklist lenders may wish to

use in their underwriting analyses. It reflects some key

considerations in assessing the eligibility of a project for spot

loans.

The standard Direct Endorsement Underwriter Certifications

applicable to condominiums under standard loan programs and the

HECM program are not sufficient for spot loan applications. Some

modification is needed. Accordingly, the following certification

is added to the list of Direct Endorsement (DE) certifications in

Appendix 3 of Handbook 4000.4, Rev. 1, Ch. 1 and to the list of

Underwriter Certification (HECM) in Appendix 3A of Mortgagee

Letter
[[95-54]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=MLET&s1=95-54%5Bno%5D&SECT1=TXTHLB&SECT5=MLET&u=./hudclips.cgi&p=1&r=1&f=G)
:

( ) The property is in a project that has not received

prior approval by HUD but the requirements of 26 CFR

234.26(i) are met.

This certification requirement will be in effect for all

mortgages executed on or after 30 days from the date of this

Mortgagee Letter. A similar statement may be used until the

requirement for a certification becomes effective.

Local HUD Offices and Regional Processing Centers will

conduct random reviews of mortgage loans insured under the spot

loan program. Mortgage Lenders demonstrating a pattern of abuse

will be subject to those enforcement mechanisms and sanctions

governing FHA mortgage insurance activity.

The spot loan program is designed to relieve a burden on

homebuyers in successfully-operating, non-approved condominium

projects where FHA involvement is limited; it must not be used to

circumvent the general requirement that a condominium project be

approved before a mortgage on any unit in that project can be

endorsed for insurance. As previously noted, the approval

requirements for condominium projects are found in [[24 CFR
234.26]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=CF96&l=20&s1=234.26$%5Bno%5D&SECT1=TXTHLB&SECT5=CF96&u=../cgi/legis.cgi&p=1&r=0&f=S),

(a)-(h). Additional requirements are set forth in Chapter 11,

HUD Handbook 4150.1 Rev 1, entitled \"Valuation Analysis for Home

-4-

Mortgage Insurance\" and reiterated in [[HUD Handbook
4265.1]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=HSGH&s1=4265.1%5Bno%5D&SECT1=TXTHLB&SECT5=HSGH&u=./hudclips.cgi&p=1&r=0&f=S)
,

entitled \"Home Mortgage Insurance - Condominium Units - Section

234(c)\".

Questions regarding spot loans and condominium project

approvals should be directed to the Single Family Division of the

local HUD Office.

Sincerely yours,

![](media/image2.png){width="2.5944444444444446in"
height="0.6236111111111111in"}

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachment

SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS

\_\_\_\_\_\_\_ 1. The legal documents of the homeowners association

do not contain a right of first refusal or restrictive covenant.

\_\_\_\_\_\_\_ 2. The unit is part of a condominium regime that

provides for common and undivided ownership of common areas by

unit owners.

\_\_\_\_\_\_\_ 3. The project, including the common elements, and those

of any Master Association, are complete, and the project is not

subject to additional phasing or annexation.

\_\_\_\_\_\_ 4. (a) There are no special assessments pending.

\_\_\_\_\_\_ (b) No legal action is pending against the

condominium association, or its officers or directors.

\_\_\_\_\_\_ 5. The common areas have been under the control of the

homeowners association for at least one year.

\_\_\_\_\_\_ 6. At least 90 percent of the total units in the project

have been sold. Verified by
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_ 7. At least 51 percent of the total units in the project

are owner-occupied. Verified by
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_ 8. There are no adverse environmental factors affecting

the project as a whole or individual units .

\_\_\_\_\_\_ 9. No single entity owns more than 10 percent of the

total units in the project. Verified by
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_ 10. The units in the project are owned in fee simple or

the units are held under a leasehold acceptable to FHA.

Leasehold in file.

\_\_\_\_\_\_ 11. The owners association has adequate common area

insurance coverage. General liability, replacement coverage,

etc. reflects the character, amenities and risks of the

particular development. Flood and other insurances carried, when

applicable.

\_\_\_\_\_\_ 12. General maintenance level of common elements is

acceptable and there is no deferred maintenance, based on the

comments by the Appraiser and/or the pictures.

\_\_\_\_\_\_ 13. The owners association has a reserve plan and a

reserve fund, separate from the operating account, that is

adequate to prevent deferred maintenance. The amount of the fund

is \$\_\_\_\_\_\_\_\_\_ as of \_\_\_\_\_\_\_\_\_\_.

-2-

\_\_\_\_\_\_\_14. (a) For projects consisting of over 30 units, no

more than 10 percent of the total units are encumbered by FHA

insured mortgages. Verified by \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_\_ (b) For projects consisting of 30 units or less, no

more than 20 percent of the total units are encumbered by FHA

insured mortgages. Verified by \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Mortgagee) (Reviewer)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Address)ss) (Title)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Date)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Condominium Project Name) (FHA case number)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(Address)