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**U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT**

WASHINGTON, D. C. 20410

OFFICE OF THE ASSISTANT SECRETARY FOR

HOUSING-FEDERAL HOUSING COMMISSIONER

**Mortgagee Letter 83-24**

OCT 25 1983

TO: ALL APPROVED MORTGAGEES

ATTENTION: Multifamily Mortgagees

**SUBJECT:** Requirements for Multifamily Insured Projects

1\. Property Insurance Requirements

2\. Increases in Replacement Reserve Deposits

3\. Investment of Replacement Reserves and Residual

Receipts

4\. Distribution of Form
[[HUD-9807]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/9807.pdf),
Request for Termination

of Multifamily Mortgage Insurance

1\. Clarification of Property Insurance Requirements. 24 CFR

[[207.260(c)]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/cf207260.pdf)
requires that all projects encumbered by FHA insured

mortgages must carry hazard insurance policies which meet the

requirements of the Federal Housing Commissioner. Since those

regulations also make mortgagees responsible for monitoring the

adequacy of the coverage and for obtaining insurance when mortgagors

fail to do so, several mortgage companies have asked the Department

to clarify its insurance requirements for multifamily projects. That

clarification follows.

Section 207.10 of the Regulations requires that multifamily

projects carry a fire and extended coverage insurance policy in an

amount that meets the coinsurance requirements of the insurer and is

at least equal to 80 percent of the actual cash value of the

project\'s insurable improvements and equipment. These insurance

requirements apply as long as the mortgage is insured by HUD and

regardless of the unpaid principal balance of the mortgage. To

determine the amount of insurance required at project completion,

mortgagees must use the estimate of insurable value shown on Form

[[HUD-92329]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/92329.pdf),
Property Insurance Schedule. In later years Form

[[HUD-92329]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/92329.pdf)\'s
insurable value figures must be updated to reflect

changes in construction costs that have occurred since project

completion. After the first year of project operation, HUD will

consider insurance coverage to be adequate if the insurance coverage

met the insurer\'s coinsurance requirements at the time the policy was

issued and:

\(a\) the policy is endorsed with an agreed amount clause in

which the insurer acknowledges the adequacy of the

insurance coverage and agrees not to invoke any coinsurance

penalty;

\(b\) the insurer annually certifies that the insurance coverage

meets its coinsurance requirements; or

\(c\) the mortgagor/the insurance agent/the mortgagee annually

correctly recomputes the projects insurable value by

applying cost factors published in one of the nationally

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recognized building cost indices and insurance coverage is

increased to 80% (or any higher percentage required by the

insurer\'s coinsurance clause) of the revised insurable value.

If the mortgagor refuses to pay any higher premiums associated

with required increases in insurance coverage, the mortgagee must pay

the additional premiums and bill the mortgagor for those premiums.

2\. Increases in Monthly Deposits to the Reserve for Replacements.

All projects subject to the replacement reserve provisions

of the revised Section 8 New Construction or Substantial

Rehabilitation regulations must increase their monthly deposits to

the replacement reserve annually by the percentage amount of the

annual adjustment approved for that project. The revised regulations

apply to all older Section 8 projects whose owners voluntarily opted

to be bound by those regulations and, except as noted below, all

insured and non-insured projects for which Agreements to Enter Into

Housing Assistance Payments Contracts (AHAPs) were executed on or

after November 5, 1979 for New Construction projects or February 20,

1980 for Substantial Rehabilitation projects. The replacement

reserve requirements of the revised Section 8 regulations do not

apply to previously HUD-owned projects sold pursuant to Section 886

(Subpart C), partially assisted projects, or Section 202/8 projects.

While HUD regulations do not require increases in deposits on

other projects, regulatory agreements on insured and HUD-held

projects do authorize HUD Field staff to approve changes in the

amounts of the monthly deposits. When processing rental increases,

HUD staff will analyze the adequacy of the deposits and suggest that

owners increase the deposits if the increases are needed to meet

replacement needs of the project.

Whenever deposits are increased pursuant to either of the two

preceding paragraphs, the Field Office will send the mortgagee a Form

HUD-9250, Reserve for Replacements Authorization. This Form will

specify the amount and effective date of the new deposit.

3\. Investment of Reserves for Replacements and Residual

Receipts.

a\. Replacement Reserves. The revised Section 8

regulations require that projects subject to those

regulations invest the Reserve for Replacements.

While HUD regulations do not mandate that other

projects invest their Replacement Reserves, HUD

encourages owners to do so as prudent investment can

offset inflationary increases in repair costs and

enhance a project\'s financial condition. If an

owner elects to invest the Replacement Reserve,

the Mortgagee\'s Certificate (Form HUD-92434)

provides that the mortgagee must permit the

investment. Either the mortgagee or the

mortgagor may effect the investment. Mortgagors

subject to the revised Section 8 regulations must

retain any investment earnings in the Reserve.

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Mortgagors not subject to the revised Section 8

regulations must deposit investment earnings in

either the project\'s operating account or the

Reserve for Replacements; the choice rests with

the mortgagor. Investment earnings may not be

distributed directly to mortgagors without regard

to surplus cash considerations.

b\. Residual Receipts. In the past only projects

subject to Subpart F of the revised Section 8

regulations were required to invest Residual

Receipts. While the Regulatory Agreements for

other projects give HUD control over the use and

investment of Residual Receipt funds, in the past

HUD has elected to allow those mortgagors to

choose to invest or not to invest these funds.

We are now changing our policy for these

projects. Effective immediately, we are

requiring that all projects\' Residual Receipts be

invested and that any earnings on the investment

be credited to the Residual Receipts account.

Residual Receipts may be invested only in the

accounts or securities listed under Paragraph c

below. While mortgagors relinquished control

over Residual Receipts when they signed the

project Regulatory Agreement, at the present time

HUD will allow the mortgagors to select among the

authorized forms of investment so long as the

mortgagor exercises due care and attempts to

maximize earnings to the extent consistent with

the project\'s liquidity needs.

c\. Forms of Investment. Reserves for Replacement and

Residual Receipts may be invested in Treasury

securities, securities issued by a a Federal agency or

deposits which are insured by an agency of the Federal

government. Acceptable forms of investments are

listed in Paragraphs (1) through (4) below. Neither

Residual Receipts nor Replacement Reserves may be

invested in Repurchase Agreements (REPOS).

Investments must be established so as to: (1) permit

the mortgagee to convert the investment to cash at any

time; and (2) provide that the investments will at all

times be under the control of the mortgagee.

\(1\) Direct Obligations of the Federal Government

Backed by the Full Faith and Credit of the United

States. These include U.S. Treasury Bills, Notes

and Bonds.

\(2\) Obligations of Federal Government Agencies.

These include, for example, GNMA Mortgage-Backed

Securities, GNMA Participation Bonds and Farm

Credit Administration issues.

\(3\) Demand and Savings Deposits. Demand and savings

deposits at commercial banks, mutual savings

banks, savings and loan associations and credit

unions are permitted, provided that the entire

deposit is insured by the Federal Deposit

Insurance Corporation (FDIC), the National Credit

Union Share Insurance Fund (NCUSIF) or the Federal

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Savings and Loan Insurance Corporation (FSLIC).

\(4\) Insured Money Market Deposit Accounts.

Investment in money market accounts is permitted,

provided that the account is insured by one of

the Federal agencies identified in Subparagraph

3c(3) above.

d\. Choosing Among Available Forms of Investment. Except

as noted below, the mortgagor has the right to

determine which of the investments discussed in

Paragraph 3c will be used and a mortgagee may not

restrict the mortgagor\'s choice. A mortgagor may

authorize a lender to select the form of investment,

if the lender is willing to accept that

responsibility. If a mortgagor retains the authority

to choose among authorized forms of investment, the

mortgagee may require the mortgagor to provide written

directions as to the type of investment desired. A

mortgagee may refuse to honor mortgagor\'s request for

a specific investment only if:

\(1\) the mortgagee determines that the mortgagor\'s

choice of investment will significantly increase

the lender\'s cost of administering the reserve,

and the mortgagee identifies another investment

which offers liquidity, security and yield equal

to or better than that proposed by the mortgagor;

or

\(2\) the proposed investment does not meet the

criteria discussed in Paragraph 3.c. above.

e\. Mortgagee Fees. The mortgagee may charge a fee for

administering invested residual receipts or

replacement reserves if the fee is acceptable to the

mortgagor. If there is an identity-of-interest

between the mortgagee and either the mortgagor or its

management agent, the mortgagor must assure that such

fees do not exceed the amounts commonly charged when

there is no identity-of-interest between the mortgagee

and mortgagor. The mortgagor must disclose any such

fees in the Replacement Reserve or Residual Receipts

supporting schedules to the annual financial

statement.

4\. Distribution of Form
[[HUD-9807]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/9807.pdf),
Request for Termination of

Multifamily Mortgage Insurance. The mortgagee is required to submit

[[Form
HUD-9807]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/9807.pdf)
when the mortgage is prepaid or the mortgagor and

mortgagee agree to terminate the mortgage insurance. Instructions

printed on Form
[[HUD-9807]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/9807.pdf)
direct mortgagees to mail the form only to

HUD Headquarters. To increase the accuracy of Field Office portfolio

listings and address lists, we are now asking that mortgagees

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mail all
[[HUD-9807]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/pdfforms/9807.pdf)
requests to both HUD Headquarters and the HUD Field

Office having jurisdiction over the project in question. The Field

Office\'s copy should be sent to the attention of the Housing Division

Director.

Sincerely,

W. Calvert Brand

General Deputy

Assistant Secretary

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