Legal Opinion: CIM-0111

Index: 3.600

Subject: Preservation

May 1, 1995

Mr. Richard M. Price

Peabody & Brown

1255 23rd Street, N.W.

Washington, DC 20037

Dear Mr. Price:

Your letter to Michael Flores of the Honolulu, Hawaii Office

of the Department of Housing and Urban Development (\"HUD\") dated

January 27, 1995 regarding Maunakea Tower has been referred to

our office for reply.

Your letter concerns the eligibility of the above project to

participate in the preservation program under the Low-Income

Housing Preservation and Resident Homeownership Act of 1990

(\"LIHPRHA\"), 12 U.S.C. 4101 note, or, in the alternative, the

eligibility of the project owner to prepay the mortgage. For the

reasons set forth below, we have concluded that the project is

not eligible for participation under LIHPRHA. Furthermore, we

have concluded that the project owner may not prepay its mortgage

at this time. The project mortgage will, however, become

eligible for prepayment without the Commissioner\'s consent on

November 25, 1996 pursuant to the HUD regulations in effect on

the date the mortgage note was initially endorsed for insurance.

The facts, as understood by our office, are as follows. The

project mortgage was insured under Section 221(d)(3) of the

National Housing Act with a limited dividend mortgagor. The

mortgage note received initial endorsement for insurance on

October 10, 1974 and was finally endorsed on November 24, 1976.

The project is receiving assistance under Section 8 of the United

States Housing Act of 1937 (\"Housing Act\"), 42 U.S.C. 1437f, but

not as a result of a conversion from rent supplement assistance

under Section 101 of the Housing and Urban Development Act of

1965 (\"HUD Act\"), 12 U.S.C. 1701s. The mortgage note contains a

prepayment prohibition for the full term of the mortgage.

A project, to be eligible for participation under LIHPRHA,

must meet the eligibility requirements of Section 229 of LIHPRHA.

The implementing regulations which govern LIHPRHA eligibility are

found at 24 CFR Part 248. Pursuant to LIHPRHA, the

determination of \"eligible low-income housing\" is a two-part

process. LIHPRHA defines \"eligible low-income housing\" as:

\"any housing financed by a loan or mortgage-

\(A\) that is-

\(i\) insured or held by the Secretary under

section 221(d)(3) of the National Housing Act and

receiving loan management assistance under

section 8 of the United States Housing Act of 1937

due to a conversion from section 101 of the

Housing and Urban Development Act of 1965;

\(ii\) insured or held by the Secretary and

bears interest at a rate determined under the

proviso of section 221(d)(5) of the National

Housing Act;

\(iii\) insured, assisted, or held by the

Secretary or a State or State agency under

section 236 of the National Housing Act; or

\(iv\) held by the Secretary and formerly

insured under a program referred to in clause (i),

(ii), or (iii); and

\(B\) that, under regulation or contract in effect

before February 5, 1988, is or will within 24 months

become eligible for prepayment without prior approval

of the Secretary.\" LIHPRHA section 229(1).

While the project meets the second part of the eligibility

test of Section 229(1)(B), it does not meet the first part under

Section 229(1)(A)(i). The project mortgage is receiving

assistance under Section 8 of the Housing Act, but not due to a

conversion from assistance under Section 101 of the HUD Act as

required by the statute. Therefore, the project is not eligible

for assistance under LIHPRHA.

The HUD regulations that govern the mortgage insurance

contract for the project are those which were in effect on the

date the mortgage note was initially endorsed for insurance,

October 10, 1974. The regulations which govern mortgages

insured under Section 221(d)(3) are found at 24 CFR Part 221.

Prepayment privileges are contained at 24 CFR section 221.524.

Section 221.524(a) provides in relevant part that a mortgage may

be prepaid without the Commissioner\'s prior consent:

\"(ii) Where the mortgagor is a limited distribution

type, which is not receiving payments from the

Commissioner under a rent supplement contract executed

pursuant to the provisions of sections 5.1 et seq. of

this title, and where the prepayment occurs after the

expiration of 20 years from the date of final

endorsement of the mortgage.\" 24 CFR

section 221.524(a)(1)(ii) (1974) (emphasis added).

The above regulatory section requires that the mortgagor be a

limited distribution type, that the project not be receiving rent

supplement assistance, and that 20 years have elapsed since the

mortgage note was finally endorsed for insurance before the

mortgage is prepaid. The project owner is a \"limited

distribution type.\" Moreover, the project is not receiving rent

supplement assistance. The mortgage note, however, was not

finally endorsed until November 24, 1976, thus the 20-year time

period from the date of final endorsement will not expire until

November 24, 1996. Therefore, the project mortgage is not yet

eligible for prepayment without HUD\'s consent pursuant to

Section 221.524(a). It will, however, become eligible for

prepayment without HUD\'s prior consent on November 25, 1996.

The prepayment prohibition in the note does not change the

result of the above analysis. In this case the governing

regulations, 24 CFR Part 221, and the mortgage note language are

in direct conflict. You are correct that in such cases the

regulations supersede contrary language in the note. The

preamble and interim rules for LIHPRHA reflect the HUD policy

that where there is a conflict between HUD regulations and

mortgage note language, the regulations will govern.

Furthermore, footnote 4 above reflects that the endorsement panel

on the mortgage note provides that the regulations in effect on

October 10, 1974 govern the contract of mortgage insurance. This

position was expressed in the context of LIHPRHA at 56 Fed. Reg.

20262, 20267 (May 2, 1991) as follows:

\"Likewise, if the applicable program regulations at

section 221.524 or section 236.30 allow prepayment at

the expiration of 20 years after final endorsement, but

the mortgage note prohibits prepayment without HUD\'s

consent for the full term of the mortgage, HUD would

construe the regulation as superseding the prepayment

prohibition in the mortgage note.\"

Therefore, despite the language in the note prohibiting

prepayment, the project mortgage will become eligible for

prepayment without prior HUD consent on November 25, 1996, which

is after 20 years from the date of final endorsement,

November 24, 1976.

In view of the foregoing, we conclude that the project is

not eligible for participation under LIHPRHA because the project

is not receiving Section 8 assistance due to a conversion from

rent supplement assistance as required by the statute. We also

conclude that the project mortgage is not eligible for prepayment

without HUD\'s consent, but will become eligible under the

applicable regulations on November 25, 1996, despite language in

the mortgage note prohibiting prepayment.

I hope this letter has resolved your questions in this

matter. If you have any further questions, please contact

Athena Katcheves at (202) 708-3667.

Sincerely,

/s/David R. Cooper for

John J. Daly

Associate General Counsel

Office of Insured Housing