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

Washington, D.C. 20410-8000

**MORTGAGEE LETTER 92-33**

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

September 28, 1992

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Single Family Loan Production - Clarifications and

Modifications to the 203(k) Rehabilitation Program

Procedures

The purpose of this Mortgagee Letter is to make clarifications and

modifications to the Department\'s policies described in HUD Handbook
4240.4

REV-2, dated December 6, 1991.

1\. ACCOUNTING OF 203(k) REHABILITATION FUNDS. In Handbook 4240.4 (para.

1-20), the lender is required to provide to the local HUD Field Office

the method(s) they will use to account for the release of

Rehabilitation Escrow Funds. The accounting system acceptable to HUD

must properly record all transactions from the escrow account. An

accounting of the escrowed funds must be made on each Draw Request and

copies of the record of transactions must be distributed to the

originating lender, the borrower and to HUD.

The accounting system must show the amount escrowed for each category

listed below. The total amount of all categories should agree with

line B-14 of Form HUD 92700. The accounting system must provide: (1)

Borrowers name and property address; (2) FHA case number; (3) Closing

date; (4) Scheduled completion date (no more than 6 months from the

closing date); and (5) Amount of funds in the rehabilitation escrow

account (line B-14 of Form HUD 92700).

A. Repairs. Show the total amount in the Repair escrow. Provide a

description and date of each draw request and include the total

amount released at each Draw. Show the amount of Holdback on

each Draw and the amount of funds disbursed (the difference

between the total amount released and the 10 percent holdback

amount). The balance remaining in the repair amount must be

properly shown.

B. Contingency Reserve. Indicate the percent of repair funds

allocated for contingency reserve. Also indicate the total

amount of funds in the Contingency Reserve Account and if they

were paid by the borrower or out of mortgage proceeds. Provide a

description and date of each Change Order (Form HUD 92577)

approved for contingency reserve. Show the amount of funds

disbursed and the balance remaining in the Contingency Reserve

Account.

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C. Inspection Fees. Show the total amount of inspection fees. Also

show the number of inspections scheduled and the cost of each

inspection. Provide a description and date of each inspection.

Show the amount of funds disbursed and the balance remaining in

the Inspection Account.

D. Title Update Fees. Show the total amount of Title Update fees.

Also show the number of updates scheduled and the cost of each

update. Provide a description and date of each update. Show the

amount of funds disbursed and the balance remaining in the Title

Update Account.

E. Mortgage Payments. Show the total amount of Mortgage Payment

funds (PITI) that are escrowed. Indicate the number of months

scheduled for mortgage payments as long as the property is not

occupied. Provide a description and date of each payment. Show

amount of funds disbursed and the balance remaining in the

Mortgage Payment Account.

F. Other Fees. The amount of allowable fees (i.e., Architectural

and Engineering fees, Independent Consultant fees, Permits, Plan

Review fees, Supplemental Origination fee and Discount Points on

repair costs) necessary for the rehabilitation work, broken down

by category. These fees may be released at closing with

sufficient documentation (i.e., paid receipt for permits, bills

from an Architect or consultant, etc.), but cannot exceed the

accepted costs on the 203(k) Maximum Mortgage Worksheet, Form HUD

92700\. Show the cost allowed for each item, the amount of funds

disbursed and the balance remaining for each item in the account.

G. Final Accounting of the rehabilitation escrow account must be

made after the final inspection and final draw. Any amount

remaining in the categories listed above must be properly

disbursed to paydown the outstanding principal balance of the

mortgage where applicable. The final accounting should show the

payout of any holdback according to handbook procedures.

H. Interest on Escrow. Since the escrow funds must be placed in an

interest bearing account, the interest earned must be accounted

for and distributed to the borrower. Show the interest rate

provided on the escrow account. For each draw on the escrow

account, show the number of days in escrow and the amount of

money in the account. Also show the interest earned for the

applicable time period. List disbursements accordingly and the

balance of interest remaining in the account.

2\. REVISION TO FORM HUD 92700, 203(k) MAXIMUM MORTGAGE WORKSHEET.

Form HUD 92700, Section 203(k) Maximum Mortgage Worksheet (Attachment

1\) has been revised. In particular, the Discount Points on Refinance

in line D-3 was removed. This was placed on the form in error. The

only time discount points can be included in the mortgage is in line

B-12 (discount points on repair costs and fees) and D-1 (discount

points on refinance when existing debt is the controlling factor).

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Additional changes to the Form HUD 92700 have also been made to make

it easier to use with the sale of a HUD-owned home. The new form

should be used immediately to ensure compliance with program

procedures.

The value placed on Form HUD 92800.5B should be (1) for a purchase

transaction, line C-3 or (2) for a refinance transaction, the lesser

of line D-1 minus the closing costs and discount points or line D-2.

The lender should provide the Maximum Mortgage Worksheet to the Field

Office with information such as the contract sales price, amount of

discount points on the loan, estimated closing costs, how many

inspections are requested, title updates, and how many mortgage

payments will be escrowed. The Maximum Mortgage Worksheet must be

completed and signed by a HUD representative or the DE Underwriter and

attached to the Conditional Commitment/ DE Statement of Appraised

Value (Form HUD 92800.5B). Also, for the firm commitment (Form HUD

92900), the Maximum Mortgage Worksheet should be revised and attached

to the Firm Commitment. These forms must be carefully prepared to

ensure the rehabilitation escrow account is properly established and

the loan is properly closed by the lender. On the Mortgage Credit

Analysis Worksheet, Form HUD 92900-WS, lines 14a through 14d and

14f(1) and (2) will be left blank. For a purchase transaction, the

total acquisition costs (sum of C3 + C4 on Form HUD 92700) is placed

in line 14e; the maximum mortgage amount (line C5 on Form HUD 92700)

is put in line 14g.

3\. ALLOWABLE DISCOUNT POINTS. It has come to our attention that some

lenders processing Section 203(k) rehabilitation loans are

manipulating their discount fee structure to take advantage of the

program\'s feature permitting discount points on the rehabilitation

portion of the loan to be financed into the mortgage. Although

Handbook 4240.4 (para. 1-10.B) permits borrowers to include \"discounts

\... on that portion of the mortgage proceeds allocated to the

rehabilitation,\" it does not permit lenders to charge a higher

discount percentage on the rehabilitation portion (which may be

financed) as opposed to a lower discount on that portion of the

mortgage not attributable to rehabilitation (which may not be

financed).

HUD will not permit, for example, a lender to obtain a yield of two

\(2\) discount points on a \$100,000 loan by charging five (5) points on

the \$40,000 rehabilitation cost rather than applying discounts to the

entire mortgage amount. While the Department recognizes that the

seller of the property may be paying discount points (and only on that

portion attributable to the borrower\'s acquisition of the property),

the loan transaction may not allocate discount points to the

rehabilitation costs to simply reduce the borrower\'s cash

requirements.

Consequently, the number of discount points charged to repair costs

and fees (line B-12 of the Section 203(k) Maximum Mortgage Worksheet,

Form HUD 92700) may not exceed the number of discount points charged

to the non-rehabilitation portion of the mortgage. The borrower is

not obligated to include discount points on rehabilitation costs in

the loan, and can decide to pay all or part of the discount points.

The HUD-1 must show the amount of discount points to be paid

out-of-pocket by the borrower or seller, because the discounts on

rehabilitation are already included in the loan proceeds. The Firm

Commitment (Form HUD 92900) or the Addendum (For HUD 92900-A) must

show the total of all discount points allowed on the loan.

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Sales and financing concessions must be properly applied to reduce the

sales price or discount points prior to placing the allowable amounts

on the 203(k) Maximum Mortgage Worksheet, Form HUD 92700. See

Handbook 4155.1 REV-4 (para. 1-7B) for additional information.

4\. MAXIMUM MORTGAGE AMOUNTS ON SALES OF HUD-OWNED PROPERTIES.

When HUD\'s Property Disposition (PD) Branch decides to allow sales

incentives (e.g., prepaids for excessive property taxes) as part of

the mortgage, then Form HUD 92700 can be modified to reflect this

policy.

The award letter must clearly state which incentives are allowed. The

maximum mortgage is calculated based upon the sum of the sales price,

the cost of repairs, and any incentives the borrower is allowed to

include into the loan amount as stated in the award letter. If the

seller (HUD) pays part of the closing costs, the estimated closing

costs in C-4 should be reduced to reflect only those costs paid by the

borrower at closing. The downpayment requirements, as shown in the

HUD accepted sales contract, are then applied. The total mortgage

amount cannot exceed the local maximum loan limits.

The following hypothetical mortgage calculation (for a HUD-owned

properly only) for Form HUD 92700 is provided for your information:

C.1. Lesser of Sales Price (A1) or

As-is Value
(A2)\...\...\...\...\...\...\...\...\...\...\...\...\....\$63,000

(Use the sales price agreed to between the HUD PD Branch and

the purchaser of a HUD-owned property (shown in item 3, Sales

Contract, Form HUD 9548). No \"As-is\" appraisal is required on

a HUD-owned property sale)

C.2. Total Rehabilitation Cost
(B14)\...\...\...\...\...\...\...\...\....14,000

C.3. Lesser of Sum of C1 + C2 (\$77,000) or

110% of After-Improved Value (A4)\...\...\...\...\...\...\...\...77,000

C.4. Estimated Closing Costs (\$3,845 (A5) - 1,250 paid by HUD

(item 5, sales contract)) + Prepaids for Excessive

Property Taxes Required Upfront Prior

to Closing
(\$1,075)\...\...\...\...\...\...\...\...\...\...\...\...\...3,670

C.5. Maximum Mortgage Amount:

Sum of C3 + C4 (\$80,670) less \$500 (downpayment

shown on sales
contract)\...\...\...\...\...\...\...\...\...\...\...80,170

Maximum Mortgage Amount cannot exceed \$80,150, rounded down

to the nearest \$50. This amount cannot exceed the local

maximum loan limits.

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5\. PLAN REVIEWER CERTIFICATION. The following certification must be

completed prior to returning the exhibits to the lender or forwarding

them to the appraiser. The plan reviewer can certify on their own

letterhead or on the Draw Request, Form HUD 9746-A. The appraisal

cannot be made without this certification.

\"I certify that I have carefully inspected the property located at

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on \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_(date). I

have reviewed the attached architectural exhibits and the

estimated rehabilitation costs listed in column two below; they

are acceptable for the rehabilitation of this property. I have no

personal interest, present or prospective, in the property,

applicant, or proceeds of the mortgage. To the best of my

knowledge, I have reported all items requiring correction and that

the rehabilitation proposal now meets all HUD requirements for

203(k) Rehabilitation Mortgage Insurance.\"

6\. \"CASH BACK\" FROM REHABILITATION FUNDS. HUD Field Offices have
noticed

several cases where investors have received excessive \"cash back\" as a

result of over-estimating the rehabilitation costs.

Handbook 4240.4 REV-2 (para. 3-2.F.) discusses the use of cost data

publications from R.S. Means \"Repair and Remodeling Cost Data\" book

and the \"Home-Tech Remodeling and Renovation Cost Estimator.\" The

cost estimates include overhead and profit for a contractor or a

mortgagor doing their own work. Where the HUD Field Office has

determined that these cost estimating books are excessive for certain

localities in their jurisdiction, they now have the authority to

require further justification from borrowers to ensure the cost

estimates are reasonable. The Field Office will notify the 203(k)

lender and plan reviewer if additional information is required for a

particular case.

To guard against over-estimates of rehabilitation costs, the amount of

funds requested for a draw inspection cannot exceed the actual cost of

rehabilitation and/or the actual percent of completion of the

rehabilitation. On each draw, the mortgagor must certify the actual

costs and completion percentage for each line item used on the revised

Draw Request, Form HUD 9746-A (Attachment 2).

Where costs savings occur, the savings can be allocated to items that

have experienced cost overruns or to pay for additional improvements

to the property that are approved by a Change Order on Form HUD 92577.

The 10 percent holdback is still applicable on all draws. The

mortgagor can be paid for their own labor, where it was approved by

the lender prior to closing the loan. On the final draw:

A mortgagor acting as the general contractor can receive the

holdback and request an additional 10 percent for the cost of

administering the rehabilitation of the property, not to exceed

the estimated cost of rehabilitation. On any line item where the

borrower is doing their own work or has an \"identity of interest\"

with the contractor (or subcontractor), the additional cost of

administering the loan is not allowed, because the profit and

overhead is already their estimated cost of rehabilitation for

that line item. Any remaining cost savings must be applied to the

mortgage principal. For an investor/builder who is using the

Escrow Commitment Procedure, the cost savings will

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be added to the escrow amount that is held by the lender for

release when an acceptable owner-occupant assumes the loan.

Cost savings that are not used must be applied to prepay the mortgage

principal to create greater equity in the property for the investor.

For the investor/builder using the Escrow Commitment Procedure, the

cost savings will be added to the escrow amount that is held by the

lender for release when an acceptable owner-occupant assumes the loan.

The Draw Request, Form HUD 9476-A (Attachment 2), is being revised to

include a certification of actual costs. Columns 4 and 5 cannot

exceed the actual cost of rehabilitation. The columns should show

the percentage for the completion of construction. In column 6, the

inspector will verify the percentage of completion and approve an

amount no greater than that percentage, and no greater than what is

requested. The following certification must be provided prior to the

release of any inspection draws:

\"I hereby certify that the actual costs of rehabilitation are as

shown on the Draw Request, Form HUD 9746-A. I

understand I cannot obtain additional monies from the

rehabilitation account without the approval of the

lender. After the final inspection, the monies in the

escrow account will be distributed as required by the

203(k) program procedures.\"

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Mortgagor\'s signature Date

Lenders are responsible to assure the mortgagor certifies to the

actual cost of rehabilitation on each draw request. Although the

mortgagor is not required to submit documentation to substantiate the

actual cost, the lender may request such documentation where there is

a question as to the validity of the amounts.

7\. SECONDARY LENDERS. The volume of 203(k) activity continues to

increase. In fiscal year 1988, the Department issued Mortgage

Insurance Certificates (MIC) on 432 loans. In fiscal year 1992, which

ends September 30th, the activity has increased to about 3000

mortgages. The reason for the increase is attributed to more lenders

processing 203(k) insured loans.

The Department continues to get calls from originating lenders

requesting information about which secondary lenders buy 203(k)

insured loans. A list of secondary lenders that have indicated an

interest in purchasing Section 203(k) insured mortgages is attached as

Exhibit 4 to this letter. If other lenders would like to be added to

the list, please contact Kenneth Crandall of my staff at the telephone

number listed below.

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If you have any questions concerning this letter, please call your

local HUD Office or the Valuation and Technical Support Branch in

Headquarters at (202) 708-2720.

Very sincerely yours,

Arthur J. Hill

Assistant Secretary of Housing

\- Federal Housing Commissioner

Attachments

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203(k) SECONDARY LENDERS

(September 1, 1992)

1\. Broadview Mortgage (Ohio Lenders Only)

965 High Street

Columbus, OH 43215

Contact: Lenny Zangardi (614) 436-2008

2\. Federal Savings Bank and Mortgage

2800 Cantrell Road, Suite 500

Little Rock, AR 72202

Contact: Dennis Mills (501) 280-3500

\(800\) 395-6001

3\. Liberty Mortgage Company

473 E. Rich Street

Columbus, OH 43215

Contact: Vickie Harmon (614) 224-4000

4\. MLA, Incorporated

24315 Northwestern Highway

Southfield, MI 48075

Contact: Jack Goodman (800) 877-2130

Jim Milliken (800) 366-6522

5\. Simmons First Mortgage Company

11101 Anderson Drive

Little Rock, AR 72212

Contact: Renee White (501) 223-4200

\(800\) 847-0058

6\. Miami Valley Bank

P.O. Box 5000

Lakeview, OH 43331-5000

Contact: Bill Gibson (513) 843-4000

7\. Malone Mortgage Corporation

8214 Westchester, Suite 606

Dallas, TX 75225

Contact: Ron Evans (214) 696-0386

8\. Statewide Funding Corporation

P.O. Box 390

Clifton Park, NY 12065

Contact: Jane King (518) 877-3500

\(800\) 755-5851

\(800\) 726-5626

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Attachment 1

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203(K) Maximum Mortgage

Worksheet

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ref: Handbook 4240.4 form HUD-927000 (09/09/92)

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Draw Request

Section 203(K)

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