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

WASHINGTON, D. C. 20410-8000

December 26, 1989

OFFICE OF THE ASSISTANT SECRETARY FOR

HOUSING-FEDERAL HOUSING COMMISSIONER

**Mortgagee Letter 89-31**

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Single Family Loan Production - Implementation

of Certain Provisions of the \"Department of Housing and

Urban Development Reform Act of 1989\"

The purpose of this letter is to inform mortgagees about

certain changes to the Single Family Mortgage Insurance programs that

must be made as a result of passage of the Department of Housing and

Urban Development Reform act of 1989 (1989 Act) that was recently

passed by the Congress and signed by the President on December 15,

1989\. According to the legislation, certain changes were effective

the date the President signed it into law and these changes are as

follows:

I. Elimination of private investors.

A. Private investors are no longer eligible for

insured mortgages under any of HUD\'s Single Family

Mortgage Insurance programs (except as set forth

under paragraphs B, D and G below). The ban on

private investors is effective for mortgages

insured:

1\. pursuant to a conditional commitment or master

conditional commitment issued by HUD on or

after December 15, 1989; or

2\. pursuant to an appraisal report or master

appraisal report signed by a Direct

Endorsement underwriter on or after

December 15, 1989; or

3\. pursuant to a certificate of reasonable value

or master certificate of reasonable value

issued by the Department of Veterans Affairs

on or after December 15, 1989.

Investors that are State or local government

agencies or instrumentalities thereof and nonprofit

organizations that intend to sell or lease the

mortgaged property to low or moderate income

persons (income does not exceed 115 percent of the

applicable median family income as provided in

Section 143(f) and (i)(2) of the Internal Revenue

Code) remain eligible for insured financing. The

nonprofit organization must be of the type

described in Section 5O1(c)(3) of the Internal

Revenue Code of 1986 as an organization exempt

under Section 501(a), have two years experience as

a provider of housing for low and moderate income

persons, have a voluntary board and no part of the

net earnings of the organization may inure to the

benefit of any member, founder, contributor or

individual. The underwriting requirements set

forth in HUD Handbook 4155.1 REV-2 remain

applicable to these investor applications, except

that a lease for the subject units(s) will no

longer be required and the maximum loan-to-value

ratio may be up to the amount available for an

owner-occupied principal residence.

Investor applications involving State and local

government agencies may be processed by Direct

Endorsement (DE) lenders. Applications involving

non-profit organizations cannot be processed by DE

lenders and must be processed by HUD.

B. Exception for Section 203(k) and the sale of HUD-

owned properties.

The ban on private investors does not apply to

mortgages insured under Section 203(k), HUD\'s

Rehabilitation Mortgage Insurance program. Private

investors are eligible for up to 85 percent loan-

to-value insured financing under this program.

State or local government agencies and nonprofit

organizations that meet the criteria set forth in

paragraph A, above, are eligible for maximum

loan-to-value financing up to the amount available

for an owner-occupied principal residence.

The ban on private investors also does not apply to

HUD-owned property being sold under our Single

Family Property Disposition program. HUD will

continue to insure mortgages for private investors

that purchase HUD-owned property, but the maximum

loan-to-value ratio will be 75 percent for one

family dwellings. The loan-to-value ratio for two

to four family dwellings will be 85 percent.

(These loan-to-value ratios do not apply to sales

contracts for HUD-owned property signed before

December 15, 1989.)

C. Assumptions of mortgages.

The ban on private investors applies to persons

that seek to assume insured mortgages that were

subject to the restrictions of the 1989 Act (see

paragraphs IAl, 2 and 3, above), including the

purchase of property subject to such mortgages. The

ban applies whether or not there is a release of

liability by the lender of the selling mortgagor.

Lenders will determine whether this ban on private

investors applies before performing the required

credit review set forth in paragraph II, below.

Please note that the ban on assumptions by

investors applies only to mortgages that are

subject to the restrictions of the 1989 Act (see

paragraph IA1, 2, and 3, above). Mortgages that

are already insured may be assumed by investors

under the provisions of Mortgagee Letters
[[86-15]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=MLET&s1=86-15%5Bno%5D&SECT1=TXTHLB&SECT5=MLET&u=./hudclips.cgi&p=1&r=1&f=G)
,

88-2, 89-5, 89-6 and 89-27.

D. Streamline refinances.

An investor that has a current mortgage insured

prior to the 1989 Act is eligible to refinance the

mortgage under HUD\'s \"streamline refinance without

appraisal\" procedure. Refinancing these mortgages

reduces HUD\'s risk and is not affected by the ban

on investors in the 1989 Act.

E. Secondary residences.

We expect that some unscrupulous persons may

attempt to circumvent the ban on private investors

by asserting that they are purchasing \"secondary\"

residences. Lenders must closely review

applications for insured mortgages on secondary

residences to be sure that the applicant intends to

be the occupant of the property and is not actually

purchasing the property for investment purposes.

Lenders are further reminded that a mortgagor can

have only one secondary residence and that the

maximum loan-to-value ratio is 85 percent.

F. Condominium units.

The requirement that no more than 20 percent of all

HUD-insured mortgages in a condominium project be

to investors is unchanged by the new legislation.

Because investor mortgages can still be insured for

public agencies and non-profits, Direct Endorsement

lenders must continue to contact the HUD Field

Office to register these transactions so that the

Field Office can monitor the owner-occupancy

requirements.

G. Other exceptions.

The ban on private investors does not apply to an

Indian tribe, as provided in Section 248 or a

service person who is unable to occupy the property

because of his or her duty assignment, as provided

in Section 216 or subsection (b)(4) or (f) of

Section 222.

II\. Creditworthiness reviews of persons assuming insured

mortgages.

Any person that assumes an insured mortgage that is

subject to the restrictions of the 1989 Act (see

paragraphs IAl, 2 and 3, above), must be found

creditworthy by HUD or a Direct Endorsement lender.

This creditworthiness review must be performed in

accordance with HUD mortgage credit policies (see

Handbook 4155.1 REV-2 and Mortgagee Letters 86-15 and

87-5) including the screening of the applicant in HUD\'s

Credit Alert Interactive Voice Response System and must

include the following documentation:

1\. HUD Application for Commitment for Insurance, Form

HUD 92900.

2\. Mortgage Credit Analysis Worksheet, Form HUD

929OOWS.

3\. Picture identification and evidence of social

security number.

4\. Residential Mortgage Credit Report.

5\. Verification of Employment.

6\. Recent pay stub.

7\. Verification of Deposit.

8\. Recent bank statement.

9\. Copy of sales contract and any other agreements

pertinent to the transaction, including agreements

that involve subordinate financing.

10\. Real estate certification signed by buyer, seller

and selling real estate agent or broker.

11\. Explanatory statements, as necessary, to clarify

the above information.

If the assumptor obtains a current, as is, appraisal

performed by a HUD fee appraiser or DE staff appraiser

showing that the present loan to value ratio for the

property and the insured mortgage is 75 percent or less,

the applicant(s) must be screened through HUD\'s

Credit Alert Interactive Voice Response System, but HUD

will allow the lender to use alternate and reduced

documentation to speed processing. In these cases, the

documentation requirements will be:

1\. HUD Application for Commitment for Insurance, Form

HUD 92900.

2\. Mortgage Credit Analysis Worksheet, Form HUD

929O0WS.

3\. Picture identification and evidence of social

security number.

4\. In-file credit report that accesses at least one

national repository.

5\. Recent pay stub that shows gross earnings for the

pay period and year to date earnings.

6\. Recent bank statement.

7\. Copy of sales contract and any other agreements

pertinent to the transaction, including agreements

that involve subordinate financing.

8\. Real estate certification signed by buyer, seller,

and selling real estate agent or broker.

9\. Explanatory statements, as necessary, to clarify

the above information.

The lender must analyze the borrower\'s ability and

willingness to pay the mortgage on the basis of the

above documentation. The lender must analyze the

borrower\'s credit characteristics, adequacy of income

and adequacy of available assets to close the

transaction. Stability of income need not be analyzed

because there is no verification of employment.

Therefore, Box 17 of Form HUD 929OOWS may be left

blank.

HUD will allow lenders to collect up to \$500 for

processing assumptions that are subject to the

restrictions of the 1989 Act.

The requirement for creditworthiness review extends for

the life of the mortgage.

III\. New Mortgage Provision

So that lenders can enforce the ban on investors and the

creditworthiness review requirements, the appropriate

following provision must be inserted in the security

instrument (mortgage, deed of trust or security deed)

for all insured mortgages that are subject to the

restrictions of the 1989 Act (see paragraphs IA 1, 2 and

3, above):

Use with HUD-approved mortgage forms.

The mortgagee shall, if permitted by applicable law

and with the prior approval of the Federal Housing

Commissioner, or his or her designee, declare all

sums secured by this mortgage to be immediately due

and payable if all or part of the property is sold

or otherwise transferred (other than by devise or

descent) to a purchaser or grantee who does not

occupy the property as his or her principal or

secondary residence, or to a purchaser or grantee

who does so occupy the property but whose credit has

not been approved in accordance with the

requirements of the Commissioner.

Use with mortgage forms developed under new

requirements.

9(b) Sale Without Credit Approval.

Lender shall, if permitted by applicable law and

with the prior approval of the Secretary, require

immediate payment in full of all the sums secured by

this Security Instrument if:

(i ) All or part of the Property is otherwise

transferred (other than by devise or descent) by the

Borrower, and

\(ii\) The Property is not occupied by the purchaser

or grantee as his or her primary or secondary

residence, or the purchaser or grantee does so

occupy the Property but his or her credit has not

been approved in accordance with the requirements of

the Secretary.

The appropriate provision should be used instead of the

language required by Mortgagee Letter 89-6 (for HUD

approved forms), or instead of Paragraph 9(b) of the

Model Mortgage Form attached to Mortgagee Letter 89-23

(for forms developed under the new requirements). The

provision must be made a part of the security

instrument, either by incorporation into the form itself

or by rider signed by the mortgagor. The new language

is not required for Home Equity Conversion mortgages.

The exception in the previous assumption provisions for

transfer by \"devise, descent or operation of law\" is now

limited to \"devise or descent\" to reflect the language

in the new law. The new provisions expressly recognize

that they may be exercised only \"if permitted by

applicable law.\" Currently, exercise of due on sale

clauses is also limited in certain circumstances by

Section 341(d) of the Garn-St Germain Depository

Institutions Act of 1982 and the implementing

regulations at 12 CFR Part 591.

The new provisions are broad enough to prevent all

assumptions by investors of mortgages subject to the

restrictions of the 1989 Act, but HUD does not intend to

approve exercise of the provisions in cases where

investor financing is still allowed as described in

paragraphs IA, lB, ID and IG, above, if the assumptor

is found to be creditworthy.

IV\. Extension of reciprocity in the approval of

subdivisions.

The 1989 Act has extended the reciprocity of acceptance

by HUD of a Certificate of Reasonable Value (CRV) or

Master Certificate of Reasonable Value (MCRV) as

evidence of subdivision approval. The provisions of

Mortgagee Letters 89-1 and 89-9 remain in effect.

V. Appraisal standards.

The 1989 Act mandates that HUD appraisals be prepared by

state licensed or certified appraisers. Accordingly, in

states that have licensing or certification

requirements, all fee appraisers and DE staff appraisers

must meet such requirements within time frames to be

prescribed by each local HUD office.

The local HUD Office will be guided by the requirements

of the licensing laws within each state.

VI\. Title X Land Development Mortgage Insurance Program.

The Title X program has been repealed. No mortgage may

be insured under this program except pursuant to a firm

commitment issued prior to June 29, 1989.

VII\. Refinancing Section 235 mortgages.

The 1989 Act authorizes HUD to insure refinance

mortgages under the Section 235 interest subsidy program

to reduce HUD\'s subsidy payments. Lenders will receive

further information about this refinance program in the

near future.

If you have any questions concerning this letter please

contact your local HUD Office or the Single Family Development

Division in HUD Headquarters at (202) 755-6700.

Very sincerely yours,

C. Austin Fitts

Assistant Secretary for Housing-

Federal Housing Commissioner