![](media/image1.png){width="0.9583333333333334in"
height="0.9166666666666666in"}

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

WASHINGTON, D. C. 20410-8000

February 5, 1988

OFFICE OF THE ASSISTANT SECRETARY FOR

HOUSING-FEDERAL HOUSING COMMISSIONER

**Mortgagee Letter 88-2**

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Implementation of the Housing and Community Development Act

of 1987 - Single Family Provisions

The purpose of this letter is to advise you of the significant

changes to the FHA Single Family insurance programs brought about by

the Housing and Community Development Act of 1987 (1987 Act). These

changes are discussed under their respective headings below and are

effective as of the date of the signing of the 1987 Act, February 5,

1988, unless otherwise stated.

Permanent Insurance Authority

The 1987 Act provides the Department with permanent insurance

authority for all of the single family programs except the Section

235 program which has not received new budget authority for several

years. Consequently, so long as the FHA programs are operating

within budgeted credit ceilings, we will no longer be hampered by the

loss of insuring authority at the end of the fiscal year or at the

expiration of short extensions of insuring authority pending the

passage of a new budget. We can now look forward to greater

continuity in our insuring operations. (The 1987 Act terminates our

authority to insure new mortgages under the Selection 235 Program as

of October 1, 1989.)

Mortgage Limits

While the 1987 Act did not change the basic mortgage limit for a

one unit property (\$67,500), it did increase the maximum ceiling to

which this limit may be raised in high cost areas from \$90,000 to

\$101,250. The new ceiling for a one unit property is now 150 percent

of \$67,500 or \$101,250. Henceforth, for high cost areas which

qualify for the new ceiling, the mortgage limits for one-, two-,

three-, and four-unit properties insured under Sections 203(b) and

234(c) will be the lesser of the following:

Percentage of Median Price

Units Ceiling of one-unit Properties in Area

1 \$101,250 95%

2 \$114,000 107%

3 \$138,000 130%

4 \$160,500 150%

For Alaska, Hawaii, and Guam the ceiling for one to four unit

properties could be raised by an additional one-half of the amounts

under \"Ceiling\" above. The 1987 Act also defines the term \"area\" as

used in this connection to mean a county or a Metropolitan

Statistical Area (MSA) as established by the Office of Management and

Budget, whichever results in the higher dollar amount.

HUD will amend its regulations to permit the increase to 150

percent of the basic mortgage limit in high cost areas. Until the

regulations are amended, HUD intends to use its authority to waive

the regulatory requirements not required by statute in individual

cases. The current regulations which limit the increase to 133-1/3

percent will be waived in each case where an increase over 133-1/3

percent is justified. The decision to exceed the limit in the

regulations will be made for each area using the methodology

described in this letter.

Although the ceiling has been increased from \$90,000 to

\$101,250, you are cautioned that this does not mean that all areas at

the current \$90,000 ceiling will automatically be raised to

\$101,250. Likewise, the mortgage limits for Alaska, Hawaii, and Guam

will not be automatically increased to the higher ceilings allowed

these areas. As described below, we will be using our own data

sources to increase the limits, where justified, to 95 percent of the

median price or \$101,250 (\$151,875 for Alaska, Hawaii, and Guam),

whichever is lower.

It has been HUD\'s recent practice to increase mortgage limits

only in response to appeals developed and supported by sales price

data in accordance with Mortgagee Letter 86-16. In order to better

respond to the expectations generated by the 1987 Act, we plan to

develop and publish as soon as possible a revised listing of high

cost areas using data currently available to us. This data is

organized by MSA and, therefore, this initial round of mortgage

limit increases will be for MSAs only, unless, by chance, we have

sales price data for an individual county supporting an increase. No

area will have its mortgage limits reduced. These new mortgage

limits will not be effective until published in the Federal Register.

Once they are published, we will notify all approved mortgagees of

the new limits. We anticipate the process will be complete within

the next 30 days.

After HUD has published this revision, it will consider any

appeal for further increases that may be submitted by those doing

business in areas for which the mortgage limit is not yet at the

\$101,250 level (or the higher limit permitted for Alaska, Hawaii and

Guam) for a one unit property and could justifiably be increased.

These appeals can include individual counties within MSAs as set

forth in the 1987 Act.

Adjustable Rate Mortgagee (ARMs)

Formerly the number of ARMs that FHA could insure was limited to

10 percent of the total number of endorsements for the previous

fiscal year. The 1987 Act raises this limit to 30 percent. Since

over 1.4 million single family mortgages were endorsed in FY 1987, we

have statutory authority in FY 1988 to insure 420,000 ARMs. The old

10 percent limit will be deleted from the regulation.

Refinancing Section 245 Graduated Payment Mortgages

Section 245 mortgages are now eligible under the statute to be

refinanced under the streamline refinance procedure without an

appraisal. The procedure will be identical to Section 203(b); i.e.,

the starting point will be the current unpaid principal balance,

which would include any negative amortization which has occurred.

However, the 1987 Act does require that the amount of the monthly

payment due under the refinancing mortgage be less than that due

under the existing mortgage for the month in which the refinancing

mortgage is executed. This should benefit numerous mortgagors in

areas where property values may have declined or not increased in the

last few years.

Investor Mortgagors

The loan-to value ratio for investor mortgagors has been reduced

to 75 percent, except for Section 203(k), a few minor special cases

and HUD\'s Property Disposition sales. (The loan-to-value ratio for

Section 203(k) investor mortgagors shall continue to be 85 percent.)

A mortgagor is considered an investor if the property in question is

not a primary or secondary residence. Previous instructions limiting

the loan-to-value ratio on secondary residences to 85 percent remain

in effect.

This new 75 percent loan-to-value ratio is effective for all

transactions involving a HUD conditional commitment, HUD Master

Conditional Commitment, VA Certificate of Reasonable Value or Master

Certificate of Reasonable Value issued, or an appraisal or Master

Appraisal signed by a Direct Endorsement Underwriter, on or after the

date of enactment of the 1987 Act, February 5, 1988.

An investor that assumes a high ratio mortgage originated by an

owner occupant pursuant to a HUD conditional commitment issued, or an

appraisal signed by a Direct Endorsement Underwriter, on or after

the date of enactment of the 1987 Act must pay down the outstanding

mortgage balance to a 75 percent loan-to-value ratio, if the selling

mortgagor is being released by the mortgagee from personal liability

on the mortgage note. This requirement continues throughout the term

of the mortgage. The original appraised value of the property should

be used in determining the loan-to-value ratio. See the following

section.

New Assumption Policy

Our current assumption requirements have been changed by the

1987 Act. Therefore, the instructions contained in Mortgagee Letter

[86-15]{.underline} , dated August 8, 1986, page 7, item 7, paragraphs
1, 2, and 3

pertaining to assumptions are modified as follows:

For all mortgages that were endorsed on or after December 1,

1986, HUD now requires a review of the creditworthiness of each

person that seeks to assume an FHA-insured mortgage:

\(1\) during the first 12 months after endorsement of the

mortgage if the original mortgagor was an owner-occupant,

or

\(2\) during the first 24 months after endorsement of the

mortgage if the original mortgagor was an investor.

Note that these provisions apply only during the first 12 and 24

months, respectively, of the term of the mortgage and are not

required during the remaining term of the mortgage.

The processing procedures for requesting creditworthiness

approval, as stated in [Mortgagee Letter 86-15]{.underline} , item 7,
pages 8-11,

remain the same.

Failure to satisfy these conditions will be grounds for

acceleration of the mortgage, subject in each case to HUD approval.

These new assumption provisions must be made a part of the

mortgage (or, where applicable, deed of trust or security deed),

either by incorporation into the form itself (initialed by the

mortgagor) or by rider, signed by the mortgagor.

The new provisions must read as follows:

The mortgagee shall, with the prior approval of the Federal

Housing Commissioner, or his designee, declare all sums secured

by this mortgage to be immediately due and payable if all or a

part of the property is sold or otherwise transferred (other

than by devise, descent or operation of law) by the mortgagor,

pursuant to a contract of sale executed not later than 12 months

after the date on which the mortgage is endorsed for insurance,

to a purchaser whose credit has not been approved in accordance

with the requirements of the Commissioner. (If the property is

not the principal or secondary residence of the mortgagor, \"24

months\" must be substituted for \"12 months. )

These new assumption provisions, like the current assumption

provisions, apply to purchasers who take title to property subject to

the mortgage without assuming personal liability for the debt as well

as to those purchasers who assume and agree to pay the mortgage debt

thereby becoming personally liable for it.

Mortgages which contain the assumption provisions required by

Mortgagee Letter [86-15]{.underline} are adequate to enable the new
assumption

policy to be followed and do not need to be modified. The

aforementioned assumption policy is not applicable to those mortgages

closed prior to December 1, 1986, but endorsed on or after December

1, 1986, since they do not contain provisions on assumptions which

require the creditworthiness review. Likewise, for mortgages

endorsed prior to December 1, 1986, these new assumption requirements

do not come into play. Such mortgages are freely assumable.

Notice to Homeowners Considering Sale by Assumption

Effective immediately, all mortgagors must be provided with a

Notice (attached) on or before the date of settlement advising them

of the procedures for requesting the lender to release them from

liability (FHA Form 2210.1 Approval of Purchaser and Release of

Seller). For the purposes of these procedures, the use of the word

\"assumptor(s)\" below refers to purchasers who assume and agree to pay

the mortgage debt and thereby become personally liable for it.

If a homeowner does not choose to request a release of liability

from the lender or the lender refuses to provide the release, the

homeowner and the assumptor will remain liable, individually and

jointly, for any default for a period of 5 years following the

assumption. Upon expiration of the 5 year period, only the assumptor

shall be liable for any default on the mortgage unless the mortgage

is in default at the time of the expiration of the 5 years.

In the case of a series of assumptors, various intervening

mortgagors between the original and current owners may request and

receive a release from liability from the lender (FHA Form 2210.1).

However, the original and intervening mortgagors that are not

released by the lender will be held liable until their 5 year

liability period expires.

Lenders must ensure that the original mortgagors receive the

Notice on or before the date of settlement. A copy of the signed

Notice should be placed in the original file.

For mortgages endorsed on or after December 1, 1986, and prior

to the effective date of the 1987 Act, a Notice must be sent to

the original mortgagor by the servicing lender when the servicer

learns that the mortgage will be assumed or has been assumed. A

notation of the mailing must be retained in the servicing file.

Prohibition of Requirement of Minimum Principal Loan Amounts

Lenders may not require, as a condition of providing an FHA

insured loan, that the principal amount of the loan exceed a minimum

amount established by the lender. If it comes to HUD\'s attention

that a lender has established a pattern of violating this

prohibition, HUD will take appropriate administrative measures to

sanction that lender, including, possibly withdrawing the lender\'s

HUD approval.

Equity Skimming

The 1987 Act amends Section 912 of the Housing and Urban

Development Act of 1970 by (1) including condominiums and

cooperatives in the class of one-to four-family dwellings covered by

the equity skimming statute; (2) indicating that a party guilty of

equity skimming (\"the purchaser\") need not be formally obligated on

the loan documents; and (3) expanding the maximum penalty from a

\$5,000 fine and three years imprisonment to a \$250,000 fine and five

years imprisonment.

The 1987 Act also amends Title II of the National Housing Act to

state that the applicability of the equity skimming penalty extends

to Single and Multi-Family mortgage notes insured, acquired or held

by the Secretary. The 1987 Act defines the persons subject to the

law as well as the activity of diverting rent and other proceeds from

application toward payment of the mortgage note. It, too, increases

the maximum penalty from three to five years imprisonment, and from

\$5,000 to \$250,000 in fines for this activity.

Since Section 912 was approved in 1970, the Department has grown

even more concerned over continued reports of equity skimming by

unscrupulous \"purchasers.\" The 1987 Act evidences this concern by

significantly increasing the penalties a guilty party can be made to

pay, as well as by enhancing the enforceability of the equity

skimming statute by plugging loopholes with more precise definitions

of the offenders and their prohibited activities.

This Mortgagee Letter address only those portions of the 1987

Act that concern the FHA Single Family insurance program which could

be implemented promptly or which were self-implementing. Steps will

be taken to implement other sections of the 1987 Act at a later

date.

Sincerely yours,

Thomas T. Demery

Assistant Secretary

Attachment

Notice to Homeowner

Assumption of HUD/FHA-Insured Mortgages

You are legally obligated to make the monthly payments required

by your mortgage (deed of trust) and promissory note.

If you sell your home by letting a purchaser assume your

mortgage, you are still liable for the mortgage debt unless you

obtain a release of liability from your mortgage lender. You may

obtain a release of liability by having the credit of your purchaser

approved by HUD/FHA or your lender and having your lender complete

FHA Form 2210.1 - \"Approval of Purchaser and Release of Seller.\"

If you sell your property but do not obtain a release of

liability and if the purchaser assumes responsibility for the debt

rather than merely taking title subject to the mortgage, then both

you and the purchaser of your property will be liable, both

individually and jointly, for any default for a period of 5 years

following the date of assumption. After 5 years, only the purchaser

will remain liable unless the mortgage is in default at the time the

5 year period expires. If the purchaser takes title subject to

the mortgage without assuming personal liability for the debt, you

will remain liable for the full term of the loan.

If you wish to pursue being released from liability, you should

get in touch with your mortgage lender.

Questions concerning your release of liability should be

directed to your mortgage lender or you should get in touch with the

Housing Management Staff of your local HUD office. Your lender can

provide you with the address of your local HUD office.

You must sign and date this Notice as indicated, return one copy

to your lender as proof of notification and keep one copy for your

records.

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

Date Mortgagor

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

Co-Mortgagor

Instruction to Lender: A copy of this Notice must be given to the

mortgagor(s) on or before the date of

settlement. You should retain a signed copy

in the origination file.