CHAPTER 6. MORTGAGE CREDIT PROCESSING

6-1. INTRODUCTION. Mortgage Credit Processing will begin at

the firm commitment stage and involves: credit

investigation; analysis of the acceptability of the

sponsorship; determining the amount and amortization

period of the loan; evaluation of the mortgagor\'s ability

to close the loan transaction, the mortgagor\'s cost

certification and the mortgagor\'s ability to liquidate the

mortgage debt and successfully operate the project.

Mortgage Credit procedures and analyses are to be

completed in accordance with HUD Handbook 4470.1, Mortgage

Credit Analysis for Project Mortgage Insurance, Section

207, except as modified herein.

6-2. MORTGAGE AMOUNT. Analysis of the credit risk is premised

upon a loan for a definite amount and amortization period

subject to the following limitations:

a\. Principal Obligation. The mortgage will involve a

principal obligation in an even multiple of 100.

b\. Amount of Loan in a Purchase Transaction. The subject

loan will be the lesser of:

\(1\) An amount not to exceed 85 percent of the

Secretary\'s estimate of value of the project.

\(2\) The maximum per unit limitation for new

construction under Section 207 of the Act plus

cost not attributable to dwelling space.

\(3\) An amount which entails a debt service not in

excess of 85 percent of the net annual income as

estimated by the Secretary.

\(4\) Eighty-five percent of the amount required to

acquire the property, as determined by the

Secretary. For purposes of this section, the

cost of acquisition is defined as the sum of the

following:

\(a\) Purchase price as indicated in the purchase

agreement and determined allowable by the

Secretary.

\(b\) The estimate of repair cost, if any, as

determined by the Secretary, provided such

costs will be borne by the purchaser and are

not included in the purchase price.

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\(c\) The sum of the amounts attributable to

financing, legal, organizational, and title

and recording expenses which the mortgagor

is required to pay and which the Secretary

determines are reasonable.

\(d\) Discounts as determined eligible by the

Secretary provided they are paid by the

purchaser.

\(e\) The amount as determined by the Secretary

for the initial deposit to the Reserve Fund

for Replacements, provided such deposit will

be funded by the purchaser.

\(f\) Architect\'s fees, mechanical engineering

fees, and municipal inspection fees, as may

be determined eligible by the Secretary.

c\. Amount of Loan in a Refinancing Transaction. The

subject loan will be the lesser of:

\(1\) An amount not to exceed 85 percent of the

Secretary\'s estimate of value of the project.

\(2\) The maximum per unit limitation for new

construction under Section 207 of the Act plus

cost not attributable to dwelling space.

\(3\) An amount which entails a debt service not in

excess of 85 percent of the net annual income as

estimated by the Secretary.

\(4\) An amount which equals the greater of the

following:

\(a\) 70% of the Secretary\'s estimate of the value

of the project, or

\(b\) The cost to refinance the project. For

purposes of this section, the cost to

refinance is defined as the sum of the

following:

1 The amount required to pay off the

existing indebtedness as determined

eligible by the Secretary.

2 The amount as determined by the Secretary

for the initial deposit to the Reserve

Fund for Replacements.

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4565.1 CHG

(6-2) 3 The sum of the amounts attributable to

financing charges, legal and

organizational, and title and recording

expenses which the mortgagor is required to

pay and which the Secretary determines are

reasonable.

4 The estimate of repair cost, if any, as

determined by the Secretary.

5 Discounts as determined eligible by the

Secretary.

6 Architect\'s fees, mechanical engineering

fees and municipal inspection fees, as may

be deter-: mined eligible by the Secretary.

\* NOTE: Any fees, discounts or other amounts

paid by the seller for or on behalf of the

purchaser must be reflected as a reduction to

the acquisition cost.\*

d\. Determining the Maximum Insurable Mortgage in a

Refinancing Transaction.

\(1\) For the purpose of determining the maximum

insurable mortgage in a refinancing transaction

under Section 223(f) of the Act, existing

indebtedness is defined to be:

\(a\) The outstanding mortgage(s) incurred in

connection\' with the construction of the

project or with capital improvements made to

the property as confirmed by the mortgagee,

using the pay-off letter which appears in

Exhibit V of this Handbook, and other

recorded indebtedness such as mechanics\' and

tax liens. The tax liens must be for a

project indebtedness rather than for an

indebtedness against the property arising

from a personal obligation of the mortgagor.

\(b\) Some unrecorded indebtednesses, such as,

delinquent interest, indebtedness incurred in

making significant betterments to the

property subsequent to the initial

completion of the project, prepayment

penalties, etc. If the indebtedness is not

recorded, the mortgagor must provide the

field office with documentation which

unquestionably identifies the indebtedness

with the project.

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4565.1 CHG

(6-2) (c) The outstanding indebtedness when

an open line of credit is used in

the construction of a project. In

such cases, a cost certification

prepared by a certified public

accountant and submitted on Form

FHA-2330 and Form FHA-2330A in the

manner prescribed in outstanding

HUD instructions must accompany the

application for insurance. The cost

certification shall not be reviewed

in the same manner as those

submitted under HUD\'s other insured

loans program but shall be accepted

as verification of the actual

construction costs which will be

eligible for re-financing. The

lending institution must verify the

amount of the outstanding

indebtedness on the line of credit

and identify that portion which is

attributable to the project.

\(2\) In some instances, it shall not be

appropriate to recognize the total

indebtedness in establishing the maximum

mortgage amount. For example, if a

second trust has been created shortly

before the application for mortgage

insurance was filed and runs to an

identity of interest party, there is a

strong presumption that such debt was

created merely for the purpose of

securing a larger insured loan to enable

the owner to recapture equity out of

mortgage proceeds. In any such case,

the amount of the existing indebtedness

shall not include the second trust

unless it can be proven that such trust

was essential to the project.

\(3\) Any recent indebtedness placed against

the property whether or not an identity

of interest party is involved must be

closely investigated. If it appears

that any such indebtedness was placed

against the project in an effort to

increase the mortgage or to circumvent

outstanding instructions, then it shall

not be considered existing indebtedness

for the purpose of determining the

maximum insurable mortgage.

e\. Amount of Loan in Older, Declining

Neighborhoods. The subject loan shall be as

follows:

\(1\) In a purchase transaction the amount of

the loan shall be determined in

accordance with Paragraph-6-2b above.

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\(2\) In a refinancing transaction the amount of the

loan shall be the lesser of:

\(a\) An amount not to exceed 85 percent of the

Secretary\'s estimate of value of the

project.

\(b\) The maximum per unit limitation for new

construction under Section 207 of the Act

plus cost not attributable to dwelling

space.

\(c\) An amount which entails a debt service not

in excess of 85 percent of the net annual

income as estimate by the Secretary.

\(d\) The cost to refinance the project as defined

in Paragraph 6-2c(4)(b) above.

6-3. TERM OF MORTGAGE AND COMMENCEMENT OF AMORTIZATION.

a\. The term of the mortgage shall not be less than 10

years, nor shall it exceed the lesser of 35 years or

75 percent of the estimated remaining economic life of

the physical improvements. Accordingly, the mortgage

term shall be the eligible number of whole years

between 10 and 35. Any fraction of a year shall be

disregarded.

b\. Amortization shall commence on the first day of the

second month following the date of the initial/final

endorsement of the mortgage for insurance under the

LAMP Plan.

6-4. IDENTITY OF INTEREST. In purchase transactions where

there is a change in the ownership of existing property

incident to the filing of the application for a

commitment, a determination must be made as to whether any

identity of interest exists between the seller and the

purchaser. If there is any identity of interest,

regardless of how slight, the application shall be

processed as a refinancing transaction. (See Paragraph

6-2c for criteria.) The amount used as existing

indebtedness shall be the allowable amount of the

indebtedness on the property existing prior to the change

in ownership.

6-5. DETERMINATION OF THE MAXIMUM INSURABLE MORTGAGE AMOUNT.

The maximum insurable mortgage amount shall be established

subject to the limitations in Paragraphs 6-2b, c, d, and e

above. This shall be accomplished by the MCE completing \*

Criteria 1, 3, 4, 5, 7 (purchase

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\* only), and 10 (refinancing only) of Form 2264-A. The

instructions for the completion and addition of Criterion

7 and Criterion 10 to the Form 2264-A are found in

reference (7) of the Foreword. In refinancing

transactions where the project is located in an older,

declining urban area, the debt service criterion will be

computed as described in Paragraph 7-4 of this handbook.

6-6. RESERVE FOR REPLACEMENTS. The initial deposit to the

Reserve Fund for Replacements shall be eligible for

inclusion in determining the maximum insurable mortgage

in a purchase transaction and in a refinancing

transaction. If a Reserve Fund for Replacements has

already been established for the project under

consideration, the funds on deposit shall be used first to

reduce the required deposit, with the excess, if any,

applied toward the reduction of any discounts,

miscellaneous fees, etc., that are included in the

mortgage. In order to avoid possible duplication of

costs, the following shall be required:

a\. Purchase Transaction.

\(1\) The purchase agreement must specify whether or

not the acquisition price includes the purchase,

as an asset of the project, of any Reserve Fund

for Replacements or other escrows that may be on

deposit with the mortgagee and must specify the

dollar amount of such escrows that are being

transferred with the sale.

\(2\) The purchase agreement must specify any and all

items which the seller will pay on behalf of the

mortgagor, e.g., the operating deficit,

discounts, the initial deposit to the Reserve

Fund for Replacements, etc., and the dollar

amount, if any, that will be contributed.

\(3\) In order to ensure that the required initial

deposit to the Reserve Fund for Replacements will

be included in the mortgage (if the deposit will

be funded by the purchaser), the MCE shall

include the amount of the HUD required deposit on

the appropriate line of Criterion 7 on Form

2264-A. If as a result of the disclosures

required in (1) and (2) above, the MCE determines

that a Reserve Fund for Replacements was

transferred to the new mortgagor as an asset of

the project, then the MCE shall apply the amount

currently on deposit as a reduction when \*

computing Criterion 7.

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b\. Refinancing Transaction.

\(1\) The mortgagor is required to submit a list of all

escrows currently on deposit with the mortgagee.

All such escrows must remain with the project.

\* (2) In computing Criterion 10, the MCE shall include

the required initial deposit to the Reserve Fund

for Replacements in the mortgage on the

appropriate line.

\(3\) If the analysis of the escrow statement reveals

that the mortgagor currently has funds on deposit

in a Reserve Fund for Replacements, the MCE will

apply the amount currently on deposit as a

reduction when computing Criterion 10 on FHA Form

2264-A.

\(4\) The commitment shall carry the requirement that

the balance in the existing Reserve Fund for

Replacements account must be applied to the

initial deposit to the Reserve Fund for

Replacements; and that any excess shall be

applied as a reduction to the costs of discounts,

miscellaneous fees and charges, etc., which have

been included in the determination of the maximum

insurable mortgage.

6-7. EXHIBITS TO BE FORWARDED TO MORTGAGE CREDIT. The

following required exhibits as specified in Paragraph 2-7

of this Handbook shall be forwarded to Mortgage Credit and

shall become part of the credit control binder:

a\. Conditional Stage.

\(1\) Form 2013, Application for Project Mortgage

Insurance.

\(2\) The Rent Roll.

\(3\) Balance sheets, operating statements, \"Statements

of Changes in Financial Position.\"

b\. Firm Stage.

\(1\) Form 2013, Application for Project Mortgage

Insurance.

\(2\) Form 3433, Request for Preliminary Determination

of Eligibility As Nonprofit Sponsor or Mortgagor, \*

if applicable.

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\(3\) All Form 2530\'s.

\(4\) The statement reflecting the balance in all

existing escrow accounts.

\(5\) The statement reflecting identities of interest.

\(6\) The evidence from the mortgagee regarding

permanent mortgage financing.

\* (7) A copy of the legal documents creating the

mortgagor entity. (A copy must be forwarded to

the Area Counsel for review and comment.)

\(8\) A copy of the Purchase Agreement.

\(9\) The updated Rent Roll.

\(10\) Balance sheets, operating statements, \"Statements

of Changes in Financial Position.\"

\(11\) Form 2417 or equivalent.

\(12\) The statement reflecting all debt service

requirements.

\(13\) The title search report.

6-8. PREAPPLICATION CONFERENCE. The MCE must participate in

the preapplication conference to discuss the Mortgage

Credit exhibits required to be submitted at the firm

commitment stage and to answer any questions regarding the

various aspects of mortgage credit processing.

6-9. FINANCIAL AND CREDIT ANALYSES. The fundamental credit

consideration in the analysis of an existing multifamily

project transaction involves the determination at firm

commitment stage that the mortgagor has the financial

capacity to provide the necessary equity to complete the

loan transaction, liquidate the mortgage debt and

successfully operate the project. This determination is

based upon the analysis of current financial statements

submitted by the mortgagor together with appropriate

supporting schedules (which include an aging of accounts

receivable). Commercial and individual credit reports

shall be ordered at the time the firm application is

received by the Mortgage Credit Staff. As in any Mortgage

Credit analysis, decisions regarding credit and financial

acceptability shall be made on a project by project

basis. \*

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a\. If the mortgagor entity has been formed and capital

has been paid in prior to the issuance of a

commitment, financial statements of the mortgagor

\* entity shall be analyzed in accordance with sound

analytical credit practices. The analysis shall

determine the adequacy of this capital to meet the

financial requirements to which the mortgagor entity

may be obligated.

b\. The MCE shall closely analyze the balance sheet entry

for \"accounts receivable.\" If the \"accounts

receivable\" entry includes rents, the MCE shall

request an aging of the receivables and a listing of

the tenants from whom the rents are due and the units

occupied by those tenants. This information shall be

needed when the operating deficit is established.

(See Paragraph 6-13 below).

c\. In those instances where the mortgagor entity has not

been formed prior to the issuance of a firm

commitment, it shall be necessary that the financial

statements of the principals, submitted in accordance

with reference (9) of the Foreword, be analyzed to

determine the availability of funds for investment in

the mortgagor entity. These funds may include

operating capital readily available for investment

purposes and/or other assets that may be readily

hypothecated to produce investment capital.

d\. The accumulated credit data, together with the

analysis made by the MCE of the financial statements,

are reveiwed to determine that the mortgagor is

financially able to provide assets which together with

the mortgage loan proceeds will be adequate to meet

the requirements of the project, including cash

deposits for the operating deficit.

6-10. SECONDARY FINANCING. For projects processed under Section

223(f), secondary financing shall be permitted as follows:

a\. Purchase Transaction. When a loan is made to

refinance the purchase of an existing multifamily

housing project, the mortgagor may not have any

additional obligations in connection with the

transaction which exceed the lesser of:

\(1\) Seven and one-half percent (7.5%) of the

Secretary\'s estimate of value, or

\(2\) Seven and one-half percent (7.5%) of the cost of

acquisition as defined in Paragraph 6-2b(4).

Such additional obligations may only be represented by

a HUD approved \"Promissory Note\", Form 2223. \*

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(6-10) Example 1. Fair Market Value \$2,000,000

7-1/2% of Value \$ 150,000

Cost of Acquisition \$2,200,000

7-1/2% of Cost of Acquisition \$ 165,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 150,000

Example 2. Fair Market Value \$2,000,000

7-1/2% of Value \$ 150,000

Cost of Acquisition \$1,900,000

7-1/2% of Cost of Acquisition \$ 142,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 142,000

b\. Refinancing Transaction. When a loan is made to

refinance an existing multifamily housing project, the

mortgagor may not have any additional obligations in

connection with the transaction which exceed the

lesser of:

\(1\) Seven and one-half percent (7.5%) of the

Secretary\'s estimate of value; or

\(2\) Fifty percent (50%) of the difference between the

cost to refinance as defined in Paragraph

6-2c(4)(b) and the maximum mortgage amount as

determined by the Secretary. (If this difference

is \$99 or less, the mortgagor may not use

promissory notes to satisfy the cash

requirements.)

Such additional obligations may only be represented by

a HUD approved \"Promissory Note,\" Form 2223.

Example 1. Fair Market Value \$2,000,000

85% of Value \$l,700,000

Cost to Refinance \$1,900,000

Maximum Mortgage Amount \$1,700,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 100,000

Lesser of (a) \$2,000,000

x.075

\$ 150,000

or (b) \$1,900,000

-1.700,000

\$ 200,000

x .50

\$ 100,000

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(6-10) Example 2. Fair Market Value \$2,000,000

85% of Value \$1,700,000

Cost to Refinance \$2,100,000

Maximum Mortgage Amount \$1,700,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 150,000

Lesser of (a) \$2,000,000

x.075

\$ 150,000

or (b) \$2,100,000

-1,700.000

\$ 400,000

x .50

\$ 200,000

Example 3. Fair Market Value \$2,000,000

85% of Value \$1,700,000

Cost to Refinance \$1,650,000

Maximum Mortgage Amount \$1,650,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 0

Lesser of: (a) \$2,000,000

x.075

\$ 150,000

or (b) \$1,650,000

-1,650.000

\$ 0

Example 4. Fair Market Value \$2,000,000

85% of Value \$1,700,000

70% of Value \$1,400,000

Cost to Refinance \$1,300,000

Maximum Mortgage Amount \$1,400,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 0

Lesser of: (a) \$2,000,000

x.075

\$ 150,000

or (b) \$1,300,000

-1,400.000

(\$ 100,000)

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c\. In both purchase and refinancing transactions, if the

cost of acquisition or cost to refinance decreases for

any reason, the maximum allowable amount of promissory

notes must be recomputed. For example, in a purchase

transaction, the seller may lower the purchase price

in order to reduce the buyer\'s front money

requirements. Also, in a refinancing transaction, the

financing plan may reveal that a portion of the

indebtedness has been forgiven in order to reduce the

mortgagor\'s front money requirements. In either case,

the permissible amount of promissory notes must be

recomputed.

\* 6-11. FINANCING PLAN. After the cash requirements have been

established, the MCE shall contact the mortgagee to advise

that the mortgagor must submit a financing plan detailing

how the cash requirements will be met. This plan must be

submitted within ten working days after contact with the

mortgagee.

a\. Promissory Notes. If a promissory note(s) will be

utilized to retire any portion of the cash

requirements, the financing plan must disclose to whom

the note(s) will be issued and the amount(s) of each.

Any other source(s) of capital must also be

identified; the amount to be obtained from each source

must be specified; and verifications from the

source(s) involved must accompany the plan.

b\. Indebtedness Forgiven. Further, if any portion of the

indebtedness will be forgiven, verifications from the

appropriate lenders must accompany the plan.

c\. Action When the Conditional Commitment Stage Has Been

Used. In refinancing or purchase transactions where a

conditional commitment has been issued, the MCE shall

review the financing plan to determine its

acceptability. If review of the plan discloses that

the financing arrangements are unsatisfactory as

submitted or if the plan is not submitted within the

required period, the MCE will reject the application

for a firm commitment and forward the completed Form

2264-A and attachments to the Director of Housing

Development.

d\. Action When the Conditional Commitment Stage Has Been

Bypassed. in refinancing or purchase transactions

where the conditional commitment stage has been

bypassed and application is made directly for a firm

commitment, the MCE shall review the financing plan to

determine its acceptability. If review of

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the plan discloses that the financing arrangements are

unsatisfactory as submitted or if the plan is not

submitted within the required period, the MCE shall

\* reject the application for a firm commitment. The MCE

shall then advise the Director of Housing Development

in writing of the reason(s) for the rejection and of

the overall financial condition of the mortgagor.

Provided it is otherwise warranted, a conditional

commitment shall then be issued which shall:

\(1\) Specify the reason for the Mortgage Credit

rejection of the application for firm commitment,

\(2\) Contain a statement of the results of the

Mortgage Credit analyses of the financial

statements and a listing of the estimated cash

requirements, and

\(3\) Required submission of an acceptable financing

plan when the application for a firm commitment

is resubmitted.

6-12. DISCOUNTS. For purposes of Section 223(f), discounts may

be eligible for inclusion in the determination of the

maximum insurable mortgage. The MCE shall review the

documentation submitted by the mortgagee regarding

permanent financing. Such documentation will state the

amount of the discounts charged and to whom they will be

paid. If the MCE determines that the stated discounts are

reasonable and are in line with prevailing market

conditions and Mortgage Credit data, they may be included

in the determination of the maximum insurable mortgage

subject to the following limitations:

a\. In a refinancing transaction, where there is an

identity of interest between the present permanent

mortgagee or the interim mortgagee and the new

permanent lender, no additional financing charges

other than the 2 percent financing fee and 1 1/2

percent placement fee shall be eligible for

inclusion.

b\. In a purchase or refinancing transaction where an

identity of interest exists between the mortgagee and

the mortgagor, no additional financing charges other

than the 2 percent financing fee and 1 1/2 percent

placement fee shall be eligible for inclusion. \*

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\* c. In a refinancing or purchase transaction, discounts

shall be recognized only for those actual costs

charged by the permanent lender which are determined

to be eligible. Discounts charged for warehousing a

mortgage for future delivery as well as those which

may be charged by the interim lender are not eligible

for inclusion.

d\. In a refinancing or purchase transaction where an

identity of interest exists between the mortgagees,

and the GNMA Mortgage-Backed Securities Program will

be used for permanent financing, discounts as

determined reasonable by the MCE may be included.

GNMA charges a \$500 fee for usage of this program.

This fee may be included in the mortgage and may be

designated as a permanent lender\'s placement fee. In

no event, however, shall the 1 1/2 percent placement

fee normally included in the mortgage for FNMA/GNMA be

eligible for inclusion.

e\. If the GNMA Mortgage-Backed Securities Program will be

used for permanent financing, a sum equal to 1 3/4

percent of the mortgage amount must be placed in

escrow for three years. This sum shall not be

eligible for inclusion in the determination of the

maximum insurable mortgage, but will be a cash

requirement to the mortgagor, not withstanding any

identity of interest which may or may not exist

between any of the parties.

6-13. DETERMINING THE OPERATING DEFICIT. The amount of the

operating deficit, if any, shall be determined at the firm

commitment stage.

a\. If the conditional commitment stage was used, the MCE

shall review the updated Rent Roll comparing it to the

Rent Roll submitted at the conditional commitment

stage. The review shall include a telephonic spot

check of five percent (5%) of the occupied units to

ascertain if the information contained in the updated

Rent Roll is correct. The MCE shall identify those

tenants contacted and the results of the conversations

in the appropriate section of the Rent Roll. If there

is inadequate space on the Rent Roll, the MCE shall

record any remarks and reconcile any differences on a

separate sheet and attach it to the Rent Roll. If

there are a significant number of discrepancies or if

the telephonic \*

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responses are unsatisfactory, the MCE must arrange for

a visit to the project to complete the verification of

the rent roll. If the occupancy has changed, the MCE

shall notify the Director of Housing Development and

Valuation staff so that, if necessary, adjustments may

be made to the estimate of time needed for the project

to reach sustaining occupancy.

b\. If application is made directly for a firm commitment,

the MCE shall not review the Rent Roll for accuracy,

since this task will have been performed by the

Appraiser during the HUD Team\'s visit to the project.

c\. The period required for the project to reach

sustaining occupancy shall be entered in the \"Remarks\"

section of Form FHA-2264; and the amount determined as

the operating deficit (using the Form FHA-2264

instructions found in reference (7) of the Foreword)

shall be prorated accordingly. In no event may an

operating deficit be established for more than

eighteen months. If the appraiser indicates that it

will take longer than eighteen months for the project

to reach sustaining occupancy, the application must be

rejected.

d\. If the project reaches sustaining occupancy prior to

the expiration of the escrow period, the mortgagor,

through the mortgagee, may petition HUD for permission

to release the balance of the operating deficit escrow

account. However, in no event may the escrow be

reduced prior to the initial/final endorsement of the

loan for insurance.

6-14. OPERATING DEFICIT ESCROW. If an escrow is required to

cover an operating deficit at the time of endorsement,

Form FHA-2476-A, \"Escrow Agreement - Additional

Contribution by Sponsors,\" must be furnished, showing the

deposit of cash, an unconditional irrevocable letter of

credit issued to the depository by a banking institution,

or United States bearer bonds at market value. The

acceptance of a letter of credit in lieu of cash or United

States bearer bonds is within the discretion of the

mortgagee and the burden is on the mortgagee to provide

cash if demand on a letter of credit is not met. The

conditions for release of the funds are contained in Form

FHA-2476-A.

a\. In the event of a claim under the contract of mortgage

insurance, HUD shall not accept an assignment of a

letter of credit from the mortgagee, but shall treat

any undrawn balance thereunder as cash held by the

mortgagee which will be deducted from the insurance

claim.

6-15 7/77

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b\. The enforceability of a letter of credit is the sole

responsibility of the mortgagee and no opinion as to

its enforceability is to be rendered by the closing

attorney. However, the Field Office Director and the

closing attorney have the responsibility to review and

determine the sufficiency and acceptability of the

escrow agreement.

6-15. COMMITMENTS. Commitments shall be issued on an Insurance

Upon Completion Basis only. There shall be only one

closing, combining both the initial and final endorsement

of the insured mortgage transaction, and all mortgage

proceeds shall be disbursed at that time. In the event

that there are any required repairs which remain

incomplete at the time of endorsement, an escrow account

equal to twice the estimated cost of such repairs shall be

established under the provisions of an Escrow Deposit

Agreement, Form FHA-2456.

6-16. MORTGAGE INCREASES AND CHANGE ORDERS. It is possible that

the field office may receive requests for mortgage

increases for projects to be insured pursuant to Section

223(f).

a\. Such requests may be processed provided all the

following criteria are satisfied:

\(1\) The increase is a result of requirements imposed

by the local municipality which were unknown when

the required repair list was developed by HUD.

\(2\) The additional costs do not cause the cost of the

repairs to exceed the limitations as set forth in

Paragraph 1-4 of this Handbook. (In the event

that the cost of repairs will exceed the 15% or

\$3,000 limitation as a result of the additional

requirements, the commitment shall be null and

void, and the mortgagor should be encouraged to

apply for insurance under one of HUD\'s

rehabilitation programs.)

\(3\) The requested increase is accompanied by a change

order, plus documentation from the municipality

attesting that the work must be done in order

that the property will comply with local laws and

codes.

11/77 6-16

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b\. In such cases, once the additional repairs and the

costs attributable thereto have been accepted and

approved, the MCE shall process Form FHA-2264-A

completing the applicable criteria and determine a new

maximum insurable mortgage. If adjustments to the

income flow become necessary the Form FHA-2264 and

Form FHA-2264-A shall be forwarded to HM for review

and comments.

6-17. COST CERTIFICATION. A modified form of cost certification

shall be completed and submitted to the HUD field office

for review 15 days prior to the initial/final endorsement

of the loan for insurance for all projects processed

pursuant to Section 223(f) except those refinancing

transactions where 70% of value is the controlling

criterion. (In such cases cost certification is not

required.)

a\. Using Form FHA-2205-A (Exhibit VII), the mortgagor

must certify to the total actual costs incurred in the

acquisition or refinancing of the property. The

certification must be dated and signed by an

authorized agent of the mortgagor entity.

b\. The MCE shall review the submission to establish the

maximum insurable mortgage amount. Any disallowances

shall be explained on a separate worksheet and

attached to Form FHA-2205-A. The MCE shall complete

Section II of Form FHA-2205-A.

c\. The general contractor will only be required to submit

a cost certification if a cost-plus form of contract

is used.

d\. If, in a purchase transaction, the amount of the

acquisition cost determined allowable at cost

certification exceeds the HUD estimate of value of the

project determined during processing, instructions in

paragraph 5-19 require that the rent formula be

recomputed by the Valuation staff. In order that the

Valuation staff may accomplish this recomputation, the

Mortgage Credit staff shall prepare a memorandum to

the Chief, Valuation staff setting forth (1) the

allowable acquisition cost as determined by cost

certification and (2) the dollar amount of secondary

financing represented by the approved promissory notes

(Form FHA-2223). \*

6-17 11/77

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6-18. REQUIREMENTS PRIOR TO FINAL ENDORSEMENT. Prior to final

endorsement, the mortgagee must provide the field office

with all required closing exhibits including Form

FHA-2455, Request for Endorsement of Credit Instrument

Certificate of Mortgagee, Mortgagor and General

Contractor, and a certified loan closing statement signed

by the mortgagee and mortgagor detailing the amount of any

promissory notes made by the mortgagor and any cash

contribution made by the mortgagor. The statement must

also itemize the disbursement of the mortgage proceeds and

of the mortgagor\'s cash contribution, if any. The

statement regarding the disbursements must be specific and

list the amounts to be paid to satisfy the mortgagor\'s

obligations for: existing or other indebtedness in a

refinancing transaction; acquisition cost in a purchase

transaction; repairs; discounts; financing fees; legal

expenses; organizational expenses; title and recording

costs etc., and any mortgagee required escrows for GNMA,

taxes, or insurance.

a\. The MCE shall review the certificate of the mortgagee

contained in Form FHA-2455 for the amounts reflected

for the operating deficit and the financing charges.

The MCE shall also review the amounts reflected in the

mortgagee\'s certified statement regarding the

disbursements, the promissory notes, etc. and shall

compare the amounts reflected on Form FHA-2455 and the

mortgagee\'s statement to those reflected on the cost

certification. If the amounts are less than those

shown on the cost certification, a recomputation of

the mortgage amount shall be necessary in order to

determine if a reduction to the maximum insurable

mortgage amount shall be required.

b\. Should such a reduction be necessary, a revised Part

II of Form FHA-2205-A must be prepared by the MCE and

delivered to the Director of Housing Development who

shall advise the closing attorney, the mortgagee, and

the mortgagor. If secondary financing is to be

utilized to satisfy a portion of the cash

requirements, a reduction in the permissible amount of

promissory notes may also be required. A

recomputation of the maximum amount of promissory

notes permissible must be made using the format

provided by Form FHA-2264 in reference (7) of the

Foreword.

6-19. REQUIREMENTS AFTER FINAL ENDORSEMENT. Funds placed in

escrow for incomplete repair items will be disbursed by

the mortgagee upon approval by HUD Upon the disbursement

of all funds, the mortgagee will notify HUD by letter that

all escrowed funds have been properly disbursed.

11/77 6-18

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