February 12, 2004

Index Number: 3.124 -- Refinancing (Section 223(a)(7)) CIM-0130

Subject: Request for Formal Opinion re: 223(a)(7) Lease Terms

MEMORANDUM FOR: Carl Kao, Chief Counsel, 9DC

FROM: John J. Daly, Associate General Counsel for Insured Housing, CI

SUBJECT: Request for Formal Opinion re: 223(a)(7) Lease Terms

This memorandum responds to your June 18, 2003 request for a formal
opinion on the issue of whether Section 223(a) of the National Housing
Act (NHA) exempts projects refinanced under 223(a)(7) from the ten-year
ground lease requirement of the original FHA mortgage insurance program.

Your memorandum states that Clark Senior Apartments is a 41-unit Section
221(d)(4)/223(a)(7) apartment building located in Los Angeles,
California, and that during the closing package review, it was
discovered that the proposed Section 223(a)(7) refinancing loan term
extended beyond the original Section 221(d)(4) term to end of the ground
lease term. After receiving an informal opinion from our office, Lender
and Owner's counsel agreed to reduce the 223(a)(7) loan term to comply
with the ten-year requirement and closing was completed.

It is our view that the 223(a)(7) loan is subject to the ground lease
requirements of the original mortgage insurance program, in this case,
Section 221(d)(4). Section 221(c) of the National Housing Act
incorporates the definitions of Section 201 of the National Housing Act
into the Section 221(d)(4) program. Section 201(a) defines "mortgage" as
a "first mortgage on real estate in fee simple, or on a leasehold (1)
under a lease for not less than ninety-nine years which is renewable or
(2) under a lease having a period of not less than ten years to run
beyond the maturity date of the mortgage...." 12 U.S.C. § 1707(a). These
statutory definitions are referenced in the core eligibility
requirements of Section 221.

Lender's counsel argued that depending on how broadly one defines
"eligibility" under Section 223(a), it may be argued that Section 223 is
exempt from the requirement of the original mortgage insurance program,
i.e. Section 221(d)(4). Section 223(a) states in pertinent part that
"*\[n\]otwithstanding* any of the provisions of this Act and without
regard to limitations upon eligibility contained in any section or title
of this Act...the Secretary is authorized upon application by the
mortgagee, to insure or make commitments to insure under any section or
title of this Act any mortgage...." (emphasis added). 12 U.S.C. § 1715n
(a). Neither the legislative history of Section 223(a) or case law
provide any interpretative guidance. HUD's regulations set forth at 24
CFR § 200.20, however, provide that "an existing insured mortgage may be
refinanced pursuant to the provisions of section 223(a)(7) of the Act
and such terms and conditions established by the Commissioner." It is
well settled that a federal agency's interpretation of its own
regulations is entitled to controlling weight and great deference.
[Thomas Jefferson University v. Shalala]{.underline}, 512 U.S. 504, 512
(1994). *See also* [Chevron U.S.A. v. NRDC]{.underline}, 467 U.S. 831,
843; [Gladstone Realtors v. Bellwood]{.underline}, 441 U.S. 91, 107
(1979); [Udall v. Tallman]{.underline}, 380 U.S. 1, 16 (1965). The
agency's interpretation does not have to be the only possible
interpretation, but merely a permissible one. In light of HUD's core
statutory definitions and requirements, it is our view that the
leasehold requirements in Section 201(a) are fundamental "terms and
conditions" to the mortgage insurance program, and therefore, not
encompassed by the "notwithstanding" language concerning eligibility in
section 223(a)(7). If the "notwithstanding" language of section 223(a)
were to apply to the definitions provision of Section 201(a), then
arguably this could eliminate some of the mortgage insurance program's
core statutory requirements, including the requirement that the mortgage
be a first lien; lease requirements; and the definitions of "mortgagee,"
"mortgagor" and "maturity date" (fundamental terms used in the
eligibility requirements of Section 221 and other mortgage insurance
programs). *See* 24 CFR § 200.71 (the project must be free and clear of
all liens other than the insured mortgage and approved inferior liens)
and 24 CFR § 207.251(c) "(the term \`mortgage' means such first lien
upon real estate and other property as is commonly given..."). Although
the leasehold requirements are not included in the definitions section
of HUD regulations, it is included within the statutory definition of
the term "mortgage" under Section 201(a) and such definition is plain
and unambiguous. Consequently, in this case, it was appropriate for the
223(a)(7) loan term to be reduced in order to comply with the statutory
requirement that a ground lease term be at least ten years beyond the
FHA loan term.

Please contact Koren McKenzie-John at 202-708-4090 if you have any
further questions regarding this memorandum.

cc:

CIM: File/Chron 9228

CIM: Potts 9228

CI: Daly 9226

Decimal file 283.0 (Sec. 223(a)(7))

## ACORN NO. 378842

GIM:MCKENZIE-JOHN: 12/31/03 (J:gim Lease Terms3-223(a)(7).doc)

CIM CIM

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McKenzie-John Potts