6400.1 REV-1

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CHAPTER 3. PROGRAM DESIGN AND OTHER REQUIREMENTS

3-1. PROGRAM DESIGN

The applicant shall develop its Urban Homesteading Program design in

compliance with [24 CFR Part
590.7](http://www.gpoaccess.gov/cfr/index.html). The Program
requirements include

the following:

A. Designation of Urban Homesteading Neighborhood; Coordinated

Approach Toward Neighborhood Improvement. 590.7(a).

The applicant shall designate one or more neighborhoods which

have available federally-owned properties to carry out its local

urban homesteading program. With the exception of communities

below 25,000 in population, target areas should not be approved

that, either separately, or in combination, encompass all or

substantially all of a community\'s total area. Exceptions to

this standard may only be approved by the Director of the Urban

Homesteading Program in Headquarters. Prior to submission of its

application to HUD, the applicant shall develop a plan that

provides for the improvement of these neighborhoods through the

homesteading program and the general upgrading of community

services and facilities, and through other measures needed to

assure a suitable living environment, in combination with other

public or private revitalization efforts affecting the

neighborhood. At a minimum, the applicant must demonstrate that

other activities, such as rehabilitation loans, water and sewer

improvements, street and sidewalk improvements, and community

and/or social services will support the efforts of the

homesteading program.

B. Minimum Number of Properties. 590.7(a).

An applicant should be reasonably certain that it will be able to

acquire a minimum of five properties each fiscal year.

Localities that will not be able to acquire five properties

should not participate as a single entity, but should participate

under the jurisdiction of a State or county program, or the

umbrella of a single public agency or qualified community

organization designated by several units of general local

government to administer a program for more than one locality

under separate Urban Homesteading Agreements with each unit of

general local government.

C. Selection and Management of Properties. 590.7(b)(1).

The applicant\'s program shall include procedures for selecting

and acquiring one- to four-unit federally-owned properties

suitable for homesteading, and for managing properties before

conditional conveyance to homesteaders. This includes inspecting

properties prior to taking title and assuming liability for

injury or damage to persons or property due to a defect in the

dwelling or its

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3-1 3/90

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6400.1 REV-1

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equipment, or for any other reason related to ownership of the

property. Properties will remain unrepaired until conditionally

conveyed to homesteaders. The LUHA shall, if feasible, continue

to include properties in its master insurance coverage if

homesteaders have difficulty obtaining coverage initially after

conditional conveyance and prior to the property achieving a

standard where private insurers will cover the homesteader\'s

interest in the property.

D. Designation of LUHA. 590.7(c).

1\. Responsibilities. 590.7(c)(1). The applicant shall

designate a LUHA, which shall have primary responsibility for

administering the local urban homesteading program for the

applicant. The LUHA shall be the legal entity that accepts

title in its own name to federally owned properties conveyed

by the applicable Federal agency with reimbursement from

Section 810 funds and which conveys title to such properties

to homesteaders pursuant to paragraph (b) of 24 CFR 590.7.

Although the applicant may at any time amend its local urban

homesteading program to designate a new LUHA, subject to HUD

approval as described in Chapter 4, paragraphs 4-5 and 4-6,

and 24 CFR 590.13-.15\>, neither the applicant nor the

designated and approved LUHA may delegate or contract out to

another legal entity, the function of accepting and conveying

in its own name title to properties for homesteading purposes

pursuant to 24 CFR Part 590. To the extent permitted by the

applicant, the LUHA may use third parties as consultants, or

agents to assist it in carrying out other functions and

responsibilities with respect to the local urban homesteading

program, by entering into a written agreement between the

LUHA and the third party. No such agreement shall be deemed

to relieve the LUHA or the applicant of responsibility for

the third party\'s actions in conjunction with the local urban

homesteading program.

2\. Identity of LUHA. 590.7(c)(2). The LUHA must have legal

authority to carry out a local urban homesteading program as

described in 24 CFR 590.7(c), including the authority to

accept and convey title to properties pursuant to 24 CFR

590.7(b). To the extent consistent therewith, the applicant

State or unit of general local government may:

a\. act as LUHA in its own name, while identifying within its

administrative organization a lead department or agency

to act as the primary contact point for HUD, VA and FmHA

(in such a case, the applicant itself is referred to as

the LUHA);

b\. designate, and enter into a written agreement with, a

legally separate public body or agency to act as LUHA in

accordance with the following paragraph 3; or

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3/90 3-2

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6400.1 REV-1

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c\. designate, and enter into a written agreement with, a

qualified community organization (as defined in Chapter

1, paragraph 1-4(K) and 590.7(c)(4)) to act as LUHA in

accordance with the following paragraph 3.

3\. Content of Agreement with Designated Public Agency or

Qualified Community Organization. 590.7(c)(3). The

applicant\'s written agreement with its designated public

agency or qualified community organization shall contain at

least the following provisions, and nothing inconsistent

therewith:

a\. the agreement of the LUHA to carry out the local urban

homesteading program, including the acceptance and

conveyance of title to properties for homesteading

purposes, in accordance with the Act, 24 CFR Part 590,

this Handbook, and the applicant\'s HUD-approved urban

homesteading application;

b\. the agreement of the LUHA to hold title (and the right

of reverter or other interest retained after the

conditional transfer to a homesteader under 24 CFR

590.7(b)(3)) to formerly federally owned properties

conveyed to it pursuant to 24 CFR Part 590 in trust,

solely for the purpose of conveying the properties to

homesteaders (or for such alternative use as may be

approved by HUD) pursuant to 24 CFR Part 590, and not to

convey, encumber or otherwise deal with such property for

its own benefit or account;

c\. the agreement of the LUHA promptly to assign or convey

title and/or other interests in properties held pursuant

to 24 CFR Part 590 to the applicant, or to such new LUHA

as may be designated by the applicant and approved by

HUD, if the applicant terminates the LUHA\'s designation;

and

d\. the agreement of the applicant and the LUHA that the

LUHA\'s designation shall not relieve the applicant of

full responsibility to HUD for the conduct of the local

urban homesteading program, and that HUD may take any

corrective or remedial action pursuant to 24 CFR 590.31

against the applicant, the LUHA, or both, solely at HUD\'s

option.

E. Affirmative Marketing. 590.11(d)(5)(ii).

The program shall include affirmative marketing practices that

further national policy for fair housing by advertising the

program in the media that will reach eligible persons least

likely to apply for participation, and by otherwise marketing

units in a manner to attract homesteaders regardless of sex,

racial, or ethnic group. Such methods should include use of

minority media outlets when

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3-3 3/90

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6400.1 REV-1

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media advertising will be used to announce the availability of

the program, and utilizing special outreach techniques/efforts to

inform eligible persons who are not likely to apply without

special outreach.

F. Homesteader Selection. 590.7(b)(2).

The program shall include equitable procedures for selecting

homesteaders who have the capacity to make or cause to be made

the repairs and improvements required under paragraph H below.

The procedures shall:

1\. exclude prospective homesteaders who own any other

residential property. (This includes owners of mobile homes

regardless of whether they own their land or rent space in a

mobile park, holders of life estates, owners of condominiums,

cooperatives, or property used for either investment or

recreational purposes, i.e., a vacation house or a rental

unit. It also excludes persons with a right to purchase

properties utilizing a land contract.)

2\. take into account the prospective homesteader\'s capacity to

rehabilitate the property, including the ability to reduce

rehabilitation costs through his/her own labor or other

resources or contributions. The homesteader\'s capacity

includes the ability to do some of the work, to manage the

work of contractors, to obtain assistance from other sources,

such as community organizations, and/or to obtain the funds

required to finance the work. Though a LUHA is not required

to give priority to applicants who can contribute their own

skills and labor, those contributions which can be verified

must be taken into account in assessing an individual

homesteader\'s ability to make or cause to be made the

necessary repairs.

3\. provide that membership in, or other ties to, any private

organization (including a qualified community organization)

may not be made a factor affecting selection as a

homesteader. Furthermore, membership of a potential

homesteader in any private organization doing business with a

qualified community organization, and any other ties to a

particular private organization, is not to be made a

criterion For homesteader selection.

4\. give a special priority to prospective homesteaders who are

\"lower income families\" as defined in Section 3(b)(2) of the

United States Housing Act of 1937, which includes single

person households. Generally, this means that the family\'s

annual income does not exceed 80% of the median income for

the area, with adjustments for smaller and larger families.

Permissible adjustments to income, and the median income for

the area shall

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3/90 3-4

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6400.1 REV-1

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be determined in accordance with the requirements for the

Section 8 Program in 24 CFR Part 813.

The special priority requires a LUHA to offer a Section 810

property to a qualified prospective homesteader who meets the

\"lower income\" definition above before offering a property to

any other prospective homesteader who does not qualify For

the priority. An otherwise qualified priority prospective

homesteader must also be credit-worthy, having the capability

to secure the financing and manage the repayment of the debt

associated with rehabilitation of a homesteading property.

This could be determined initially through a credit check,

and thereafter through the loan underwriting process.

To reduce the administrative burden due to an influx of

applications, the LUHA in advertising its program and

availability of properties should announce up front the

selection criteria, thus assuring that most prospective

homesteaders will meet the criteria. Also, the LUHA may

charge an application fee, limited to the cost of a credit

check. This fee generally shall not exceed \$25, unless the

applicant does not subscribe to a credit bureau service, in

which case, the fee may be more. The LUHA shall refund the

application fee if it determines the prospective homesteader

is ineligible prior to a credit check, e.g., under age to

enter into a binding contract.

5\. include locally adopted criteria reasonably matching the

family size to the number of bedrooms in the property. Such

criteria shall not permit homesteaders who are one-person

households to be awarded a property having more than two

bedrooms, unless there are no larger households on the

waiting list.

6\. specify other reasonable selection criteria, if any, which

must be specified in the applicant\'s application. Other

selection criteria may include preferences for the selection

of neighborhood residents or other local residents only to

the extent that they are consistent with affirmative

marketing objectives to which the LUHA certifies under 24 CFR

590.11(d)(5)(ii). Preferences may not be based on the length

of time the prospective homesteader has resided in the

jurisdiction or the neighborhood. In addition, persons who

are working, or who have been notified that they are hired to

work, in the jurisdiction shall be extended any preference

available to current residents. (If there is a low-income

applicant otherwise qualified to participate in the program,

who does not meet the locally imposed residency criteria,

then that applicant would still take precedence over any

non-lower income applicant meeting the local residency

criteria.)

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3-5 3/90

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6400.1 REV-1

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Additional generally permissible selection criteria may

include preference for those displaced due to other public

action, minimum income limits to assure ability to repay a

rehabilitation loan, maximum income limits to assure that

\"lower income families\" are being served, or physical

handicap. All selection criteria must be submitted to and

approved by Field Office staff in accordance with 24 CFR

590.11(a) and 590.13. (See Chapter 4, paragraph 4-2, C.4.)

7\. Assure nondiscrimination upon the basis of race, creed,

color, sex, national origin, age, handicap, religion, or

familial status in the selection of homesteaders.

G. Conditional Conveyance. 590.7(b)(3).

The program shall provide for the conditional conveyance of

unoccupied, unrepaired residential property to homesteaders

within 1 year, or loss, of title transfer to the LUHA. Property

received from the Federally-owned inventory shall be

conditionally conveyed without substantial consideration. The

term \"without substantial consideration\" is defined as a nominal

amount not exceeding the minimum local definition of

\"consideration\" used to transfer real property, generally \$1.00.

\"Conditional conveyance\", as used here and in 24 CFR 590.7(b)(3),

does not necessarily require that the homesteader immediately

receive an interest technically classified as a real property

interest under applicable State law. If the document contains a

contractual right to acquire fee simple title when the

homesteader has complied with all of its terms and with the

homesteader agreement, that is sufficient for this purpose.

While a LUHA is restricted to the transfer of a property for

nominal consideration, the LUHA may require a homesteader to pay

for items such as recording fees, transfer taxes and property

taxes after acquisition to the extent that such fees and taxes

are uniformly applicable to other purchasers of property in the

jurisdiction. Furthermore, the homesteader can be required to

pay third parties, but not the LUHA or other public agencies, for

all of the costs that would normally be incurred in connection

with the rehabilitation of the property. This includes, but is

not limited to, architectural and inspection fees and costs

associated with arranging private rehabilitation financing (if

applicable), such as appraisal fees, points, loan origination

fees, and closing fees. Where a loan is made directly to a

homesteader by the applicant or the LUHA, it is assumed that

applicant or LUHA staff or other public or nonprofit staff, will

perform these functions; and, therefore, the costs thereof are

not to be charged to the homesteader. The homesteader is

responsible for payment of the loan principal, plus interest, if

any. The LUHA may not pass on to

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3/90 3-6

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6400.1 REV-1

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the homesteader any property management expenses and taxes that

it incurs while the property is in its inventory prior to

conveyance to the homesteader. Any charges should be clearly

distinguishable from the nominal consideration for the property.

The LUHA will include in each deed conveying a property, if

applicable, a covenant enforceable under applicable State law,

prohibiting the homesteader, or any successor homesteader, from

discriminating on the grounds of race, creed, color, sex,

national origin, age or handicap in the sale or rental of the

property.

H. Homesteader Agreement. 590.7(b)(5). The program shall provide

for executing, concurrent with or as a part of the conditional

conveyance, a Homesteader Agreement between the LUHA and the

homesteader which shall require the homesteader to:

1\. repair health and safety defects within one year. The

agreement must provide that any defects that pose a

substantial danger to health and safety will be repaired

within one year from the date of conditional conveyance of

the property. For purposes of this requirement, States and

localities have reasonable discretion in determining what

poses a substantial danger to health and safety both to the

prospective homesteader and to the community. Any defect

that poses such a hazard must be repaired within one year.

It should be noted that any repairs financed through the

Section 312 Program must also comply with its loan terms.

While rehabilitation activity under Section 312 must, under

HUD policy, be completed within 24 months, the loan note

usually specifies a period not to exceed six months. In

general, a homesteader agreement may require that

rehabilitation be completed in a shorter time frame than one

year unless the shorter term unreasonably impairs the

homesteader\'s ability to utilize self-help in the

rehabilitation process where he or she is qualified and

willing to do so. Further, States and local governments may

enforce generally applicable requirements relating to

occupancy of homesteading properties, like any other housing

under their jurisdiction.

2\. complete all repairs within three years. The agreement must

provide that all additional repairs and improvements

necessary to meet the applicable local standards for decent,

safe and sanitary housing, and any energy conservation

measures designated by the LUHA will be completed within

three years from the date of conditional conveyance of the

property to the homesteader. Again, this is a maximum

permissible period; the homesteader agreement may provide a

shorter period where warranted.

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3-7 3/90

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6400.1 REV-1

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3\. Occupy the property for five years. The homesteader must

agree to occupy the property as his/her principal residence

for not less than five consecutive years from the date of

initial occupancy. A LUHA shall assure that the date of

initial (physical) occupancy is recorded, since the date of

the occupancy permit or the date of occupancy projected in

the Homesteader Agreement may differ from the date of actual

occupancy.

Where a Section 312 loan exists on a homestead property, the

LUHA shall assure that the Homesteader Agreement and/or the

operative document, i.e., certificate of occupancy, that

establishes the actual date of occupancy is submitted to the

Section 312 loan servicer for inclusion in the homesteader\'s

loan file. This is necessary in the event the homesteader

defaults on the loan prior to the end of the 5-year period,

so that the loan servicer will know to contact the LUHA to

either work things out with the homesteader or to find a

successor homesteader to assume the loan. (See paragraph

3-3.)

The five-year occupancy requirement may be determined

infeasible and relief may be granted by HUD on a case by case

basis in certain emergency situations. The following are

examples under which relief may be granted:

a\. the property may have been made uninhabitable as a result

of natural disaster or casualty loss;

b\. the property may have been taken by eminent domain;

c\. the homesteader\'s job may have been transferred outside

of reasonable commuting distance of the property;

d\. the homesteader may have been determined to be mentally

incompetent and removed from the property;

e\. the homesteader may have a terminal illness in which

death is known to be imminent or the homesteader may have

died.

Written requests for relief received from the LUHA will be

approved or disapproved by the Field Office after

consultation with the Headquarters Urban Homesteading Program

Team on a case-by-case basis.

4\. Permit inspections. The homesteader must agree to permit

reasonable inspections at reasonable times by employees or

designated agents of the LUHA to determine compliance with

the Homesteader Agreement, including a yearly inspection to

verify occupancy by the homesteader.

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3/90 3-8

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6400.1 REV-1

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5\. Surrender possession of the property upon material breach of

the agreement. The homesteader must agree to surrender

possession of (vacate), and any interest in, the property

upon any material breach of the Homesteader Agreement

(including default on any rehabilitation financing secured by

the property \-- See paragraph 3-3), as determined by the

LUHA.

I. Monitoring and Selecting Successor Homesteaders. 590.7(b)(6).

The program shall provide for monitoring of the homesteader\'s

compliance with the Homesteader Agreement; revocation of the

conditional conveyance and Homesteader Agreement upon any

material breach by the homesteader; and, to the extent necessary

and practical, selection of one or more successor homesteaders to

assume the responsibility for homesteading the property including

any existing debt for costs of rehabilitation. The LUHA hall

make reasonable efforts to assure that the proposed successor

homesteader assumes any Section 312 loan on the property subject

to HUD approval of the terms of the assumption. Priority must be

given to lower income families. If there are no priority

applicants available who are willing or able to assume a Section

312 loan, HUD Headquarters may approve an exception to the

requirement that assumptors of 3% Section 312 loans be lower

income families in order to let a family above 80% of median

income assume the loan. If a successor homesteader is selected,

the homesteader shall execute a new Homesteader Agreement and the

property shall be conditionally conveyed for a new five-year

period, except that HUD may approve a lesser occupancy period to

facilitate assumption of a Section 312 loan or any other type of

financing on a homestead property. This lesser period cannot be

less than the greater of (1) two additional years, or (2) the

remaining amount of the original occupancy period.

J. Fee Simple Title. 590.7(b)(7). The program shall provide for

he conveyance of fee simple title to the property from the LUHA

to the homesteader, without consideration, upon compliance with

the terms of the Homesteader Agreement and conditional

conveyance. This occurs upon completion of rehabilitation and the

five-year residency requirement.

K. Homesteading Infeasible; Alternative Use. 590.7(b)(8). If

homesteading of a federally-owned property after acquisition by

the LUHA proves to be infeasible in the judgment of HUD, the LUHA

shall not demolish, dispose of, rent or otherwise convert the

property to its own use until the Field Office has approved an

alternative use of the property consistent with the coordinated

approach to neighborhood improvement. (See Chapter 10,

Alternative lisps of Federally-Conveyed Urban Homesteading

Property.)

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3-9 3/90

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6400.1 REV-1

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3-2. CONFLICT OF INTEREST

The Urban Homesteading conflict of interest exclusion is intended to

avoid any appearance of unfairness in the conduct of the program.

The exclusion applies to the individuals listed below and to those

with whom they have family or business relationships. The period of

coverage is during their current tenure and one year thereafter.

A. Persons not Eligible

1\. No person shall be awarded an Urban Homesteading property, or

receive a personal or financial interest or benefit from the

award or rehabilitation of an Urban Homesteading property, or

have any interest in any contract, subcontract or agreement

with respect thereto, or the proceeds thereunder, if that

person is:

a\. an elected or appointed official or officer of the

applicant;

b\. an elected or appointed official or officer of the

public agency or qualified community organization

designated as the Local Urban Homesteading Agency

(LUHA); or

c\. an employee, agent, contractor, or consultant of the

applicant or public agency or qualified community

organization designated as the LUHA who:

\(1\) exercises or has exercised any functions or

responsibilities in connection with the

administration of the Urban Homesteading Program,

or assists or has assisted with rehabilitation

activities, or

\(2\) is in a position to participate in a decision

making process or gain inside information with

regard to such activities.

B. Exceptions

1\. Threshold requirements

Upon the written request of the applicant, HUD may grant an

exception to this exclusion on a case-by-case basis when it

determines, using the factors listed in paragraph C. below,

that such an exception will serve to further the purposes of

the Urban Homesteading Program. An exception may be

considered only after the applicant has provided the

following:

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

3/90 3-10

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6400.1 REV-1

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a\. a disclosure of the nature of the conflict, accompanied

by an assurance that there has been public disclosure of

the conflict and a description of how the public

disclosure was made; and

b\. an opinion of the applicant\'s attorney that the interest

for which the exception is sought would not violate State

or local law.

C. Factors to be considered for exceptions

In determining whether to grant a requested exception after the

applicant has satisfactorily met the threshold requirements

listed above, HUD shall consider the cumulative effect of the

following factors, where applicable:

1\. whether the exception would provide significant benefit to

the program or project which would otherwise not be

available;

2\. whether an opportunity was provided for open competitive

bidding or negotiation;

3\. whether the person affected is a member of a group or class

of lower income persons intended to be the primary

beneficiaries of the assisted activity, and the exception

will permit such person to receive generally the same

interests or benefits as are being made available or provided

to the group or class;

4\. whether the affected person has withdrawn from his or her

functions or responsibilities, or the decision making process

with respect to the specific assisted activity in question;

5\. whether the interest or benefit was present before the

affected person was in a position as described under \"Persons

not Eligible;\"

6\. whether undue hardship will result either to the recipient or

the person affected when weighed against the public interest

served by avoiding the prohibited conflict; and

7\. any other relevant considerations.

3-3. FINANCING MECHANISMS FOR URBAN HOMESTEADING PROPERTIES 590.7(b)(4).

The program shall provide procedures for the LUHA to undertake, or

assist the homesteader in arranging, financing for rehabilitation

required under the Homesteader Agreement. This requires the LUHA to

assist the homesteader in securing financing or, if it chooses to

provide financing for the rehabilitation required under the

Homesteader Agreement.

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3-11 3/90

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6400.1 REV-1

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A. Section 312 Loan Program

If financing is through the Section 312 Loan Program, the LUHA

shall assist HUD in monitoring and securing compliance with the

terms of the loan during the homesteader\'s conditional title

period, including securing an assumptor for the Section 312 loan,

subject to HUD approval, in order to obtain a successor

homesteader after the breach of the homesteader agreement or the

Section 312 loan documents by the original homesteader.

1\. Language to include in Homesteader Agreements. See Section

312 Rehabilitation Loan Program Handbook, HUD 7375.01 REV-2,

paragraph 12-16(b). In order to avoid the possibility of a

homesteader becoming entitled to full fee simple title to a

homesteading property when he or she is not repaying a

Section 312 loan, the Local Urban Homesteading Agency should

include substantially the following language in each

Homesteader Agreement involving Section 312 rehabilitation

financing:

\"The homesteader agrees that a default under the

promissory note, the rehabilitation loan agreement, or

the mortgage (deed of trust) evidencing any Section 312

loan obtained to finance the rehabilitation of the

homestead property shall constitute a default under this

Urban Homesteader Agreement. This entitles the Local

Urban Homesteading Agency to enforce any and all

remedies available for a material breach or default

under this agreement, including forfeiture of the

homesteader\'s interest in the property. Specifically,

the homesteader shall have no right to a final

conveyance of the homesteading agency\'s reversionary

interest in the property unless the homesteader is

current on his or her Section 312 loan.\"

2\. Loan Delinquency. If a Section 312 loan on a homestead

property becomes delinquent, the following will occur:

a\. After 30 days. The Section 312 master servicer will

send a letter to the homesteader and the LUHA, and

request the LUHA to begin proceedings to obtain a

voluntary settlement or to exercise its reversionary

interest. Upon receipt of this notice, the LUHA must

contact the homesteader by letter, telephone, or

personal visit to relate the importance of prompt

payment and to remind the homesteader that non-payment

constitutes a breach of the Homesteader Agreement, thus

resulting in forfeiture of the property if neglected.

The LUHA\'s collection efforts must be reported to the

Section 312 master servicer at (800) 876-5626.

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3/90 3-12

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6400.1 REV-1

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b\. After 60 and 90 days. The master servicer will send a

letter to the homesteader after 60 days to accelerate the

loan and again request the LUHA to obtain a voluntary

settlement or to exercise its reversionary interest. A

letter will also be sent to the homesteader and LUHA

after 90 days, at which time the LUHA should have already

taken action to evict the homesteader.

3\. Actions of LUHA to Obtain Voluntary Transfer of Property and

Assumption of Section 312 Loan. A default on a Section 312

loan in and of itself constitutes a breach of the Homesteader

Agreement, if the agreement contains the provisions required

in paragraph 12-16(b) of the Section 312 Handbook as cited

above. When a breach cannot be resolved, the homesteader must

surrender all interest in the property and must vacate the

property and the LUHA must attempt to re-homestead the

property. When the reversionary interest is exercised by the

LUHA, the security interest of the Section 312 loan executed

by the homesteader will be cut off for HUD, but the original

homesteader remains responsible for repayment of the loan.

In this situation, HUD may seek a judgment as a recourse to

collect the loan. The possibility of such action may serve

as an inducement to the Section 810/312 homesteader to agree

to a voluntary transfer, and is an action which should be

presented to a homesteader who is in default.

The LUHA should attempt to persuade the original homesteader

in default to voluntarily transfer his or her interest in the

property and the liability of the loan to a new homesteader

by:

a\. offering the original homesteader a general release of

liability on the Section 312 loan (prepared by HUD Field

Counsel or the master servicer for approval by the Office

of Urban Rehabilitation); and

b\. agreeing that the homesteader\'s credit record and future

eligibility for other HUD programs will not be affected.

4\. Finding Successor Homesteader. As an aid to finding a

successor homesteader who can afford the property, HUD may

consider:

a\. a reduction in the principal amount of the Section 312

loan (and consequent reduction in the monthly payments)

in cases where the appraised value of the property is

less than the amount of the loan. If the original

outstanding principal balance exceeds \$20,000, the

Federal Claims Collection Standards (4 CFR 101-105)

requires Justice Department Concurrence, as a

\"compromise\" of the loan obligation.

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3-13 3/90

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6400.1 REV-1

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b\. a write off of accrued interest.

Arrangements to obtain a current appraisal must be

discussed with Headquarters Section 312 staff.

Where there is a voluntary transfer and assumption of the

Section 312 loan, the successor homesteader must acquire

the conditional title from the original homesteader, sign

a new or modified Homesteader Agreement with the LUHA

(which incorporates a new 5-year continuous occupancy

period), and assume the Section 312 loan under the

existing documents, or under modified documents, as

appropriate. The LUHA is responsible for the preparation

of homesteader and Section 312 loan documents; however,

any modification to Section 312 loan documents must be

cleared by HUD Field Counsel.

Any proposed assumption must be cleared with the Section

312 Rehabilitation Management Specialist/Urban

Homesteading Coordinator before the property is

transferred to a successor homesteader. A copy of the

new Homesteader Agreement should accompany the 312 loan

assumption documents submitted to HUD. If a reduction or

write-off of any part of a Section 312 debt is

anticipated, it must be coordinated with Headquarters

Section 312 staff and the master servicer.

5\. Exercising the Reversionary Interest. If a homesteader

resists a voluntary surrender of possession and transfer of

the property to a successor homesteader, the LUHA must take

steps to exercise its reversionary interest (or the

equivalent), to evict the original homesteader, to protect

the property from vandalism, and to find a successor

homesteader to assume the loan.

The LUHA\'s recapture of possession and/or title to the

property may wipe out HUD\'s security interest for the Section

312 loan, but it will not wipe out the loan itself. The

loan, however, cannot be assumed by a successor homesteader

without the consent of the original homesteader. The LUHA

may facilitate an assumption by requiring all homesteaders to

execute an irrevocable power of attorney at the time of

conditional conveyance and the signing of the Section 312

loan documents, which would give the LUHA consent in advance

to transfer the Section 312 loan to a successor homesteader

in the event of a breach of the homesteader agreement.

Without such a document, there can be no voluntary assumption

of the Section 312 loan and the original homesteader

continues to remain liable for payment. If a successor

homesteader assumes the Section 312 loan after the LUHA

exercises its reversionary interest, the

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3/90 3-14

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6400.1 REV-1

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terms of the assumption and procedures noted in (b) above

should be followed, except that the successor homesteader

acquires the property from the LUHA instead of the original

homesteader.

6\. Foreclosure. Foreclosure or a deed in lieu of foreclosure

divests the original homesteader of his or her right to owner

occupancy of the property, also breaching his or her

conditional title and Homesteader Agreement. Therefore, in

foreclosing, HUD acquires only a partial interest in the

property which is essentially worthless, unless it is merged

with the reversionary interest held by the LUHA. A

foreclosure also wipes out the Section 312 loan.

Therefore, a foreclosure or deed-in-lieu is a viable option

for homesteading properties prior to conveyance of fee simple

title to the homesteader only under the following

circumstances.

a\. The property has substantial net value over and above the

estimated cost of foreclosure, superior liens, and

property management expenses;

b\. The LUHA has first used all reasonable efforts to arrange

a voluntary settlement with the original homesteader, in

order to transfer the property to a successor homesteader

who will assume all or a substantial portion of the

Section 312 loan, which also both preserves the property

for homesteading and minimizes the Government\'s Section

312 loss;

c\. The LUHA quit claims its interest in the property to HUD

prior to the initiation of foreclosure (or acceptance by

HUD of a deed-in-lieu) so that HUD acquires an interest

it can dispose of; and

d\. The LUHA also agrees not to reclaim the property from

HUD\'s inventory for re-homesteading.

If the property has substantial net value and the LUHA does

not cooperate with respect to items 2, 3, and 4 above, HUD

will view the LUHA as causing unnecessary losses to the

Section 312 revolving fund and the Section 810 appropriation,

and will consider terminating the LUHA\'s participation in

these programs.

7\. Tax Consequences Involving Loan Delinquencies.

a\. The LUHA must report to the IRS on Form 1099-S any gross

proceeds of sale of a homestead/Section 312 security

property (including the amount of the loan assumed) from

a

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3-15 3/90

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6400.1 REV-1

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voluntary conveyance or through exercise of the reverter

clause.

b\. HUD Headquarters must report to the IRS on Form 1099-G

the amount of principal reduction or accrued interest

forgiveness in connection with a compromise.

c\. HUD Headquarters must report to the IRS on Form 1099-A

when a Section 312 loan is foreclosed by HUD, a

deed-in-lieu is accepted by HUD, or the security property

is abandoned by the homesteader.

d\. The Field Office Section 312/Urban Homesteading

Coordinator must inform Headquarters when the

circumstances in Items 2 and 3 occur so that the forms so

noted can be filed.

B. Other public or private financing.

Where the rehabilitation is financed for a homesteading property

with other public funding, such as CDBG funds, the LUHA should

consider including language similar to that in paragraph 3-3 A.1.

of this Handbook, in the Homesteader Agreement and/or the

conditional conveyance instruments. The LUHA\'s homesteading

interest may not be subordinated to a lien securing other public

financing.

If a private lender is involved, HUD recommends that the LUHA

negotiate with the lender a separate agreement wherein the lender

will provide notification to the LUHA of any delinquency or

default prior to any formal action; that the LUHA will be

provided a reasonable period of time in which to exercise its

reversionary rights, including action to remove the homesteader

from the property, if necessary; and the LUHA can find a

replacement homesteader to assume the existing obligation. Where

private lenders are involved, the LUHA may find it necessary to

make payments to keep the loan current until the successor

homesteader is located. CDBG funds may not be used to make such

loan payments unless there was a legally binding commitment to do

so (such as a loan guarantee) prior to commencement of

rehabilitation.

3-4. OTHER REQUIREMENTS.

A. Annual Inspection

The LUHA must verify by an on-sight inspection on an annual

basis, the continued occupancy of the homestead property by the

homesteader during the 5-year conditional period.

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3/90 3-16

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6400.1 REV-1

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B. Flood Disaster Protection Act (42 USC Section 4012a; 4106)

Buildings located within special flood hazard areas identified by

the Federal Emergency Management Agency under the National Flood

Insurance Program (NFIP) are subject to the Act and implementing

regulations. The two requirements affecting homesteading

properties are:

1\. Either the LUHA as the initial owner or the homesteader as

the ultimate owner must:

a\. purchase flood insurance coverage (see paragraph 3

below);

b\. renew the coverage so that the flood insurance policy

does not lapse during the mandatory period (see paragraph

5 below); and

c\. provide proof of purchase of insurance to the HUD Urban

Homesteading Coordinator if HUD is transferring the

property to the LUHA, or to the LUHA if the LUHA is

transferring the property to the homesteader \-- for

inclusion in the homesteading file.

2\. The unit of general local government\'s responsibility is:

a\. to establish and maintain its eligibility as a

participant in the NFIP; otherwise homesteading is

prohibited for buildings located in special flood hazard

areas by Section 202(a) of the Act; and

b\. to assure compliance with Section 102(a), which prohibits

homesteading in a special flood hazard area, unless the

property is covered by flood insurance.

3\. The LUHA must check property locations against NFIP flood

maps to determine whether properties to be transferred are

located within Flood Hazard Zones \"A\" and \"V\" series and for

which flood insurance is required.

4\. Premium. Flood insurance coverage must be in the amount at

least equal to the property value (less estimated land value)

or to the maximum limit of coverage available with respect to

the particular type of property as set forth under the Act,

whichever is less.

5\. Term. The mandatory period for flood insurance is for the

useful life of the property. The NFIP will assure compliance

by providing an annual notification to HUD for any property

transferred to the LUHA, but not yet transferred to a

homesteader, and to the LUHA for any property transferred to

a

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3-17 3/90

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6400.1 REV-1

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homesteader. In completing the flood insurance application

form, the LUHA or homesteader, as appropriate, will indicate

the name and address of the monitor (HUD or the LUHA), in

item #6 or #7 on the Federal Emergency Management Agency

(FEMA) Form 81-16 or comparable form authorized by FEMA.

Thereafter, FEMA will forward to the monitor (HUD or the

LUHA) the insurance renewal premium notice and the national

flood insurance expiration reissue premium notice in the same

manner as it does to the insured (the LUHA or the

homesteader). Samples of these forms are contained as

Exhibits 12-1 through 12-4 of HUD Handbook 7375.01, Rev. 2,

Section 312 Rehabilitation Loan Program. The LUHA should

keep an up-to-date listing of each insured property,

including address, description, amount and the mandatory

period of insurance coverage, the expiration and renewal

dates of the flood insurance policy, the name and address of

the insurer, and the applicable insurance policy numbers; and

take any reasonable means to enforce the legal requirements

and consult with the HUD Field Office promptly on any

unresolved flood insurance purchase problem or delinquency.

C. Lead-Based Paint

Pursuant to 24 CFR section 590.11(d)(6), the Department\'s

regulations with respect to lead-based paint at 24 CFR Part 35

are currently applicable to the Urban Homesteading Program. Part

35 contains the following relevant provisions:

1\. Requirement of notification to \"purchasers\" of housing

constructed prior to 1978 of the hazards of lead-based paint

poisoning (Part 35, Subpart A). Although homesteaders are

not technically \"purchasers,\" the LUHA should nevertheless do

this notification before a prospective homesteader accepts

title to the property, as part of the process of informing

the prospective homesteader about the results of the

inspection and what rehabilitation is required to correct

\"immediate hazards\" on \"applicable surfaces\" under Part 35,

Subpart C. Thus, the homesteader will be in a position to

accept title knowing what rehabilitation is required to meet

lead-based paint hazard elimination standards.

2\. Prohibition of the use of lead-based paint in federally

assisted rehabilitation (Part 35, Subpart 8).

3\. Provision requiring the inspection of housing constructed

prior to 1973 and its treatment to eliminate \"immediate

hazards\" on \"applicable surfaces\" (Part 35, Subpart C).

Under Part 35, this consists principally of the covering or

removal of defective paint surfaces, defined as cracking,

scaling, peeling, chipping or loose paint. These conditions

shall be

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3/90 3-18

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6400.1 REV-1

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eliminated as part of the rehabilitation undertaken by the

homesteader under the direction of the LUHA.

Some housing transferred to LUHAs may have already been treated

by HUD to eliminate lead-based paint hazards as part of HUD\'s

property disposition process; notification of hazards is still

required for these properties. In addition, if the property is

being rehabilitated with either CDBG or Section 312 funds, more

stringent hazard elimination requirements will apply (CDBG \-- see

24 CFR section 570.608; Section 312 \-- see 24 CFR section

510.410). Finally, Section 566 of the Housing and Community

Development Act of 1987 substantially amends the Lead-Based Paint

Poisoning Prevention Act, essentially to require testing of

HUD-associated housing constructed or substantially rehabilitated

prior to 1978, and treatment of both intact and non-intact paint

surfaces. LUHAs shall comply with HUD\'s regulations implementing

the new act with respect to all properties transferred to

homesteaders.

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3-19 3/90