4510.1

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CHAPTER 3. CONTRACT AUTHORITY

3-1. GENERAL. The term \"contract authority\" refers to the dollar

amount of funds which can be used to enter into new contracts to

make interest reduction payments on behalf of project owners. The

overall level of available contract authority to established on

a yearly basis. Except for any amount retained by the Central

Office as a contingency reserve, contract authority is either

allocated to field offices for regular program operations or set

aside for use in connection with special programs. Allocations

are made in accordance with the procedures stated in Reference

\(8\) of the Foreword.

3-2. DISTRIBUTION. The term \"adjusted fair share\" describes the

methodology for providing that every section of the country, as

represented by the various field office jurisdictions, receives

a proportionate share of assistance for low and moderate income

housing.

a\. Demand and Production Factors. Under this system, HUD

utilizes the budgetary projections of units for which

reservations will be made in a given calendar year for all

subsidized program. Allocations of contract authority are

then made to field offices by the HUD Central Office, through

and with Regional Office consultation, on the basis of demand

and production capacity factors. These factors are:

\(1\) Demand Factors:

\(a\) Program potentials-standardized annual estimates of

need for each housing program are projected for each

county on the basis of family income distribution,

age of heads of household, and housing conditions

as reported by the Bureau of the Census.

\(b\) Absorption potentials-as estimated by the field

offices.

\(2\) Production Factors:

\(a\) Starts under the program during the previous year.

\(b\) Prospective starts-as estimated by the field

offices.

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4510.1

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b\. Adjusted Fair Share. These factors combine to permit the

establishment of an \"adjusted fair share\" for each jurisdiction

based on demand and absorption potential modified by

past and estimated production performance.

c\. Field Office Responsibility: Each field office is responsible

for assuring that reservations of contract authority never

exceed amounts allocated to the field office. Offices must

hold back any amount of funds that may be needed for increases.

Each Regional Office is responsible for efficient utilization

of authority by field offices within their jurisdiction.

3-3. EVALUATION OF MARKET DEMAND AND USE OF PROJECT SELECTION CRITERIA.

Since the demand for Section 236 assistance is greater than the

supply, each field office must carefully evaluate needs within

its jurisdiction in order to achieve optimum utilization of

available contract authority.

a\. The Role of HUD in meeting the nation\'s housing needs should

be an active one; HUD is to take the lead in encouraging

sponsors and builders to develop the capacity to meet the

needs of the total housing market. Each field office should

divide its jurisdiction into recognizable market areas and

plan its distribution of contract authority so that each area

receives an equitable share of assisted housing. It should

be recognized that one area will not necessarily need the same

percentage of Section 236 allocation as another, since demand

is not the same in each area as to type or volume of housing,

or economic levels to be served.

b\. In Market Areas for which an Inadequate Amount of Assisted

Housing Has Been Proposed, the field office should actively

solicit and/or assist in the development of housing proposals.

Various elements of the housing industry, and prospective

housing sponsors, should be made aware of the need for housing

in particular areas.

c\. Section 236 Housing Proposals should initially be separated

according to the market area proposed. They should then be

evaluated in terms of the Project Selection Criteria. Within

a market area in which many Section 236 projects are proposed

for development, the Project Selection Criteria should

establish priorities as to which will be funded and in what

order.

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4510.1

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d\. The Utilization of Project Selection Criteria is mandatory.

Housing sponsors should be educated concerning Project

Selection Criteria and informed of ratings received by their

proposals. Upon inquiry such sponsors may also be given the

ratings of superior proposals, if any, and the reasons for

the differences.

3-4. ENVIRONMENTAL REQUIREMENTS. HUD regulations implementing the

National Environmental Policy Act of 1969 (P.L. 91-190) and the

Guidelines of the Council on Environmental Quality are applicable

to each Section 236 project.

3-5. PROCEDURE DURING PERIOD WHEN CONTRACT AUTHORITY IS NOT AVAILABLE

\- TREATMENT OF \"BACKLOG.\" Field offices need not process proposals

up to feasibility when contract authority is not available. It

is recognized that staff limitations may at times make immediate

processing impossible, and further, that some effort will be

duplicated at the time contract authority becomes available. The

Field Office Director, pursuant to guidance of the ARA for HPMC,

should employ a policy which will make the best use of his

resources and best serve the public.

a\. Proposals need not be formally recorded or numbered unless a

complete FHA Form 2013 (Request for Feasibility Determination)

has been submitted. Periodic review of the backlog file must

be made to identify which proposals are still active. One

method would be an interview with each sponsor at intervals

of not more than 60 days to determine whether it is still

interested. Each proposal must at least be analyzed to

determine (1) the market area which it would serve, and (2)

whether it is potentially eligible for feasibility review or is

clearly ineligible under the Project Selection Criteria and

economic viability tests.

b\. The extent of review and whether or not FHA Form 2013 will

be obtained will depend upon staff time available to the

office. When the proposal is found to be potentially eligible,

the sponsor is to be advised in writing that its proposal

will be held in abeyance for review and should be given a

general idea of when contract authority may become available.

A proposal must never be permitted to remain unprocessed

without the sponsor being notified of its status.

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4510.1

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3-6. ROLL-OVER PROVISION. The HUD Act of 1970 revised HUD treatment

of contract authority with respect to cancellation of interest

reduction contracts and reuse of contract authority. Contract

authority recaptured from cancelled contracts reverts to the

originating field office and may be used to fund new proposals.

Fiscal instructions appear in Reference (9) of the Foreword.

3-7. RENT SUPPLEMENTS IN COMBINATION WITH SECTION 236. In order to

facilitate an economic mix among Section 236 tenants, Section 236

projects will generally include some rent supplement assistance.

Rent supplement contract authority to be used in Section 236

projects will be allocated in block amounts to field offices for

their use in accordance with the following instructions. The

block allocations will be specifically designated as \"piggyback\"

funds and may not be used for any other purpose.

a\. Rent Supplement Contract Authority for a Section 236 project

should be reserved by the field office Director at the same

time the Section 236 reservation is made. That is, the FHA

Form 3126 and the FHA Form 2500 (reservation forms for Section

236 and Rent Supplement contract authority, respectively, see

Appendices 1 and 2) should be executed simultaneously. Field

Office Directors are reminded that the inclusion of rent

supplement assistance in any project requires local approval

in the form of a certified Workable Program for Community

Improvement or an official resolution adopted or signed by

the appropriate local official(s).

b\. The Statute Permits up to 40% of the units in a Section 236

project to receive the benefit of rent supplement assistance.

However, the limited amount of available rent supplement

authority has necessitated an administrative ceiling precluding

the rent supplementation of more than 10% of the units in any

Section 236 project.

\(1\) Field Office Directors may not reserve rent supplement

contract authority for more than 10% of the units in any

Section 236 project except when the project is intended

to meet:

\(a\) A need for relocation housing,

\(b\) A need to house displacees, or

\(c\) Situations which involve vacancies of extended

duration where it can be shown that a market exists

for rent supplement units.

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4510.1

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(3-7) (2) A Field Office Director may reserve rent supplement

contract authority for more than 10% of the units in a

Section 236 project in the above-stated circumstances

provided he lists his justification for waiving the

administrative limit (10%) in the \"remarks section of

the FHA Form 2500. In addition, need for relocation

housing must be documented by a letter from the local

public agency.

\(3\) In all cases a Field Office Director must obtain Central

Office prior approval (Office of Subsidized Housing

Programs) in order to reserve rent supplement contract

authority for more than 20% of the units in a Section

236 project.

\(4\) In no case may rent supplement contract authority be

reserved for more than 40% of the units in a Section 236

project; fractions of the units must be rounded down to

avoid conflicting with the statutory limitation.

c\. Computations for arriving at the total amount of rent supplement

reservation should be based on the formula in the special

worksheet (see Appendix 3). The maximum rent supplement for

any individual tenant is 70% of the basic rent, and no more

than 25% of the rent supplement tenants in a given project

may receive rent supplements amounting to more than 60% of

the basis rent.

d\. When Rent Supplement Contracts are Executed for Section 236

Projects, the number of units receiving rent supplement should

be indicated in Section 17 of the Contract by adding the

following: \"Total project units - ( ); rent supplement

units - ( ).\"

e\. Public Housing Authorities may lease units in a Section 236

project (through the provisions of the Section 23 leasing

program). Such housing authorities are permitted to pay the

\"basic rent\" for the Section 236 units which they lease. The

aggregate number of units in any Section 236 project to

receive assistance through the Rent Supplement program or

Section 23 leasing may not exceed a combined total of 40% of

the units, except with special permission of the Central

Office.

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4510.1

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3-8. SECTION 236 ASSISTANCE PAYMENTS. As a condition of a Section 236

mortgage insurance commitment, HUD agrees to make assistance

payments for the project, commencing at a specified time. The

total amount of assistance is based upon the difference between

the monthly payments for principal, interest and mortgage insurance

premium (which the project owner, as a mortgagor, is obliged to

pay under the mortgage) and the monthly payments for principal

and interest which the project owner would be obligated to pay

if the mortgage were to bear interest at a rate of 1% per annum.

It is important to understand that this formula is not used to

compute each monthly subsidy payment, nor is it meant to identify

specifically the components of the mortgage payment which are paid

by the government. It is solely for the purpose of arriving at

the total amount of assistance paid on behalf of a project. In

order to spread the benefit of assistance evenly over the term of

the mortgage, a factor is applied against the mortgage amount to

arrive at an annual subsidy amount. Then, provided the mortgage

is not subsequently amended, the mortgage payments and subsidy

payments remain constant except for a gradual diminution in the

amount attributable to MIP (which is based on the outstanding

principal balance). Since the combination of the mortgagor\'s

payment and the federal payment equals the total monthly mortgage

payment, including MIP, the mortgagee must accumulate and

safeguard, throughout the year, the amount attributable to MIP to

be paid at the beginning of the next year. MIP for the first year,

for insurance of advances cases, is to be paid at initial

endorsement. For insurance upon completion cases, MIP is paid at

initial/final endorsement. Subsequent annual payments of MIP will

be made on each anniversary of initial/final endorsement, as the

case may be, until the date of first payment to principal, at

which time the account will be adjusted. Thereafter, MIP will be

due on each anniversary of the first principal payment date.

a\. Factors to be Used in computing the subsidy at varying

interest rates are provided in the Section 236 Tables (see

Appendix 4). Prior to August 13, 1971, the terms of the

interest reduction payment contract began at final endorsement

for all cases. For mortgages which were not finally endorsed

as of August 13, 1971, the term for which interest payments

shall be made shall begin as follows:

\(1\) For a mortgage involving insurance of advances, on the

day after the cut-off date for cost certification

purposes (usually 30 days after the endorsement of

FHA Form 2449, the Project Inspection Report);

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4510.1 CHG

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(3-8) (2) For a mortgage insured upon completion, on the date on

which the Assistant Secretary-FHA Commissioner endorses

the note for insurance.

b\. The First Interest Reduction Payment will cover the period

from the day after the cut-off date for cost certification or

from the date of final endorsement, as prescribed in

paragraph 3-8.a.(1) or (2) above, through the end of the month.

All computations are made on the basis of a 360-day year or

twelve 30-day months.

c\. In an Insurance of Advances Case, the completion and execution

of FHA Form 3107 (see Appendix 5) will constitute the Field

Office Director\'s approval of the commencement of the term of

the interest reduction payment contract. Instructions for

completion and distribution appear on the Form. Interest

reduction payments made prior to final endorsement will be

calculated on the basis of the advances of mortgage proceeds

that have been insured through the cut-off date. Fiscal

instructions are included on FHA Form 3107. Advances approved

by Field Office Directors prior to the cut-off date but not

disbursed by mortgagees must not be included in the total

shown in panel #4 of FHA Form 3107. Subsequent to final

endorsement, payments shall be due on the first day of each

month following the beginning of the term and shall be paid

upon receipt of a billing from the mortgagee (or its

authorized agent) on FHA Form 3102, see Appendix 6.

d\. Amortization shall commence in accordance with the terms of

the mortgage note. However, if there is more than a 60-day

period between final endorsement and the date previously

established for the commencement of amortization, then at

final endorsement, the mortgagor and mortgagee will be

encouraged to amend the mortgage note to provide for

commencement of amortization on the first day of the first month

following 30-days from the date of final endorsement.

e\. Since the entire mortgage amount will receive a subsidy,

item 12A, \"Amount of Insured Mortgage to be applied for,\"

in Form 3126, and the quantity shown in item D of that form,

\"Amount of insured mortgage to be applied for,\" must be

equal. After cost certification and completion of the final

rent formula and allocation of rents, the Form 3126 shall be

reviewed to assure that item D of this form contains the

correct final and total mortgage amount to be insured. If

it does not, an amended Form 3126 shall be prepared. \*

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Page 3-7 8/75

HUD-Wash., D. C.

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4510.1 CHG

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3-9. RENT SUPPLEMENTS IN FINALLY ENDORSED SECTION 236 PROJECTS.

a\. Conditions for Approval. New rent supplement contracts may

be issued to provide rent supplement assistance in finally

endorsed Section 236 projects for which there are no existing

contracts, and outstanding rent supplement contract may be

increased to cover additional units in finally endorsed

Section 236 projects for the following reasons:

\(1\) The necessity to house families and individuals

displaced from their homes by natural disaster;

\(2\) The immediate need for relocation housing;

\(3\) The need to utilize vacancies of extended duration

when it can be shown that there is a market for rent

supplement units;

\(4\) The need to provide rent supplement assistance to

families now living in Section 236 projects who meet

all the criteria for rent supplement eligibility and

who, because of increases in rent, can no longer afford

to pay the basic rent. Tenants in occupancy in

Section 236 projects could be eligible for rent supplement

assistance only if they meet the rent supplement

income and asset limitations and are elderly, handicapped,

a family whose head, or spouse is a member of

the Armed Forces serving on active duty, or were

displaced by governmental action.

In no case may a rent supplement contract be issued or

increased to cover more than the 40 percent statutory

limitation on the number of units in Section 236 projects which

may receive the benefits of rent supplement assistance.

New rent supplement contracts or increases in units covered

by existing rent supplement contracts may not be approved

for finally endorsed Section 221(d)(3) BMIR or MIR projects.

b\. Procedure. Field Office Directors may approve new rent

supplement contracts or increases in existing rent supplement

contracts for finally endorsed Section 236 projects in

accordance with the previously mentioned criteria. Contract

authority must be provided from regular office allocations.

The remarks section of the Rent Supplement Reservation Form

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4510.1

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(3-9) (FHA 2500) must provide documentation as to the condition(s)

under which approval of the contract (or increase) was given. If

rent supplement contract authority is not available in the field

office, a request for a special allocation accompanied by FHA

Form 2500 and full justification, may be forwarded through the

Office of the Regional Administrator to the Director, Office of

Subsidized Housing Programs. Central Office permission must be

obtained prior to reserving rent supplement contract authority

for more than 20% of the units in a Section 236 project in any

case.

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