www.hudclips.org 

U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
AUG - 3 1994
Mortgagee Letter 94-38
     TO:  ALL HUD-APPROVED MULTIFAMILY MORTGAGEES
     SUBJECT:  DISPOSITION OF FIRE and HAZARD INSURANCE PROCEEDS
 
          The Department published regulation changes on
 
     June 17, 1994, that affect disposition of multifamily fire and
 
     hazard insurance proceeds.   Enclosed for your convenience are
 
     copies of these changes.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing
Federal Housing Commissioner
 
     Enclosure
 
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DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
 
Office of the Assistant Secretary for
Housing--Federal Housing
Commissioner
 
24 CFR Parts 207, 213, 221, and 242
 
 Docket No, R-94-1723; FR-3603-F-01
 
RIN 2502-AG19
 
Disposition of Fire and Hazard
Insurance Proceeds
 
AGENCY:  Office of the Assistant
Secretary for Housing--Federal Housing
Commissioner, HUD.
 
ACTION:  Final rule.
__________________________________________________
 
SUMMARY:  This rule revises certain
provisions in HUD regulations covering
multifamily mortgage insurance which
have the effect of requiring prior HUD
endorsement before the expenditure of
any fire and hazard insurance loss
proceeds by mortgagees.  Instead of this
requirement the regulations would be
revised to allow loss proceeds to be
expended to restore or repair the
property without prior HUD approval.
The proceeds may not however, be used
for any other purposes without prior
HUD approval.
 
EFFECTIVE DATE:  July 18, 1994.
 
FOR FUTURE INFORMATION CONTACT:
James Tahash, Planning and Procedures
Division, Office of Multifamily Housing
Management, Room 6182, Department
of Housing and Urban Development,
451 Seventh Street, SW, Washington,
DC 20410, voice (202) 708-3944, TDD
(202) 7084594.  (These are not toll-free
numbers.)
 
SUPPLEMENTARY INFORMATION:  Under
existing HUD regulations (24 CFR
207.260) in the event a loss occurs to the
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mortgaged property under any policy of
fire or other hazard insurance and the
mortgagee has received the proceeds
therefrom, it shall not exercise its option
under the mortgage to use the proceeds
of the insurance for the repairing,
replacing, or rebuilding of the premises,
or apply them to the mortgage
indebtedness, or make any other
disposition of the proceeds without the
prior written approval of the
Commissioner.  Through cross-referencing
this requirement is also
made applicable to other FHA
multifamily programs i.e. Part 213
Cooperative Housing Mortgage
Insurance, Part 220 Mortgage Insurance
and Insured Improvement Loans for
Urban Renewal and Concentrated,
Development Areas, Part 221 Low Cost
and Moderate Income Mortgage
Insurance, Part 231 Housing Mortgage
Insurance for the Elderly, Part 232
Mortgage Insurance for Nursing Homes,
Intermediate Care Facilities, and Board
and Care Homes, Part 234
Condominium Ownership Mortgage
Insurance, Part 236 Mortgage Insurance
and Interest Reduction Payments for
Rental Projects, Part 241 Supplementary
Financing for Insured Project Mortgages
and Part 242 Mortgage Insurance for
Hospitals.
   This rule revises current regulatory
requirements to provide that the
mortgagee may exercise its option to use
the insurance proceeds for the repairing,
replacing or rebuilding of the premises
without prior HUD approval.  It may not
however make any other disposition of
insurance proceeds without prior
approval.
   The Department has found that its
Field Office staff resources can be more
effectively allocated to tasks other than
the endorsing of property insurance loss
drafts where the proceeds, in any event,
are going to be used to restore or repair
the property.  We estimate that from
$10,000 to $20,000 per year in staff
resources could be saved by making this
change.  Mortgagees could have similar
 
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savings (from reduction of paperwork
and check cashing steps) of from $5,000
to $10,000 per year.  Project owners also
could have savings.  Approximately
20,000 project owners, their mortgagees
and their insurance agents and
companies should benefit by
eliminating this unnecessary procedural
step.
   The rule also makes conforming
revisions to 24 CFR 207.10, 213.13,
221.521 and 242.43 of HUD regulations
to provide that fire and hazard and
insurance have attached a standard
mortgagee clause making loss payable to
the mortgagee, its successors and
assigns rather than the current
requirement that loss be payable to the
mortgagee and the Commissioner as
their interests may appear.
   Due to the strictly technical nature of
this rule, the Department has
determined that the notice and public
comment procedure under Title 5 of the
United States Code is unnecessary and
is therefore issuing this document as a
final rule.
 
Procedural Matters
 
Executive Order 12866--Regulatory
Planning and Review
 
   This rule was reviewed by the Office
of Management and Budget under
Executive Order 12866, Regulatory
Planning and Review.  Any changes
made to the rule as a result of that
review are clearly identified in the
docket file which is available for public
 
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inspection in the office of the
Department's Rules Docket Clerk, room
10276, 451 Seventh Street SW.,
Washington, DC.
 
Regulatory Flexibility Act
 
   In accordance with 5 U.S.C. 605(b)
(the Regulatory Flexibility Act), the
undersigned hereby certifies that this
rule does not have a significant
economic impact on a substantial
number of small entities.  This rule is
technical in nature.  It effects no
substantive changes in HUD programs
or policies.
 
Semiannual Agenda
 
   This rule was listed as item 1569 in
the Department's Semiannual Agenda of
Regulations published on April 25, 1994
(59 FR 20424, 20444) under Executive
order 12866 and the Regulatory
Flexibility Act.
 
Executive Order 12612, Federalism
 
   The General Counsel, as the
Designated Official under section 6(a) of
Executive order 12612, Federalism, has
determined that the policies contained
in this rule do not have Federalism
implications and, thus, are not subject
to review under the Order.  No
programmatic or policy changes result
from this rule's promulgation which
would affect existing relationships
between the Federal Government and
State and local governments.
 
Executive Order 12606, The Family
 
   The General Counsel, as the
Designated Official under Executive
order 12606, The Family, has
determined that this rule does not have
potential for significant impact on
family formation, maintenance, and
general well-being, and, thus, is not
subject to review under the Order.  The
 
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rule is technical in nature and makes no
significant change in existing HUD
policies or programs.
 
Environment
 
   An environmental assessment is
unnecessary, since internal
administrative procedures whose
content do not constitute a development
decision affecting the physical
condition of specific project areas or
building sites is categorically excluded
from the Department's National
Environmental Policy Act procedures
under 24 CFR 50.20(k).
 
List of Subjects
 
24 CFR Part 207
 
   Manufactured homes, Mortgage
insurance, Reporting and recordkeeping
requirements, Solar energy.
 
24 CFR Part 213
 
   Cooperative Mortgage Insurance,
Reporting and recordkeeping
requirements.
 
24 CFR Part 221
 
   Low and moderate income housing,
Mortgage insurance, Reporting and
recordkeeping requirements.
 
24 CFR Part 242
 
   Hospitals, Mortgage insurance,
Reporting and recordkeeping
requirements.
 
   Accordingly, 24 CFR parts 207, 213,
221, and 242 are amended to read as
follows:
 
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PART 207--MULTIFAMILY HOUSING
MORTGAGE INSURANCE
 
   1.  The authority citation for 24 CFR
part 207 continues to read as follows:
 
   Authority:  12 U.S.C. 1713 and 1715b; 42
U.S.C. 3535(d).  Sections 207.258 and
207.258b are also issued under 12 U.S.C.
1701z-11(e).
 
   2.  Section 207.10 is revised to read as
follows:
 
  207.10  Covenant for fire Insurance.
 
   The mortgage shall contain a covenant
acceptable to the Commissioner binding
the mortgagor to keep the property
insured by a standard policy or policies
against fire and such other hazards as
the Commissioner, upon the insurance
of the mortgage, may stipulate, in an
amount which will comply with the
coinsurance clause applicable to the
location and character of the property,
but not less than 80 percent of the actual
cash value of the insurable
improvements and equipment of the
project.  The initial coverage shall be in
an amount estimated by the
Commissioner at the time of completion
of the entire project or units thereof.  The
policies evidencing such insurance shall
have attached thereto a standard
mortgagee clause making loss payable to
the mortgagee, its successors and
assigns
 
   3.  Paragraph (e) of  207.260 is revised
to read as follows:
 
  207.260 Protection of mortgage security.
*  *  *   *  *
 
   (e) Application of insurance proceeds.
   (1) In the event a loss has occurred to
the mortgaged property under any
policy of fire or other hazard insurance
and the mortgagee has received the
proceeds therefrom, it may exercise its
option under the mortgage to use the
 
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proceeds of such insurance for the
repairing, replacing, or rebuilding of the
premises.  It may not make other
disposition of such proceeds, without
the prior written approval of the
Commissioner.
   (2) If the proceeds are applied to the
mortgage with such prior written
approval and result in the payment in
full of the entire mortgage indebtedness,
the contract of mortgage insurance made
with the Commissioner shall thereupon
terminate.
   (3) If the Commissioner shall fail to
give his approval to the use or
application of such funds within 60
days after written request by the
mortgagee, the mortgagee may use or
apply such funds for any of the
purposes specified in the mortgage
without the approval of the
Commissioner.
 
PART 213--COOPERATIVE HOUSING
MORTGAGE INSURANCE
 
   4.  The authority citation for 24 CFR
part 213 continues to read as follows:
 
Authority:  12 U.S.C. 1715b, 1715e; 42
U.S.C. 3535(d).
 
   5.  Section 213.13 is revised to read as
follows:
 
  213.13  Covenant for fire Insurance.
 
   The mortgage shall contain a covenant
acceptable to the Commissioner binding
the mortgagor to keep the property
insured by a standard policy or policies
against fire and such other hazards as
the Commissioner, upon the insurance
of the mortgage, may stipulate, in an
amount which will comply with the
coinsurance clause applicable to the
location and character of the property,
but not less than 80 percent of the actual
cash value of the insurable
improvements and equipment of the
project.  The initial coverage shall be in
 
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an amount estimated by the
Commissioner at the time of completion
of the entire project or units thereof.  The
policies evidencing such insurance shall
have attached thereto a standard
mortgagee clause making loss payable to
the mortgagee, its successors and
assigns.
 
PART 221--LOW COST AND
MODERATE INCOME MORTGAGE
INSURANCE
 
   6.  The authority citation for 24 CFR
part 221 is revised to read as follows:
 
   Authority:  12 U.S.C. 1715b and 1715l; 42
U.S.C. 3535(d); sec. 221.544(a)(3) is also
issued under 12 U.S.C. 1707(a).
 
   7.  Section 221.521 is revised to read
as follows:
 
  221.521  Covenant for fire insurance.
 
   The mortgage shall contain a covenant
acceptable to the Commissioner binding
the mortgagor to keep the property
 
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insured by a standard policy or policies
against fire and such other hazards as
the Commissioner, upon the insurance
of the mortgage, may stipulate, in an
amount which will comply with the
coinsurance clause applicable to the
location and character of the property,
but not less than 80 percent of the actual
cash value of the insurable
improvements and equipment of the
project.  The initial coverage shall be in
an amount estimated by the
Commissioner at the time of completion
of the entire project or units thereof.  The
policies, evidencing such insurance shall
have attached thereto a standard
mortgagee clause making loss payable to
the mortgagee, its successors and
assigns.
 
PART 242--MORTGAGE INSURANCE
FOR HOSPITALS
 
   8.  The authority citation for 24 CFR
part 242 continues to read as follows:
 
   Authority:  12 U.S.C. 1715b, 1715n(f),
1715z-7; 42 U.S.C. 3535(d).
 
   9.  Section 242.43 is revised to read as
follows:
 
  242.43  Covenant for fire Insurance.
 
   The mortgage shall contain a covenant
acceptable to the Commissioner binding
the mortgagor to keep the property
insured by a standard policy or policies
against fire and such other hazards as
the Commissioner, upon the insurance
of the mortgage, may stipulate, in an
amount which will comply with the
coinsurance clause applicable to the
location and character of the property,
but not less than 80 percent of the actual
cash value of the insurable
improvements and equipment of the
project.  The initial coverage shall be in
an amount estimated by the
Commissioner at the time of completion
of the entire project or units thereof.  The
 
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policies evidencing such insurance shall
have attached thereto a standard
mortgagee clause making loss payable to
the mortgagee, its successors and
assigns.
 
   Dated:  June 9, 1994.
 

Nicolas P. Retsinas,
 
Assistant Secretary for Housing-Federal
Housing Commissioner.
 
 FR Doc. 94-14744 Filed 6-16-94; 8:45 am
 
BILLING CODE 4210-27-P