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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

 
September 29, 1989
Mortgagee Letter 89-24
 TO:  ALL APPROVED MORTGAGEES
 SUBJECT:  Insurance of Adjustable Rate Mortgages on Single Family
             Properties Section 251 of the National Housing Act
 
      The purpose of this letter is (1) to advise you of changes to
 the Adjustable Rate Mortgage (ARM) Program mandated by the
 publication on January 4, 1989, of a final rule at 54 FR 110-111
 in the Federal Register; and (2) to provide you with a
 comprehensive summary (which will incorporate the most recent
 changes) of the major features of the Program, thereby superseding
 Mortgagee Letters 84-16, 84-28 , 85-24, 87-31, 88-7, 88-26, and
 paragraph 6 on page 2 of 88-2 .  The effective date for the
 aforementioned rule is March 31, 1989.  Notification of this date
 was published in the Federal Register on February 28, 1989.
 
                        REGULATORY CHANGES
 
 Annual Adjustment Notice to the Mortgagor
 
      Previously, notice of any annual adjustment to the interest
 rate and monthly payment, increase or decrease, had to be given to
 the mortgagor at least 30 days prior to the change in payment.
 The new rule shortens the period for advance notice that a holder
 of an ARM must allow when it makes effective any annual
 adjustment; specifically, the rule revises 24 CFR 203.49(g) and
 234.79(g) to change our annual disclosure requirement from "at
 least 30 days"  to "at least 25 days" before a monthly payment at
 the new level is due.  It is important to note that the date on
 which the new monthly payment is due is 30 days after the date at
 which the interest rate may be changed.  The annual disclosure
 must be made each year, even if the interest rate or monthly
 payment does not change.
 
      This revision will conform HUD's disclosure requirement with
 the time frame required by the Federal Reserve Board in their
 Truth-in-Lending regulations ("Regulation Z") at 12 CFR
 226.20(c).
 
      Existing insured mortgages provide for a 30 day notice.  The
 new rule does not prohibit notice periods longer than 25 days and
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                                 2
 
 existing mortgagors have a contract right to the longer notice
 period.  Thus, mortgagees should honor the terms of existing
 mortgages and apply the shorter notice period only if the revised
 Adjustable Rate Rider and Adjustable Rate Allonge Amending Note,
 Attachment I herein, are used.
 
 Elimination of Carryover
 
      As a result of the final rule published at 54 FR 110-111,
 portions of 24 CFR 203.49(e) and 234.79(e) that discuss carryover
 are eliminated.  The purpose of this is to avoid confusion in the
 industry which has been caused by reference to a feature of the
 ARM program that has never been adopted in practice since the
 program was implemented in 1984.  Consequently, with respect to
 the magnitude of change in interest rate allowed for an ARM, the
 procedure to be followed is simply a continuation of current
 practice:  No single adjustment to the interest rate can result in
 a change in either direction of more than one percentage point
 from the interest rate in effect for the period immediately
 preceding that adjustment (the "annual cap"); and adjustments in
 the effective rate of interest over the entire term of the
 mortgage may not result in a change in either direction of more
 than five percentage points from the initial contract interest
 rate over the term of the mortgage (the "lifetime cap").
 
 Amendments to Adjustable Rate Rider and Adjustable Rate Allonge
   Amending Note
 
      As a result of the elimination of carryover, and of the
 change in the period of time required to be given to the mortgagor
 concerning the annual disclosure, several changes are required in
 the Adjustable Rate Rider for new FHA insured adjustable rate
 mortgages, and in the Adjustable Rate Allonge Amending Note used
 with the Adjustable Rate Notes secured by new FHA insured
 adjustable rate mortgages.  These changes are reflected at
 Attachment I herein, and also in the Notice on Requirements for
 Single Family Mortgage Instruments, published at 54 FR 27596 on
 June 29, 1989.
_____________________________________________________________________
                                 3
 
      The HUD Adjustable Rate Mortgage Disclosure Statement
 (Attachment III) has also been revised.
 
      The revised HUD Adjustable Rate Mortgage Disclosure
 Statement may be used immediately and must be used for all
transactions involving sales contracts signed on or after November
1, 1989, unless a disclosure statement meeting criteria of the
 Federal Reserve Board's Truth-in-Lending regulations ("Regulation
 Z") is used (see discussion under "Loan Disclosure at
 Origination").  The revised Rider and Allonge may be used
 immediately and must be used for all transactions involving sales
 contracts signed on or after November 1, 1989.  If the revised
 Rider and Allonge are used and the old HUD Adjustable Rate
 Mortgage Disclosure Statement was provided, the revised HUD
 Adjustable Rate Mortgage Disclosure Statement should be provided
 to the mortgagor at or before closing with an explanation that it
 supersedes the previous Disclosure Statement.
 
               MAJOR FEATURES OF THE HUD ARM PROGRAM
 
 Legislative History
 
      The Housing and Urban-Rural Recovery Act of 1983 (HURRA)
 added Section 251 to the National Housing Act authorizing HUD to
 insure adjustable rate mortgages (ARMs) on single family
properties.  The program became effective July 30, 1984.
 
 Eligible Sections, Borrowers, and Properties
 
      ARM loans originated under Sections 203(b), 203(k) (first
 lien only) and 234(c) are eligible for mortgage insurance.  Direct
 Endorsement lenders may originate loans under Sections 203(b) and
 234(c) only.  The ARM program is limited to owner-occupants.
 Investors are not eligible.
 
      One-to-four family units are eligible under the ARM program
 as long as one of the units will be occupied by the mortgagor.
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                                 4
 
 Limited Insurance Authority
 
      Formerly the number of ARMs that HUD could insure was limited
 to 10 percent of the total number of endorsements for the previous
 fiscal year.  The Housing and Community Development Act of 1987
 raised this number to the current volume of 30 percent.
 
      As previously stated, ARMs may be processed under Direct
 Endorsement.  After the mortgage credit analysis has been
 completed, but prior to notifying the applicant, the Direct
 Endorsement underwriter must contact the HUD Field Office for
 approval and to record the application against the ARM allocation
 in the Computerized Homes Underwriting Management System (CHUMS).
 
 Determination of Interest Rate
 
      The adjustable rate mortgage initial interest rate shall be
 negotiated by the mortgagee and the borrower.  Subsequent
 adjustments to this interest rate must correspond to changes in
 the weekly average yield on United States Treasury Securities
 adjusted to a constant maturity of one year.
 
      Weekly average yields are published in the Federal Reserve
 Bulletin and are made available by the Federal Reserve Board in
 Statistical Release H.15(519).  (Example at Attachment II.)  This
 is a national index, which can be obtained from the Federal
 Reserve Board, by requesting to be placed on the mailing list for
 receipt of the weekly H.15 publication.  The address is:
 
                Publications Services
                Mail Stop 138
                Board of Governors
                Federal Reserve System
                Washington, DC  20551
 
      The index is also published regularly in many newspapers,
 e.g. Wall Street Journal, USA Today.
_____________________________________________________________________
                                 5
 
 Frequency of Interest Rate Changes
 
      Interest rate adjustments to the ARM loan must occur on an
 annual basis, except that the first adjustment must occur no
 sooner than 12 months and no later than 18 months from the due
 date of the mortgagor's initial monthly payment.  This six month
 window period is designed to facilitate the pooling of loans for
 sale in the secondary market.  Subsequent interest rate
 adjustments will occur on each anniversary date of the first
 adjustment.  The date of the interest rate change is called the
 "Change Date" by HUD, and the "Interest Adjustment Date" by the
 Government National Mortgage Association (GNMA).
 
 Caps on Interest Rate Changes
 
      No single adjustment to the interest rate can result in a
 change in either direction of more than one percentage point from
 the interest rate in effect for the period immediately preceding
 that adjustment (the "annual cap").
 
      Adjustments in the effective rate of interest over the entire
 term of the mortgage may not result in a change in either
 direction of more than five percentage points from the initial
 contract interest rate (the "lifetime cap").
 
 Method of Calculating Interest Rate Adjustments
 
      The mortgagee and the borrower negotiate the initial interest
 rate and margin.  The margin must be constant for the entire term
 of the mortgage.  To calculate the annual adjustments to the
 initial interest rate:
 
      a.   Determine the current index.  The proper date to be used
           for indexing an interest rate adjustment is stated in
           paragraph 3(a) of both the Adjustable Rate Rider and the
           Adjustable Rate Allonge Amending Note:  "The amount of
           the Index will be determined, using the most recently
           available figure, thirty (30) days before the Change
           Date ('Current Index')."
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                                 6
 
           The index used, based on the weekly average yield on US
           Treasury securities adjusted to a constant maturity of
           1 year, must be the one effective on the date thirty
           (30) exact days before the Change Date.  The Federal
           Reserve Board Statistical Release H.15 is published
           weekly on Monday, or on Tuesday if Monday is a Federal
           holiday, and the index shown on that release is
           effective the day it is issued until the H.15 is issued
           the next week.
 
           The following are the proper indices to use when the
           30th exact day falls on:
 
           (1)  A Monday which is a business day.  Use the index
           rate contained in the H.15 release issued that Monday,
           if the 30th exact day prior to a Change Date and the
           issue date of an H.15 release both occur on the same
           day, i.e., they both occur on a Monday.
 
           (2)  A Monday which is a Federal holiday.  Use the index
           in the H.15 release issued the prior week if the 30th
           exact day before the Change Date falls on a Monday which
           is a Federal holiday.
 
           (3) A day of the week other than Monday.  Use the index
           in the H.15 release issued on the Monday of that week
           (or issued on Tuesday if that Monday is a Federal
           holiday).
 
                For example, for an April 1, 1989 Change Date, 30
                exact days before April 1 is Thursday, March 2.
                The correct index to use is the one contained in
                the H.15 release issued on Monday of that week,
                which is February 27 (see Attachment II).
_____________________________________________________________________
                                 7
 
      b.   Determine the calculated interest rate.  This is the
           current index plus the margin (the number of basis
           points identified as "margin" in paragraph 3(b) of the
           Adjustable Rate Rider and the Adjustable Rate Allonge
           Amending Note) rounded to the nearest 1/8th of one
           percentage point (0.125 percent).
 
           Since mortgages placed into GNMA pools must be rounded
           to the nearest 1/8th of one percent at each Interest
           Adjustment Date, the Adjustable Rate Mortgage Rider and
           Adjustable Rate Allonge Amending Note comply with GNMA's
           requirements.  However, item 3 of Attachment I provides
           lenders with the necessary modifications to the Rider
           and Allonge if the loan will not be placed in a GNMA
           pool and the lender does not want to round the interest
           rate to the nearest 1/8th of one percent.  Rounding is
           required unless the Rider and Allonge have been modified
           to delete the provision for rounding.
 
      c.   Compare the calculated interest rate (index plus margin,
           rounded to the nearest 1/8th of one percent) to the
           existing interest rate (rate in effect for the preceding
           12 months) to determine the new adjusted interest rate
           as follows:
 
           (1)  If the calculated interest rate is equal to the
                existing interest rate, the adjusted interest rate
                will not change.
 
           (2)  If the calculated interest rate is equal to or less
                than one percent (100 basis points) higher or lower
                than the existing interest rate, the calculated
                interest rate will become the new adjusted interest
                rate.
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                                 8
 
           (3)  If the new calculated interest rate is more than
                one percent (100 basis points) higher or lower than
                the existing interest rate, the new adjusted
                interest rate will be limited to one percent higher
                or lower than the existing interest rate.
 
      d.   In no event may any resulting Adjusted Interest Rate be
           more than five percentage (5 percent) points higher or
           lower than the initial interest rate at settlement.
 
      e.   An Adjusted Interest Rate becomes effective on the
           Change Date (the date is specified in paragraph 2 of
           both the Rider and Allonge) and thereafter will be
           deemed to be the existing interest rate.  The new
           existing interest rate will remain in effect until the
           next Change Date.  During the term of the mortgage each
           adjustment will be effective on the same date of each
           succeeding year.
 
 Computation of the Monthly Installment
 
      If there is a new interest rate on the mortgage as a result
 of the above calculations, a new monthly payment must be
 determined.  The monthly payment attributable to principal and
 interest will be calculated by determining the amount that is
 necessary to fully amortize the unpaid principal balance during
 the remaining term of the mortgage.  For this purpose, the unpaid
 principal balance shall mean that which would be due on the Change
 Date if there had been no default in any payment, but reduced by
 the amount of any prepayments to principal.  (Accordingly,
 mortgagee must credit all eligible prepayments, but must not debit
 any delinquency.)  Escrow requirements will then be added to
 principal and interest to arrive at the new monthly payment.
 
      Since interest is payable on the first day of the month
 following the month in which it accrued, the borrower will begin
 to pay the new monthly payment 30 days after the Change Date,
 provided the borrower is given proper notice as required under the
 Annual Disclosure section of this Mortgagee Letter.
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                                 9
 
      All ARM adjustments affect interest percentages only, no
 negative amortization may occur.
 
 Loan Disclosure at Origination
 
      The lender must disclose to the borrower the nature of the
 ARM loan at the time of loan application.  In order to meet this
 requirement, mortgagees may use either the HUD Adjustable Rate
 Mortgage Disclosure Statement (Attachment III) or a disclosure
 statement that meets the criteria of the Federal Reserve Board's
 Truth-in-Lending regulations ("Regulation Z") at 12 CFR Part 226.
 (The specific Federal Reserve Board disclosure requirements may be
 found in Section 226.19(b).)
 
      If the HUD ARM Disclosure Statement is used, mortgagees may
 use the 30 year principal and interest payment factors with the
 original mortgage amount to calculate the payments for years 2
 through 6.
 
 Annual Disclosure Requirements
 
      There are two basic steps which the mortgagee must take each
 year with respect to the interest rate adjustment.
 
      a.   Step 1:  Make the computation to adjust the interest
           rate and the monthly payments.  The first adjustment to
           the interest rate will become effective on the day
           specified in paragraph 2 of the Rider or the Allonge
           (Change Date) and thereafter each adjustment will be
           effective on the same date of each succeeding year
           during the term of the mortgage.  (As previously noted,
           the date on which the new monthly payment is due is 30
           days after the Change Date.)
 
      b.   Step 2:  Notify the mortgagor of any change in the
           interest rate and monthly payment.
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                                10
 
           The mortgagee's obligation to compute, adjust the
           interest rate, and give notice to the mortgagor on the
           prescribed dates, is not affected by delinquencies or
           foreclosures so long as the mortgage debt exists.  It is
           the mortgagee's responsibility to see that its
           collection actions continually update the mortgage debt.
           Notice of any adjustment to the interest rate and
           monthly payment, increase or decrease, must be given to
           the mortgagor at least 25 days prior to the change in
           payment.  (If the mortgage provides for 30 days notice,
           that provision must be followed.)  Our rule concerning
           the timing of the annual notice of adjustment is
           consistent with Federal Home Loan Bank Board (FHLBB)
           regulations and policy.
 
           The Adjustment Notice must contain (a) the date the
           Adjustment Notice is given, (b) the Change Date, (c) the
           current interest rate, (d) the new Existing Interest
           Rate (which is the Adjusted Interest Rate)  as adjusted
           on the Change Date, (e) the current Index and the date
           it was published, (f) the method of calculating the
           adjustment to the monthly payments, (g) the amount of
           the adjusted monthly payments, and (h) any other
           information which may be required by law from time to
           time.  The Notice should contain other relevant
           information such as an explanation of why a new Existing
           Interest Rate is less than the Calculated Interest Rate
           when the 5 percent cap is reached.
 
           The content of the annual disclosure notice may meet the
           criteria of either 24 CFR 203.49(g) and 234.79(g), or
           the criteria of the Federal Reserve Board in Regulation
           Z at 12 CFR 226.20(c).  The suggested format for
           providing the annual disclosure notice which appears at
           Attachment IV is designed to comply with HUD
           regulations.
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                                11
 
           It is suggested that the Notice be sent to the mortgagor
           by Certified Mail, Return Receipt Requested.  However, a
           Notice addressed and mailed via first class mail to all
           property owners identified on the mortgagee's records
           shall be sufficient unless the mortgagors' whereabouts
           are known to be elsewhere.  A Notice must be given each
           year, even if the interest rate does not change.
 
           For HUD review purposes, lenders must keep evidence that
           timely notice has been given, and evidence of the annual
           adjustment computations, for the mortgage term.  A file
           copy of the suggested HUD annual disclosure notice will
           be sufficient to satisfy this requirement.  However,
           should disputes arise as to timely notice or as to the
           annual adjustment computations, compliance with our
           suggested methods may not satisfy local legal
           interpretations of the mortgage provisions in determining
           whether the evidence was sufficient.  Lenders should,
           therefore, be guided by the advice of counsel in matters
           concerning the type and duration of record retention.
 
           The mortgagee's collection personnel should be alerted
           to the prospect of Notice not being received by the
           mortgagor, and should take appropriate remedial action
           when necessary.  If the mortgagor's payments do not
           reflect the increase or decrease recited in the Notice,
           a follow-up should be made to assure that the Notice was
           received.
 
 Failure to Provide Timely Notice
 
      If the mortgagee fails to provide notice for more than one
 year, an Existing Interest Rate must be determined for each
 omitted year because the calculations for each year affect the
 rate for subsequent years.  The one percent and five percent
 limitations are applicable each year and must be taken into
 consideration in determining the new Existing Interest Rate.  The
 mortgagee's failure to provide Notice in advance of each Change
 Date results in penalties (to be found in the ARM Rider and
 Allonge) to the mortgagee.
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                                12
 
      Although the interest rate may change, the mortgagee is
 prevented from collecting any increase in payments until the
 Notice has been provided at least 25 days prior to any new
 payments becoming effective (or 30 days, if the mortgage so
 provides).  If timely notice is not provided, the lender forfeits
 its right to collect the increased amount and the borrower is
 relieved from the obligation to pay that increase.
 
      In the event that the adjusted rate were to decline, the
 failure to provide Notice would result in overpayments until the
 mortgage rate was properly adjusted.  In such case, the mortgagee
 must refund the excess with interest, at a rate equal to the sum
 of the Margin and the Index in effect on the Change Date, from the
 date of the excess payment to the date of repayment.  The borrower
 has the option of a cash refund or application of the excess to
 the unpaid principal balance of the mortgage, after application of
 the refund to any existing delinquency.
 
 Failure to Provide Accurate Notice
 
      If the mortgagee miscalculates the interest rate and/or the
 monthly payment, and the error(s) are reflected in the Annual
 Notice, HUD takes the position that the errors need to be
 corrected.  However, HUD takes no position as to whether an
 erroneous Notice would constitute a failure to provide notice
 under the terms of the mortgage contract.  This is a legal matter
 subject to local law and court interpretation.
 
 Sales, Assignments and Transfers of Servicing Among Mortgagees
 
      It is the responsibility of the transferor (seller) to
 provide the transferee with complete servicing records which
 reflect all annual ARM requirements as having been met.  Although
 HUD regulations require the transferee/assignee to assume all
 servicing obligations, we do not intend that a negligent ARM
 mortgagee-transferor be permitted to avoid its disclosure
 obligations.  In the event that a failure of Notice or other error
 is discovered, it shall be the responsibility of the mortgagee
 transferor who was holding the loan when the failure occurred, to
 reimburse the mortgagee currently holding the loan, where any
 burden of refund to the mortgagor is required.
_____________________________________________________________________
                                13
 
 Underwriting and Processing
 
      The ARM loan will be processed and underwritten using the
 initial interest rate negotiated between the lender and borrower,
 as stated in the Form HUD-92900, Application for Commitment and
 Insurance.  Mortgage credit processing shall be in accordance with
 existing instructions as modified below:
 
      a.   An adjustable rate mortgage disclosure statement, signed
           by all borrowers, must accompany the Form HUD-92900,
           Application for HUD/FHA Insured Mortgage.  As previously
           stated, mortgagees may use either the HUD Adjustable
           Rate Mortgage Disclosure Statement (Attachment III) or a
           disclosure statement that meets the criteria of the
           Federal Reserve Board's Truth-in-Lending regulations
           ("Regulation Z").  If the HUD ARM Disclosure Statement
           is not used, it is necessary for lenders to provide
           borrowers with the standard HUD disclosure statement
           concerning the unregulated HUD interest rate and
           discount points.
 
      b.   Consistent with existing policy, the initial interest
           rate of an ARM may increase up to one percentage point
           above that shown on the commitment (Direct Endorsement
           underwriter approval of the borrower), before
           reprocessing is required by HUD (Direct Endorsement
           lender).
 
      c.   ARMS insured under Section 203(b) are subject to the
           one-time mortgage insurance premium.  The MIP factors
           and the calculations for ARMS are the same as for fixed
           rate loans.  On ARM loans insured under Section 234(c)
           and Section 203(k), the Department will collect the MIP
           based on the monthly MIP figures for the initial
           interest rate throughout the term of the loan.
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                                14
 
      d.   See Handbook 4000.4 REV-1, Single Family Direct
           Endorsement Program, dated September 1988, to identify
           the applicable underwriter certifications.
 
      e.   The initial interest rate, the margin, the date of the
           first adjustment to the interest rate and the frequency
           of adjustments must be specified in the mortgage
           documents.  Modifications to HUD's mortgage documents
           may be found at Attachment I.  However, each mortgagee
           is responsible for ascertaining whether or not the
           provisions contained in the attached documents are
           permissible under local and State law.  In the event of
           any perceived conflict with local or State law, you
           should contact the Office of General Counsel, Home
           Mortgage Division, HUD Headquarters, to discuss such
           potential conflict and for further instructions.
 
      f.   For an ARM associated with an interest rate buydown, the
           underwriting will be based upon the interest rate before
           applying the buydown.  The buydown will only be
           considered as a compensating factor.
 
           With regard to the caps, they are determined exclusive
           of any temporary buydown.  The five percent cap is based
           on the rate in the mortgage documents.  The one percent
           annual cap is determined from the existing interest rate
           on the loan.  It is the mortgagee's responsibility to
           explain to the borrower the impact of the buydown on the
           borrower's repayment schedule.
 
           If there is a permanent buydown, the underwriting will
           be based on the rate in the application.
 
      g.   ARMs may not be used with Shared Equity loans.
 
      h.   ARMs will be limited to only a 30-year term.
 
      i.   This Mortgagee Letter does not apply to Home Equity
           Conversion Mortgage ARMs.
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                                15
 
 Assumptions
 
      Lenders should encourage sellers to disclose the terms of an
 ARM in any sales transaction; however, when an assumption will
 take place both the seller and the lender should assume
 responsibility for notifying the purchaser (assumptor) about the
 conditions of the ARM.
 
      As soon as the lender becomes aware of an assumption and has
 the name of the purchaser, he should provide the purchaser with a
 copy of the original Disclosure Statement with an explanatory
 letter addressing the ARM mortgage conditions.  Request for
 acknowledgment of the receipt of this information is advisable.
 
      For assumption transactions which require a creditworthiness
 review or in cases where a release from personal liability is
 requested and approved, the lender must prepare a new Disclosure
 Statement to ensure that the purchaser is aware of the ARM
 obligation.  Processing of the HUD 2210, Request for Credit
 Approval of Substitute Mortgagor and/or FHA Form 2210-1, Approval
 of Purchaser and Release of Seller, must be based on the existing
 interest rate in effect at the time the complete credit review
 package is submitted to HUD or to the DE Underwriter.
 
 Statistical Information
 
      To track ARM activity, HUD has established case number suffix
 codes (Section of the Act ADP Codes) which should be indicated on
 all firm commitment applications (Form HUD-92900) and which are
 printed on computer generated mortgage insurance certificates
 (Form 59100).  There will be different suffix codes for HUD
 processed cases, HUD processed cases with VA CRVs and all Direct
_____________________________________________________________________
                                16
 
 Endorsement cases.  The following chart has been prepared to
 assist your staff:
 
  Eligible   Section of the   Section of the   Section of the
  Program    Act Suffix       Act Suffix       Act Suffix
             Code - HUD       Code - HUD       Code - Direct
             Processed Case   Processed Case   Endorsement
                                with VA-CRV
_______________________________________________________________
 
  203(b)          229             529             729
  203(k) first    230             530             730
  lien
  234(c)          231             531             731
 
 Definitions
 
      Attachment V incorporates definitions of some of the
 principal ARM terms.
 
      If you have any questions concerning this Mortgagee Letter,
 you may contact the Single Family Development Division, HUD
 Headquarters, (202) 426-7212, regarding ARM origination issues;
 or the Single Family Servicing Division, HUD Headquarters, (202)
 755-6672 regarding ARM servicing issues.
 
                               Sincerely,
 
                               C. Austin Fitts
                               Assistant Secretary for Housing
                                 Federal Housing Commissioner
 
 Attachments
 
                           ATTACHMENT I
 
 1.   Forms are attached hereto for (a) an Adjustable Rate Rider,
      and (b) an Adjustable Rate Allonge Amending Note.  These
      forms contain all of the provisions necessary to comply with
      the National Housing Act and the regulations promulgated in
      connection therewith.  However, prior to the origination of
      any adjustable rate loan under Section 203(b), 203(k) or
      234(c), each lender is responsible for ascertaining whether
      or not the provisions contained in the attached forms are
      permissible under, and are in compliance with, local and
      State law.  Accordingly, all lenders should have qualified
      legal counsel review the attached forms.  In the event of any
      perceived conflict between the provisions contained in the
      attached forms and the requirements of local or State law,
      you should contact the Office of General Counsel, Home
      Mortgage Division, HUD Headquarters, for further
      instructions, prior to the origination of any adjustable rate
      mortgage.
 
 2.   The following are instructions for MANDATORY modifications to
      the existing FHA Note and Mortgage Forms for all States, to
      create adjustable rate mortgage documents.  If applicable
      State law requires that contemporaneously executed Riders or
      Allonges be notarized, the appropriate notarization should be
      added.
 
      a.   Mortgage Instrument
 
             (i)     On page one, after the words "with interest at
                     the rate of _______ per centum (______%) per
                     annum," and again after the words "in monthly
                     installments of _______ Dollars ($_____),"
                     type in the following words:  "See Adjustable
                     Rate Rider."
 
             (ii)    Above the final sentence of the document which
                     is before the signature lines for the
                     Mortgagors, type in capital letters:  "SEE
                     ADJUSTABLE RATE RIDER ATTACHED HERETO AND MADE
                     A PART HEREOF FOR ADDITIONAL TERMS, COVENANTS
                     AND CONDITIONS OF THIS MORTGAGE."  (Substitute
                     "Deed of Trust" or "Security Deed" for the
                     word "Mortgage", where applicable.)
 
_____________________________________________________________________
                                 2
 
           Where space limitations prohibit typing the above
           sentence as directed, type the sentence in the margin
           (or below the signature lines, if necessary) with an
           asterisk for identification placed both at the beginning
           of the sentence and the location where the sentence
           would have been typed if space permitted.  (If
           necessary, use the same procedure of typing in the
           margin and using asterisks, for adding the words "See
           Adjustable Rate Rider.")
 
           (iii)     Attach the Adjustable Rate Rider, with all
                     blanks properly completed.
 
           (iv)      For loans originated under Section 203(b), be
                     certain that the mortgage form you use
                     provides for the one-time mortgage insurance
                     premium (MIP) payment.
 
      b.   Note:
 
           (i)       After the words "with interest from date at
                     the rate of _____ per centum (_____%) per
                     annum," and again after the words "monthly
                     installment as follows: _____________ Dollars
                     ($_____)," type in the following words:  "See
                     Adjustable Rate Allonge Amending Note."
 
           (ii)      Above the final sentence of the Note which is
                     before the signature lines for the Borrowers,
                     type in capital letters:  "SEE ADJUSTABLE RATE
                     ALLONGE AMENDING NOTE ATTACHED HERETO AND MADE
                     A PART HEREOF FOR ADDITIONAL ITEMS, COVENANTS
                     AND CONDITIONS OF THIS NOTE, INCLUDING,
                     WITHOUT LIMITATION, PROVISIONS FOR ADJUSTING
                     THE INTEREST RATE AND MONTHLY PAYMENTS." At
                     the mortgagee's discretion, the language
                     following "HEREOF" may be deleted.
_____________________________________________________________________
                                 3
 
                     Where space limitations prohibit typing the
                     above sentence as directed, type the sentence
                     in the margin (or below the signatures, if
                     necessary) with an asterisk for identification
                     placed both at the beginning of the sentence
                     and the location where the sentence would have
                     been typed if space permitted.  (If necessary,
                     use the same procedure, of typing in the
                     margin and using asterisks, for adding the
                     words "See Adjustable Rate Allonge Amending
                     Note.")
 
           (iii)     Attach the Adjustable Rate Allonge Amending
                     Note, will all blanks properly completed.
 
 3.   The following are instructions for OPTIONAL modifications to
      the Adjustable Rate Rider and Adjustable Rate Allonge
      Amending Note (which are attached hereto), to be used if you
      do not want to round out the amount of the interest rate
      charged to the Borrower.  THIS MODIFICATION DOES NOT COMPLY
      WITH GNMA REQUIREMENTS AND SHOULD NOT BE MADE TO ANY MORTGAGE
      WHICH WILL BE PLACED IN A GNMA POOL.
 
      (a)  Adjustable Rate Rider.  Delete paragraph 3(b) of the
           Adjustable Rate Rider and substitute the following
           paragraph in its place:
 
                "(b) _____ percentage points (_____%; the "Margin")
                will be added to the Current Index.  The sum, of
                the Margin plus the Current Index, will be called
                the "Calculated Interest Rate" for each Change
                Date."
 
      (b)  Adjustable Rate Allonge Amending Note.  Delete paragraph
           3(b) of the Adjustable Rate Allonge Amending Note and
           substitute the following paragraph in its place:
 
                "(b) _____ percentage points (_____%; the "Margin")
                will be added to the Current Index.  The sum, of
                the Margin plus the Current Index, will be called
                the "Calculated Interest Rate" for each Change
                Date."
_____________________________________________________________________
                                 4
 
                                  For use only with an Adjustable
                                  Rate Mortgage, Deed of Trust or
                                  Security Deed insured under
                                  Section 203(b), 203(k) (first
                                  lien only) or 234(c) of the
                                  National Housing Act.
 
                       ADJUSTABLE RATE RIDER
 
      THIS ADJUSTABLE RATE RIDER is made this _____________ day of
 _________, 19____, and is incorporated into and shall be deemed to
 amend and supplement the Mortgage, Deed of Trust or Security Deed
 ("Mortgage"), of even date herewith, given by the undersigned
 ("Mortgagor") to secure Mortgagor's Adjustable Rate Note ("Note"),
 of even date herewith, to ________________________________________
 ("Mortgagee"), covering the premises described in the Mortgage and
 located at _______________________________________________________
 ___________________.
 
      Notwithstanding anything to the contrary set forth in the
 Mortgage, Mortgagor and Mortgagee hereby agree to the following:
 
 1.   Under the Note, the initial stated interest rate of _____ per
      centum (_____%) per annum ("Initial Interest Rate") on the
      unpaid principal balance is subject to change, as hereinafter
      described.  When the interest rate changes, the equal monthly
      installments of principal and interest also will be adjusted,
      as hereinafter provided, so that each installment will be in
      an amount necessary to fully amortize the unpaid principal
      balance of the Note, at the new adjusted interest rate, over
      the remaining term of the Note.
_____________________________________________________________________
                                 5
 
 2.   The first adjustment to the interest rate (if any adjustment
      is required) will be effective on the first day of _________,
      19__ (which date will not be less than twelve months nor more
      than eighteen months from the due date of the first
      installment payment under the Note), and thereafter each
      adjustment to the interest rate will be made effective on that
      day of each succeeding year during the term of the Mortgage
      ("Change Date").
 
 3.   Each adjustment to the interest rate will be made based upon
      the following method of employing the weekly average yield on
      United States Treasury Securities adjusted to a constant
      maturity of one year ("Index"; the Index is published in the
      Federal Reserve Bulletin and made available by the United
      States Treasury Department in Statistical Release H.15
      (519)).  As of each Change Date, it will be determined
      whether or not an interest rate adjustment must be made, and
      the amount of the new adjusted interest rate, if any, as
      follows:
 
      (a)  The amount of the Index will be determined, using the
           most recently available figure, thirty (30) days before
           the Change Date ("Current Index").
 
      (b)  _____ percentage points (_____%; the "Margin") will be
           added to the Current Index and the sum of this addition
           will be rounded to the nearest one-eighth of one
           percentage point (0.125%).  The rounded sum, of the Margin
           plus the Current Index, will be called the "Calculated
           Interest Rate" for each Change Date.
 
      (c)  The Calculated Interest Rate will be compared to the
           interest rate being earned immediately prior to the
           current Change Date (such interest rate being called the
           "Existing Interest Rate").  Then, the new adjusted
           interest rate, if any, will be determined as follows:
_____________________________________________________________________
                                 6
 
           (i)       If the Calculated Interest Rate is the same as
                     the Existing Interest Rate, the interest rate
                     will not change.
 
           (ii)      If the difference between the Calculated
                     Interest Rate and the Existing Interest Rate
                     is less than or equal to one percentage point,
                     the new adjusted interest rate will be equal
                     to the Calculated Interest Rate (subject to
                     the maximum allowable change over the term of
                     the Mortgage of five percentage points, in
                     either direction, from the Initial Interest
                     Rate, herein called "5% Cap").
 
           (iii)     If the Calculated Interest Rate exceeds the
                     Existing Interest Rate by more than one
                     percentage point, the new adjusted interest
                     rate will be equal to one percentage point
                     higher than the Existing Interest Rate
                     (subject to the 5% Cap).
 
           (iv)      If the Calculated Interest Rate is less than
                     the Existing Interest Rate by more than one
                     percentage point, the new adjusted interest
                     rate will be equal to one percentage point
                     less than the Existing Interest Rate (subject
                     to the 5% Cap).
 
      (d)  Notwithstanding anything contained in this Adjustable
           Rate Rider, in no event will any new adjusted interest
           rate be more than five percentage (5%) points higher or
           lower than the Initial Interest Rate.  If any increase
           or decrease in the Existing Interest Rate would cause
           the new adjusted interest rate to exceed the 5% cap, the
           new adjusted interest rate will be limited to five
           percentage (5%) points higher or lower, whichever is
           applicable, than the Initial Interest Rate.
_____________________________________________________________________
                                 7
 
      (e)  Mortgagee will perform the functions required under
           Subparagraphs 3(a), (b) and (c) to determine the amount
           of the new adjusted rate, if any.  Any such new adjusted
           interest rate will become effective on the Change Date
           and thereafter will be deemed to be the Existing
           Interest Rate.  The new Existing Interest Rate will
           remain in effect until the next Change Date on which the
           interest rate is adjusted.
 
      (f)  If the Index is no longer available, Mortgagee will be
           required to use any index prescribed by the Department
           of Housing and Urban Development.  Mortgagee will notify
           Mortgagor in writing of any such substitute index
           (giving all necessary information for Mortgagor to
           obtain such index) and after the date of such notice the
           substitute index will be deemed to be the Index
           hereunder.
 
 4.   (a) If the Existing Interest Rate changes on any Change Date,
      Mortgagee will recalculate the monthly installment payments
      of principal and interest to determine the amount which would
      be necessary to repay in full, on the maturity date, the
      unpaid principal balance (which unpaid principal balance will
      be deemed to be the amount due on such Change Date assuming
      there has been no default in any payment on the Note but that
      all prepayments on the Note have been taken into account), at
      the new Existing Interest Rate, in equal monthly payments.
      At least 25 days before the date on which a monthly payment
      at the new level is due, Mortgagee will give Mortgagor
      written notice ("Adjustment Notice") of any change in the
      Existing Interest Rate and of the revised amount of the
      monthly installment payments of principal and interest,
      calculated as provided above.  Each Adjustment Notice will
      set forth (i) the date the Adjustment Notice is given, (ii)
      the Change Date, (iii) the current interest rate, (iv) the
      new Existing Interest Rate as adjusted on the Change Date,
_____________________________________________________________________
                                 8
 
      (v) the amount of the adjusted monthly installment payments,
      calculated as provided above, (vi) the Current Index and the
      date it was published, (vii) the method of calculating the
      adjustment to the monthly installment payments, and (viii)
      any other information which may be required by law from time
      to time.
 
      (b)  Mortgagor agrees to pay the adjusted monthly installment
      amount beginning on the first payment date which occurs at
      least twenty-five (25) days after Mortgagee has given the
      Adjustment Notice to Mortgagor.  Mortgagor will continue to
      pay the adjusted monthly installment amount set forth in the
      last Adjustment Notice given by Mortgagee to Mortgagor until
      the first payment date which occurs at least twenty-five (25)
      days after Mortgagee has given a further Adjustment Notice to
      Mortgagor.  Notwithstanding anything to the contrary
      contained in this Adjustable Rate Rider or the Mortgage,
      Mortgagor will be relieved of any obligation to pay, and
      Mortgagee will have forfeited its right to collect, any
      increase in the monthly installment amount (caused by the
      recalculation of such amount under Subparagraph 4(a)) for any
      payment date occurring less than twenty-five (25) days after
      Mortgagee has given the applicable Adjustment Notice to
      Mortgagor.
 
      (c)  Notwithstanding anything contained in this Adjustable
      Rate Rider, in the event that (i) the Existing Interest Rate
      was reduced on a Change Date, and (ii) Mortgagee failed to
      give the Adjustment Notice when required, and (iii)
      Mortgagor, consequently, has made any monthly installment
      payments in excess of the amount which would have been set
      forth in such adjustment Notice ("Excess Payments"), then
      Mortgagor, at Mortgagor's sole option, may either (1) demand
      the return from Mortgagee (who for the purposes of this
      sentence will be deemed to be the mortgagee, or mortgagees,
      who received such Excess Payments, whether or not any such
      mortgagee subsequently assigned the Mortgage) of all or any
_____________________________________________________________________
                                 9
 
      portion of such Excess Payments, with interest thereon at a
      rate equal to the sum of the Margin and the Index on the
      Change Date when the Existing Interest Rate was so reduced,
      from the date each such Excess Payment was made by Mortgagor
      to repayment, or (2) request that all or any portion of such
      Excess Payments, together with all interest thereon
      calculated as provided above, be applied as payments against
      principal.
 
 5.   Nothing contained in this Adjustable Rate Rider will permit
      Mortgagee to accomplish an interest rate adjustment through
      an increase (or decrease) to the unpaid principal balance.
      Changes to the Existing Interest Rate may only be reflected
      through adjustment to Mortgagor's monthly installment
      payments of principal and interest, as provided for herein.
 
      BY SIGNING BELOW, Mortgagor accepts and agrees to the terms
 and covenants contained in this Adjustable Rate Rider.
 
                                 _________________________ (Seal)
                                          Mortgagor
 
                                 _________________________ (Seal)
                                          Mortgagor
_____________________________________________________________________
                                10
 
                                  For use only with an Adjustable
                                  Rate Note secured by a Mortgage,
                                  Deed of Trust or Security Deed
                                  insured under Section 203(b),
                                  203(k) (first lien only) or
                                  234(c) of the National Housing
                                  Act.
 
                      ADJUSTABLE RATE ALLONGE
                           AMENDING NOTE
 
      THIS ADJUSTABLE RATE ALLONGE is an AMENDMENT made this ____
 day of ________, 19____, and is incorporated into and shall be
 deemed to amend and supplement the Note ("Note"), of even date
 herewith, given by the undersigned ("Borrower") to evidence
 Borrower's indebtedness to __________________________________
 ("Holder"), which indebtedness is secured by that certain
 Mortgage, Deed of Trust or Security Agreement ("Mortgage"), of
 even date herewith, covering the premises described in the
 Mortgage and located at _________________________________.
 
      Notwithstanding anything to the contrary set forth in the
 Mortgage, Borrower hereby agrees to the following:
 
 1.   The interest rate stated in the Note, of _____ per centum
      (_____%) per annum ("Initial Interest Rate"), is subject to
      change as hereinafter provided.  Borrower promises to pay, on
      the unpaid principal amount, interest at the rate in effect
      from time to time, as adjusted in accordance with the
      provisions of this Amendment, in monthly installments of
      principal and interest as provided in Paragraph 4.  When the
      interest rate changes, the equal monthly installments of
      principal and interest also will be adjusted, as hereinafter
      provided, so that each installment will be in an amount
      necessary to fully amortize the unpaid principal balance of
_____________________________________________________________________
                                11
 
      the Note, at the new adjusted interest rate, over the
      remaining term of the Note.  Borrower agrees to pay to the
      order of Holder the amount of all such adjusted monthly
      installments, provided that Borrower is notified of such
      adjustments as hereinafter required.
 
 2.   The first adjustment to the interest rate (if any adjustment
      is required) will be effective on the first day of _________,
      19____ (which date will not be less than twelve months nor
      more than eighteen months from the due date of the first
      installment payment under the Note), and thereafter each
      adjustment to the interest rate will be made effective on
      that day of each succeeding year during the term of the
      Note ("Change Date").
 
 3.   Each adjustment to the interest rate will be made based upon
      the following method of employing the weekly average yield on
      United States Treasury Securities adjusted to a constant
      maturity of one year ("Index"; the Index is published in the
      Federal Reserve Bulletin and made available by the United
      States Treasury Department in Statistical Release H. 15
      (519)).  As of each Change Date, it will be determined
      whether or not an interest rate adjustment must be made, and
      the amount of the new adjusted interest rate, if any, as
      follows:
 
      (a)  The amount of the Index will be determined, using the
           most recently available figure, thirty (30) days before
           the Change Date ("Current Index").
 
      (b)  ____ percentage points (_____%; the "Margin") will be
           added to the Current Index and the sum of this addition
           will be rounded to the nearest one-eighth of one
           percentage point (0.125%).  The rounded sum, of the
           Margin plus the Current Index, will be called the
           "Calculated Interest Rate" for each Change Date.
 
      (c)  The Calculated Interest Rate will be compared to the
           interest rate being earned immediately prior to the
           current Change Date (such interest rate being called the
           "Existing Interest Rate").  Then, the new adjusted
           interest rate, if any, will be determined as follows:
_____________________________________________________________________
                                12
 
           (i)       If the Calculated Interest Rate is the same as
                     the Existing Interest Rate, the interest rate
                     will not change.
 
           (ii)      If the difference between the Calculated
                     Interest Rate and the Existing Interest Rate
                     is less than or equal to one percentage point,
                     the new adjusted interest rate will be equal
                     to the Calculated Interest Rate (subject to
                     the maximum allowable change over the term of
                     the Note of five percentage points, in either
                     direction, from the Initial Interest Rate,
                     herein called the "5% cap").
 
           (iii)     If the Calculated Interest Rate exceeds the
                     Existing Interest Rate by more than one
                     percentage point, the new adjusted interest
                     rate will be equal to one percentage point
                     higher than the Existing Interest Rate
                     (subject to the 5% cap).
 
           (iv)      If the Calculated Interest Rate is less than
                     the Existing Interest Rate by more than one
                     percentage point, the new adjusted interest
                     rate will be equal to one percentage point
                     less than the Existing Rate (subject to the 5%
                     cap).
 
      (d)  Notwithstanding anything contained in this Amendment, in
           no event will any new adjusted interest rate be more
           than five percentage (5%) points higher or lower than
           the Initial Interest Rate.  If any increase or decrease
           in the Existing Interest Rate would cause the new
           adjusted interest rate to exceed the 5% cap, the new
           adjusted interest rate will be limited to five
           percentage (5%) points higher or lower, whichever is
           applicable, than the Initial Interest Rate.
 
      (e)  Holder will perform the functions required under
           Subparagraphs 3(a), (b) and (c) to determine the amount
           of the new adjusted rate, if any.  Any such new
           adjusted interest rate will become effective on the
           Change Date and thereafter will be deemed to be the
           Existing Interest Rate.  The new Existing Interest Rate
           will remain in effect until the next Change Date on
           which the interest rate is adjusted.
_____________________________________________________________________
                                13
 
      (f)  If the Index is no longer available, Holder will be
           required to use any index prescribed by the Department
           of Housing and Urban Development.  Holder will notify
           Borrower in writing of any such substitute index (giving
           all necessary information for Borrower to obtain such
           index) and after the date of such notice the substitute
           index will be deemed to be the Index hereunder.
 
 4.   (a) If the Existing Interest Rate changes on any Change Date,
      Holder will recalculate the monthly installment payments of
      principal and interest to determine the amount which would be
      necessary to repay in full, on the maturity date, the unpaid
      principal balance (which unpaid principal balance will be
      deemed to be be the amount due on such Change Date assuming
      there has been no default in any payment on the Note but that
      all prepayments on the Note have been taken into account), at
      the new Existing Interest Rate, in equal monthly payments.
      At least 25 days before the date on which a monthly payment
      at the new level is due, Holder will give Borrower written
      notice ("Adjustment Notice") of any change in the Existing
      Interest Rate and of the revised amount of the monthly
      installment payments of principal and interest, calculated as
      provided above.  Each Adjustment Notice will set forth (i)
      the date the Adjustment Notice is given, (ii) the Change
      Date, (iii) the current interest rate, (iv) the new Existing
      Interest Rate as adjusted on the Change Date, (v) the amount
      of the adjusted monthly installment payments, calculated as
      provided above, (vi) the Current Index and the date it was
      published, (vii) the method of calculating the adjustment to
      the monthly installment payments, and (viii) any other
      information which may be required by law from time to time.
 
      (b)  Borrower agrees to pay the adjusted monthly installment
      amount beginning on the first payment date which occurs at
      least twenty-five (25) days after Holder has given the
      Adjustment Notice to Borrower.  Borrower will continue to pay
_____________________________________________________________________
                                14
 
      the adjusted monthly installment amount set forth in the last
      Adjustment Notice given by Holder to Borrower until the first
      payment date which occurs at least twenty-five (25) days
      after Holder has given a further Adjustment Notice to
      Borrower.  Notwithstanding anything to the contrary contained
      in this Amendment or the Note, Borrower will be relieved of
      any obligation to pay, and Holder will have forfeited its
      right to collect, any increase in the monthly installment
      amount (caused by the recalculation of such amount under
      Subparagraph 4(a)) for any payment date occurring less than
      twenty-five (25) days after Holder has given the applicable
      Adjustment Notice to Borrower.
 
      (c)  Notwithstanding anything contained in this Amendment, in
      the event that (i) the Existing Interest Rate was reduced on
      a Change Date, and (ii) Holder failed to give the Adjustment
      Notice when required, and (iii) Borrower has, consequently,
      made any monthly installment payments in excess of the amount
      which would have been set forth in such adjustment Notice
      ("Excess Payments"), then Borrower, at Borrower's sole
      option, may either (1) demand the return from Holder (who for
      the purposes of this sentence will be deemed to be the
      holder, or holders, who received such Excess Payments,
      whether or not any such holder subsequently assigned the Note
      and Mortgage)  of all or any portion of such Excess Payments,
      with interest thereon at a rate equal to the sum of the
      Margin and the Index on the Change Date when the Existing
      Interest Rate was so reduced, from the date each such Excess
      Payment was made by Borrower to repayment, or (2) request
      that all or any portion of such Excess Payments, together
      with all interest thereon calculated as provided above, be
      applied as payments against principal.
 
 5.   Nothing contained in this Amendment will permit Holder to
      accomplish an interest rate adjustment through an increase
      (or decrease) to the unpaid principal balance.  Changes to
      the Existing Interest Rate may only be reflected through
      adjustment to Borrower's monthly installment payments of
      principal and interest, as provided for herein.
_____________________________________________________________________
                                15
 
 6.   If more than one person has signed the Note and this
      Amendment, each person is jointly and severally liable for
      all of the obligations under the note as modified by this
      Amendment and, therefore, each person is fully and personally
      obligated to fulfill all of the promises made in the Note and
      this Amendment, including, without limitation, payment of the
      entire amount owed (except as provided under Subparagraph
      4(b)).
 
      BY SIGNING BELOW, Borrower accepts and agrees to the terms
 and covenants contained in this Amendment.
 
                                  ________________________ (Seal) ___
                                          Borrower
 
                                  ________________________ (Seal)
                                          Borrower
 
                          ATTACHMENT III
 
           ADJUSTABLE RATE MORTGAGE DISCLOSURE STATEMENT
                IMPORTANT MORTGAGE LOAN INFORMATION
                       PLEASE READ CAREFULLY
 
      You must receive this statement and be given an opportunity
 to read it prior to the time you sign the "Borrowers
 Certification" on the loan application, Form HUD-92900.1.
 
 ADJUSTABLE RATE MORTGAGE MEANS YOUR PAYMENT MAY CHANGE IN THE
   FUTURE
 
      You are applying for an Adjustable Rate Mortgage (ARM) loan.
 This means that your interest rate and monthly payments may change
 during the life of your loan.  Your monthly payments will increase
 if the interest rate rises and decrease if it falls.  An ARM is
 different from a fixed rate mortgage loan.  For fixed rate loan,
 the monthly payments of principal and interest do not change
 during the life of the loan.  You should consider carefully which
 type of loan is best for you.
 
 ARM LOAN TERMS
 
      There are six important factors in an ARM loan.  They are the
 initial interest rate, margin, discount points, frequency of rate
 adjustment, index used to calculate interest rate adjustments and
 caps on interest rate increases.  Since all FHA ARM loans have the
 same index, caps, and frequency of rate adjustment, you should pay
 particular attention to the initial interest rate, margin and
 discount points that different lenders charge when shopping for an
 ARM loan.  These three items are freely negotiable between you and
 the lender.  In addition, you can negotiate the length of time
 before your loan closes during which these terms are guaranteed
 not to change.  However, lenders sometimes require a commitment
 fee for "locking in" loan terms for a designated period (for
 example, 30, 60, or 90 days).
_____________________________________________________________________
                                 2
 
                       INITIAL INTEREST RATE
 
      This is the interest rate that will be charged for the first
 year of your mortgage and may remain in effect from l2 to 18
 months, depending on the terms of your particular loan.  The
 lender must disclose, in the mortgage documents at closing, when
 this initial interest rate will change.  The date on which the
 interest rate changes is the same each year and is called the
 Change Date.
 
      After the initial period, the interest rate on your mortgage
 may change on the change date every year you have this ARM loan.
 However, you must have been given at least 25 days notice before
 you must pay any changed amount in your monthly payment.  In this
 notice, the lender must also tell you the amount of the index and
 how your interest rate and monthly payments will be affected.
 
                              MARGIN
 
      The margin is a percentage that is added to the current index
 to establish the annual interest rate on your ARM.  The amount of
 the margin will remain constant for the life of the mortgage.  The
 larger the margin, the more interest you will pay on your loan.
 
      Since the margin affects the interest rate for every year but
 the first one, you should make certain that the margin being
 charged is reasonable.  A slightly lower initial interest rate may
 prove more costly to you if a higher margin is being charged than
 you can obtain from other lenders.
 
                          DISCOUNT POINTS
 
      Discount points are a one time fee charged at closing by the
 lender to increase the lender's yield on the loan.  Each discount
 point is one percent of the loan amount.  This fee will be paid by
 you unless the seller has agreed (in your written agreement) to
 pay all or part of these discount points.
_____________________________________________________________________
                                 3
 
                               INDEX
 
      After the first year, the annual changes in the interest rate
 charged on your ARM will be tied to the weekly average yield on
 United States Treasury Securities adjusted to a constant maturity
 of one year (One Year Treasury Constant Maturities).  This is a
 national index published by the Federal Reserve Board in
 Statistical Release H.15(519).  You may request to be placed on
 the mailing list to receive copies of this weekly publication by
 writing:
 
           Publication Services
           Mail Stop 138
           Board of Governors
           Federal Reserve System
           Washington, DC  20551
 
      The index is also published regularly in many newspapers,
 e.g. Wall Street Journal, USA Today.
 
                   CAPS ON INTEREST RATE CHANGES
 
      Your interest rate cannot increase (or decrease) more than
 one percentage point per year and cannot increase (or decrease)
 more than five percentage points from the initial interest rate on
 your loan, no matter how much the index may have moved.
 
      METHOD OF CALCULATING ANNUAL INTEREST RATE ADJUSTMENTS
 
      Each year, on the Change Date, the lender will adjust the
 interest rate on your loan.  The lender will check the most recent
 weekly index available 30 days before the change date and add to
 it the amount of the margin (index plus margin equals the
 calculated interest rate).  Unless your mortgage documents provide
 otherwise, the calculated interest rate will be rounded to the
 nearest 1/8th percent.  The calculated interest rate is compared
 to the existing interest rate (the rate you have been paying for
 the last year) and subject to the 5 percent cap:
_____________________________________________________________________
                                 4
 
      1)   if the two differ by one percent or less the calculated
           interest rate will become your new (adjusted) interest
           rate;
 
      2)   if the calculated interest rate is more than one percent
           higher or lower, your new interest rate will be only one
           percent higher or lower than the existing interest
           rate;
 
      3)   if the calculated interest rate is the same as the
           existing interest rate, the adjusted interest rate
           will not change.
 
 Year   Index + Margin = Calculated            New Interest
                         Interest Rate             Rate
 _________________________________________________________________
 
  1     N/A      N/A         N/A                 10% (initial
                                                    interest rate)
  2      9.5     2.0     ( 9.5 + 2.0 = 11.5)     11%
  3      9.0     2.0     ( 9.0 + 2.0 = 11.0)     11%
  4     10.5     2.0     (10.5 + 2.0 = 12.5)     12%
  5      8.5     2.0     ( 8.5 + 2.0 = 10.5)     11%
 
      o    The lender and borrower in this example agreed to an
           initial interest rate of 10 percent for the first year
           and that the annual adjustments to the interest rate
           will be calculated using the index plus a margin of two
           percentage points.
 
      o    In year two, the calculated interest rate (index plus
           margin) is 11.5 percent.  Because this is more than one
           percent above the initial interest rate, the new
           interest rate is 11 percent.
 
      o    In year three, the index decreases .5 percent from 9.5
           to 9 and the calculated interest rate is 11 percent.
           Therefore, the interest rate remains the same as the
           previous year.
_____________________________________________________________________
                                 5
 
      o    In year four, the index increases 1.5 percent (from 9 to
           10.5) and the calculated interest rate is 12.5 percent.
           However, because of the 1 percent ceiling on interest
           rate increases, the new interest rate is only 12
           percent.
 
      o    In year five, the index decreases 2 percent (from 10.5
           to 8.5).  After adding the margin, the calculated
           interest rate is 10.5 percent.  However, since the 1
           percent limit is also imposed on interest rate
           decreases, the new interest rate will return to 11
           percent.
 
                           REPROCESSING
 
      The wording of your agreement with the lender will determine
 the amount, if any, that the interest rate and discount points may
 change before closing.  HUD requires that your loan be reprocessed
 if there is any increase in the discount points you will pay or an
 increase of more than one percent in the initial interest rate on
 your loan.
 
      If the lender seeks reprocessing, the lender will ask you to
 sign a new application.  Whether or not you sign is your choice.
 However, if you refuse to sign you may lose your deposit.  Before
 you sign any loan application or agreement, make certain you
 understand your rights.  If you sign, you would be agreeing to the
 higher interest rate and/or discount points shown in your new
 application.  If, after reprocessing, you remain eligible for the
 loan, the conditions of your agreements with the lender and the
 seller may require you to complete the transaction at the higher
 interest rate, lose your deposit or pay some form of penalty fee.
 You should seek professional advice if you do not understand the
 agreements you are signing.
_____________________________________________________________________
                                 6
 
               WHAT IS THE MOST YOU MAY HAVE TO PAY
 
      The chart below shows what your monthly payments to principal
 and interest would be if your interest rate increases the maximum
 permitted amount of one percentage point per year.  If your loan
 closes at the interest rate shown on your application, lines 1
 through 6 show your payment after the annual adjustments.
 Beginning with the sixth year, the payments would not increase
 again because of the five percentage points ceiling on interest
 rate increases.  The chart shows the highest amount of principal
 and interest you will be required to pay in any year if your loan
 closes at the interest rate shown in your application and if the
 interest rate increases at the one percent maximum each year.
 This highest payment cannot be reached earlier than the sixth
 year, but could be reached after then if your interest rate does
 not increase as quickly as permitted.
 
                        WORST CASE EXAMPLE
 
 Loan Amount:     Enter mortgage amount from application
 ________________________________________________________________
 Year                 Interest Rate        Monthly Payment for
  No.                   (percent)          Principal and Interest
 ________________________________________________________________
 
  1
 
  2
 
  3
 
  4
 
  5
 
  6
 ________________________________________________________________
 
_____________________________________________________________________
                                 7
 
              TERMS OF YOUR ADJUSTABLE RATE MORTGAGE
 
 Frequency of rate changes:  Annually after first adjustment.
 First adjustment will occur between 12-18 months after first
 payment date.
 
 Maximum interest rate change at one time:  One (1) percentage
 point.
 
 Maximum interest rate change over life of loan:  Five (5)
 percentage points from the initial interest rate shown on your
 mortgage.
 
 Index:  One Year Treasury Constant Maturities.
 Index rate for week ending __________ was __________%.
 
 Initial mortgage interest rate:
 
 Margin:
 
 BE CERTAIN THAT YOU UNDERSTAND THIS TRANSACTION.  SEEK
 PROFESSIONAL ADVICE IF YOU ARE UNCERTAIN.
 
                                  ___________________  Signature
 
                                  ___________________  Signature
 
 Date ______________
 
                           ATTACHMENT IV
 
          Suggested Form of Annual Disclosure ARM Notice
 
 Mortgagee Name                                     Date
 Address
 Telephone No.
 
 Mortgagor(s) Name
 Address
 
 Re:  Annual Notice of Changes in Interest Rate and Monthly
      Installment Payments on Your Adjustable Rate Mortgage
 
 Dear Mortgagor:
 
      On ___ (date) __, the interest rate on your Adjustable Rate
 Mortgage (ARM) will (increase/decrease) from ____ % to ____ %, and
 your monthly installment payments will (increase/decrease) from
 $ ______ to $ _____.  Beginning with your __ (date) _____ payment,
 please pay the new amount.  New payment coupons (or monthly
 billings) reflecting the new amount will be sent shortly.
 
      Your present interest rate was based on an Index Value of
 ____ %.  To determine your new interest rate we added the Current
 Index Value of _______ % as of ___ (date) ______, to the agreed
 upon Margin of ______ % for a total of ______ % (rounded to the
 nearest 1/8th percent).
 
      The new Existing Interest Rate of _______ % may not be more
 than one percent higher or lower than the prior Existing Interest
 Rate of _______ %.  The original Interest Rate of your mortgage
 was _______ % which may not be increased or decreased beyond five
 percent during the life of the mortgage.
 
      The new monthly installment was determined by computing the
 monthly payment to principal and interest necessary to pay off the
 principal balance of the mortgage ($_________________) over the
 remaining term of the mortgage ( __ yrs.) at the new Existing
 Interest Rate, without taking into account delinquent payments,
 and crediting any prepayments to principal.  The required monthly
 escrow payment ($ ______ ) was then added to the required
 principal and interest payment.
 
_____________________________________________________________________
                                 2
 
      If you have any questions, please call __________ at the
 telephone number listed above, or you may use the toll-free
 numbers previously provided.
 
                               Sincerely,
 
 NOTE:     If the annual ARM Notice is designed to include all the
           essential factors for calculation of the new interest
           rate and monthly payment, a file copy should be
           sufficient to reflect the computation.
 
                           ATTACHMENT V
 
 INDEX               The weekly average yield on United States
                     Treasury Securities adjusted to a constant
                     maturity of one year (published in the Federal
                     Reserve Bulletin).  See Attachment II.
 
 CURRENT INDEX       The most recently available Index published 30
                     exact days before the Change Date.
 
 CHANGE DATE         The effective date of an adjustment to the
                     interest rate.  (Called the Interest
                     Adjustment Date by GNMA).  The date is
                     specified in paragraph 2 of the Adjustable
                     Rate Rider or the Allonge amending the Note.
                     (This is not the date on which monthly
                     payments change.)
 
 MARGIN              The agreed number of percentage points added
                     to the Current Index to determine the
                     Calculated Interest Rate.  The number is
                     specified in paragraph 3(b) of the Adjustable
                     Rate Rider or the Allonge Amending the Note,
                     and remains constant for the life of the
                     mortgage.
 
 INITIAL INTEREST    The interest rate stated in the note which
   RATE              will be in effect for 12 to 18 months from the
                     date of the first monthly payment.
 
 CALCULATED          The Current Index plus the Margin, rounded to
   INTEREST RATE     the nearest one-eighth of one percentage point
                     (0.125%).  The Calculated Interest Rate is
                     used to determine the Adjusted Interest Rate.
 
 ADJUSTED INTEREST   The new interest rate effective for the
   RATE              twelve month period following each Change
                     Date.  (The Adjusted Interest Rate will become
                     the Existing Interest Rate on the next Change
                     Date.)
 
 EXISTING INTEREST   The interest rate in effect immediately prior
   RATE              to any adjustment on the current Change Date.