www.hudclips.org 


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

February 11 1991
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 91-8
       TO:  ALL APPROVED MORTGAGEES
       SUBJECT:  Single Family Loan Production - Updated Requirements
                 for Single Family Mortgage Instruments
 
            This Mortgagee Letter announces an update to the
       Requirements for Single Family Mortgage Instruments announced in
       Mortgagee Letter 89-23, as modified in Mortgagee Letter 89-31.
       Unless otherwise stated, the updated requirements set forth in
       the attachment to this Mortgagee Letter will become mandatory for
       loans closed on or after July 1, 1991.  Until then, they may be
       adopted at the discretion of mortgagees.
 
            HUD has concluded that it is no longer necessary to publish
       its requirements for mortgage instruments in the Federal Register
       since mortgagee Letters are widely circulated to the affected
       parties.  In the future, HUD expects to issue changes to its
       requirements exclusively through Mortgagee Letters, Notices and
       Handbooks.
 
       Effect of Changes to FNMA/FHLMC Forms
 
            On December 31, 1990, FNMA and FHLMC announced changes to
       their approved single family mortgage instruments.  Because the
       HUD requirements reference the FNMA/FHLMC instruments, questions
       have arisen regarding the effect of the FNMA/FHLMC changes on HUD
       requirements.  The FNMA/FHLMC instruments are now 6 letter-sized
       pages rather than 4 legal-sized pages.  HUD does not restrict the
       size or number of pages and any approach which will be accepted
       by recording offices and is legible continues to be acceptable.
       The uniform covenants in FNMA/FHLMC mortgages have also changed.
       This change has no immediate impact on mortgages used for HUD
       programs since HUD has its own separate set of uniform covenants.
       Because of the many similarities between the FNMA/FHLMC and HUD
       approaches, we will examine the FNMA/FHLMC uniform covenants for
       ideas regarding future changes to the HUD language.  Until
       further notice, however, the only changes in the language
       required by HUD for all mortgages are explained in the
       attachment.  HUD has included new language in paragraph 5 of the
       Model Mortgage Form, regarding owner-occupancy and false loan
       applications, that is adapted from the FNMA/FHLMC forms.
 
            Changes have also been made in the non-uniform covenants of
       the FNMA/FHLMC forms for many jurisdictions.  HUD's current
       instructions for preparing the state-specific provisions of a
 
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                                                                  2
 
mortgage direct mortgagees to use language from "the most recent
approved FNMA/FHLMC mortgage form for the appropriate
jurisdiction."  Thus, mortgagees will be required to work from
the newly-issued versions of the FNMA/FHLMC forms (dated 9/90).
To provide an orderly transition, however, HUD will not object to
continued use of language based on the non-uniform covenants in
the old FNMA/FHLMC forms until July 1, 1991.
 
Adjustable Rate Mortgages
 
     Among other changes, the documentation for adjustable rate
mortgages (ARMs) is changed by the attachment to this Mortgagee
Letter.  The Adjustable Rate Allonge Amending Note (Exhibit D to
the original requirements) will no longer be used to convert the
standard fixed-rate Model Note Form to an adjustable rate note.
Instead, a new Model Adjustable Rate Note Form is prescribed as a
replacement Exhibit D.  The Adjustable Rate Rider (Exhibit C to
the original requirements) is withdrawn.  The attachment explains
several ways in which the standard fixed-rate Model Mortgage Form
can be adapted for ARMs if adaptation is required to meet state
or local law requirements.
 
     These changes for ARMs require some changes to Mortgagee
Letter 89-24.  For ARMs following the updated requirements,
Mortgagee Letter 89-24 is modified as follows:
 
 1.  Paragraph a. under the heading "Method of Calculating
     Interest Rate Adjustments" on page 5 should read:
 
     a.   Determine the correct index.  The proper date to be
          used for indexing an interest rate adjustment is
          stated in Paragraph 5(B) of the Model Adjustable Rate
          Note Form prescribed by HUD, which states that the
          "Current Index" means the most recent Index figure
          available 30 days before the Change Date.
 
 2.  The parenthetical phrase beginning in the second line of
     page 7 should be changed to "(the number of basis points
     identified as the margin in Paragraph 5(C) of the Model
     Adjustable Rate Note Form prescribed by HUD)".
 
 3.  In the fifth line of the second paragraph on page 7, "item 3
     of Attachment I" should be changed to "Footnote 3 of the
     Model Adjustable Rate Note Form prescribed by HUD".
 
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                                                                3
 
 4.  The parenthetical phrase beginning in the second line from
     the bottom of page 11 should be changed to "(to be found in
     Paragraph 5(G) of the Model Adjustable Rate Note Form
     prescribed by HUD)".
 
 5.  Attachment I to Mortgagee Letter 89-24 is no longer
     applicable for any new cases.  It was superseded in its
     entirety when the new requirements announced in Mortgagee
     Letter 89-23 became mandatory.
 
Changes Required by New Legislation
 
     The attachment reflects two changes required because of new
legislation affecting the single family mortgage insurance
programs.  That legislation is discussed in detail in Mortgagee
Letter 91-1.  As stated in that Mortgagee Letter, the words "or
secondary residence" in Paragraph 9(b)(ii) of the Model Mortgage
Form must be deleted or struck out in all cases subject to the
new restriction on assumptions as second homes.  Thus, unlike
most of the changes in the attachment notice which are not
mandatory for any cases closed before July 1, 1990, the reference
to secondary residence must be handled on a case-by-case basis
depending on the date of the conditional commitment or other
factors explained in Mortgagee Letter 91-1.
 
     The fourth subparagraph of Paragraph 2 of the Model Mortgage
Form will also become outdated as legislative changes to the
mortgage insurance premium (MIP) structure are implemented.
Although the current approved language is legally sufficient to
enable the mortgagee to collect the appropriate MIP amounts for
mortgagors in all cases, the language states that in most
programs the entire MIP is paid in advance.  This will be
inaccurate when the new MIP structure takes effect.  Therefore,
mortgagees must modify the fourth subparagraph of Paragraph 2 and
the first item under Paragraph 3 of their mortgage forms as
indicated in the attachment, for cases closed on or after July 1,
1991.
 
                         Very sincerely yours,
 
                         Arthur J. Hill
                         Acting Assistant Secretary for
                           Housing-Federal Housing  Commissioner
 
Attachment
 
_____________________________________________________________________
 
                           ATTACHMENT
 
The purpose of this attachment is to update and revise the
 
Requirements for Single Family Mortgage Instruments published in
 
the June 29, 1989 issue of the Federal Register.  In that issue,
 
HUD announced a new approach for creating mortgage instruments
 
for HUD single family mortgage insurance programs.  The changes
 
announced in this attachment are effective on December 1, 1990
 
but compliance is optional until July 1, 1991.
 
     The HUD Requirements for Single Family Mortgage Instruments
 
were published as Appendix A to the Notice of Policy on June 29,
 
1989 in the Federal Register.  Although some revisions have been
 
made previously through mortgagee letters, this publication
 
serves as an update of all the changes in the previous year
 
regarding the single family mortgage instruments, notes, riders,
 
and interim mortgagee letters.
 
The notice, when originally published, did not have an effective
 
date.  On October 2, 1989, the notice was corrected and an
 
effective date of March 1, 1990 was announced in the Federal
 
Register.  Both the June 29, 1989 and October 2, 1989 Federal
 
Register publications were distributed to mortgagees through
 
Mortgagee Letter 89-23, which also contained one change regarding
 
the acceleration language.  On December 15, 1989, Congress
 
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                                                                2
 
approved the HUD Reform Act which affected the assumption policy
 
on FHA mortgages.  Mortgagee Letter 89-31 was issued on December
 
26, 1989 to announce new mortgage language needed to carry out
 
the changed assumption policy.
 
The new requirements for FHA Single Family Mortgage Instruments
 
became mandatory in the U.S. Virgin Islands and Guam on June 1,
 
1990.  The mandatory compliance date for Single Family Mortgage
 
Instruments in Puerto Rico was extended to September 1, 1990.
 
The majority of changes have been made based on consideration of
 
suggestions, comments, questions received, and minor errors
 
pointed out from the mortgage industry, mandatory changes
 
dictated by Acts of Congress, or need for clarifying conflicting
 
instructions.  One important general clarification, however,
 
focuses on the use of the FNMA/FHLMC mortgage forms as a
 
guideline for development of state specific language.  HUD does
 
not intend to require use of FNMA/FHLMC language verbatim when
 
the language would not be adequate under state or local law, but
 
HUD intends to give the lender a basis for developing a valid and
 
enforceable form.  The FNMA/FHLMC language may be modified to
 
accommodate subsequent state law changes after the development of
 
the FNMA/FHLMC forms, or if FNMA/FHLMC has approved changes for
 
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                                                                3
 
general use, as opposed to state specific use.  HUD recognizes
 
that new editions of the approved FNMA/FHLMC mortgage instruments
 
have recently been issued for all states, and guidance is
 
provided in this attachment regarding use of the new editions in
 
preparing instruments under HUD's revised requirements.  The
 
lender, however, is required to use verbatim the model mortgage
 
paragraphs 1-16 (not 1-10 as originally stated) since those
 
paragraphs are basic to the HUD program.  (See page 27601 of the
 
June 29, 1990 notice.)
 
The following will describe revisions identified by page number
 
of the original Federal Register Notice to Appendix A and Exhibit
 
designation where relevant.  It includes all revisions to the
 
original notice including the correction previously announced in
 
the October 2, 1989 notice.
 
CHANGES TO APPENDIX A OF JUNE 29, 1989 NOTICE
 
A.  Changes to Part I-D -- General Instructions, page 27600.
 
Add the following:  The Department is recommending that the
 
lenders include the last revision date on each form in order to
 
clarify the versions being distributed.
 
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                                                                4
 
B.  Changes to Part II-E -- Mortgage Provisions, page 27601.
 
Lenders are not to insert "Lender in possession" paragraphs from
 
the non-uniform covenants sections of the FNMA/FHLMC forms.
 
Paragraph 17 is intended to address foreclosure procedures only.
 
The intention of the model forms is not to use the FNMA/FHLMC
 
language verbatim, but to give the lender a basis for developing
 
a valid form given the limitations of state and local
 
requirements. (These instructions should also be used in context
 
with footnote 6 of Exhibit A.)  Until July 1, 1991, material
 
added by the lender may be based on either the new edition of the
 
FNMA/FHLMC forms marked "9/90" or the previous forms.  Cases
 
closed on July 1, 1991, or later must use language based on the
 
revised edition.
 
C.  Changes to Part IV-A -- Other Requirements; Special
 
Situations, Pages 27601 - 27602.
 
1.  Introductory Paragraph:  In the list of prescribed riders and
 
allonge, add "Rehabilitation Loan Rider" immediately before
 
"Condominium Rider" so that the list, as completed, will read as
 
follows:
 
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                                                                5
 
               Model Mortgage Form
 
               Model Note Form
 
               Adjustable Rate Note
 
               Graduated Rate Allonge Amending Note
 
               Graduated Payment Rider
 
               Growing Equity Allonge Amending Note
 
               Rehabilitation Loan Rider
 
               Condominium Rider
 
               Planned Unit Development Rider
 
               Tax-Exempt Financing Rider
 
               Rider for Section 248 Mortgage
 
2. Paragraph 4, Rehabilitation Rider, page 27601.
 
Delete the first and third sentences.  In line 7, change "model
 
note form" to "model mortgage form."  Handbook 4240.4 was
 
replaced by Handbook 4240.4 REV-1. after the Rehabilitation Loan
 
Rider (Exhibit H) was published.  However, mortgagees should
 
continue to use Exhibit H (as revised by this notice) instead of
 
Appendix 3 to Handbook 4240.4 REV-1.  The special mortgage
 
requirements in Paragraph 1-15.B. of that handbook apply as
 
stated in the handbook except that "Rehabilitation Loan Rider"
 
and "security instrument" should be used instead of
 
"Rehabilitation Rider" and "mortgage."
 
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                                                                 6
 
3.  Paragraph 8, Tax-Exempt Financing, page 27601.
 
The July 8, 1987, memorandum to HUD Field Offices has been
 
replaced by an October 12, 1990 Notice to HUD Field Offices
 
designated as H 90-76.  The Notice provides details on the use of
 
the Tax-Exempt Financing Rider (Exhibit K), instruction for
 
requesting changes to the Rider, and other instructions including
 
a notice to be provided to the mortgagor.  Any mortgagee involved
 
in tax-exempt financing using qualified mortgage bonds should
 
consult both those issuances and information in this notice which
 
updates the Rider.  This Rider does not apply to financing
 
through qualified veterans mortgage bonds.  There have been no
 
requests for a Veterans Bond Rider.
 
4.  Paragraph 11, Junior Mortgages to HUD, page 27602.
 
Delete any references to Temporary Mortgage Assistance Payments
 
(TMAP) due to the unavailability of the program.
 
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                                                                7
 
5.  Paragraph 12, Home Equity Conversion mortgage, page 27602.
 
The Home Equity Conversion Mortgage program has been implemented;
 
any references to the program may be located in HUD Handbook
 
4235.1. and Mortgagee Letter 90-17.
 
6.  Paragraph 13, Price Level Adjusted Mortgage, page 27603.
 
Delete this paragraph which refers to the Price Level Adjusted
 
Mortgage insurance program, since there is no projected
 
implementation date for the program.
 
D.  Changes to Part IV-B -- Special Requirements for Particular
 
States and Localities, page 27602.
 
1.  Paragraph 2, page 27602.
 
The Georgia Security Deed may include the address of the borrower
 
if so desired.
 
2.  Add the following state specific-instructions to page 27602
 
as paragraphs 9, 10 and 11 respectively:
 
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                                                               8
 
#9:  For Pennsylvania, a "Certificate of Residence" is required
 
at the end of the mortgage.  It should read as follows:
 
CERTIFICATE OF RESIDENCE I, _______________________________ do
 
hereby certify that the correct address of the within-named
 
lender is_____________________________________, witness my hand
 
this _____ day of 19_____.  ________________________________
 
Agent of Lender.
 
#10:  For Texas, delete FNMA/FHLMC paragraph 22 entitled "Waiver
 
of Notice of Intent to Accelerate," or if used, the paragraph
 
should be adapted since the paragraph reference is incorrect and
 
omits HUD notice language.
 
#11:  For Kansas, delete reference to Attorney's Fees in the deed
 
of trust, per KSA 58-2312 (1976).
 
E.  Changes to Model mortgage Form (Exhibit A), page 27603.
 
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                                                                9
 
1.  General Instructions:
 
a.  In all cases, the word "property" should be capitalized in
 
the numbered paragraphs.  As published, Exhibit A is inconsistent
 
in its capitalization.
 
b.  Delete the witness lines located at the end of the model
 
mortgage form.  Witness lines are needed only if required by
 
applicable state or local laws.
 
2.  Paragraph in the Mortgage Form entitled "Riders to this
 
Security Instrument," page 27607:  Add " specify " to the box
 
designated "other."  The box labelled "Adjustable Rate Rider" may
 
be deleted in all cases.  If it is deleted but an Adjustable
 
Rate Rider is used, the "Other" box should be checked with a
 
notation describing the rider.
 
3.  Paragraph 2 entitled "Monthly Payments of Taxes, Insurance
 
and Other Charges," page 26704.  Amend the fourth subparagraph by
 
deleting "Most Security Instruments issued by the Secretary are
 
insured under programs which require advance payment of the
 
entire mortgage insurance premium.  If this Security Instrument
 
is or was insured under a program which did not require advance
 
payment of the entire mortgage insurance premium, then" so that
 
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                                                               10
 
the second sentence of the fourth subparagraph will begin:  "In
 
any year in which the Lender must pay a mortgage insurance
 
premium to the Secretary, each monthly payment shall also
 
include".
 
4.  Paragraph 5 entitled "Application of Payments," page 27604.
 
Amend the first item listed by deleting ", unless Borrower paid
 
the entire mortgage insurance premium when this Security
 
Instrument was signed;" so that the first item ends with "monthly
 
mortgage insurance premium;".
 
5.  Paragraph 5 entitled "Preservation and Maintenance of the
 
Property, Leaseholds," page 27605.  The paragraph should be
 
changed to read as follows:
 
      5.  Occupancy, Preservation, Maintenance and
 
      Protection of the Property; Borrower's Loan
 
      Application; Leaseholds.  Borrower shall occupy,
 
      establish, and use the Property as Borrower's
 
      principal residence within sixty days after the
 
      execution of this Security Instrument and shall
 
      continue to occupy the Property as Borrower's
 
      principal residence for at least one year after the
 
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                                                               11
 
      date of occupancy, unless the Secretary determines
 
      this requirement will cause undue hardship for
 
      Borrower, or unless extenuating circumstances exist
 
      which are beyond Borrower's control.  Borrower shall
 
      notify Lenders of any extenuating circumstances.
 
      Borrower shall not commit waste or destroy, damage or
 
      substantially change the Property or allow the
 
      Property to deteriorate, reasonable wear and tear
 
      excepted.  Lender may inspect the property if the
 
      property is vacant or abandoned or the loan is in
 
      default.  Lender may take reasonable action to
 
      protect and preserve such vacant or abandoned
 
      property.  Borrower shall also be in default if
 
      Borrower, during the loan application process, gave
 
      materially false or inaccurate information or
 
      statements to Lender (or failed to provide Lender
 
      with any material information) in connection with the
 
      loan evidenced by the Note, including, but not
 
      limited to, representations concerning Borrower's
 
      occupancy of the Property as a principal residence.
 
      If this Security Instrument is on a leasehold,
 
      Borrower shall comply with the provisions of the
 
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                                                                12
 
      lease.  If Borrower acquires fee title to the
 
      Property, the leasehold and fee title shall not be
 
      merged unless Lender agrees to the merger in writing.
 
6.  Paragraph 9(b) entitled "Sale Without Credit Approval," page
 
27605.  Amend to read as follows:
 
      9(b)  Sale Without Credit Approval.  Lender shall, if
 
      permitted by applicable law and with the prior approval of
 
      the Secretary, require immediate payment in full of all
 
      sums secured by this Security Instrument if:
 
           (i)  All or part of the Property, or a beneficial
 
           interest in a trust owning all or part of the
 
           Property, is sold or otherwise transferred (other than
 
           by devise or descent) by the Borrower, and
 
           (ii)  The property is not occupied by the
 
           purchaser or grantee as his or her
 
           principal  or secondary  residence, or the
 
           purchaser or grantee-does so occupy the
 
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                                                               13
 
           Property, but his or her credit has not
 
           been approved in accordance with the
 
           requirements of the Secretary.
 
The words in brackets should be used only for cases not subject
 
to the restriction on secondary residences described in Mortgagee
 
Letter 91-1.  The rest of the language contains a correction to
 
the version of this paragraph as printed in Mortgagee Letter
 
89-31, as well as new language covering transfer of beneficial
 
interests in trusts.  The new paragraph 9(b) is required if one
 
of the following three conditions has been met:
 
     i.     A conditional commitment or master conditional
 
           commitment has been issued by HUD on or after December
 
           15, 1989; or
 
    ii.    An appraisal report or master appraisal report has
 
           been signed by a Direct Endorsement underwriter on or
 
           after December 15, 1989; or
 
   iii.    A certificate of reasonable value or master
 
           certificate of reasonable value has been issued by the
 
           Department of Veterans Affairs on or after December
 
           15, 1989.
 
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                                                               14
 
 7.  Paragraph 12 entitled "Successors and Assigns Bound; Joint
 
and Several Liability; Co-Signers", page 27606.
 
      The word "term" in subsection (c) should be made plural so
 
the subsection will read as follows:
 
      (c)  agrees that Lender and any other Borrower may
 
      agree to extend, modify, forbear or make any
 
      accommodations with regard to the terms of this
 
      Security Instrument or the Notice without that
 
      Borrower's consent.
 
 8.  Acceleration Language:  Mortgagees are authorized, but not
 
required, to add the following provision to the mortgage/deed of
 
trust as paragraph 9(e):
 
      (e)  Mortgage Not Insured.  Borrower agrees that
 
      should this Security Instrument and the note secured
 
      thereby not be eligible for insurance under the
 
      National Housing Act within _________    from the
 
      date hereof, Lender may, at its option and
 
      notwithstanding anything in Paragraph 9, require
 
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                                                               15
 
      immediate payment in full of all sums secured by this
 
      Security Instruments.  A written statement of any
 
      authorized agent of the Secretary dated subsequent to
 
      _________________ from the date hereof, declining to
 
      insure this Security Instrument and the note secured
 
      thereby, shall be deemed conclusive proof of such
 
      ineligibility.  Notwithstanding the foregoing, this
 
      option may not be exercised by Lender when the
 
      unavailability of insurance is solely due to Lender's
 
      failure to remit a mortgage insurance premium to the
 
      secretary.
 
These instructions modify Mortgagee Letter 89-23 by specifying
 
where this optional language should be inserted if it is used and
 
making minor wording changes.  Any period may be inserted in the
 
blanks, expressed either in numbers of days or months, which is
 
not shorter than 60 days and not longer than eight months.
 
Lenders are cautioned that this clause should not be used to
 
abuse innocent borrowers.
 
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                                                                16
 
9.  Paragraph 17 entitled "Foreclosure Procedure," page 27607.
 
      Remove the first sentence, following the bracketed material,
 
 and substitute the following:
 
       If lender requires immediate payment in full under
 
       paragraph 9, Lender may invoke the power of sale and
 
       any other remedies permitted by applicable law.  Lender
 
       shall be entitled to collect all expenses incurred in
 
       pursuing the remedies provided in this paragraph 17,
 
       including, but not limited to, reasonable attorney's fees
 
       and costs of title evidence.
 
 10. Footnotes for Model Mortgage Form, page 27608.
 
       a. Footnote #2, page 27608:  Inclusion of Borrower's
 
       and Trustee's addresses is acceptable.  Also, note
 
       that the special deed of trust language would replace
 
       the first three sentences of Exhibit A, not the first
 
       two sentences.
 
       b.  Footnote #5, page 27608.  Capitalize the initial
 
       word in "To have and ..."
 
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                                                         17
 
c.  Footnote #5a, page 27608.  Add "Lenders need not
 
follow the FNMA/FHLMC form verbatim if the FNMA/FHLMC
 
language would conflict with state or local laws and
 
requirements."
 
d.  Footnote #6, page 27608.
 
      (1)  Substitute "Property" for "mortgage" in the
 
      third sentence beginning, "Paragraph 17 must include
 
      the mortgagee's right to a public sale if the
 
      property, including a power of sale is legally
 
      permissible."
 
      (2)  Add:  "In New York, lender may leave out the
 
      30 day notice part of the FNMA/FHLMC foreclosure
 
      provision."
 
      (3)  Lenders are not to insert "Lender in
 
      Possession" paragraphs from the non-uniform
 
      covenant sections of the FNMA/FHLMC forms.
 
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                                                                 18
 
F.  Changes to Model Note Form (Exhibit B) page 27609.
 
      1. Paragraph 4(B) entitled "Manner of Payment-Place", page
 
      27609.  Add the phrase "by notice to borrower" to read as
 
      follows:  "Payment shall be made at ___________________ or
 
      at such other place as lender may designate in writing by
 
      notice to Borrower."
 
      2.  Paragraph 4(D), entitled "Allonge to this note for
 
      payment adjustments", page 27609.  Add " specify " to the
 
      box designated "other."  The box designated "Adjustable
 
      Rate Allonge" should be deleted.
 
      3. Paragraph 9 entitled "Obligations of Persons Under this
 
      Note", page 27610.  The last sentence beginning with "Any
 
      one person" should insert lowed" after "amounts" and before
 
      "under" to read as follows:  " Any one person signing this
 
      Note may be required to pay all the amounts owed under this
 
      Note."
 
      4.  Footnote 1, page 27611.  Add "Use 'Commonwealth of' or
 
      'Territory of' if appropriate."
 
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                                                                19
 
G.  Deletion of Adjustable Rate Rider (Exhibit C), page 27612:
 
Revised Instructions for Adjustable Rate Mortgages.
 
      1. Because of the change to an Adjustable Rate Note with a
 
      simplified description of the interest adjustment
 
      procedures, as described in the next section, the
 
      Adjustable Rate Rider (Exhibit C) cannot be used without
 
      redrafting to match the Adjustable Rate Note.  HUD has
 
      chosen to delete Exhibit C from the requirements instead of
 
      requiring use of a revised Exhibit C. HUD's legal research
 
      indicates that in most states there is no apparent need to
 
      record a document such as Exhibit C, which contains the
 
      details of the interest adjustment procedures.  The
 
      description of the Note contained on the first page of the
 
      Model Mortgage form sufficiently describes the debt for
 
      recordation purposes.  Mortgagees now have three options
 
      for drafting an adjustable rate mortgage.
 
           (a) Option 1:  Use a mortgage meeting the regular
 
           requirements as published at 54 Federal Register
 
           27596, June 29, 1989 (as updated by this notice) with
 
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                                                     20
 
no special adaption for adjustable rate loans, if such
 
a mortgage would be fully enforceable under state or
 
local law.
 
(b) Option 2:  Use a mortgage meeting the regular
 
requirements with one or more of the following
 
adaptations to the form:  change the title to
 
"Adjustable Rate Mortgage," change the first use of
 
the word "note" on the first page to "adjustable rate
 
note," change the first use of the word "interest" on
 
the first page to "interest at a rate subject to
 
adjustment," and/or add additional language (either to
 
Paragraph 1 or as an additional numbered paragraph at
 
the end of the mortgage) which references, describes
 
or summarizes the adjustable rate feature of the Note
 
to the extent desired by the mortgagee or as required
 
for enforceability under state or local law.  Any
 
mortgagees desiring to describe the entire interest
 
rate adjustment procedure in the mortgage should
 
follow Option 3.
 
(c)  Option 3:  Use a rider following the format of
 
the former Exhibit C, but substitute Paragraph 5 of
 
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                                                                 21
 
           the new Adjustable Rate Note in place of paragraphs 1
 
           through 5 in the former Exhibit C.  Some minor changes
 
           to paragraph references will be needed in the language
 
           taken from the Adjustable Rate Note.
 
Note:  None of these instructions on the Adjustable Rate Rider
 
apply to Adjustable Rate Home Equity Conversion Mortgages.
 
      2.  Do not use the ARM rider/allonge form in Mortgagee
 
      Letter 89-24.  The only acceptable documents for Adjustable
 
      Rate Mortgages are described in this notice.  Mortgagee
 
      Letter 89-24 addressed changes to the HUD-distributed
 
      Adjustable Rate Mortgage rider/allonge form which became
 
      obsolete on March 1, 1990.
 
H. Changes to Adjustable Rate Allonge Amending Note (Exhibit D),
 
page 27615.
 
The Allonge formerly designated as Exhibit D was used to convert
 
the fixed-rate Model Note form (Exhibit B) to an Adjustable Rate
 
Note.  HUD is now prescribing a Model Adjustable Rate Note as a
 
replacement Exhibit D to eliminate the need for an Allonge.  This
 
will improve clarity and reduce the required number of pages.
 
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                                                                22
 
Replacement Exhibit D appears at the end of this notice.  It
 
should be used in the same manner as the fixed-rate Model Note
 
form, with any appropriate modifications required by the
 
footnotes and such other adaption as may be necessary to conform
 
to state or local requirements.
 
I. Changes to Graduated Payment Allonge Amending Note (Exhibit
 
F), page 27619.
 
      Begin:  "THIS GRADUATED PAYMENT ALLONGE is an
 
      AMENDMENT made this..."
 
J.  Changes to Rehabilitation Loan Rider (Exhibit H), page 27621.
 
Paragraph A, page 27621:  Add a reference to Direct Endorsement so
 
that the last sentence reads as follows:  "No advances shall be
 
made unless approved by the Secretary of Housing and Urban
 
Development or a Direct Endorsement Underwriter."
 
K.    Changes to Condominium Rider (Exhibit I), page 27622.
 
       1.  The sentence beginning with "The Property Address
 
       includes a unit in ...," page 27622:  "Individual" should
 
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                                                                  23
 
      be deleted and "undivided" added in its place.  The
 
      sentence should read as follows:  "The Property Address
 
      includes a unit in, together with an undivided interest in
 
      the common elements of, a condominium project known as:"
 
      2. Paragraph A, eighth line, page 27622.  Delete "this"
 
      and add "of this Security Instrument" after "Paragraph 4"
 
      and before "to maintain...."
 
L.  Changes to Planned Unit Development Rider (Exhibit J), page
 
27623.
 
      1. Paragraph A, eighth line, page 27623:  Delete "this"
 
      and add "of this Security Instrument" after "Paragraph 4"
 
      and before "to maintain..."
 
M.  Changes to Tax-Exempt Financing Rider (Exhibit K), page
 
27624.
 
      1.  Paragraph beginning with "In addition to the
 
      covenants," page 27624.  Amend paragraph to reflect
 
      acceleration language in the model mortgage form so that
 
      the paragraph reads as follows:  In addition to the
 
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                                                              24
 
     covenants and agreements made in the Security Instrument,
 
     Borrower and Lender further covenant and agree to amend
 
     Paragraph 9 of the Model Mortgage Form, entitled 'Grounds
 
     for Acceleration of Debt' as by adding additional grounds
 
     for acceleration follows:"
 
     2.  Line beginning "Lender, or such of...," page 27624.
 
     change "be" to "by".
 
     3.  Paragraph (a), beginning with " a ll or part of the
 
     property...," page 27624.  Delete "(other than by devise,
 
     descent, or operation of law)."
 
     4.  Paragraph (a)(i), page 27624.  Change "resident" to
 
"residence."
 
5.  Paragraph (a)(iv), page 27624.   This paragraph should be
 
altered to read as follows if the bonds involved are subject to
 
the 1988 amendments to Section 143(f) of the Internal Revenue
 
Code.
 
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                                                                  25
 
      (iv) who has a gross family income in excess of the
 
      applicable percentage of applicable median family income as
 
      provided in Section 143(f) and (i)(2) of the Internal
 
      Revenue Code; or
 
 6. Next-to-last sentence, page 27624.  Change the sentence to
 
read "References are to the Internal Revenue Code as amended and
 
in effect on the date of issuance of bonds, the proceeds of which
 
will be used to finance the purchase of the Security Instrument
 
and are deemed to include the implementing regulations."
 
If bond proceeds are used for purposes other than mortgage
 
purchase, such as for direct loans to homeowners or as loans to
 
mortgagees who lend to homebuyers, the description of the bonds
 
should be amended as needed.
 
 7.  General, page 27624.  The word "Tax-Exempt" should always
 
have a hyphen.  As published, Exhibit K is inconsistent on this
 
point.