www.hudclips.org 


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

August 1, 1996
 
MORTGAGEE LETTER 96-41
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Single Family Loan Production - Condominium Units in
            Non-FHA Approved Projects; Mortgage Insurance
 
     On May 29, 1996, in 61 FR 26982, the Department issued a
final rule in the Federal Register, permitting the insurance of
mortgages on individual units in condominium projects that have
not been previously approved by the Department.  That final rule
established a "spot loan" procedure to provide home mortgage
insurance on individual units in condominium projects where there
is little likelihood that the project's homeowners association
would make the requisite changes to its legal documents (usually
to benefit one association member) to obtain FHA approval.  This
Mortgagee Letter provides further guidance on the use of these
spot loans.
 
     The Department's requirements for condominium projects are
set forth in 24 CFR 234.26 of the Code of Federal Regulations.
The spot loan provisions add a sub-section (i) to this section
and lists specific criteria that must be met.  The new spot loan
regulations also add a new section, 24 CFR 206.51, to the Home
Equity Conversion Mortgage (HECM) regulations.  The HECM program
incorporates by reference the project requirements set forth in
24 CFR 234.26(i).  Therefore, spot loans may be used under both
the Department's Section 234(c) and HECM programs.  Cooperatives
and planned unit developments (PUDS) are not eligible for spot
loans.
 
     The following requirements must be satisfied before a spot
loan is endorsed:
 
         The condominium project must be complete.  There should
     be no ongoing or anticipated addition of any units, common
     elements, and/or facilities.
 
         Control of the common areas of the project must have
been
     turned over to the unit owners association for at least one
     year.
                               -2-
 
         The owners association must provide evidence that the
 
     project has the appropriate hazard, liability and flood
     insurance.
 
         Individual units in the project must be owned in fee
 
     simple or be an eligible leasehold interest.  The project's
     legal documents must provide for undivided ownership of
     common areas by unit owners.  By virtue of this ownership,
     unit owners must have the right to use all facilities and
     unrestricted common elements.
 
         The project's documents should not place any legal
     restrictions on conveyance.  Any provisions that seek to
     limit the free transferability of title is generally
     unacceptable.  Such restrictions include rights of first
     refusal and restrictive covenants.  Certain governmental or
     nonprofit programs designed to assist in the purchase or
     rental of low-or moderate-income housing are exempted from
     the restrictions on conveyance provisions.  The Department's
     policy on the free assumability and transferability of
     property is set forth in 24 CFR 234.66.
 
         At least 90% of the units in the project must have been
     sold.
 
         At least 51% of the units in the project must be owner-
 
     occupied.
 
         No single entity may own more than 10% of the units in a
 
     project.  "Entity" includes an individual partnership,
     corporation, limited liability company, limited liability
     partnership, joint venture, investor group or other natural
     or legal person qualified to hold an interest in real
     property.  The 10% restriction does not apply when the
     ownership of less than three units would disqualify an
     otherwise eligible project.
 
         The Department recognized that the 10% cap on the number
of
     units that may secure FHA insured mortgages in a given
     project can place a small regime at a disadvantage, since
     only a few units will invoke the limit. Accordingly, a two-
     tiered system was established.  For condominium projects
     having more than 30 units, no more than 10% of the units may
     have FHA insured loans at any given time.  Condominium
     projects consisting of 30 units or less, can have up to 20%
     of the units encumbered by FHA insured mortgages under the
     spot loan rule.
                               -3-
 
     Mortgage lenders underwriting spot loans must perform
sufficient investigation and analysis to certify that the
condominium project satisfies the eligibility criteria.  Under
the regulations, mortgage lenders may employ a wide range
of approaches to ascertain compliance with the spot loan
requirements.  Project developers, appraisers, owners,
associations, management companies and real estate brokers are
among the sources of information lenders may use.  To the extent
that the Department has information that can be of assistance, it
will provide mortgagees with that information.  However, it
remains the lender's responsibility to ensure the accuracy of the
information it relies upon in making its certification.
 
     Attachment 1 is a suggested checklist lenders may wish to
use in their underwriting analyses.  It reflects some key
considerations in assessing the eligibility of a project for spot
loans.
 
     The standard Direct Endorsement Underwriter Certifications
applicable to condominiums under standard loan programs and the
HECM program are not sufficient for spot loan applications.  Some
modification is needed.  Accordingly, the following certification
is added to the list of Direct Endorsement (DE) certifications in
Appendix 3 of Handbook 4000.4, Rev. 1, Ch. 1 and to the list of
Underwriter Certification (HECM) in Appendix 3A of Mortgagee
Letter 95-54 :
 
     ( ) The property is in a project that has not received
     prior approval by HUD but the requirements of 26 CFR
     234.26(i) are met.
 
     This certification requirement will be in effect for all
mortgages executed on or after 30 days from the date of this
Mortgagee Letter.  A similar statement may be used until the
requirement for a certification becomes effective.
 
     Local HUD Offices and Regional Processing Centers will
conduct random reviews of mortgage loans insured under the spot
loan program.  Mortgage Lenders demonstrating a pattern of abuse
will be subject to those enforcement mechanisms and sanctions
governing FHA mortgage insurance activity.
 
     The spot loan program is designed to relieve a burden on
homebuyers in successfully-operating, non-approved condominium
projects where FHA involvement is limited; it must not be used to
circumvent the general requirement that a condominium project be
approved before a mortgage on any unit in that project can be
endorsed for insurance.  As previously noted, the approval
requirements for condominium projects are found in 24 CFR 234.26,
(a)-(h).  Additional requirements are set forth in Chapter 11,
HUD Handbook 4150.1 Rev 1, entitled "Valuation Analysis for Home
                               -4-
 
Mortgage Insurance" and reiterated in HUD Handbook 4265.1 ,
entitled "Home Mortgage Insurance - Condominium Units - Section
234(c)".
 
     Questions regarding spot loans and condominium project
approvals should be directed to the Single Family Division of the
local HUD Office.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
 
Attachment
 
        SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS
 
_______ 1.  The legal documents of the homeowners association
do not contain a right of first refusal or restrictive covenant.
 
_______ 2.  The unit is part of a condominium regime that
provides for common and undivided ownership of common areas by
unit owners.
 
_______ 3.  The project, including the common elements, and those
of any Master Association, are complete, and the project is not
subject to additional phasing or annexation.
 
______  4.  (a)  There are no special assessments pending.
 
______      (b)  No legal action is pending against the
condominium association, or its officers or directors.
 
______  5.  The common areas have been under the control of the
homeowners association for at least one year.
 
______  6.  At least 90 percent of the total units in the project
have been sold.  Verified by _________________________.
 
______  7.  At least 51 percent of the total units in the project
are owner-occupied.  Verified by ______________________.
 
______  8.  There are no adverse environmental factors affecting
the project as a whole or individual units .
 
______  9.  No single entity owns more than 10 percent of the
total units in the project.  Verified by ______________________.
 
______ 10.  The units in the project are owned in fee simple or
the units are held under a leasehold acceptable to FHA.
Leasehold in file.
 
______ 11.  The owners association has adequate common area
insurance coverage.  General liability, replacement coverage,
etc. reflects the character, amenities and risks of the
particular development.  Flood and other insurances carried, when
applicable.
 
______ 12.  General maintenance level of common elements is
acceptable and there is no deferred maintenance, based on the
comments by the Appraiser and/or the pictures.
 
______ 13.  The owners association has a reserve plan and a
reserve fund, separate from the operating account, that is
adequate to prevent deferred maintenance.  The amount of the fund
is $_________ as of __________.
 
                               -2-
 
_______14.  (a)  For projects consisting of over 30 units, no
more than 10 percent of the total units are encumbered by FHA
insured mortgages.  Verified by ___________________.
 
_______     (b)  For projects consisting of 30 units or less, no
more than 20 percent of the total units are encumbered by FHA
insured mortgages.  Verified by _______________.
 
____________________________________     ________________________
       (Mortgagee)                           (Reviewer)
____________________________________     ________________________
       (Address)ss)                             (Title)
____________________________________     ________________________
                                             (Date)
__________________________________        _______________________
  (Condominium Project Name)                 (FHA case number)
__________________________________
  (Address)
__________________________________