[Federal Register Volume 72, Number 64 (Wednesday, April 4, 2007)]
[Rules and Regulations]
[Pages 16678-16685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5960]



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Part V





Department of Housing and Urban Development





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24 CFR Part 92



 HOME Investment Partnership Program; American Dream Downpayment 
Initiative and Amendments to Homeownership Affordability; Final Rule

Federal Register / Vol. 72, No. 64 / Wednesday, April 4, 2007 / Rules 
and Regulations

[[Page 16678]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 92

[Docket No. FR-4832-F-02]
RIN 2501-AC93


HOME Investment Partnerships Program; American Dream Downpayment 
Initiative and Amendments to Homeownership Affordability

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This rule follows publication of, and considers the public 
comments on, two earlier HUD rules. First, this rule makes final the 
March 30, 2004, interim rule establishing regulations for a downpayment 
assistance component under the HOME Investment Partnerships Program 
(HOME), referred to as the American Dream Downpayment Initiative 
(ADDI). Through the ADDI, HUD makes formula grants to participating 
jurisdictions under the HOME Program for the purpose of assisting low-
income families to achieve homeownership. In addition, this rule also 
makes final HUD's November 22, 2004, interim rule, which revised and 
clarified the HOME Program homeownership affordability requirements of 
the HOME Investment Partnerships Program. In response to the public 
comments received on both interim rules, this final rule clarifies that 
the purchase of manufactured homes is an ADDI eligible activity, and 
broadens and clarifies the use of HOME funds to help preserve 
affordable housing previously assisted with HOME funds.

DATES: Effective Date: May 4, 2007.

FOR FURTHER INFORMATION CONTACT: Virginia Sardone, Director, Program 
Policy Division, Office of Affordable Housing Programs, Department of 
Housing and Urban Development, 451 Seventh Street, SW., Room 7164, 
Washington, DC 20410-7000; telephone (202) 708-2470. (This is not a 
toll-free number.) A telecommunications device for hearing- and speech-
impaired persons (TTY) is available at (800) 877-8339 (Federal 
Information Relay Service).

SUPPLEMENTARY INFORMATION:

I. Background

A. The HOME Program

    The HOME Investment Partnerships Program (HOME Program) is 
authorized under Title II of the Cranston-Gonzalez National Affordable 
Housing Act (42 U.S.C. 12704 et seq.) (NAHA). Through the HOME Program, 
HUD allocates funds by formula among eligible state and local 
governments to strengthen public-private partnerships and to expand the 
supply of decent, safe, sanitary, and affordable housing for very low-
income and low-income families. Generally, HOME funds must be matched 
by nonfederal resources. State and local governments that become 
participating jurisdictions may use HOME funds to carry out multiyear 
housing strategies through acquisition, rehabilitation, and new 
construction of housing, and through tenant-based rental assistance. 
Participating jurisdictions may provide assistance in a number of 
eligible forms, including grants, loans, advances, equity investments, 
interest subsidies, and other forms of assistance that HUD approves. 
HUD's regulations for the HOME Program are located at 24 CFR part 92.

B. The March 30, 2004, Interim Rule Implementing the American Dream 
Downpayment Initiative

    The American Dream Downpayment Act (Pub. L. 108-186, approved 
December 16, 2003) (ADDI statute) amended NAHA to establish a 
downpayment assistance component under the HOME program, referred to as 
the American Dream Downpayment Initiative (ADDI). Specifically, the 
ADDI statute established a separate formula under the HOME Program by 
which HUD allocates funds to states that are participating 
jurisdictions under the HOME Program and to participating jurisdictions 
within those states for the purpose of making downpayment assistance to 
low-income families who are first-time homebuyers for the purchase of 
single family housing that will serve as the family's principal 
residence. The ADDI statute revised section 271 of NAHA (12 U.S.C. 
12881) to establish specific statutory requirements for administration 
of ADDI, including the allocation of funds.
    With respect to allocation of funds, the ADDI statute established a 
formula that is based primarily on the need for assistance to 
homebuyers as measured by the percentage of low-income households 
residing in rental housing within the participating jurisdiction. This 
formula governs the allocation of ADDI funds. Among other requirements, 
the ADDI statute also established the definitions applicable to ADDI, 
authorized the use of ADDI funds for certain rehabilitation costs 
completed in conjunction with ADDI downpayment assistance, established 
new Consolidated Plan requirements, and prescribed other requirements 
regarding the allocation and use of ADDI funds. Through the statutory 
requirement that participating jurisdictions have a plan for conducting 
targeted outreach to public housing tenants and to families receiving 
rental assistance from public housing agencies, the ADDI statute 
envisioned that among the low-income families who will move from rental 
to homeownership are those families who are currently public housing 
residents or who are receiving rental assistance. ADDI provides a much-
needed resource to participating jurisdictions to assist low-income 
families achieve the dream of homeownership.
    On March 30, 2004 (69 FR 16758), HUD published an interim rule that 
established regulations at 24 CFR part 92 for ADDI. The interim rule 
codified the statutory formula (located at 42 U.S.C. 12821) for 
allocation of ADDI funds to HOME participating jurisdictions, 
identified eligible activities and costs under ADDI, and established 
other applicable requirements.

C. The November 22, 2004, Interim Rule Revising the HOME Program 
Homeownership Affordability Requirements

    Section 215(b) of NAHA establishes affordability requirements for 
HOME-assisted homeownership housing. These requirements apply to both 
the initial sale to a HOME-assisted homebuyer and to any subsequent 
resale by that homebuyer during the applicable period of affordability. 
Specifically, the statute provides that participating jurisdictions 
must impose restrictions that either require that (1) the HOME-assisted 
housing be resold to another low-income homebuyer at an affordable 
price; or (2) the HOME-assisted housing may be resold to any homebuyer 
regardless of income, but the subsidy to the original homebuyer must be 
recaptured unless the net proceeds of the sale are insufficient.
    On November 22, 2004 (69 FR 68050), HUD published an interim rule 
that amended the regulations at 24 CFR part 92 for homeownership 
housing under the HOME Program. The interim rule revised the 
affordability requirements for homeownership housing assisted under the 
HOME program. Specifically, the interim rule limited the amount of the 
HOME investment subject to recapture after the sale of a HOME-assisted 
homebuyer project during the period of affordability to the net 
proceeds of the sale. In addition, the rule created a provision to 
allow participating jurisdictions to preserve HOME-assisted homebuyer 
housing as

[[Page 16679]]

affordable housing by investing additional HOME funds to acquire the 
housing before foreclosure or at a foreclosure sale.

II. This Final Rule: Differences Between the March 30, 2004, ADDI 
Interim Rule, the November 22, 2004, Affordability Requirements Interim 
Rule, and This Final Rule

    This final rule follows publication of the March 30, 2004, and the 
November 22, 2004, interim rules and takes into consideration the 
public comments received on the interim rules. After careful 
consideration of the public comments, HUD has made the following 
changes to the interim rules.
    1. Definition of first time homebuyer; clarifying language 
regarding manufactured housing as an eligible activity. HUD is amending 
the definition of first time homebuyer in the HOME Investment 
Partnerships program definitions to include those individuals who own 
dwelling units not permanently affixed to a foundation (inadvertently 
omitted from the March 30, 2004, regulation); and amending the ADDI 
regulations to include statutory language on the purchase of 
manufactured housing as an ADDI eligible activity. Specifically, 
language has been included stating that individuals shall not be 
excluded from consideration as a first-time homebuyer on the basis that 
the individual owns or owned, as a principal residence during the 
three-year period prior to assistance with ADDI funds, a dwelling unit 
whose structure is not permanently affixed to a permanent foundation in 
accordance with local or other applicable regulations or not in 
compliance with state, local, or model building codes, or other 
applicable codes, and cannot be brought into compliance with such codes 
for less than the cost of constructing a permanent structure. Also, 
although the regulatory definition of ``housing'' includes manufactured 
housing and manufactured housing lots, the ADDI regulations now state 
that ADDI funds may be used to purchase manufactured housing units and 
manufactured housing lots; the manufactured housing must be connected 
to permanent utility hook-ups; and the land on which the manufactured 
housing is located must be owned by the manufactured housing owner, 
owned as cooperative, or subject to a leasehold interest with a term, 
at minimum, equal to the term of the mortgage financing on the unit or 
the period of affordability, whichever is greater.
    2. HOME funds for the preservation of affordable housing. HUD has 
amended the HOME program's eligible administrative and planning costs 
to now include as eligible the preservation of affordable homeownership 
housing previously assisted with HOME funds. Also, the HOME program's 
prohibitions were amended to make clear that funds may be used for 
assistance to preserve affordability of homeownership housing. 
Additionally, Sec.  92.254(a)(9) has been reorganized to more clearly 
explain that HOME funds may be used to acquire housing in default 
through a purchase option, right of first refusal, or other preemptive 
right before foreclosure or through acquisition at a foreclosure sale, 
as well as to assist another homebuyer in purchasing the housing. 
Furthermore, although HOME funds cannot be used to repay a loan made 
with HOME funds, HOME funds may be used to pay foreclosure costs. The 
regulations were also amended to clarify that the investment of 
additional HOME funds to preserve affordability is considered an 
amendment of the original project rather than a new project.
    3. HOME fund recaptures. HUD has amended the final rule to clarify 
that HOME fund recaptures cannot exceed net proceeds, if there are in 
fact net proceeds. No substantive change is being made to the recapture 
requirement; but, rather, HUD is rewording the regulatory text for the 
sake of clarity.

III. Discussion of Public Comments on the March 30, 2004, Interim Rule 
Establishing ADDI Regulations

    The public comment period on the ADDI interim rule closed on June 
1, 2004, and HUD received 15 public comments. Comments were received 
from trade and professional organizations representing the realtor, 
homebuilder, and manufactured home industries; state and local 
community development agencies (as well as the national organizations 
representing these state and local agencies); private citizens; and 
non-profit downpayment assistance organizations. This section of the 
preamble presents a summary of the significant issues raised by the 
public comments and HUD's responses to those issues.

A. General Comments

    Six commenters expressed general support for the ADDI interim rule. 
The commenters wrote that ``this program will help reduce home buying 
costs and allow people to achieve homeownership'' and that ADDI is 
``focused on providing additional resources to HOME participating 
jurisdictions for homeownership activities.'' One commenter wrote that 
it was pleased that HUD included displaced homemakers and single parent 
households among those eligible to benefit from ADDI, and that the 
inclusion of condominiums and cooperative units within the definition 
of single family housing was a positive step.
    The primary area of concern that commenters mentioned was the 
inability to use ADDI funds for ADDI administrative costs. Several 
commenters were concerned that even though the regulation permits HOME 
funds to be used for ADDI's administration and planning, lack of 
additional funds for ADDI administration will make oversight and 
execution of the ADDI program extremely difficult. Another area of 
concern related to the requirement that participating jurisdictions 
repay HOME/ADDI funds on homes that go into foreclosure.
    Additional comments involved perceived negative connotations of 
manufactured housing, questions about eligible new construction costs, 
questions about the definition of first time homebuyer, and concerns 
that nonprofit homebuyer assistance organizations may not be permitted 
to participate in the ADDI. A breakdown of the comments by subject area 
follows.

B. Use of HOME Administrative Funds for ADDI Administrative Costs; ADDI 
Funding

    The March 30, 2004, interim rule amended Sec.  92.207 to make clear 
that a participating jurisdiction may expend HOME funds for payment of 
ADDI administrative expenses. The expended amount cannot exceed ten 
percent of the fiscal year HOME basic formula. ADDI funds cannot be 
used for administration costs of the ADDI program.
    Comment: Not providing for additional funding for the ADDI program 
is unduly burdensome to participating jurisdictions. One commenter 
wrote that the intent of the ADDI program is to provide funding for a 
new homebuyer initiative rather than supplement funding for already 
existing programs. According to the commenter, new initiatives require 
new administrative costs; thus, additional funding is required in order 
to sufficiently get the ADDI program up and running. Another commenter 
wrote that a 10 percent allocation of HOME funds for both HOME and ADDI 
administrative costs is inadequate to meet program costs. An additional 
commenter wrote that HUD should add a participating jurisdiction's ADDI 
allocation to its HOME allocation to

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calculate its ten percent program administration limit. One commenter 
asked HUD to amend the rule to allow all participating jurisdictions to 
expend up to 10 percent of their ADDI allocations on administrative 
costs.
    HUD Response. ADDI is a downpayment assistance program under the 
HOME Program. Most participating jurisdictions already fund homebuyer 
projects with their HOME Program funds. Many of these projects are part 
of homebuyer programs that provide downpayment assistance to low-income 
homebuyers. Consequently, many participating jurisdictions will choose 
to implement ADDI as part of their existing homebuyer programs. HUD 
agrees that it may be burdensome to some participating jurisdictions to 
implement ADDI without additional funding for program administration. 
However, the ADDI statute does not provide additional funds for ADDI 
program administration from ADDI funds.
    Comment: Congress intended to allow for the expenditure of ADDI 
funds as administrative expenses. One commenter wrote that Congress' 
silence on an administrative fee in the final statutory language for 
the ADDI program allows HUD the discretion to include a jurisdiction's 
FY 2004 and subsequent ADDI allocation into its HOME allocation for 
purposes of calculating an administrative fee. Another commenter wrote 
that Congress considered including administrative funds for ADDI and 
that the Senate Banking, Housing and Urban Affairs Committee amended 
the original Senate bill, S. 811, during its mark-up of the bill to 
include a five percent administrative provision for ADDI. A third 
commenter wrote that the ADDI statute should be interpreted to 
authorize the same level of administrative funding for ADDI activities 
as is already available for all other HOME activities, including those 
that provide homeownership assistance. Another commenter wrote that it 
interprets 24 CFR 92.602 of the HOME regulation as allowing a 
participating jurisdiction to use ADDI funds to finance ADDI project 
delivery costs.
    HUD Response. HUD disagrees that Congress' silence on the 
eligibility of administrative costs in the final statutory language for 
the ADDI program allows HUD the discretion to include a jurisdiction's 
FY 2004 and subsequent ADDI allocations into its HOME allocations for 
purposes of calculating an administrative fee. As pointed out by a 
commenter, Congress considered including administrative funds for ADDI 
and the Senate Banking, Housing and Urban Affairs Committee amended the 
original Senate bill, S. 811, during its mark-up of the bill to permit 
five percent of ADDI funds to be used for administrative provision. 
However, this language was struck from the legislation before 
enactment. Section 92.602 identifies eligible costs under ADDI 
including staff and overhead costs directly related to carrying out an 
ADDI project, which are eligible project related soft costs under Sec.  
92.602(b)(3)(iv).
    Comment: ADDI should be funded as a standalone program instead of a 
set-aside within the HOME program. One commenter made this suggestion.
    HUD Response. Congress wrote the ADDI legislation to be a component 
of the HOME Program. The American Dream Downpayment Act amended the 
HOME statute (subtitle E of Title II of the Cranston-Gonzalez National 
Affordable Housing Act (42 U.S.C. 12821)) to create ADDI. The 
implementation of ADDI was facilitated because ADDI is a set-aside 
within the HOME Program.

C. Recaptured/Repaid Funds Due to Foreclosure

    Several commenters on the ADDI rule expressed concern about HOME 
recapture and repayment requirements, which are applicable to ADDI 
under Sec.  92.616. HUD addressed the concerns of these commenters by 
publishing the November 22, 2004, rule.
    Comment: Validation is sought as to whether 24 CFR 92.254(a)(5) 
requires the participating jurisdiction to submit for HUD approval the 
resale and recapture provisions of the ADDI program before a 
participating jurisdiction may implement the program.
    HUD Response. The HOME regulations at Sec.  92.254(a)(5) require 
HOME participating jurisdictions to establish resale or recapture 
requirements that comply with the provisions of that section of the 
HOME rule and to set forth the requirements in their consolidated 
plans. In addition, Sec.  91.220(g)(2)(ii) and Sec.  91.320(g)(2)(ii) 
direct local participating jurisdictions and states, respectively, that 
will use HOME funds to assist homebuyers, to state the guidelines for 
resale or recapture as required in Sec.  92.254. HUD reads Sec.  
92.254(a)(5) to include both HOME and ADDI funds used to assist 
homebuyers. Therefore, it is not necessary for a participating 
jurisdiction to separately submit for HUD approval the resale and 
recapture provisions it will use for the ADDI program unless the 
provisions used for ADDI projects differ from the provisions previously 
set forth in the consolidated plan for HOME homebuyer projects.

D. Manufactured Homes

    Comment: Maintaining the current action plan language regarding 
manufactured homes is contrary to current federal and state policy. Two 
commenters wrote that the language requiring targeted outreach to 
residents and tenants of public and manufactured housing creates 
negative and inaccurate connotations for manufactured housing that are 
contrary to current policy. One of the commenters wrote that this 
language strongly implies that jurisdictions must have targeted plans 
to displace persons from manufactured homes.
    HUD Response. The language added to the consolidated plan 
regulations at 24 CFR part 91 is the statutory requirement. 
Specifically, the language added to the action plan provisions for 
local HOME participating jurisdictions at Sec.  91.220 and for states 
at Sec.  91.320 requires a recipient of ADDI funds to include in its 
action plan a plan for conducting targeted outreach to residents and 
tenants of manufactured housing. Because the definition of single 
family housing in the ADDI statute and rule includes manufactured 
housing and a manufactured housing lot, the consolidated plan 
requirement regarding outreach to residents and tenants of manufactured 
housing has been read by commenters as contradicting the eligibility of 
manufactured housing as ADDI eligible single-family housing. However, 
tenants of the manufactured housing qualify as first-time homebuyers. 
In addition, ownership of manufactured housing that is not permanently 
affixed does not disqualify the family as a first-time homebuyer. In 
order to clarify the language in the interim rule regarding 
participating jurisdictions' responsibilities providing outreach to 
residents and tenants of manufactured housing, HUD is revising the 
definition of first-time homebuyer in the ADDI regulations that more 
closely tracks the statutory definition of single family housing. 
Specifically, the definition of first-time homebuyer now states that an 
individual shall not be excluded from consideration as a first-time 
homebuyer on the basis that the individual owns or owned, as a 
principal residence during the three-year period prior to assistance 
with ADDI funds, a dwelling unit whose structure is not permanently 
affixed to a permanent foundation in accordance with local or other 
applicable regulations or not in compliance with state, local, or model 
building codes, or other applicable codes, and cannot be brought into 
compliance with such

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codes for less than the cost of constructing a permanent structure.
    Comment: The definition of single family housing should be revised 
to use the exact statutory language pertaining to manufactured housing. 
Two commenters wrote that the statutory language provides that 
manufactured housing owned as a cooperative or subject to a leasehold 
interest is an eligible activity under ADDI. The commenters urged that 
this be clarified in the final rule.
    HUD Response. HUD agrees that additional language is needed 
clarifying that the purchase of manufactured homes is an eligible 
activity. HUD has added language to Sec.  92.602(a) stating that ADDI 
funds may be used to purchase a manufactured housing unit, manufactured 
housing lots, and that the manufactured housing unit must, at the time 
of project completion, be connected to permanent utility hook-ups and 
be located on land that is owned by the manufactured housing owner, 
owned as a cooperative, or is subject to a leasehold interest with a 
term equal to at least the term of the mortgage financing on the unit 
or the period of affordability (whichever is greater).

E. Nonprofit Downpayment Assistance Programs

    Comment: The interim rule unfairly excludes certain nonprofit 
organizations from participation in ADDI. Two commenters objected to 
the limitation on subrecipients and contractors contained in the 
interim rule. The interim rule prohibits a participating jurisdiction 
from providing ADDI funds to an entity or organization that provides 
downpayment assistance, if the activities of that entity are financed 
by contributions, service fees, or other payments from the sellers of 
housing, whether or not made in conjunction with the sale of specific 
housing acquired with ADDI funds. The commenters wrote that this 
limitation goes beyond the statutory prohibition and unfairly excludes 
certain nonprofit organizations from participating in ADDI, because the 
commenters believe the statute can be interpreted to permit an entity 
to run two programs, one program with seller-provided funds and 
another--the ADDI program--without seller funds. In addition, the 
commenters objected to the rationale in the preamble to the interim 
rule, which provided that seller-financed downpayment assistance 
artificially inflated the fees charged to homebuyers in excess of the 
amount necessary to compensate sellers for their payment of certain 
closing charges or contributions to the cost of the downpayment.
    HUD Response. The ADDI statute prohibits participating 
jurisdictions from using ADDI to provide funding to an entity or 
organization that provides downpayment assistance if the activities of 
that entity or organization are funded in whole or in part, directly or 
indirectly, by contributions, service fees, or other payments from the 
sellers of housing. The ADDI regulations at Sec.  92.602(f) copy the 
statutory language and adds the following phrase: ``whether or not made 
in conjunction with the sale of specific housing acquired with ADDI 
funds.'' HUD purposefully added this language to better articulate the 
statutory prohibition against organizations that receive funds from 
sellers of housing. The prohibition applies to the entire organization, 
not just to specific programs of the organization.
    The statement in the preamble about seller-funded downpayment 
programs is supported by a recent study. ``An Examination of 
Downpayment Gift Programs Administered by Non-profit Organizations'' 
(March 2005), prepared for HUD by Concentrance Consulting Group, found 
strong evidence that the cost of downpayment assistance added to the 
sales price, increased the loan amount, and eliminated any borrower 
equity in the property. This study can be found at: http://www.hud.gov/offices/hsg/comp/rpts/dpassist/dpa2.pdf.

F. Other Comments

    Comment: The language relating to the usage of ADDI funds for new 
construction financing and the definition of ``single family home'' 
should be made more clear. One commenter requested that HUD clarify 
that, although ADDI funds cannot be used for hard or soft costs related 
to new construction, ADDI funds may be used for the acquisition and 
financing of new construction. Two commenters requested a clarification 
on the definition of single family housing and whether that definition 
includes both newly constructed and existing homes. One commenter 
suggested the rule should state that downpayment funds can only be used 
in association with the purchase or repair of existing homes. The 
commenter interpreted the interim rule to prohibit the use of ADDI 
funds for newly constructed homes.
    HUD Response. The ADDI statute and Sec.  92.602(a) of the ADDI 
regulations clearly state that the only eligible activities are 
downpayment assistance towards the purchase of single family housing by 
low-income families who are first-time homebuyers and rehabilitation 
that is completed in conjunction with the home purchase assisted with 
ADDI funds. Single family housing includes housing that is newly 
constructed. Section 92.601(b)(4) prohibits the use of ADDI funds for 
the development costs of new construction of housing or for rental 
assistance. Since ADDI funds can only be used for downpayment 
assistance towards the purchase of single family housing and for 
rehabilitation of the ADDI-assisted housing, ADDI funds can be used to 
assist low-income first-time homebuyers to purchase newly constructed 
housing, but not to develop or finance new construction.
    Comment: The definition of first-time homebuyer should include a 
financial cap on ownership of other real estate. One commenter wrote 
that under the interim rule's definition of a first-time homebuyer, the 
first-time homebuyer could feasibly own other types of real estate 
prior to purchasing a first home, such as industrial, agricultural, 
commercial, and rental housing which did not include the buyer's 
residence. The commenter wrote that if HUD intends to allow for this 
kind of additional property ownership, the appraised value of such 
allowable property be capped at $300,000.
    HUD Response. The purpose of the ADDI program is to assist low-
income first-time homebuyers with downpayment assistance to purchase 
modest single family housing. An individual who has owned housing--
whether or not it is the principal residence--within the three-year 
period before purchase of a home with ADDI assistance is not a first-
time homebuyer, unless that person is a displaced homemaker or single 
parent as defined in the rule. If the participating jurisdiction is 
using the definition of ``annual income'' in Sec.  5.609, the assets of 
the individual must be considered in determining whether the person is 
low-income.
    Comment: The definition of low-income family at 24 CFR 92.2 should 
be waived for high-cost localities. One commenter wrote that HUD should 
allow a waiver of the definition of low-income families for higher cost 
areas where there may be a shortage of affordable housing for purchase 
by persons at 80 percent of area median income or below.
    HUD Response. HUD disagrees with the commenter's suggestion that 
HUD waive the definition of low-income families in high cost areas. The 
definition of low-income families is statutorily based (42 U.S.C. 
12704(10)) and cannot be waived. Moreover, allowing participating 
jurisdictions in

[[Page 16682]]

high cost areas in which there may be a shortage of affordable housing 
for low-income families to serve families with a higher income is 
contrary to the purpose of ADDI and will not resolve the affordable 
housing shortage for low-income families in that area.
    Comment: Eligible ADDI costs should include pre-purchase housing 
inspections and housing counseling, regardless of ultimate ADDI 
assistance. One commenter wrote that pre-purchase housing inspections 
should be allowed as an eligible soft cost. The commenter wrote that in 
the event the purchase falls through due to the inspection uncovering 
problems that cancel the sale, HUD should allow participating 
jurisdictions to pay for those inspections with HOME administrative 
funds. The commenter also wrote that lead-based paint stabilization and 
clearance testing be included as an acceptable ADDI rehabilitation or 
soft cost, respectively. Another commenter wrote that HUD should 
recognize as an eligible ADDI cost the provision of pre-purchase 
services, such as housing counseling, to potential buyers who are ADDI-
eligible, whether or not those eligible buyers are ultimately assisted 
with ADDI funds. Another commenter suggested that ADDI funds received 
by housing counseling organizations be chargeable as project costs even 
when the individual receiving the assistance is not immediately able to 
qualify for mortgage financing or receives such financing without ADDI 
assistance. The commenter also wrote that HUD should give ADDI funds 
directly to housing counseling agencies rather than filtering the funds 
through participating jurisdictions and urged that the 25 percent match 
associated with FY 2003 ADDI funds be waived in the case of awards to 
housing counseling organizations.
    HUD Response. The ADDI statute and Sec.  92.602(a) of the ADDI 
regulations identify eligible activities as downpayment assistance and 
home repairs. Section 92.602(b) identifies eligible project costs of 
ADDI projects. Included in eligible project costs are acquisition 
costs, rehabilitation costs, and related soft costs. Pre-purchase 
inspections and housing counseling are considered eligible soft costs, 
provided the eligible low-income, first-time homebuyer purchases 
single-family housing with ADDI assistance. If the purchase falls 
through and the sale is cancelled, there is no eligible ADDI project, 
and therefore, there are no eligible project soft costs. In this case, 
participating jurisdictions may use HOME administrative funds to pay 
for related soft costs expended on the cancelled ADDI project. 
Likewise, lead paint clearance testing is an eligible ADDI project 
related soft cost and lead paint stabilization is an eligible ADDI 
rehabilitation cost provided an eligible low-income, first-time 
homebuyer purchases the subject single-family housing with ADDI 
assistance.
    HUD agrees that housing counseling is a crucial component of a 
successful homeownership program. However, the chief purpose of ADDI is 
to assist low-income families to achieve homeownership. HUD currently 
administers a housing counseling program through the Federal Housing 
Administration (FHA) that could assist persons who will not purchase 
single family housing with ADDI assistance. ADDI only authorizes HUD to 
``award grants to participating jurisdictions to assist low-income 
families to achieve homeownership. * * *'' ``Participating 
jurisdiction'' is defined in the ADDI statute as a State or unit of 
general local government. Accordingly, housing counseling entities that 
are not participating jurisdictions are not eligible direct recipients 
of ADDI funds. The ADDI statute does not require participating 
jurisdictions to match ADDI funds. However, because FY 2003 ADDI funds 
are governed by the FY 2003 HOME appropriation act, not the ADDI 
statute, participating jurisdictions are required to match their FY 
2003 ADDI funds. HUD cannot waive the statutory match requirement for 
these funds.
    Comment: Clarification requested regarding 20 percent cap on 
rehabilitation. One commenter asked for clarification about the actual 
percentages the homebuyer may receive for rehabilitation. The commenter 
asked if, for example, a homebuyer is receiving $4,000 in downpayment 
assistance, whether the homebuyer is limited to rehabilitation 
expenditures of 20 percent of the $4,000 assistance total (in that 
case, $800), or can that homebuyer actually receive $6,000 in 
rehabilitation assistance (the maximum allowable under Sec.  92.602(e)) 
as long as the participating jurisdiction's total entire ADDI 
rehabilitation amount does not exceed 20 percent of the fiscal year 
formula allocation.
    HUD Response. According to ADDI statute, not more than 20 percent 
of the grant funds provided under the formula allocation to a 
participating jurisdiction may be used to provide assistance to low-
income, first-time homebuyers for home repairs. The regulation at Sec.  
92.602(a)(2) states that ``total rehabilitation shall not exceed 20 
percent of the participating jurisdiction's ADDI fiscal year formula 
allocation.'' Therefore, a homebuyer can receive ADDI funds for 
downpayment assistance and home repairs, subject to the maximum amount 
of assistance set forth at Sec.  92.602(e)--the greater of 6 percent of 
the purchase price or $10,000--as long as the participating 
jurisdiction has not reached 20 percent of its ADDI formula allocation 
for home repairs. Thus, in the example the commenter set forth above, 
the homebuyer could receive up to $6,000 in rehabilitation assistance 
as long as the participating jurisdiction's entire ADDI rehabilitation 
amount does not exceed 20 percent of its fiscal year formula 
allocation.
    Comment: ADDI funds should be disbursed in the same manner HOME 
funds are disbursed. One commenter, citing 24 CFR 92.502, wrote that 
certain costs associated with downpayment assistance will be charged 
against ADDI funds which involves per-household assistance caps. The 
commenter wrote that ADDI costs will be assigned to projects by HUD 
computers and those computers cannot effectively discern separate ADDI 
expenditures. The commenter wrote that rather than assigning ADDI funds 
to individual projects, HUD should disburse ADDI funds in the same 
manner as HOME funds, since local jurisdictions are better suited to 
decide how funds should be distributed.
    HUD Response. ADDI funds are disbursed in the same manner as HOME 
funds through HUD's Integrated Disbursement and Information System 
(IDIS). However, ADDI funds cannot be separated from HOME funds in 
IDIS, and therefore, HUD has developed a report that uses a number of 
project identification factors to identify ADDI projects. These reports 
may be useful to participating jurisdictions to track ADDI 
disbursements. However, participating jurisdictions are free to 
maintain their own records of ADDI project disbursements. The sum of 
HOME and ADDI disbursements in IDIS will match a participating 
jurisdiction's records.
    Comment: HUD should accept the median area purchase price developed 
by the real estate industry in the participating jurisdiction as the 
price for single family housing as per 24 CFR 92.254(a)(2)(iii). One 
commenter made this suggestion.
    HUD Response. A participating jurisdiction that receives ADDI funds 
may use the Single Family Mortgage Limits under section 203(b) of the 
National Housing Act or it may determine 95 percent of the median area 
purchase price as set forth in 24 CFR 92.254(a)(2)(iii).

[[Page 16683]]

IV. Discussion of Public Comments on the November 22, 2004, Interim 
Rule on the HOME Program Homeownership Affordability Requirements

    The public comment period on the November 22, 2004, interim rule 
closed on January 21, 2005, and HUD received seven public comments. 
Comments were received from state and local HOME participating 
jurisdictions, as well as the national organizations representing these 
state and local agencies, and private citizens. This section of the 
preamble presents a summary of the significant issues raised by the 
public comments and HUD's responses to those issues.

A. General Comments

    Five commenters expressed general support for the interim rule. One 
commenter expressed ``strong support'' for the interim rule. Commenters 
wrote that they ``appreciate the clarification of the HOME 
affordability requirements relating to homebuyer projects'' and that 
``the interim rule goes a long way towards addressing our concerns 
about participating jurisdictions' liability in cases of foreclosure.'' 
Another commenter wrote that it appreciated the renewed flexibility 
provided in the interim rule.
    The November 22, 2004, interim rule made changes to the 
affordability requirements in Sec.  92.254. One commenter wrote that it 
is supportive of the language in the interim rule that allows 
participating jurisdictions the flexibility to invest additional HOME 
funds in a HOME-assisted property in order to prevent foreclosure or 
acquire the HOME-assisted property at the foreclosure sale.

B. Net Proceeds Limitation

    The November 22, 2004, interim rule limited recapture amounts in 
sales (voluntary and involuntary) of HOME-assisted homebuyer projects 
during the period of affordability to the net proceeds of the sale. One 
commenter wrote that HUD should ease the repayment requirement for HOME 
rental properties, homebuyer properties in which participating 
jurisdictions impose resale restrictions rather than recapture 
restrictions, and noncompliance other than foreclosure for housing that 
is subject to recapture.
    HUD Response. HUD is not expanding the coverage of this rule to 
include the commenter's requests. However, HUD is aware of issues 
involving troubled HOME-assisted rental housing and is taking steps to 
address the issues, including using Technical Assistance funds to 
deploy experts to analyze specific projects and work out solutions.
    Homeownership housing that is subject to resale restrictions must 
continue to be affordable for the period of affordability. This portion 
of the rulemaking only addresses housing that is subject to recapture, 
not housing subject to resale restrictions. The participating 
jurisdiction determines which option--recapture or resale--it will 
impose to ensure the housing meets the affordability requirements for 
the period. The participating jurisdiction's written agreement with the 
homebuyer sets forth its remedies for noncompliance. In addition, the 
rule permits additional investment of HOME funds to preserve previously 
assisted HOME homeownership housing, both housing subject to recapture 
and to resale restrictions. No substantive change is being made to the 
recapture requirement; but, rather, HUD is rewording the regulatory 
text for the sake of clarity.

C. Additional Home Funds for Preserving Affordability

    The November 22, 2004, interim rule added language to the HOME 
regulations for the purpose of preserving the affordability of housing 
that was previously assisted with HOME funds and subject to the 
requirements of Sec.  92.254(a). The new paragraph (a)(9) allows a 
participating jurisdiction to use additional HOME funds to acquire 
HOME-assisted homebuyer housing through a purchase option, right of 
first refusal, or other preemptive right before foreclosure, or to 
acquire the housing at the foreclosure sale, to undertake any necessary 
rehabilitation, and to provide assistance to another homebuyer. The 
section also allows participating jurisdictions to use HOME 
administrative funds under Sec.  92.207 for this purpose.
    Comment: The prohibition against using HOME funds to acquire a unit 
that has a HOME mortgage at a foreclosure sale may be problematic for 
some participating jurisdictions. One commenter questioned why 
participating jurisdictions are permitted to use additional HOME funds 
to preserve homebuyer housing for which HOME funds were already used 
but not when a jurisdiction forecloses on a defaulted HOME loan. 
Another commenter wrote that participating jurisdictions with limited 
resources would be unable to enforce affordability requirements of the 
HOME loan agreement because of the costs associated with foreclosing on 
the HOME loan and reselling the unit. Another commenter wrote that HUD 
needs to clarify the language in the interim rule if its intent was to 
permit the participating jurisdiction to use HOME administrative funds 
to acquire HOME-assisted homebuyer housing before foreclosure or at the 
foreclosure sale when the mortgage being foreclosed is a HOME loan.
    HUD Response. In response to the comments, HUD is broadening the 
eligible uses of HOME funds to preserve affordable homeownership 
housing previously assisted with HOME funds in the final rule. Also, as 
noted earlier in the preamble, the HOME program's prohibitions have 
been amended to make clear that funds may be used for assistance to 
preserve affordability of homeownership housing. Additionally, Sec.  
92.254(a)(9) has been reorganized to more clearly explain that HOME 
funds may be used to acquire housing in default through a purchase 
option, right of first refusal, or other preemptive right before 
foreclosure or through acquisition at a foreclosure sale, as well as to 
assist another homebuyer in purchasing the housing. Furthermore, 
although HOME funds cannot be used to repay a loan made with HOME 
funds, HOME funds may be used to pay foreclosure costs. HOME funds 
cannot be used to repay a loan made with HOME funds because, as stated 
in the preamble to the interim rule, if a participating jurisdiction 
forecloses on a HOME loan, it receives the housing without additional 
cost to the HOME program. However, the rule now permits the use of HOME 
funds to pay the foreclosure costs (92.207(h)). The regulation also 
permits HOME funds to be used for any necessary rehabilitation and for 
assistance to another homebuyer and for the cost of owning/holding the 
housing pending resale to another homebuyer--regardless of whether the 
housing was acquired due to default of a HOME loan or loan superior to 
the HOME loan.
    Comment: The use of HOME administrative funds to purchase a HOME-
assisted property facing foreclosure may be problematic for some 
participating jurisdictions. A commenter expressed concern about the 
provision in the interim rule that allows participating jurisdictions 
to preserve the affordability of HOME-assisted homebuyer housing 
through the use of additional HOME funds to acquire the housing before 
foreclosure or at the foreclosure sale. According to the commenter, 
using HOME administrative funds to acquire the housing would be a 
burden to participating jurisdictions with limited administrative 
funds. In addition, the commenter wrote that the use of administrative 
funds to acquire the housing would not allow the participating 
jurisdiction to sell the

[[Page 16684]]

affected property to an eligible homebuyer wishing to assume the 
existing HOME loan without having to permanently lose the 
administrative funds expended to foreclose and possibly rehabilitate 
the home.
    HUD Response. HUD is sympathetic to the commenter's concern and 
understands that it may not be feasible for a participating 
jurisdiction with limited HOME resources to use its administrative 
funds to preserve affordability. However, for participating 
jurisdictions with sufficient administrative funds available for this 
purpose, the regulatory language provides participating jurisdictions 
another option to preserve their affordable housing portfolio.
    Comment: HUD should ensure that homebuyers purchasing homes already 
assisted with HOME funds that were acquired by the participating 
jurisdiction as a result of noncompliance can be assisted with HOME 
funds as direct homebuyer assistance. One commenter wrote that the 
interim rule should allow homebuyers purchasing housing previously 
assisted with HOME funds that was subsequently acquired by the 
participating jurisdiction before foreclosure or at the foreclosure 
sale to be assisted with HOME funds as direct homebuyer assistance, if 
they are eligible for HOME assistance.
    HUD Response. The HOME regulation at Sec.  92.214(a)(6) has long 
provided an exception to the HOME prohibited activities to permit HOME 
funds to be used to provide assistance to a homebuyer to acquire 
housing previously assisted with HOME funds during the period of 
affordability. Section Sec.  92.254(a)(9) also permits HOME funds to be 
used to provide direct homebuyer assistance to an eligible homebuyer 
purchasing that property that the participating jurisdiction has 
acquired to preserve its affordability. HUD has amended the HOME 
prohibited activities to now allow HOME funds to be used for assistance 
to preserve affordability of homeownership housing in accordance with 
Sec.  92.254(a)(9) to a project previously assisted with HOME funds 
during the proscribed period of affordability. This clarification will 
help to ensure the preservation of affordable housing and ensure that 
homebuyers purchasing homes already assisted with HOME funds that were 
acquired by the participating jurisdiction as a result of noncompliance 
can be assisted with HOME funds as direct homebuyer assistance.

IV. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
OMB determined that this rule is a ``significant regulatory action'' as 
defined in section 3(f) of the order (although not an economically 
significant regulatory action, as provided under section 3(f)(1) of the 
order). The docket file is available for public inspection between the 
hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office 
of General Counsel, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
advance appointment to review the docket file by calling the 
Regulations Division at (202) 708-3055 (this is not a toll-free 
number).

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made for this final rule in accordance with HUD regulations at 
24 CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332 et seq.). This Finding 
of No Significant Impact is available for public inspection between the 
hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office 
of General Counsel, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the finding by calling the Regulations Division 
at (202) 708-3055 (this is not a toll-free number).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This rule makes final two interim rules that established regulations 
for the downpayment assistance program under the ADDI program and that 
revised and clarified the HOME program affordability requirements of 
the ADDI downpayment assistance program, respectively. This final rule 
is not imposing any additional regulatory requirements on participating 
jurisdictions. The majority of jurisdictions that are statutorily 
eligible to receive HOME formula allocations are relatively larger 
cities, counties, or states; thus, the final rule will not 
significantly affect a substantial number of small entities. 
Additionally, the final rule broadens the use of HOME funds to help 
preserve affordable homeownership housing. This expansion of the 
eligible use of funds actually benefits all participating 
jurisdictions, regardless of size. Accordingly, the undersigned 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the order. This final rule will not have federalism 
implications and would not impose substantial direct compliance costs 
on state and local governments or preempt state law within the meaning 
of the order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This final rule will not 
impose any federal mandates on any state, local, or tribal government, 
or on the private sector, within the meaning of UMRA.

Paperwork Reduction Act

    Under section 3504(h) of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501-3520), an agency may not conduct or sponsor, and a person 
is not required to respond to, a collection of information unless the 
collection displays a currently valid control number. There are no 
information collection requirements contained in this final rule.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for the HOME 
program is 14.239.

[[Page 16685]]

List of Subjects in 24 CFR Part 92

    Administrative practice and procedure, Grant programs--housing and 
community development, Low and moderate income housing, Manufactured 
homes, Rent subsidies, Reporting and recordkeeping requirements.


0
Accordingly, for the reasons described in the preamble, HUD revises 24 
CFR part 92 as follows:

PART 92--HOME INVESTMENT PARTNERSHIPS PROGRAM

0
1. The authority citation for 24 CFR part 92 continues to read as 
follows:

    Authority: 42 U.S.C. 3535d and 12701-12839.


0
2. In Sec.  92.2 revise the definition of ``First-time homebuyer'' to 
read as follows:


Sec.  92.2  Definitions.

* * * * *
    First-time homebuyer means an individual and his or her spouse who 
have not owned a home during the three-year period prior to purchase of 
a home with assistance under the American Dream Downpayment Initiative 
(ADDI) described in subpart M of this part. The term first-time 
homebuyer also includes an individual who is a displaced homemaker or 
single parent, as those terms are defined in this section. An 
individual shall not be excluded from consideration as a first-time 
homebuyer on the basis that the individual owns or owned, as a 
principal residence during the three-year period, a dwelling unit whose 
structure is not permanently affixed to a permanent foundation in 
accordance with local or other applicable regulations or is not in 
compliance with State, local, or model building codes, or other 
applicable codes, and cannot be brought into compliance with the codes 
for less than the cost of constructing a permanent structure.
* * * * *

0
3. Section 92.207 is amended to add a new paragraph (h) to read as 
follows:


Sec.  92.207  Eligible administrative and planning costs.

* * * * *
    (h) Preserving affordable housing already assisted with HOME funds. 
Costs specified under Sec.  92.254(a)(9) may be charged as an 
administrative cost or may be charged to the project as provided in 
Sec.  92.254(a)(9). In addition, the foreclosure cost of a HOME-
assisted rental housing project with a HOME loan in default is an 
eligible administrative cost.
0
4. Revise Sec.  92.214(a)(6) to read as follows:


Sec.  92.214  Prohibited activities.

* * * * *
    (a) * * *
    (6) Provide assistance (other than tenant-based rental assistance, 
assistance to a homebuyer to acquire housing previously assisted with 
HOME funds, or assistance to preserve affordability of homeownership 
housing in accordance with Sec.  92.254(a)(9)) to a project previously 
assisted with HOME funds during the period of affordability established 
by the particular jurisdiction in the written agreement under Sec.  
92.504. However, additional HOME funds may be committed to a project 
for up to one year after project completion (see Sec.  92.502), but the 
amount of HOME funds in the project may not exceed the maximum per-unit 
subsidy amount established under Sec.  92.250.
* * * * *

0
5. In Sec.  92.254 revise paragraphs (a)(1), the second sentence of 
(a)(2)(ii), (a)(5)(ii)(A) introductory text, and (a)(9) to read as 
follows:


Sec.  92.254  Qualification as affordable housing: Homeownership.

    (a) * * *
    (1) The housing must be single family housing.
    (2) * * *
    (iii) * * * The participating jurisdiction must set forth the price 
for different types of single family housing for the jurisdiction. * * 
*
    (5) * * *
    (ii) * * *
    (A) The following options for recapture requirements are acceptable 
to HUD. The participating jurisdiction may adopt, modify or develop its 
own recapture requirements for HUD approval. In establishing its 
recapture requirements, the participating jurisdiction is subject to 
the limitation that when the recapture requirement is triggered by a 
sale (voluntary or involuntary) of the housing unit, the amount 
recaptured cannot exceed the net proceeds, if any. The net proceeds are 
the sales price minus superior loan repayment (other than HOME funds) 
and any closing costs.
* * * * *
    (9) Preserving affordability of housing that was previously 
assisted with HOME funds.
    (i) To preserve the affordability of HOME-assisted housing a 
participating jurisdiction may use additional HOME funds for the 
following costs:
    (A) The cost to acquire the housing through a purchase option, 
right of first refusal, or other preemptive right before foreclosure, 
or at the foreclosure sale. (The foreclosure costs to acquire housing 
with a HOME loan in default are eligible. However, HOME funds may not 
be used to repay a loan made with HOME funds.)
    (B) The cost to undertake any necessary rehabilitation for the 
housing acquired.
    (C) The cost of owning/holding the housing pending resale to 
another homebuyer.
    (D) The cost to assist another homebuyer in purchasing the housing.
    (ii) When a participating jurisdiction uses HOME funds to preserve 
the affordability of such housing, the additional investment must be 
treated as an amendment to the original project. The housing must be 
sold to a new eligible homebuyer in accordance with the requirements of 
Sec.  92.254(a) within a reasonable period of time.
    (iii) The total amount of the original and additional HOME 
assistance may not exceed the maximum per unit subsidy amount 
established under Sec.  92.250. Alternatively to charging the cost to 
the HOME program under Sec.  92.206, the participating jurisdiction may 
charge the cost to the HOME program under Sec.  92.207 as a reasonable 
administrative cost of its HOME program, so that the additional HOME 
funds for the housing are not subject to the maximum per-unit subsidy 
amount. To the extent administrative funds are used, they may be 
reimbursed, in whole or in part, when the housing is sold to a new 
eligible homebuyer.
* * * * *

0
6. Section 92.602 is amended to add a new paragraph (a)(3) to read as 
follows:


Sec.  92.602  Eligible activities.

    (a) * * *
    (3) Manufactured housing. ADDI funds may be used to purchase a 
manufactured housing unit and purchase a manufactured housing lot. The 
manufactured housing unit must, at the time of project completion, be 
connected to permanent utility hook-ups and be located on land that is 
owned by the manufactured housing owner, owned as a cooperative, or is 
subject to a leasehold interest with a term equal to at least the term 
of the mortgage financing on the unit or the period of affordability 
(whichever is greater).
* * * * *

    Dated: March 23, 2007.
Roy A. Bernardi,
Deputy Secretary.
[FR Doc. E7-5960 Filed 4-3-07; 8:45 am]
BILLING CODE 4210-67-P