21918 Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Part 206

[Docket No. FR–2958–P–04]

RIN 2502–AF32

Office of the Assistant Secretary for

Housing—Federal Housing

Commissioner; Home Equity

Conversion Mortgage Insurance

Demonstration: Additional

Streamlining

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Proposed rule.

SUMMARY: This proposed rule would

make changes to the Home Equity

Conversion Mortgage (HECM) Insurance

Demonstration, including technical and

clarifying changes, to improve and

streamline the program as a supplement

to the changes made through the interim

rule, published on August 16, 1995, and

made final on December 21, 1995.

DATES: Comment Due Date: July 9, 1996.

ADDRESSES: Interested persons are

invited to submit comments regarding

this proposed rule to the Rules Docket

Clerk, Office of General Counsel, Room

10276, Department of Housing and

Urban Development, 451 Seventh Street,

SW, Washington, DC 20410–0500.

Communications should refer to the

above docket number and title.

Facsimile (FAX) comments are not

acceptable. A copy of each

communication submitted will be

available for public inspection and

copying between 7:30 a.m. and 5:30

p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT:

Richard K. Manuel, Acting Director,

Single Family Development Division,

Office of Insured Single Family

Housing, Room number 9272,

Department of Housing and Urban

Development, 451 Seventh Street, SW,

Washington, DC 20410, telephone (202)

708–2700; TTY (202) 708–4594. (These

are not toll-free telephone numbers.)

SUPPLEMENTARY INFORMATION: The

information collection requirements for

the Home Equity Conversion Mortgage

Insurance Demonstration have been

approved by the Office of Management

and Budget under the Paperwork

Reduction Act of 1995, and have been

assigned OMB Control Number 2528–

0133. 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 valid

control number. This rule does not

contain additional information

collection requirements.

Background

The Home Equity Conversion

Mortgage (HECM) Insurance

Demonstration was authorized by

section 417 of the Housing and

Community Development Act of 1987

(42 U.S.C. 5301), which amended

section 255 of the National Housing Act

(12 U.S.C. 1715z–20) to permit elderly

homeowners to borrow against the

equity in their homes. The interim rule

published on August 16, 1995, at 60 FR

42754, revised 24 CFR part 206 to

include improvements to the program

that did not require prior public

comment before implementation. The

interim rule was made final on

December 21, 1995, at 60 FR 66476.

This proposed rule reflects additional

ideas for improving the program

regulations for which the Department

desires public comment prior to

implementation. An explanation of the

proposed changes follows.

Proposed Changes to HECM

Regulations

Sections 206.3 and 206.209

A definition of ‘‘mortgage balance’’ is

proposed to be included that would

make HECMs ‘‘closed end’’ credit for

purposes of the regulations

implementing the Truth in Lending Act

(TILA) (15 U.S.C. 1601 et seq.). The rule

would continue to permit prepayment

by mortgagors as mandated by statute,

but prepayments (including insurance

or condemnation proceeds that have

been applied to the debt) would be

excluded from the definition of

mortgage balance for purposes of

calculating future loan advances,

thereby prohibiting mortgagors from reborrowing funds previously prepaid. A

recent amendment to § 206.21(c) deleted

specific reference to the ‘‘open end’’

credit TILA regulations at 12 CFR part

226 in anticipation of this change.

Currently, HECM funds may be

prepaid and borrowed again. This fact

makes the mortgage ‘‘open end’’ credit

or ‘‘revolving’’ credit under the TILA.

The TILA requires initial and periodic

disclosures, in addition to those

disclosures required by the HECM

statute. The TILA disclosures have been

difficult for mortgagees to produce for

this type of mortgage and have

increased the paperwork at closing.

Mortgage lenders ordinarily only have

experience with ‘‘closed end’’ credit

requirements. Additionally, at this point

in the demonstration, few, if any,

mortgagors have utilized the option to

re-borrow. HUD does not regard the

option as an important aspect of the

demonstration.

The definitions of ‘‘principal limit’’

and ‘‘expected average mortgage interest

rate’’ in § 206.3 also would be amended

to require that the principal limit grow

at the mortgage interest rate plus the

monthly mortgage insurance premium

(MIP) rate instead of the expected

average mortgage interest rate (expected

rate) plus the monthly MIP rate. The

expected rate would be used only when

needed to project the principal limit for

calculation of future payments for

adjustable rate mortgages because the

actual mortgage interest rate cannot be

calculated in advance. HUD is

particularly interested in receiving

public comment on this proposal.

Under the current regulation, the

principal limit increases for all purposes

each month by one-twelfth of the

expected rate plus the monthly MIP

rate. For fixed rate mortgages, the

expected rate is the same as the actual

fixed interest rate that appears in the

note. For adjustable rate mortgages, the

expected rate is fixed at closing as the

sum of the mortgagee’s margin plus the

weekly average yield for U.S. Treasury

Securities adjusted to a constant

maturity of 10 years. In contrast, the

mortgage balance grows at the actual

current interest rate that is applied

under the note and adjusted

periodically. Because two different

interest rates are used to determine the

principal limit and the mortgage balance

on adjustable rate mortgages, these sums

grow at different rates and the difference

between them can become

unpredictable.

When the mortgage note rate is higher

than the expected rate, the mortgage

balance increases at a faster pace than

the principal limit. In this case the

maximum loan advance amount

available under a HECM line of credit is

eroded by interest charged to the

account balance, leaving the mortgagor

with less to borrow than he or she might

have anticipated. Monthly payments

under a term or tenure payment option,

however, are guaranteed under the loan

agreement regardless of this interest rate

risk.

When the note rate is lower than the

expected rate, the mortgage balance

grows at a slower pace than the

principal limit. This discrepancy

between the note rate and the expected

rate creates additional potentiallyavailable credit. This situation has

caused servicing problems because

mortgagors that have borrowed the full

principal limit under a line of credit

may at a future date have additional

credit created from the difference in the

interest rates.
Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules 21919

HUD has considered several solutions

to this interest rate risk problem. One

solution would be to terminate a

mortgagor’s right to continue borrowing

once his or her mortgage balance

reached the principal limit, even if at a

later time the interest rate differential

caused the principal limit to exceed the

mortgage balance. The disadvantage of

this solution is that it does not address

the problem of an increasing note rate

resulting in an erosion of the principal

limit. An alternative solution would be

to cap the note rate at the expected rate.

However, this solution does not address

the problem presented when the note

rate is below the expected rate resulting

in excess credit, and is of questionable

legality due to the statutory provision

providing for a note rate negotiated

between the mortgagor and mortgagee

rather than one regulated by HUD.

Another solution would be to require

that all line of credit payment plans

must be established together with a term

or tenure monthly payment plan. Each

payment plan would carry a separate

principal limit. All fees and charges

would be charged to the monthly

payment plan balance. In this way, as

long as no line of credit draws were

made, the line of credit would not be

effected by the interest rate fluctuations

because the line of credit principal limit

would be separate from the monthly

payments principal limit. This solution

only forestalls the problem. Once a draw

is made against the line of credit the

same interest rate risk problem can

occur as under the current rule.

HUD does not propose these solutions

because each one requires additional

regulatory restraint on the terms and

conditions of the HECM. Instead, HUD

proposes to make a program change by

altering the definitions of ‘‘expected

average mortgage interest rate’’ and

‘‘principal limit.’’ The expected rate

would only be used to determine future

monthly payments. (Section

206.25(b)(1)(vi) provides for continued

use of the expected rate to calculate

future estimated interest that will accrue

on scheduled monthly payments.) The

monthly calculation of growth to the

principal limit would not involve the

expected rate but would instead be

determined by using the mortgage note

rate plus the monthly MIP rate. In this

way, both the principal limit and the

mortgage balance would grow at the

same rate. This solution would give

mortgagors and mortgagees more

certainty in knowing what funds would

be available to be drawn than the

current system.

In low interest rate markets,

mortgagors would not have the benefit

of an increase in available principal

limit. In high interest rate markets,

mortgagors would not experience the

erosion of lines of credit. These

variations in the available principal

limit would be replaced by a system

with greater predictability. In the long

run, the principal limit is expected to be

approximately the same as the current

rule because the expected rate under the

current rule encompasses the market’s

best estimate of future note rates. This

rule change would be effective only for

mortgages which the mortgagee closed

on or after the effective date of the final

rule.

Section 206.8.

A new § 206.8 would be added to

provide a first lien priority to all debt

secured by the HECM, including all

direct payments to the mortgagor and all

other loan advances under the HECM

for purposes such as interest, taxes and

special assessments, premiums for

hazard or mortgage insurance, servicing

charges and costs of collection. Any

contrary State laws would be

preempted. This preemption is

proposed to clarify the current

uncertainty regarding the lien priority to

be accorded HECM loan advances in

certain circumstances and to ensure that

all HECM debt will have a first lien

priority. That priority is a basic

assumption behind the computer model

used to determine the amount of

payments to the mortgagor. State law

would still be applicable for

determining the authority of a

mortgagee to make a HECM loan as

provided in § 206.9(a) of the current

HECM regulation.

In the absence of an applicable

Federal statute or regulation, lien

priority would be determined under

United States v. Kimbell Foods, Inc., 440

U.S. 715 (1979) if the HECM had been

assigned to HUD. In most circumstances

courts applying Kimbell Foods have

determined that the lien priority law of

the State should be adopted as the

Federal rule of decision. State law

would also apply while the HECM was

still held by the mortgagee as an insured

mortgage.

State law is sometimes unclear

regarding the appropriate priority to be

given to loan advances made many

years after the original mortgage was

recorded when other liens have been

filed in the interim. To the extent State

laws are clear, they differ, and some

would have the effect of subordinating

the priority of HECM loan advances

made after certain events such as the

filing of another lien that has been

brought to the attention of the HECM

mortgagee. HUD or the mortgagee could

guard against loss of priority to some

extent by stopping further loan

advances directly to the mortgagor (as

permitted by the HECM loan documents

when needed to protect lien priority)

but this will not protect the lien priority

of the mandatory loan advances that

will continue for interest, mortgage

insurance premiums and servicing

charges. HUD or the mortgagee may find

it necessary to accelerate the loan and

foreclose to prevent the continued

growth of debt without a first lien

priority. Even without a foreclosure, the

homeowner may have to move if loan

advances are stopped, because of

inability to pay basic homeowner

expenses such as real estate taxes

without further advances. This result

would conflict with the program goal of

non-displacement of an elderly

homeowner that desires to continue

living in his or her home.

The proposed rule would serve as a

Federal law that courts would use to

determine the lien priority of HECM

loan advances. Kimbell Foods would be

inapplicable for a HECM assigned to

HUD because that decision guides

courts only in the absence of a Federal

law, and the regulation would otherwise

preempt state law that would be applied

to an insured HECM still held by a

mortgagee. This use of a regulation to

avoid any application of Kimbell Foods

is in accord with Chicago Title Ins. Co.

v. Sherred Village Associates, 708 F. 2d

804 (1st Cir. 1983), and preemption by

regulation of state law that would

otherwise apply to privately-held

mortgages has been approved by the

Supreme Court in cases such as Fidelity

Federal Savings and Loan Association v.

De La Cuesta, 458 U.S. 141 (1982) and

United States v. Shimer, 367 U.S. 374

(1961).

The proposed priority lien regulation

would assure that HECM loan advances

made in accordance with the loan

agreement would not be interrupted due

to the application of State lien priority

laws. Reasonable arguments can be

made that, even without this rule,

Kimbell Foods would not compel

application of State lien priority laws to

a HECM held by HUD due to distinctive

features of the HECM program, and that

State laws would not apply to a HECM

held by a private mortgagee if conflict

with the program goal of nondisplacement, as described above,

would occur. This proposed rule does

not reject those arguments. It recognizes

the uncertainty of current law and

proposes to replace that uncertainty

with a clear rule on which HUD,

mortgagees and other potential lienors

can rely. Private creditors intending to

rely on the equity of the mortgagor in

the home will be on clear notice that the
21920 Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules

1 Complete abandonment of a second mortgage

requirement might not be prudent in the absence of

a statutory change—which has not been proposed

to date by HUD—that would guarantee HUD the

right to assume first mortgages upon mortgagee

default, similar to language found in section

306(g)(1) of the National Housing Act (12 U.S.C.

1723)(g)(1)). Section 306(g)(1) provides that the

Government National Mortgage Association

(GNMA) shall be subrogated fully to the rights of

a defaulted issuer when GNMA makes the payment

of principal and interest on securities guaranteed by

GNMA. Section 306(g)(1) further provides that

GNMA may provide by regulation or contract with

the issuer for the extinguishment, upon default by

the issuer, of any right, title or interest of the issuer

in the assumed mortgages (this provision also

appears in GNMA regulations at 24 CFR 390.15(b)).

entire HECM debt will be superior to

any other private lien. The proposed

priority lien regulation would have one

exception to permit a higher priority for

state or local liens for taxes or special

assessments, to the extent provided by

State or local law.

Section 206.21

Paragraph (b) of § 206.21 would be

amended to permit a mortgage that

provides for monthly adjustments to the

interest rate to be converted to one that

provides for annual adjustments if the

mortgage is assigned to HUD by the

mortgagee. This would enable HUD to

reduce greatly the servicing burden

associated with ARMs that are assigned

to HUD. A similar change is proposed

for § 206.121(c) regarding the second

mortgage held by HUD. If the mortgagee

had drafted the second mortgage to

provide for monthly adjustments HUD

could convert it to annual adjustments.

Section 206.25

Section 206.25(d) would be revised to

permit the principal limit amount set

aside for a line of credit to increase at

the same rate as the full principal limit

whether or not combined with a term or

tenure option with monthly payments.

HUD has been informed that the current

regulation has been interpreted to

permit this by some participants in the

HECM program, including the Federal

National Mortgage Corporation (FNMA).

Although not necessarily in conformity

with HUD’s original intentions behind

§ 206.25(d), this approach to calculating

the principal limit for a line of credit

has the advantage of simplicity as

compared to HUD’s original intention,

and does not result in increased risk to

the borrower or HUD. HUD is proposing

a formal change in regulations to permit

FNMA and others to continue with a

practice that is compatible with the

general design of the HECM program.

Most of the actual difference in results

between the various approaches to

§ 206.25(d) would be eliminated as a

result of the separate proposal to

calculate the principal limit using the

actual mortgage interest rate instead of

the expected average mortgage interest

rate; the proposed change to § 206.25(d)

is a technical revision to eliminate

remaining perceived adverse effects of

the current § 206.25(d). A conforming

change would be made to § 206.19(c) to

avoid conflicting descriptions of how

line of credit payments are calculated.

Section 206.26

The specific dollar amount of $20 that

mortgagees may charge when payments

are recalculated would be removed from

§ 206.26(d), and the Secretary would be

given discretion to set a fee. The

Secretary would continue to set a

maximum fee at $20, but would

establish the amount in Handbook

4235.1 subject to future reconsideration.

Section 206.27

Changes to §§ 206.27(d), 206.117, and

206.121(c) are proposed to be made to

give the Secretary the option to

eliminate the HUD-held second

mortgage. The current regulations

require originating mortgagors to

execute a second HECM security

instrument and note (second mortgage)

held by the Secretary. The second

mortgage comes into effect only if a

mortgagee defaults in making payments

and is unable or unwilling to assign the

mortgage to HUD. It assures that any

funds advanced by HUD are secured by

a mortgage. (In the case of assignments,

the Secretary continues making

payments to the mortgagor under the

first mortgage and the second mortgage

is not utilized.) HUD now concludes

that it is inappropriate to bind itself by

regulation to this particular approach to

protection of the Secretary’s financial

interests.

In practice, the second mortgage has

proven to be cumbersome and costly to

mortgagors. First, in virtually all cases

mortgagors are required to pay recording

fees per page of documents recorded.

Two mortgages double the recording

fees. Second, mortgagees and

mortgagors have mistakenly believed

that the second mortgage represents

additional mortgage debt and have been

confused as to the purpose of the second

mortgage. Third, when the mortgage has

been paid off, release of the second

mortgage has been time-consuming. The

provisions in the legal documents

regarding the relationship between the

debts secured by the first and second

mortgages if the second mortgage is

used are complex, untested and without

close precedent and therefore could

invite litigation.

HUD’s ultimate objective is to

eliminate or reduce reliance on the

second mortgage as the means of

protecting the mortgagor and HUD

against mortgagee defaults. The

proposed changes would permit the

Secretary to do without the second

mortgage when deemed prudent. HUD

does not expect to change its current

practices, however, until it is reasonably

certain that it has a legal means of

enforcing an assignment of the first

mortgage free and clear of any interests

of other parties. At such time as legal

doubts are resolved, HUD anticipates

that the second mortgage requirement

could be terminated without further

regulatory changes.1

Sections 206.27 and 206.35

Currently part 206 does not permit

mortgagors to hold only a life estate in

the mortgaged property. At least one

eligible mortgagor must hold title in fee

simple or through a long-term leasehold

of a fee simple interest. HUD is

proposing amendment of sections

206.27(c)(1) and 206.35 to permit

mortgages to be insured and remain in

force even if no eligible mortgagor has

any interest in the property greater than

a life estate. If a mortgagor holds only

a life estate when the mortgage is

executed, all holders of any future

interest in the property (remainder or

reversion) would also be required to

execute the mortgage to ensure that the

mortgage was secured by a fee simple.

A holder of a future interest would not

execute the note or loan agreement and

would not have the rights to loan

proceeds of other mortgagors. The

proposed change would also permit a

mortgagor who held fee simple title

when the mortgage was executed to

subsequently convey his or her interests

in the property as long as a life estate

is retained.

Because the mortgage will in all cases

be secured by a fee simple or long-term

leasehold interest in the property,

mortgagees and HUD should not be

subject to any greater financial risk if

the proposed change is adopted. The

proposed change would recognize that

an elderly homeowner may wish to

convey future interests in his or her

home as an estate planning measure

while retaining a life interest to ensure

a continued right of occupancy for the

remaining lifetime. There is no conflict

between this approach to estate

planning and the basic objective of the

HECM program—to provide elderly

homeowners the financial means to

continue residing in their homes for the

remainder of their lifetimes. HUD has

already accommodated other

approaches to estate planning by
Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules 21921

permitting mortgagors to convey joint

ownership of the mortgaged property to

other non-elderly, non-occupant parties

and by permitting a living trust to hold

legal title to the home for benefit of the

elderly homeowner.

Section 206.45

A new paragraph (e) would be added

to § 206.45 to incorporate the free

assumability regulations at 24 CFR

203.41 and 234.66 which were

published in a final rule at 58 FR 42645

(August 11, 1993). Those rules codify

HUD’s general policy that the property

mortgaged under its single family

mortgage insurance programs must be

freely marketable except for a limited

number of specific exceptions, primarily

those permissible for affordable housing

purposes. While HUD does not have the

same concerns about restrictions on

assumptions for the HECM program as

for other single family programs,

because a HECM by its nature is not

assumable, HUD is concerned that any

property acquired by the mortgagee or

HUD through foreclosure or deed-in-lieu

of foreclosure needs to be readily

marketable without restrictions to a

wide potential market. HUD has

identified one area of special impact of

this policy on the HECM program for

which it specifically seeks comment.

The rule would prevent use of the

HECM program for a unit in a

condominium if the condominium

association possesses a right of first

refusal (unless the condominium project

received written approval from HUD

prior to September 10, 1993). HUD

believes that there may be a substantial

number of condominiums existing prior

to that date that did not obtain FHA

approval, have condominium

associations with rights of first refusal,

and have current unit owners that

would be prospective applicants for a

HECM. A recent proposed amendment

of § 206.51 (60 FR 32630, June 23, 1995)

would permit HECMs on some

individual units in a condominium

project that have not received HUD

approval but such units would also be

affected by the proposed change to

§ 206.45. HUD therefore also seeks

comment on whether, if the proposed

change to § 206.51 is adopted, HUD

should insure a HECM on a unit in a

condominium project that does not meet

usual HUD policy regarding rights of

first refusal.

Section 206.125

Paragraph (d) of § 206.125 would be

amended to apply HUD’s State by State

time frames to define ‘‘reasonable

diligence’’ as provided in 24 CFR

203.356.

Section 206.209

Section 206.209 would be revised to

reflect the proposed policy that prepayments do not increase the amount of

funds available to be borrowed as

discussed for § 206.3. The regulation

also would provide that in the event the

prepayment is made from insurance or

condemnation proceeds, the principal

limit would decrease by the amount of

proceeds not applied to repair of the

property. This will reflect the

permanent reduction in the value of the

security that resulted from the

condemnation or unrepaired damage.

The prepayment requirements which

permit the mortgagee to charge interest

if the prepayment is not made within

the required time frames would be

eliminated. The current prepayment

provision parallels the prepayment

procedures for Section 203(b)

mortgages. The prepayment regulation

for Section 203(b) mortgages is

necessary to assure that prepayments

are made in a timely fashion so that

interest due to GNMA security holders

is available to the GNMA issuers. Since

HECMs are not securitized there is no

need to restrict the time of prepayment.

Other Matters

Environmental Impact

A Finding of No Significant Impact

with respect to the environment has

been made in accordance with HUD

regulations at 24 CFR part 50, which

implements section 102(2)(C) of the

National Environmental Policy Act of

1969 (NEPA). This Finding of No

Significant Impact is available for public

inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules

Docket Clerk, Office of the General

Counsel, Department of Housing and

Urban Development Room 10276, 451

Seventh Street, SW, Washington, DC

20410.

Impact on Small Entities

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed this proposed rule

before publication and by approving it

certifies that this proposed rule would

not have a significant economic impact

on a substantial number of small

entities. The proposed rule is limited to

revision of the Home Equity Conversion

Mortgage Demonstration. Specifically,

the requirements of the proposed rule

are directed to making the program

more efficient for participating

mortgagees, mortgagors and the

Department.

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, has determined

that § 206.8 of the proposed rule has

federalism implications. Specifically,

the rule provides that State law on lien

priority would be preempted if HECM

loan advances made by private

mortgagees would not have a first lien

priority (subject only to liens for State

or local taxes or special assessments).

(Preemption is not an issue for loan

advances made by HUD because Federal

law rather than State law would apply

under United States v. Kimbell Foods,

Inc., 440 U.S. 715 (1979).

The purpose of the proposed rule is

to permit a mortgagee to be able to

continue to make loan advances in

accordance with the loan agreement

(including advances for accruing

interest and mortgage insurance

premiums) as long as the elderly

homeowner/mortgagor desires to

continue to occupy his or her home,

while still maintaining a first lien

priority for all advances. If State law

was applied and resulted in granting

priority to some other lien created after

the HECM was recorded, the mortgagee

would need to stop further payments to

the mortgagor. The mortgagee might also

need to foreclose to stop the continuing

accrual of items such as interest and

mortgage insurance premium with a

junior lien priority. Either result would

conflict with the HECM program goal of

preventing displacement of the elderly

homeowner, either directly from

foreclosure or indirectly because of lack

of funds available to the homeowner for

the expenses of homeownership.

This conflict itself might result in

preemption of State law under relevant

Supreme Court opinions. The proposed

rule would remove any doubt and

provide needed clarification for HUD,

mortgagees, and other creditors who

may rely on the mortgagor’s equity.

HUD has concluded that State law

would ordinarily result in a first lien

status for all HECM loan advances, but

is concerned that applicable law is not

always clear and that some situations

might occur in which the application of

State law would leave the first lien

status in doubt. The effect of the

proposed preemption is likely to be

small but it is important to ensure that

the HECM program remains a first

mortgage program as intended by

Congress.

HUD has concluded that it is not

necessary to preempt laws that would

give priority to liens for unpaid State or

local taxes or special assessments. If the

mortgagee pays them and later files an
21922 Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules

insurance claim, HUD would reimburse

the mortgagee for those amounts as part

of the insurance benefits. This

distinguishes these liens from other

liens and there is therefore no need to

object to a superior lien position. This

exception permitting superior liens for

unpaid taxes and special assessments

means that the proposed rule would

have no substantial direct effects on

States or their political subdivisions, or

the relationship between the Federal

government and the States.

The Department believes that

although the proposed rule might have

federalism implications, it is designed

to achieve a legitimate Federal purpose

and is carefully crafted to limit its

effects to those necessary to achieve that

end. In these circumstances, the

Department believes that the Order

imposes no bar to implementation of the

rule. For these reasons, the General

Counsel has determined that the rule’s

federalism implications are not

sufficiently significant to warrant

preparation of a Federalism Assessment

under section 6(b) of the Order.

Executive Order 12606, The Family

The General Counsel, as the

Designated Official under Executive

Order 12606, The Family, has

determined that this proposed rule

would not have potential for significant

impact on family formation,

maintenance, and general well-being,

and, thus, is not subject to review under

the order. No significant change in

existing HUD policies or programs will

result from promulgation of this rule, as

those policies and programs relate to

family concerns.

List of Subjects in 24 CFR Part 206

Aged, Condominiums, Loan

programs—housing and community

development, Mortgage insurance,

Reporting and recordkeeping

requirements.

Accordingly, 24 CFR part 206 is

proposed to be amended as follows:

PART 206—HOME EQUITY

CONVERSION MORTGAGE

INSURANCE

1. The authority citation for part 206

continues to read as follows:

Authority: 12 U.S.C. 1715b, 1715z–20; 42

U.S.C. 3535(d).

2. Section 206.3 is amended by

revising the first sentence of the

definition of ‘‘expected average

mortgage interest rate,’’ by revising the

definition of ‘‘principal limit,’’ and by

adding a new definition of ‘‘mortgage

balance,’’ to read as follows:

§ 206.3 Definitions.

* * * * *

Expected average mortgage interest

rate means the mortgage interest rate

used to calculate future payments to the

mortgagor and is established when the

mortgage interest rate is established.

* * *

* * * * *

Mortgage balance means the total

amount of accrued debt calculated in

accordance with the terms of the

mortgage. For the purpose of

recalculating payments under

§§ 206.19(c), 206.25(b)(ii), 206.25(d) and

206.26(c), the mortgage balance includes

principal that has been repaid,

including insurance or condemnation

proceeds that have been applied to the

debt, unless the mortgage was executed

before [effective date of final rule].

* * * * *

Principal limit means the maximum

disbursement that could be received in

any month under a mortgage, assuming

that no other disbursements are made,

taking into account the age of the

youngest mortgagor, the mortgage

interest rate, and the maximum claim

amount. Mortgagors over the age of 95

will be treated as though they are 95 for

purposes of calculating the principal

limit. The principal limit is used to

calculate payments to a mortgagor. It is

calculated for the first month that a

mortgage could be outstanding using

factors provided by the Secretary. It

increases each month thereafter at a rate

equal to one-twelfth of the mortgage

interest rate in effect at that time, plus

one-twelfth of one-half percent per

annum, unless the mortgage was

executed on or after [effective date of

final rule]. If the mortgage was executed

before [effective date of final rule], the

principal limit increases at a rate equal

to the expected average mortgage

interest rate plus one-twelfth of one-half

percent per annum. The principal limit

may decrease because of insurance or

condemnation proceeds applied to the

mortgage balance under § 209.209(b) of

this chapter.

* * * * *

3. Subpart A is amended by adding a

new § 206.8, to read as follows:

§ 206.8 Preemption.

(a) Lien priority. The full amount

secured by the mortgage shall have the

same priority over any other liens on the

property as if the full amount had been

disbursed on the date the initial

disbursement was made, regardless of

the actual date of any disbursement. The

amount secured by the mortgage shall

include all direct payments by the

mortgagee to the mortgagor and all other

loan advances permitted by the

mortgage for any purpose including loan

advances for interest, taxes and special

assessments, premiums for hazard or

mortgage insurance, servicing charges

and costs of collection, regardless of

when the payments or loan advances

were made. The priority provided by

this section shall apply notwithstanding

any State constitution, law or

regulation.

(b) Second mortgage. If the Secretary

holds a second mortgage, it shall have

a priority subordinate only to the first

mortgage (and any senior liens

permitted by paragraph (a) of this

section).

4. Section 206.19 is amended to revise

paragraph (c), to read as follows:

§ 206.19 Payment options.

* * * * *

(c) Line of credit payment option.

Under the line of credit payment option,

payments are made by the mortgagee to

the mortgagor at times and in amounts

determined by the mortgagor as long as

the amounts do not exceed the payment

amounts permitted by § 206.25(d).

* * * * *

5. Section 206.21 is amended to add

paragraph (b)(3), to read as follows:

§ 206.21 Interest rate.

* * * * *

(b) * * *

(3) A mortgage providing for monthly

adjustments to the interest rate may be

converted by the Secretary to one

providing for annual adjustments at any

time after the mortgage is assigned to

the Secretary by providing notice to the

mortgagor.

* * * * *

6. Section 206.25 is amended to revise

paragraph (d), to read as follows:

§ 206.25 Calculation of payments.

* * * * *

(d) Line of credit separately or with

monthly payments. If the mortgagor has

a line of credit, separately or combined

with the term or tenure payment option,

the principal limit is divided into an

amount set aside for servicing charges

under § 206.19(d), an amount equal to

the line of credit (including any portion

of the principal limit set aside for

repairs or property charges under

§ 206.19(d)), and the remaining amount

of the principal limit (if any). The line

of credit amount increases at the same

rate as the total principal limit increases

under § 206.3. A payment under the line

of credit may not exceed the difference

between the current amount of the

principal limit for the line of credit and

the portion of the mortgage balance,

including accrued interest and MIP,
Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Proposed Rules 21923

attributable to draws on the line of

credit.

* * * * *

7. Section 206.26 is amended to revise

paragraph (d), to read as follows:

§ 206.26 Change in payment option.

* * * * *

(d) Fee for change in payment. The

mortgagee may charge a fee, not to

exceed an amount determined by the

Secretary, whenever payments are

recalculated.

* * * * *

8. Section 206.27 is amended to revise

paragraphs (c)(1) and (d), to read as

follows:

§ 206.27 Mortgage provisions.

* * * * *

(c) * * *

(1) The mortgage shall state that the

mortgage balance will be due and

payable in full if

(i) A mortgagor dies and the property

is not the principal residence of at least

one surviving mortgagor, or

(ii) A mortgagor conveys all or his or

her title in the property and no other

mortgagor retains title to the property.

For purposes of the preceding sentence,

a mortgagor retains title in the property

if the mortgagor continues to hold title

to any part of the property in fee simple,

as a leasehold interest as set forth in

§ 206.45(a), or as a life estate.

* * * * *

(d) Second mortgage to Secretary.

Unless otherwise provided by the

Secretary, a second mortgage to secure

any payments by the Secretary as

provided in § 206.121(c) must be given

to the Secretary before a Mortgage

Insurance Certificate is issued for the

mortgage.

* * * * *

9. Section 206.35 is amended by

adding a new sentence at the end, to

read as follows:

§ 206.35 Title held by mortgagor..

* * * If one or more mortgagors hold

a life estate in the property, for purposes

of this section only the term

‘‘mortgagor’’ shall include each holder

of a future interest in the property

(remainder or reversion) who has

executed the mortgage.

10. Section 206.45 is amended to add

a new paragraph (e), to read as follows:

§ 206.45 Eligible properties.

* * * * *

(e) Freely marketable. The property

must be freely marketable. Conveyance

of the property may only be restricted as

permitted under 24 CFR 203.41 or

234.66 and this part.

11. Section 206.117 is revised to read

as follows:

§ 206.117 General.

The Secretary is required by statute to

take any action necessary to provide a

mortgagor with funds to which the

mortgagor is entitled under the mortgage

and which the mortgagor does not

receive because of the default of the

mortgagee. The Secretary may hold a

second mortgage to secure repayment by

the mortgagor under § 206.27(d) or may

accept assignment of the first mortgage.

12. Section 206.121 is amended by

revising the first two sentences of

paragraph (c), to read as follows:

§ 206.121 Secretary authorized to make

payments.

* * * * *

(c) Second mortgage. If the contract of

insurance is terminated as provided in

§ 206.133(c), all payments to the

mortgagor by the Secretary will be

secured by the second mortgage, if any.

Payments will be due and payable in the

same manner as under the insured first

mortgage, except that if the first

mortgage provided for monthly

adjustments to the interest rate under

§ 206.21(b)(2) then the Secretary may

convert the second mortgage to an

annually adjustable interest rate under

§ 206.21(b)(1) at any time by providing

notice to the mortgagor. * * *

13. Section 206.125 is amended to

revise paragraph (d)(3), to read as

follows:

§ 206.125 Acquisition and sale of the

property.

* * * * *

(d) * * *

(3) The mortgagee must give written

notice to the Secretary within 30 days

after the initiation of foreclosure

proceedings, and must exercise

reasonable diligence in prosecuting the

foreclosure proceedings to completion

and in acquiring title to and possession

of the property. A time frame that is

determined by the Secretary to

constitute ‘‘reasonable diligence’’ for

each State is made available to

mortgagees.

* * * * *

14. Section 206.209 is revised to read

as follows:

§ 206.209 Prepayment.

(a) No charge or penalty. The

mortgagor may prepay a mortgage in full

or in part without charge or penalty at

any time, regardless of any limitations

on prepayment stated in a mortgage.

Amounts prepaid are not available to be

re-borrowed, unless the mortgage was

executed before [effective date of final

rule].

(b) Insurance and condemnation

proceeds. If insurance or condemnation

proceeds are paid to the mortgagee, the

principal limit and the mortgage balance

shall be reduced by the amount of the

proceeds not applied to restoration or

repair of the damaged property.

Dated: April 12, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 96–11649 Filed 5–9–96; 8:45 am]

BILLING CODE 4210–27–P