26982 Federal Register / Vol. 61, No. 104 / Wednesday, May 29, 1996 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Parts 206 and 234

[Docket No. FR–3655–F–02]

RIN 2502–AG23

Office of the Assistant Secretary for

Housing-Federal Housing

Commissioner; Mortgage Insurance on

Condominium Units in Non-FHA

Approved Projects

AGENCY: Office of the Assistant

Secretary for Housing-Federal Housing

Commissioner, (HUD).

ACTION: Final rule.

SUMMARY: This rule adds provisions to

the regulations governing Federal

Housing Administration (FHA)

mortgage insurance on condominium

units to permit insurance of mortgages

on individual units in condominium

projects that have not received FHA

approval in advance. These ‘‘spot loans’’

will be approved under less stringent

requirements than the existing

requirements for mortgage insurance for

condominiums, but mortgages on these

units are required to satisfy standards

that assure that the risk involved for

FHA is reasonable. The final rule does

make one change from the proposed

rule in response to public comment—to

increase, for small projects, the

percentage of units that may be

approved for FHA mortgage insurance.

EFFECTIVE DATE: June 28, 1996.

FOR FURTHER INFORMATION CONTACT:

Richard Manuel, Director, Single Family

Development Division, Office of Insured

Single Family Housing, Department of

Housing and Urban Development, 451

Seventh Street, SW, Washington, D.C.

20410. He may be reached at (202) 708–

2700 (not a toll-free number). For

hearing- and speech-impaired persons,

this number may be accessed via text

telephone by dialing the Federal

Information Relay Service at 1–800–

877–9339.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

The information collection

requirements contained in § 234.26(i) of

this rule were reviewed and approved

by the Office of Management and

Budget under the Paperwork Reduction

Act of 1995 (42 U.S.C. 3501–3520) and

assigned OMB approval number 2502–

0513. 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.

I. Response to Public Comments

On June 23, 1995, HUD published a

proposed rule to revise the regulations

concerning eligibility of mortgages for

insurance under the Home Equity

Conversion Mortgage Insurance program

(24 CFR part 206) or under the

Condominium Ownership Mortgage

Insurance program (24 CFR part 234).

During the comment period, which

ended August 22, 1995, HUD received 7

public comments from lending

institutions and individuals. Three of

the public comments favored the rule,

while the remaining comments focused

on difficulties with the rule. The only

change being made in the rule as a

result of consideration of these public

comments is to increase the percentage

of units on which ‘‘spot loans’’ are

permitted from 10 percent to 20 percent

of the units in a project of 30 or fewer

units.

General comments

Several commenters stated that the

rule would permit elderly homeowners

to take advantage of the Home Equity

Conversion Mortgage program more

easily, since they would not have to

make public to other unit owners in the

condominium that they were seeking

additional income from this source.

Similarly, homeowners would be able to

use the refinancing program that

permits cash out to the buyer in a

project not currently eligible for FHA

mortgage insurance. The availability of

this additional cash to condominium

owners will increase their ability to

keep up with growing costs for such

basic needs as increasing condominium

association fees, health care costs, or

other essential services.

One commenter praised the reduction

in paperwork, noting that the Federal

National Mortgage Association (‘‘Fannie

Mae’’) and the Federal Home Loan

Mortgage Corporation (‘‘Freddie Mac’’)

streamlined their project approval

processes in the past decade, with each

one using a procedure very similar to

the one proposed in this rule for one

class of mortgage (Fannie Mae Type A

condominium and Freddie Mac Class III

condominium).

A commenter also praised this effort

as contributing towards stabilizing the

condominium resale market.

Specific Comments

Ten Percent Limit on Participation in a

Project

1. Comment: There is no way now to

track how many units in a particular

project have received the benefit of FHA

mortgage insurance. Even though

project approval requests could be

added to HUD’s existing CHUMS system

at the time of project approval, spot

loans would be difficult to track. This

problem is complicated by the

multitude of direct endorsement

lenders.

Response: Since the Department

currently is without the technical or

staffing capability to track the exact

number of FHA-insured mortgages in a

condominium project, mortgagees will

be responsible for assuring that the

condominium project meets all the

streamlined approval requirements.

These streamlined requirements are

similar to Fannie Mae’s requirements for

approving ‘‘Type A condominiums,’’

found in Part VIII, Chapter 2, § 201 of

its Selling Guide. To the extent that the

Department has information that can

assist in ensuring compliance with the

new FHA requirements, it will provide

mortgagees with that information.

The rule requires lenders to monitor

all of the requirements, including the

limit on FHA spot loans in a project of

no more than ten percent of the units

and certifying to this effect. The

Department recognizes that there is

some potential for exceeding the

prescribed limit, either accidentally or

intentionally. The local HUD offices or

the Regional Processing Centers will be

conducting random reviews of these

mortgage loans. Mortgage lenders

demonstrating a pattern of abuse will be

subject to sanctions.

The Department relies primarily on

this limitation on the number of loans

in a project to minimize risk of loss. As

an additional safeguard, however, risk

of loss also is minimized by the other

requirements added to § 234.26, which

collectively should ensure the viability

of the project.

2. Comment: HUD need not limit this

type of approval to 10 percent of the

units. Alternative suggestions were to

eliminate the limit entirely (Fannie Mae

and Freddie Mac do not so limit their

exposure); to add a requirement for the

lender to insure that the project’s budget

is adequate, such as to fund replacement

of common elements; or to increase the

percentage to 20 percent of the units if

the project has fewer than 30 units and/

or has been in existence for more than

five years. For example, in a project of

fewer than 10 units, even one unit

would exceed the 10 percent limit.

Response: The reason for this

restriction is to limit the Department’s

risk of loss under this program.

Furthermore, it assures that the spot

loan process does not become a means

of circumventing the requirements and

protection of HUD’s condominium

approval process. Since the Department

recognizes that small condominium
Federal Register / Vol. 61, No. 104 / Wednesday, May 29, 1996 / Rules and Regulations 26983

projects might not be able to participate

in the spot loan program, we are

accepting the recommendation to permit

up to 20% of the units in a project of

30 or fewer units to have FHA-insured

mortgages.

Concern About Default Rate

1. Comment: Units insured under spot

loans pose a greater risk of default than

those approved as part of a project

approval. Many of the criteria relied

upon in approving condominium

developments for FHA insurance under

the Section 234(c) program would not

be used in the case of spot loans.

Response: The Department expects

mortgage lenders to apply sound

underwriting practices in processing

spot loans. In most cases, spot loan

projects should have the same

maintenance level, reserves for

replacement level, plan for

maintenance, and insurance coverage as

comparable developments approved

under the Section 234(c) program.

Lenders also should look at the length

of time the homeowners association has

operated successfully. All pertinent

information regarding the viability of

the development should be reviewed.

Lenders may wish to create checksheets

to facilitate this review. Presently, the

Department believes that it is

unnecessary to require all spot loan

appraisals to be done on the Fannie Mae

Form 1073, as one commenter

suggested.

2. Comment: One method for limiting

FHA’s risk would be to limit spot loan

mortgage insurance to reverse mortgage

loans.

Response: The impetus for the spot

loan program was to provide home

mortgage insurance for those seeking to

purchase condominium units in

developments where there is little

likelihood that the development would

make the requisite changes in its legal

documents (usually to benefit one

association member) to obtain FHA

approval. However, the Department

wants spot loans to be available in

forward loans as well as reverse loans.

Reducing the risk of loss is addressed by

limiting the Department’s involvement

in the development.

Downpayment

Comment: Given the additional risk

involved in approving mortgage

insurance without the full approval

process, the downpayment should be

proportionately increased, for example

to 20 or 30 percent.

Response: The Department believes

that increased downpayment

requirements would thwart the spot

loan program and, particularly, those

constituents the Department has

traditionally served—middle- and

moderate-income families who normally

could not obtain loans in other mortgage

insurance markets. Few of FHA

traditional constituents could afford to

meet a 20 percent downpayment

requirement. As previously noted, the

Department has determined that spot

loans pose a ‘‘reasonable risk,’’ which

the rule controls largely by limiting the

Department’s involvement in each

development.

Enforcement of lender responsibilities

Comment: If a lender approves a

mortgage for FHA insurance under the

spot loan provisions and the project

does not satisfy the eligibility

requirements stated in the regulation,

there should be a penalty. Cancellation

of the mortgage insurance or loss of the

lender’s direct endorsement authority

might be appropriate.

Response: The Department agrees that

enforcement mechanisms governing

mortgagee activity apply to this

program, as to other FHA mortgage

insurance activity. The Department will

monitor activity under the spot loan

program.

Miscellaneous

1. Comment: Current provisions for

FHA-approved projects with respect to

the 51% owner-occupancy requirement

should be loosened—permitting HUD

field offices to approve a lower

percentage if appropriate.

Response: This provision is not new.

It follows current practice for non-spot

loans. The Department does not believe

it appropriate to change this

requirement at this time.

2. Comment: The criterion

(§ 234.26(i)(1)(iii)) limiting the number

of units owned by a single entity in a

project for which a spot loan approval

is sought should be changed to the

number of units controlled by a single

entity. This would prevent insuring

mortgages in projects where family

members and wholly owned businesses

or partnerships own more than 10

percent of the units in a project.

Response: The Department believes

that ‘‘ownership’’ is a reasonable

standard to use and that is easy to

understand. ‘‘Control’’ is harder to

identify and enforce. The Department

declines to change this provision.

Findings and Certifications

Impact on the Environment

A Finding of No Significant Impact

with respect to the environment was

made in accordance with HUD

regulations at 24 CFR part 50 that

implement section 102(2)(C) of the

National Environmental Policy Act of

1969, 42 U.S.C. 4332, in connection

with the proposed rule on this subject.

The Finding of No Significant Impact is

available for public inspection and

copying during regular business hours

(7:30 a.m. to 5:30 p.m.) in the Office of

the Rules Docket Clerk, room 10276, 451

Seventh Street, SW, Washington, DC

20410–0500.

Federalism Impact

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that the policies contained

in this rule do not have significant

impact on States or their political

subdivisions since the provisions of the

proposed rule affect private purchasers

and sellers of condominium units.

Impact on the Family

The General Counsel, as the

Designated Official under Executive

Order 12606, The Family, has

determined that this rule does not have

potential for significant impact on

family formation, maintenance, and

general well-being. Therefore, the rule is

not subject to review under the Order.

The rule merely broadens the coverage

of condominium units for which

mortgage insurance can be obtained.

Impact on Small Entities

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed this rule before

publication and by approving it certifies

that this rule will not have a significant

impact on a substantial number of small

entities, because it makes available

additional financing options for

purchasers and sellers of condominium

units.

Catalog

The Catalog of Federal Domestic

Assistance number for the program

affected by this proposed rule is 14.133.

List of Subjects

24 CFR Part 206

Aged, Condominiums, Loan

programs—housing and community

development, Mortgage insurance,

Reporting and recordkeeping

requirements.

24 CFR Part 234

Condominiums, Mortgage insurance,

Reporting and recordkeeping

requirements.

Accordingly, for the reasons stated in

the preamble, parts 206 and 234 of title

24 of the Code of Federal Regulations

are amended as follows:
26984 Federal Register / Vol. 61, No. 104 / Wednesday, May 29, 1996 / Rules and Regulations

PART 206—HOME EQUITY

CONVERSION MORTGAGE

INSURANCE

1. The authority citation continues to

read as follows:

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

U.S.C. 3535(d).

2. Section 206.51 is revised to read as

follows:

§ 206.51 Eligibility of mortgages involving

a dwelling unit in a condominium.

If the mortgage involves a dwelling

unit in a condominium, the project in

which the unit is located shall have

been committed to a plan of

condominium ownership by deed, or

other recorded instrument, that is

acceptable to the Secretary, except as

provided in § 234.26(i) of this chapter.

PART 234—CONDOMINIUM

OWNERSHIP MORTGAGE INSURANCE

3. The authority citation for part 234

continues to read as follows:

Authority: 12 U.S.C. 1715b and 1715y; 42

U.S.C. 3535(d). Section 234.520(a)2)(ii) is

also issued under 12 U.S.C. 1701(a).

4. In § 234.26, a new paragraph (i)

would be added, to read as follows:

§ 234.26 Project requirements.

* * * * *

(i) Notwithstanding the requirements

of paragraphs (a) through (h) of this

section, a loan on a single unit in an

unapproved condominium project

(‘‘spot loan’’) may qualify for mortgage

insurance under this part.

(1) The project must meet the

following criteria:

(i) All units, common elements, and

facilities—including those that are part

of any master association—must have

been completed, and the project cannot

be subject to additional phasing or

annexation. The project must provide

for undivided ownership of common

areas by unit owners;

(ii) Control of the owners’ association

must have been turned over to the unit

purchasers, and the unit purchasers

must have been in control for at least

one year;

(iii) At least 90% of the total units in

the project must have been conveyed to

the unit purchasers, and at least 51% of

the total units in the project must have

been conveyed to purchasers who are

occupying the units as their principal

residences or second homes. No single

entity (the same individual, investor

group, partnership, or corporation) may

own more than 10% of the total units

in the project;

(iv) The units in the project must be

owned in fee simple or be an eligible

leasehold interest, as described in

§ 234.65, and the unit owners must have

sole ownership interest in, and right to

the use of, the project’s facilities,

common elements, and limited common

elements including parking, recreational

facilities, etc.;

(v) The project must be covered by

hazard, flood, and liability insurance

acceptable to the Commissioner;

(vi) For projects with more than 30

units, no more than 10% of the total

units in the project may be encumbered

by FHA-insured mortgages. (If more

than 10% of the units in the project are

encumbered by FHA-insured mortgages,

the condominium project must be

approved under paragraphs (a) through

(h) of this section.) For smaller projects,

no more than 20% of the total units in

the project may be encumbered by FHAinsured mortgages; and

(vii) The assumability provisions of

§ 234.66 must be satisfied.

(2) Lenders must perform an

underwriting analysis and certify that a

project satisfies the eligibility criteria for

a ‘‘spot loan’’ in a condominium project

that has not been approved by FHA.

Lenders may use information from the

appraiser, the owners’ association, the

management company, the real estate

broker, and the project developer, but

the lender must ensure the accuracy of

the information obtained from these

sources.

(Approved by the Office of Management and

Budget under control number 2502–0513)

Dated: May 22, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal

Housing Commissioner.

[FR Doc. 96–13335 Filed 5–28–96; 8:45 am]

BILLING CODE 4210–27–P