[Federal Register Volume 61, Number 104 (Wednesday, May 29, 1996)]
[Rules and Regulations]
[Pages 26982-26984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13335]




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Part III





Department of Housing and Urban Development





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24 CFR Parts 206 and 234



Condominium Units in Non-FHA Approved Projects; Mortgage Insurance; 
Final Rule

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

[[Page 26982]]



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.

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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 Sec. 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, Sec. 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 Sec. 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

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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 (Sec. 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:

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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:


Sec. 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 
Sec. 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 Sec. 234.26, a new paragraph (i) would be added, to read as 
follows:


Sec. 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 Sec. 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 
FHA-insured mortgages; and
    (vii) The assumability provisions of Sec. 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