www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 April 6, 1988 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 88-11 TO: ALL APPROVED MORTGAGEES SUBJECT: Mortgage Insurance on Indian Reservations and other Restricted Lands The purpose of this letter is to provide implementing instructions for Section 248 of the National Housing Act. Section 248 provides for Single Family Mortgage Insurance on Indian Reservations and other restricted lands. These instructions are effective immediately. Background (1) Need for Program. Prior to this program there has been no procedure for the mortgaging of a leasehold of tribal land. Since many leases restrict ownership of housing on tribal land to Indians, such restrictions have precluded non- Indian mortgagees from foreclosing on the property and conveying good, marketable title to the Department. Because of the inexperience of most mortgagees in dealing with tribal courts and tribal governments, mortgagees have been disinclined to lend money where alienation of the property is restricted and where mortgage insurance cannot be obtained. The enactment of Section 248 has removed the marketability of title restriction and has given HUD authority to waive any other limitation determined contrary to promoting the availability of FHA mortgage insurance on Indian reservations. (2) Program Overview. The principal differences in the operation of this program and standard procedures are as follows. Most of these will be elaborated elsewhere in this letter. (a) Marketability of title. Mortgagees do not have to convey marketable title in order to get mortgage insurance benefits. Mortgagees will not be involved in foreclosure activities but will be permitted to assign mortgages under this section to HUD once the mortgagor is more than 90 days in default. (b) Eviction procedures. Mortgagees must submit evidence with the application for mortgage insurance that the tribe having jurisdiction over the mortgaged property has adopted eviction procedures to be used in the event of foreclosure. (c) First lien. Where the mortgagor cannot establish that the mortgage will be a first lien, he will have to establish that the tribal government has passed a law effecting the superiority of FHA-insured and HUD-held mortgages. (d) Mortgage and lease. The enclosed rider must be made to existing mortgage forms for properties on Indian lands. The attached lease must be used. Approval of these forms has been obtained from the Bureau of Indian Affairs (BIA). (3) Definitions. (a) Indian means an individual member of any Indian tribe and that member's family. (b) Indian land means trust or otherwise restricted land (1) as defined by the Secretary of the Interior, over which an Indian tribe is recognized by the United States as having governmental jurisdiction; (2) held in trust for the benefit of any Indian tribe or individual or held by any Indian tribe or individual subject to a restriction by the United States against alienation; or (3) acquired by Alaska natives under the Alaska Native Claims Settlement Act or any other land acquired by Alaska natives pursuant to statute by virtue of their unique status as Alaska natives. (c) Indian tribe means any Indian or Alaska native tribe, band, nation, or other organized group or community of Indians or Alaska natives recognized as eligible for the services provided to Indians or Alaska natives by the Secretary of the Interior because of its status as such an entity, or that is an eligible recipient under chapter 67 of title 31, United States Code. Processing Requirements (4) Tribal Participation. While there is no explicit requirement for tribal consent to HUD's making this program available on a tribe's land, many of the program's requirements cannot be fulfilled without the tribe's active participation. To participate, a tribe must take the following measures. Lenders should contact their local HUD Field Office for specific guidance regarding local tribal lands. (a) Certify to HUD that it has adopted eviction procedures and will enforce them. (b) Permit HUD access for the purpose of servicing properties. (c) Agree to the lease form that HUD prescribes. (d) Where a tribal government's courts have jurisdiction to hear foreclosures, it must enact a law so that the FHA-insured or HUD-held mortgage can be assured of being a first lien. (5) Lease. The attached lease must be used for all insured Section 248 mortgages. This lease is designed to protect the security interest of the mortgages and of HUD while at the same time ensure that the interests of the tribe are also protected. (a) Term. The term of this lease is twenty-five (25) years with a provision for an automatic extension of an additional twenty-five (25) years. Thus, effectively the term of the lease is fifty (50) years. (b) Termination. The lease may not be terminated by either or both parties if the leasehold is mortgaged under Section 248. Likewise, in the event of foreclosure of an FHA-insured or HUD-held mortgage, the lease shall not be subject to any forfeiture or reversion and shall not be otherwise subject to termination. (6) Eligible Programs. The following FHA mortgage insurance programs may be employed pursuant to Section 248. Section 248 cases cannot be processed under the Direct Endorsement program or insured pursuant to Section 223(e). Only the programs listed below can be used. When calling into HUD for an FHA case number and appraiser assignment, be sure to advise the receiving assignment clerk that the property is on Indian lands and will be insured under Section 248 of the National Housing Act. PROGRAM 203(b) 203(b) ARM 203(b) §245(a)GPM 203(b) §245(a) GPM/GEM 203(k) Improvements/First Lien 203(k) ARM 203(k) §245(a) GPM (7) Mortgage Insurance Premium. Mortgages insured under Section 248 are obligations of the FHA General Insurance fund. Therefore, all of these mortgages will have periodic or monthly MIP payments. Section 248 mortgages will not have a one-time MIP. (8) First Lien. Mortgages insured under Section 248 must constitute a first lien on the property. A mortgage can be established as a first lien by filing it with the State recording system and with the BIA, U.S. Department of Interior. In the event that a tribal government has its own courts and these have jurisdiction to hear foreclosures, the tribal government must do one of the following to ensure that the FHA-insured mortgage is a first lien: (a) The tribal government could enact a law satisfactory to HUD providing for the satisfaction of FHA-insured and HUD-held mortgages before other obligations are satisfied (other than tribal leasehold taxes against the property assessed after the property is mortgaged). (b) Alternatively, the tribal government could enact a law providing that State law shall determine the priority of liens against the property. (9) Tribal Leasehold Taxes. The tribe must notify the mortgagee of leasehold taxes so that the mortgagee can include the payment of such taxes in the mortgage payment as is done with local property taxes. If a tribe wishes, tribal tax liens resulting from unpaid taxes may be recorded in the State recording system. The tribe may also intervene in any foreclosure proceeding to ask that the taxes be paid. (10) Principal Residence. To be eligible for mortgage insurance under Section 248, the mortgagor must intend to occupy the property as a principal residence. However, this provision does not apply to purchasers of the leasehold who assume the mortgage. (11) Mortgage Term. The mortgage shall not have a term greater than thirty (30) years. (12) Valuation. Appraisal procedures will not differ from standard procedures except that the requirement for marketability will be waived. For new construction the Marshall and Swift square foot method will be used. The Marshall and Swift cost analysis shall also be used to appraise existing homes when comparables are not available. (a) When using Marshall and Swift, note that it includes in its cost figures a prorated amount of real estate commission in tract development. Since such an expense is unlikely on Indian land, it should be subtracted from the total. (b) No value should be attributed to the land. This is because the land will remain under tribal ownership, is generally leased at a nominal cost, and the ownership of the leaseholds is restricted. (13) Mortgage Credit. Other than assuring that the mortgagor is an Indian qualified to participate in this program, there are no special mortgage credit considerations for Section 248. (14) Assumptions or Sale of Leasehold. The Indian mortgagor may sell his leasehold with the buyer assuming the insured mortgage. While the requirements of Mortgagee Letters 86- 15 and 88-2 governing assumptions will apply, HUD requirements will not restrict the sale to Indians or to one who will use the property as a principal residence. However, the lease requires that all purchasers be approved by the tribe. Finally, lenders may charge an assumption fee. (15) Secondary Market. Mortgages insured pursuant to Section 248 are eligible for GNMA pools for mortgage backed securities. Mortgage Servicing (16) Assignment for forbearance. 24 CFR 203.600 et seq. establish requirements for mortgagees with regard to the Assignment Program. These requirements and those established in Handbook 4330.2 and supplementary instructions also apply to Section 248 Mortgages. (17) Contact with the mortgagor. Pursuant to 24 CFR 203.604, the mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting before the mortgagor becomes three months' delinquent. If the mortgagor defaults during a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face interview or attempt to arrange such, within 30 days after the default or 30 days before assignment is requested. (a) A reasonable effort to arrange such a meeting shall include at least one trip to see the mortgagor at the mortgaged property, notwithstanding that such property is more than 200 miles from the mortgagee, its servicer, or a branch office of either. (b) The mortgagee must document that it has made at least one telephone call to the mortgagor for the purpose of trying to arrange a face-to-face interview. (c) The mortgagee may appoint an agent to perform the services of arranging and conducting the meeting. (d) The mortgagee must also: (1) Advise the mortgagor that information regarding the loan will be given to credit bureaus. (2) Advise the mortgagor of other available assistance. (3) Notify the mortgagor that if the mortgage remains in default for more than 90 days, the mortgagee will ask HUD to accept assignment of the mortgage. (4) Notify the mortgagor of the qualifications for forbearance relief from the mortgagee, if any, and that forbearance relief may be available from HUD if the mortgage is assigned. (5) Provide the mortgagor names and addresses of HUD officials to whom further communications may be addressed. (18) Non-forbearance assignment. As indicated above, mortgagees will not be involved in the foreclosure of defaulted mortgages. Thus, notwithstanding the provisions of the assignment program, HUD will accept assignment of any Section 248 mortgage where the mortgagor has been in default for more than 90 days. The mortgagee must provide documentation showing that the requirements of 24 CFR 203.604 (summarized in part in the paragraph above) have been met. (19) Forbearance relief provided by HUD. 24 CFR 203.664 provides requirements for HUD's providing forbearance relief on Section 248 mortgages. (20) Foreclosure by Secretary. Subject to consideration of forbearance in accordance with Section 203.664., HUD may initiate foreclosure proceedings with respect to any mortgage acquired under this section in a tribal court, a court of competent jurisdiction or Federal district court. If the mortgagor remains on the property following foreclosure, HUD may seek an eviction order from the court hearing the foreclosure action. From an administrative perspective, such foreclosures will be handled in the same manner as the foreclosure of other HUD-owned mortgages. Other Issues (21) Failure to enforce evictions. 24 CFR 203.43h(b) addresses the problem of tribes that do not enforce eviction procedures. If the Field Office Manager determines that a tribe has failed adequately to enforce its eviction procedures, HUD will cease issuing commitments for the insurance of mortgages to tribal members. (22) Construction Advances. Although 24 CFR 203.43h(d) provides for insuring construction advances on Section 248 cases, we are not implementing this provision at present. If you have any questions concerning this Mortgagee Letter, please contact Joseph Bates in the Single Family Development Division, Programs and Procedures Branch, (202) 755-5672. Sincerely, Thomas T. Demery Assistant Secretary Enclosures RESIDENTIAL LEASE Lease No. Contract No. THIS LEASE, made and entered into between , hereafter designated as "LESSOR," and residing upon the Indian Reservation, hereinafter designated as "LESSEE(S)." If the Lessor is not an Indian Tribe, the term "Tribe: is defined as: . WITNESSETH: 1. SECRETARIAL APPROVAL. As used in this Lease, the term "Secretary" means the Secretary of the Interior or his duly authorized representative. This Lease is subject to the approval of the Secretary pursuant to the Act of August 9, 1955, 69 Stat. 539, as amended; 25 U.S.C. 415. This Lease has been prescribed by the Secretary of Housing and Urban Development (HUD) pursuant to 24 CFR 203.43h(c), which implements Section 248 of the National Housing Act, 12 U.S.C. 1715z-13, for use in connection with Federal Housing Administration (FHA) insurance of a mortgage on the interest created by this Lease. 2. PREMISES. Lessor, as authorized by law and in accordance with a resolution adopted by the on , hereby leases to the Lessee(s) all that tract or parcel of land situated on the Indian Reservation, County of State of , and described as follows: 3. USE OF PREMISES. The object of this Lease is to enable the Lessee(s) to construct, improve and/or maintain a dwelling and related structures on the leased premises, and otherwise to use said premises as a principal residence. 4. TERM. Lessee shall have and hold the premises for a term of twenty-five (25) years beginning on the effective date of this Lease. This Lease shall automatically and without notice renew for an additional term of twenty-five (25) years on the same terms and conditions contained herein. This Lease may not be terminated by either or both parties during its initial or renewal term if, and as long as, the Lease and/or any improvements on the premises, or any interest therein, are mortgaged or otherwise pledged as security for any loan in accordance with the provisions hereof, unless consent in writing to such termination is given by the Lender and, when HUD/FHA insurance is in force, by HUD. This Lease shall not be subject to any forfeiture or reversion and shall not be otherwise terminable, if such event would adversely affect any interest in the premises, including improvements thereon, acquired in accordance with the purchaser at a foreclosure sale under such mortgage (or lien) or provisions hereof by the holder of any mortgage or other lien, or of any under any conveyance given in lieu of foreclosure, or of any holder subsequent to such purchase. In the event HUD acquires a mortgage on the interest created by this Lease by assignment from a lender, the Lessor shall not terminate the Lease without the written consent of HUD as long as the mortgage is in force. 5. RENT. The improvement of housing for families is a public purpose of the Lessor. The consideration for this Lease is (1) the said purpose, (2) the promise hereby given of Lessee(s) to pay the Lessor rent at the rate of One Dollar ($1.00) for each twenty-five (25) year term, payment to be made each term in advance, (3) the extinguishment, hereby agreed to by Lessee(s), of any and all use rights heretofore held by Lessee(s) in the premises, so that Lessee(s) shall hereafter hold rights only by virtue of this lease, and (4) other good and valuable considerations, the receipt of which is hereby acknowledged by Lessor. It is agreed that there shall be no adjustment of the rent if the Lease is terminated before its term otherwise would expire or in the event that any part of the premises is taken by condemnation for highway or other public purposes. 6. IMPROVEMENTS. All buildings or other improvements now existing or hereafter constructed on the premises shall be the leasehold property of the Lessee(s) during the term of this Lease, including any extension or renewal thereof. 7. USE RIGHT. Upon expiration of this Lease, or upon its termination in accordance with the terms hereof, unless such termination is due to default upon the part of Lessee(s), Lessee(s) or any successors in interest shall be entitled to use rights in the premises if qualified under the laws and customs of the . If not so eligible, Lessee(s) and any successors in interest shall, upon demand, surrender to Lessor upon expiration or other termination of this Lease complete and peaceable possession of the premises and all improvements thereon, which shall be the property of the . 8. FEDERAL SUPERVISION. (a) Nothing contained in this Lease shall operate to delay or prevent a termination of Federal responsibilities with respect to the premises by the issuance of a fee patent, the lifting of restrictions on alienation, or otherwise during the term of the Lease; such termination, however, shall not serve to abrogate the Lease. (b) No member of Congress or any delegate thereto or any Resident Commissioner shall be admitted to any share or part of this Lease or to any benefit that may arise herefrom. (c) The Lessee(s) agree(s) not to use or cause to be used any part of said premises for any unlawful conduct or purpose. 9. QUIET ENJOYMENT. Lessor agrees to defend the title to the premises and also agrees that Lessee(s) and any successors in interest shall peaceably and quietly hold, enjoy and occupy the premises for the duration of this Lease without any hindrance, interruption, ejection or molestation by Lessor or by any other persons whomsoever. 10. ASSIGNMENT. Except as otherwise provided herein, Lessee(s) shall not assign this Lease without the prior written consent of the Lessor and, if this Lease and/or any improvements on the premises are mortgaged or pledged as security for a loan, without the written approval of the lender. Lessee(s) may assign the Lease or deliver possession of the premises, including any improvements thereon, to the lender or its successors in interest if Lessee(s) default(s) in any mortgage or other loan agreement for which the Lease and/or improvements on the premises are pledged as security, and, in such event, the lender or its successors in interest may transfer this Lease or possession of the premises to a successor Lessee. Nothing in this Lease shall prevent the Lessee(s) from executing and recording a mortgage, declaration of trust and/or other security instrument as may be necessary to obtain financing for the construction and/or improvement of a dwelling and related structures, or shall prevent the mortgagee or other lender from foreclosing or instituting other appropriate proceedings under law in the event of default or any mortgage or other loan agreement by the Lessee(s). Except in cases involving loans for home construction or home improvement by a bank or other recognized lending institution, where no such consent or approval of Lessor shall be required, lessee(s) may not execute a mortgage, declaration of trust or other security instrument pledging their interest in this Lease or any improvements on the premises without the prior consent of Lessor and the approval of the Secretary. Notwithstanding the provisions contained above, the following additional requirements shall be applicable to a Lease which secures a mortgage insured or held by HUD/FHA: (1) Lessee(s) shall not sell or otherwise assign this Lease without the prior written consent of the tribe of which the Lessee(s) is/are member(s), if the Lessor is not such tribe. (2) In the event HUD acquires the mortgage secured by this Lease, and subsequently acquires the Lease by foreclosure, or by the assignment of the Lease by Lessee(s) (for which the approval of the tribe is not required), then: (a) HUD will notify the tribe of the availability of the Lease for sale, the sales price and other terms of sale. (b) If a purchaser is found, the Lease will be transferred by HUD to the purchaser, with the written consent and approval of the tribe. (c) If a purchaser cannot be found, HUD shall be entitled to sublease the leased premises to anyone wishing to sublease the same. The term of the initial sublease period and any succeeding periods shall not exceed one year each. A purchaser approved by the tribe must wait where the leased premises are sublet until the expiration of any current sublease before occupying the premises. (d) No mortgagee (except HUD as assignee of a mortgage) may obtain title to the interest created by this Lease without the prior written consent of the tribe. 12. OPTION. In the event of default by the Lessee(s) on any mortgage or other loan agreement for which this Lease or any improvements on the premises are pledged as security, Lessor shall have the right of first refusal to acquire the Lessee's interest in the premises (subject to all valid liens and encumbrances) upon (a) payment of all sums then in arrears, and (b) either payment of the balance of the loan or assumption of the mortgage. Said right of first refusal may be exercised at any time within thirty (30) days after notice in writing from the lender of the Lessee's default, which notice shall be given before the lender invokes any other remedies provided under the mortgage or by law, and shall be exercised by notice in writing from the Lessor to the Lessee(s) and the lender; provided, however, that the Lessee(s) shall have fifteen (15) days from the date of the latter notice to cure the default. The estate acquired by the Lessor through exercise of said right of first refusal shall not merge with any other estate or title held by the as long as this Lease and/or any improvements on the premises, or any interest therein, are mortgaged or otherwise pledged as security for any loan, and said estate shall remain subordinate to any valid and subsisting mortgage or other security instrument. Provided: Where the Lessee(s) default(s) on a HUD/FHA insured mortgage, this option shall not be exercised by the Lessor unless: (1) HUD has considered the Lessee(s) for assignment forbearance relief and determined Lessee(s) to be ineligible; (2) after Lessee(s) has/have received assignment forbearance relief, HUD determines Lessee(s) to be ineligible for additional assignment relief, or (3) HUD is not required by appropriate regulation (24 CFR Section 203.664.(b)(2)) to grant assignment forbearance relief to the Lessee(s). 13. EFFECTIVE DATE. This Lease and all its terms and provisions shall be binding upon the heirs, successors, executors, administrators and assigns of the Lessee(s) and any successor in interest to the Lessor, and shall take effect on the day of , 19 . 14. OBLIGATIONS TO THE UNITED STATES. It is understood and agreed that while the leased premises are in trust or restricted status, all of the Lessee's obligations under this lease, and the obligation of his sureties, are to the United States as well as to the owner of the land. , LESSOR ATTEST: By (Authorized Official) WITNESS: , LESSEE , LESSEE APPROVED: DATE: Secretary of the Interior RIDER - Section 248 Mortgages 1. The interests of the mortgagor in the property described above were created by a lease agreement from as lessor dated , 19 . Any reference to the "property" or the "premises" shall be construed as referring only to the interests of mortgagor created by such lease or any replacement lease. B. If the mortgage is assigned to the Secretary of Housing and Urban Development (the "Secretary") any foreclosure proceeding may take place in a tribal court, Federal district court, or other court of competent jurisdiction. Section 248(f)(5) of the National Housing Act grants to any such court the jurisdiction to convey to the Secretary the remaining life of a lease on the property and to order eviction of the delinquent mortgagor. C. Any purchaser at foreclosure sale other than the Secretary must receive the written consent of the lessor or, if lessor is not an Indian Tribe, the tribe of which lessor is a member. The purchaser shall receive a new lease for the remaining term of the existing lease unless the tribe consents to an assumption of the existing lease. D. This mortgage may be assumed, subject to credit approval by the mortgagee and the consent of the tribe to an assumption of the existing lease or the grant of the new lease. Assumption shall not cause an adjustment of the interest rate. E. A sale of property subject to the mortgage without an assumption of the mortgage may be made only if a new lease for the remaining term of the existing lease is granted.