www.hudclips.org 


U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

August 26, 1996
 
MORTGAGEE LETTER 96-46
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Single Family Miscellaneous Amendments to the FHA
Regulations
 
The purpose to this Mortgagee Letter is to announce the
publication of the Final Rule which makes a variety of
amendments, clarifications, and corrections for single family
mortgage insurance programs.  Many of the items listed below have
been permitted as a matter of policy, and now these items have
been incorporated into the FHA Regulations. The rule was
published on July 9, 1996, and was effective on August 8, 1996.
A copy of the rule is attached to this letter.
 
LENDER APPROVAL
 
     The Secretary may identify classes or groups of mortgagees
that are exempt from one or more fees associated with the
application and recertification process.  Governmental mortgagees
are exempt from these fees.  In addition, non-depository
mortgagees that are nonprofit organizations now will also be
exempt from these fees.
 
CREDIT POLICY
 
     All mortgages may now be in multiples of $1 regardless of
whether the up-front segment of the mortgage insurance premium
(MIP) is financed or not.  The rule eliminates the requirement
that if the up-front segment is not financed, the mortgage
principal obligation must be in multiples of $50.  Loans for
condominium units under section 234(c) may now also be in
multiples of $1.
 
     Mortgage payments can now increase by $50 when an owner-
occupant is refinancing to a shorter term.  This is a change to
the regulations which formerly required that the payment must be
reduced (except when refinancing from a fixed rate mortgage to an
adjustable rate mortgage).   As indicated in the Mortgage Credit
Analysis Handbook, 4155.1, REV-4, Chg. 1, this has been our
outstanding policy, based on a waiver of regulations, but the
regulations have now been amended to reflect this.
     The disaster assistance program, Section 203(h), has been
expanded to permit the use of adjustable rate mortgages (ARMs).
 
     Two items are presented for clarification regarding the
maximum mortgage calculation.  The maximum mortgage limit is
based upon 75% of the current Freddie Mac limit instead of 75% of
the 1992 Freddie Mac limit as indicated in the Regulations.  The
rule also states that the maximum mortgage limit for an Energy
Efficient Mortgage (EEM) may exceed the area dollar limit that
otherwise would apply.  Mortgagee Letter 95-46 describes the
Energy Efficient Mortgage program and contains examples of the
calculations for this loan product.
 
     The "rule of seven," which prohibits a borrower who is
purchasing a rental property (that will be part of a project,
subdivision or group of properties) from having a financial
interest in more than seven units, is clarified to delete the
term "subdivision."  The rule outlines that the Department does
not have difficulty with the concept of "subdivision," but rather
with properties that are in very close proximity to each other,
hence, increasing our geographical risk.  The definition for
"close proximity" is properties within a two-block radius from
one another, and is more in line with the intent of the original
rule.
 
     It was not FHA's intention to require a homeowner to go to
arbitration to obtain resolution to problems associated with a
builder's ten year insured warranty plan.  Some providers of
these plans have interpreted our regulations to indicate that in
order for homeowners to successfully collect on the plan, they
must submit claims to arbitration.  We expect that the plan would
permit a homeowner to seek judicial resolution of disputes as an
alternative to arbitration.  As a reminder, a builder's ten year
insured warranty plan should be acceptable to FHA.
 
     Two of our smaller programs, Section 248 (Indian Home Lands)
and Section 247 (Hawaiian Homelands), have minor regulation
changes.  In the Section 248 program, the borrower eligibility
criteria has been expanded to include an Indian Tribe, which may
act through its authorized representative.  Section 247,
mortgages on Hawaiian Homelands, has now been expanded to allow
for the use of the Section 203(k) program.
 
     The Department is not insuring "open-end" mortgages.  These
mortgages were designed for the borrower to apply for additional
funding at a later time, analogous to a line of credit which
could be used for financing home repairs or improvements.
 
     The regulations have also been amended to require a new
nondiscrimination certification.  Further instructions will be
issued regarding this change.
SERVICING
 
     Where the mortgagee has failed to meet the notification of
foreclosure requirement (24 CFR 203.356(a)), the rule provides
the Secretary with the authority to administratively set the date
to which interest will be computed on a claim for insurance
benefits.  Detailed guidance implementing this provision will be
provided in a separate mortgagee letter.  Until this mortgagee
letter is issued, the date to which interest is computed shall
continue as is currently provided in the FHA Single Family
Insurance Claims Handbook, 4330.4 , REV-1 and mortgagees shall
continue to follow the procedures listed in the Handbook.
 
     Notification to the Secretary of a transfer of servicing
will be the responsibility of the transferee mortgagee rather
than the current requirement that the transferring mortgagee
provide this notification.  However, the Department will continue
to accept mortgage record changes from the transferring mortgagee
until further notice.
 
REAL ESTATE OWNED
 
     The rule provides more flexibility regarding the form of
earnest money deposit HUD will accept in the sale of HUD-acquired
single family properties.  Generally, HUD will accept cashier's
checks, certified checks, and money orders from reputable
institutions.  However, based on local banking practices, HUD
field offices may prescribe other acceptable cash equivalents.
 
     The rule clarifies our position on the percentage of
available financing for investors on 203k property disposition
sales.  The section 203k program specifically allows eligible
investors to obtain mortgage financing with a 15 percent
downpayment, based upon the lesser of the estimated value of the
property plus the cost of rehabilitation, or 110 percent of the
estimate of value after rehabilitation.
 
     If you have any questions regarding this letter, please
contact your local FHA office.
 
Sincerely,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
Attachment