[Federal Register Volume 63, Number 68 (Thursday, April 9, 1998)]
[Rules and Regulations]
[Pages 17654-17656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9419]
[[Page 17653]]
_______________________________________________________________________
Part IV
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 206
Home Equity Conversion Mortgage Insurance; Right of First Refusal
Permitted for Condominium Associations; Interim Rule
Federal Register / Vol. 63, No. 68 / Thursday, April 9, 1998 / Rules
and Regulations
[[Page 17654]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 206
[Docket No. FR-4267-I-01]
RIN 2502-AG93
Home Equity Conversion Mortgage Insurance; Right of First Refusal
Permitted for Condominium Associations
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This interim rule removes, for the Home Equity Conversion
Mortgage (HECM) insurance program only, the current restriction on FHA
mortgage insurance for a dwelling unit in a condominium project where
the condominium association has a right of first refusal to purchase
units that are offered for sale. As a result of this change, some
condominium units in projects may be approved for the HECM program.
DATES: Effective Date: May 11, 1998.
Comment Due Date: June 8, 1998.
ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, 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: John J. Coonts, Director, Office of
Insured Single Family Housing, Room 9266, Department of Housing and
Urban Development, 451 Seventh Street, SW, Washington, DC 20410,
telephone (voice) (202) 708-3046. (This is not a toll-free number.)
Hearing-impaired or speech-impaired individuals may access the voice
telephone listed by calling the Federal Information Relay Service
during working hours at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
Background
This interim rule addresses a difficult area that has been the
subject of prior FHA rulemaking and involves balancing competing
policies. These policies relate to the extent to which property subject
to an FHA-insured mortgage must be freely transferable without
restrictions. The interim rule makes one limited refinement to current
FHA policies.
FHA published a final rule on September 17, 1996 (61 FR 49033) to
add 24 CFR 206.45(e) 1. It generally bars Home Equity
Conversion Mortgage (HECM) insurance for a home that is not freely
marketable, with the exception of restrictions on conveyance that are
permitted for other FHA programs by 24 CFR 203.41 (for property other
than condominium units) or 24 CFR 234.66 (for condominium units.) The
FHA policy permits certain restrictions that facilitate affordable
housing programs, and a limited number of other restrictions, such as a
limitation of housing to elderly residents when consistent with the
Fair Housing Act and State and local non-discrimination laws.
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\1\ A typographical error in the final rule, which has been
corrected, designated the new provision as Sec. 203.47(e). The
proposed rule had correctly indicated that the new provision would
be Sec. 203.45(e).
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The FHA policy was codified, for programs other than the HECM
program, as a regulation in 1993 (new 24 CFR 203.41 and 234.66 were
added) to incorporate administrative policies on permissible
restrictions on conveyance that FHA developed in the preceding decades
(58 FR 42649, August 11, 1993 (final rule) and 56 FR 58762, November
21, 1991 (proposed rule)).
One provision of the regulation generally prohibited mortgage
insurance on property for which another party held a right of first
refusal, in part because such a right could make more difficult an
expeditious sale at fair market value by a mortgagor in financial
distress. A delay in the sale of a property, or inability to sell at a
price that would cover the mortgage debt, could result in a mortgage
default entitling the mortgagee to foreclose and claim insurance
benefits from HUD. Similarly, rights of first refusal and other
restrictions on conveyance can increase the difficulty to FHA in
marketing an acquired property expeditiously at fair market value,
thereby increasing FHA's holding costs and decreasing its ultimate
recovery. FHA's policies on rights of first refusal and other
restrictions on conveyance also recognized the potential that the right
could be improperly used for discriminatory purposes. The 1991 proposed
rule would have permitted only rights of first refusal that would be
exercised in the context of an affordable housing program by a public
body or an eligible non-profit organization (or an assignee who would
occupy the property) within a reasonable time after the event
permitting exercise of the right (i.e., a bona fide purchase offer by
another person) occurred. Also, the right had to permanently terminate
if mortgage assignment to HUD, foreclosure, or a deed in lieu of
foreclosure took place.
In response to a public comment stating that this exception was too
narrow, the 1993 final rule added a sentence that authorized HUD to
approve an individual or organization who was not a public body or
eligible non-profit organization to hold a right of first refusal under
the same conditions. As explained in the rule preamble, this change was
to accommodate ``unusual situations,'' such as employer homebuyer
assistance to low- or moderate-income employees in areas with little or
no affordable housing, when the employer would want to be able to
continue to limit the homeownership to employees needing assistance.
HUD stated (58 FR 42647):
This provision is not intended to permit condominium
associations to have rights of first refusal, and HUD approval
should not be requested for rights held by a condominium
association, or rights held by others if a condominium is not
involved in an affordable housing program.
FHA has long been aware that condominium organizational documents
frequently grant to the condominium association a right of first
refusal to purchase the unit of a condominium unit owner who offers a
unit for sale, and that prohibiting FHA insurance in such cases can
exclude some of the condominium market (particularly existing projects
not originally conceived as attracting a market likely to use FHA
programs). From 1981 until 1993, when 24 CFR 234.66 took effect, FHA
administrative policy permitted rights of first refusal for existing
condominium projects that otherwise were acceptable for FHA mortgage
insurance. HUD pointed this out in its rule preamble (56 FR 58764) but
clearly indicated that it proposed to reverse this policy except for
the ``grandfathering'' under Sec. 234.66 of condominium projects
already approved by HUD.
When the proposal to change policy was published for public comment
in 1991, the HECM program was operating at a very low volume. Any
special concerns that might be relevant to the program if 24 CFR 203.41
and 234.66 were to be applied to the HECM program were not taken into
consideration because the 1993 rule did not apply at all to the HECM
program. Although no rule barred HECM mortgage insurance in
condominiums
[[Page 17655]]
with rights of first refusal, it was barred as a practical matter
because Sec. 206.51 of the HECM program regulations restricted the HECM
program to condominium projects approved by FHA and FHA did not approve
any projects solely for the HECM program.
HUD proposed in 1996 to formally apply to the HECM program the
general policies regarding restrictions on conveyance (see 61 FR 21918,
May 10, 1996). HUD stated in the rule preamble:
While HUD does not have the same concerns about restrictions on
conveyance 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 project
possesses a right of first refusal (unless the condominium project
received written approval from HUD prior to September 10, 1993). HUD
believes there may be a number of successful 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 Sec. 206.51 [adopted in final form on
May 29, 1996, 61 FR 26984] 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
Sec. 206.45. HUD therefore also seeks comment on whether, if the
proposed amendment to Sec. 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. (61 FR 21921)
No public comments were received that generally opposed the application
of Sec. 234.66 in its entirety, but one commenter did--in the context
of discussing extension of the HECM program to cooperatives--oppose
applying the restriction against rights of first refusal to
condominiums in the HECM program. As stated at 61 FR 49031:
Comment: * * * If HUD expands the HECM regulations to include
housing cooperatives, the regulations should also be changed to
allow HUD to insure a HECM on a unit in a condominium or housing
cooperative project even if the project does not meet usual HUD
policy regarding ``rights of first refusal.'' In both a condominium
and a housing cooperative, rights of first refusal are a necessary
safeguard for the project. In addition, it is an industry-wide
accepted practice that protects the investment of these homeowners
as well as the mortgage holder. Rights of first refusal do not
prevent the unit from being widely marketable without restrictions
to a wide potential market. Rather, it should be viewed as enhancing
the value of the unit as well as providing a necessary protection
for future purchasers.
Response: The single family insurance program for cooperatives
is inactive. Cooperative units, therefore, are not eligible for the
HECM program. * * *
HUD received no other comments indicating that the proposed rule would
cause any specific problems and the proposed rule was adopted without
change in this regard. The final rule and preamble did not address the
commenter's remarks on the value of rights of first refusal for
condominiums in the HECM program, except through silence and failure to
make any change in the final rule to permit rights of first refusal.
Reason for Change
This rulemaking will allow an eligible owner of a condominium unit
to obtain a HECM when a right of first refusal would have otherwise
precluded the elderly homeowner from obtaining HECM financing.
It has come to FHA's attention that in several recent instances an
elderly homeowner living in a condominium has attempted to obtain a
HECM loan but was precluded from doing so because the condominium
association held a right of first refusal. As discussed above, FHA has
previously considered the HECM program separately from other FHA single
family programs with regard to the application of general policies
against restrictions on conveyance, and expressed specific concern
about the application of the ban on rights of first refusal held by
condominium associations.
In addition to the concerns expressed above, it is unlikely that
many HECM applicants are living in condominiums that were established
with the intent of qualifying the units for traditional FHA mortgage
insurance. FHA programs are typically used to help finance the purchase
of condominium units for first-time homebuyers and others who are
unable to afford the larger downpayment required for other mortgage
alternatives. Particularly in the case of a condominium project
specifically designed for occupancy by the elderly, a condominium
developer or person who converted a rental building to condominium
ownership would have been unlikely to have avoided providing a right of
first refusal for the condominium association if that was a common
practice in the area, as frequently is the case. Thus, the FHA policy
regarding rights of first refusal by condominium associations can have
a disproportionately adverse effect, although unintentional, when
applied to the HECM program.
HUD is again seeking public comment on whether, on balance, it is
preferable to accept these risks rather than to deny access to the HECM
program to a substantial proportion of elderly owners of condominium
units. Because FHA has previously sought public comment on this issue
and received no comment supporting the restriction of rights of first
refusals for condominiums in the HECM program but did receive an
opposing comment, and because there have been actual instances recently
identified in which mortgage insurance has been unavailable under
current policy but which could have been acceptable to HUD, HUD
considers it appropriate to refine its policy on an interim basis
pending consideration of any further public comments on the subject.
This is a minor change to the basic and continuing HUD policy that
restrictions on conveyance for all FHA single family programs,
including the HECM program, should be severely limited, and condominium
rights of first refusal should ordinarily be covered by those
limitations.
Condominium associations are not permitted to exercise their rights
of first refusal to engage in discriminatory practices when an elderly
homeowner, or the homeowner's heirs, dispose of the property. The
Department will use all of its enforcement authority at its disposal if
discriminatory practices occur as a result of the exercise of a right
of first refusal.
Effect of Change
Section 206.51 of the HECM program regulations requires that the
condominium project be acceptable to HUD (other than spot loans meeting
the requirements of Sec. 234.26(i)), but it does not mandate project
approval standards identical to those used in the basic FHA program for
mortgage insurance on condominium units under section 234(c) of the
National Housing Act (Sec. 234.26). To date, HUD administrative policy
has been to permit HECMs (other than spot loans) only for condominium
units in projects that were accepted for the section 234(c) program. As
a result of this rule change, some condominium projects may be approved
for the HECM program but not for the section 234(c) program. HUD will
issue appropriate administrative instructions concerning the lists of
FHA-approved condominiums.
The rule change also affects HECM spot loans. They will now be
permitted in projects that have not received FHA
[[Page 17656]]
approval, subject to the general rules limiting spot loans, if no
restrictions on conveyance barred by Sec. 203.41 apply to the unit
other than a right of first refusal for the condominium association.
Other Matters
Justification for Interim Rulemaking
HUD generally publishes a rule for public comment before issuing a
rule for effect, in accordance with its own regulations on rulemaking
in 24 CFR part 10. However, part 10 provides for exceptions to the
general rule if the agency finds good cause to omit advance notice and
public participation. The good cause requirement is satisfied when
prior public procedure is ``impracticable, unnecessary, or contrary to
the public interest'' (24 CFR 10.1). The Department finds that good
cause exists to publish this rule for effect before it receives and
completes consideration of public comments, because the public was
previously afforded an opportunity to comment on the precise issue
involved in this interim rule, and the only relevant comment supported
the position adopted in this interim rule. In addition, the Department
now has specific examples regarding the adverse effect of the current
rule on potential mortgagors under the HECM program which it lacked
when evaluating the previous rulemaking. After the previous rulemaking,
the potential adverse effect of the policy in the current rule was
expanded due to adoption of the ``spot loan'' procedure which opened up
the HECM program to condominiums that are not eligible for project
approval under the section 234(c) program. This increased the adverse
effect of the Department's previous handling of the issue and is
additional information that causes the Department to consider its
rulemaking and adjust the result in a minor but specific manner.
This interim rule should have no adverse effect on those who had
the opportunity to comment in previous rulemaking. It will, however,
immediately benefit others by expanding the available means through
which mortgagees and mortgagors can obtain the benefits of FHA mortgage
insurance for a HECM on a dwelling in a condominium unit. In the
interest of obtaining the fullest participation possible in determining
the proper means of administering the HECM program, the Department
again invites public comment on the policy presented in interim rule.
The comments received within the 60-day comment period will be
considered during development of a final rule that ultimately will
supersede this interim rule.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this interim rule, and in
doing so certifies that this interim rule will not have a significant
economic impact on a substantial number of small entities. This rule
removes the current restriction on FHA mortgage insurance for a
dwelling unit in a condominium project where the condominium
association has a right of first refusal to purchase units that are
offered for sale. Small entities are specifically invited, however, to
comment on whether this rule will significantly affect them, and
persons are invited to submit comments according to the instructions in
the DATES and COMMENTS sections in the preamble of this interim rule.
Environmental Finding
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4332). 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 General
Counsel, Department of Housing and Urban Development, Room 10276, 451
7th Street S.W., Washington, D.C. 20410.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this interim
rule will not have substantial direct effects on States or their
political subdivisions, or the relationship between the Federal
government and the States, or on the distribution of power and
responsibilities among the various levels of government. No
programmatic or policy changes will result from this interim rule that
would affect the relationship between the Federal government and State
and local governments.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal
agencies to assess the effects of their regulatory actions on State,
local, and tribal governments, and on the private sector. This interim
rule does not impose any Federal mandates on any State, local, or
tribal governments, or on the private sector, within the meaning of the
UMRA.
Catalog
The Catalog of Federal Domestic Assistance number for the Home
Equity Conversion Mortgage Program is 14.183.
List of Subjects in Part 206
Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, 24 CFR part 206 is amended as follows:
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
1. The authority for part 206 continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).
2. Section 206.45(e) is revised to read as follows:
Sec. 206.45 Eligible properties.
* * * * *
(e) Restrictions on conveyance. The property must be freely
marketable. Conveyance of the property may only be restricted as
permitted under 24 CFR 203.41 or 24 CFR 234.66 and this part, except
that a right of first refusal to purchase a unit in a condominium
project is permitted if the right is held by the condominium
association for the project.
Dated: February 20, 1998.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 98-9419 Filed 4-8-98; 8:45 am]
BILLING CODE 4210-27-P
