[Federal Register: August 31, 1995 (Volume 60, Number 169)]
[Rules and Regulations]
[Page 45331-45335]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Part 291
[Docket No. FR-3814-I-01]
RIN 2502-AG42
Sale of HUD-Held Single Family Mortgages
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This interim rule sets forth HUD's policies and procedures for
the sale of HUD-held single family mortgages. HUD intends to sell a
large portion of its single family mortgages, including both performing
and nonperforming mortgages, without recourse and without FHA
insurance. HUD intends to sell these mortgages to reduce losses to the
FHA fund, decrease its inventory of single family mortgages, and
improve the servicing of these mortgages.
DATES: Effective Date: October 2, 1995.
Sunset Provision: Sections 291.300 through 291.307 shall expire and
shall not be in effect after September 30, 1996, unless prior to
September 30, 1996, HUD publishes a final rule adopting the interim
rule with or without changes, or publishes a notice in the Federal
Register to extend the effective date of the interim rule.
Comments due date: October 30, 1995.
ADDRESSES: Interested persons are invited to submit comments regarding
this interim rule to the Office of the General Counsel, Rules Docket
Clerk, Room 10276, Department of Housing and Urban Development, 451
Seventh Street SW., Washington, DC 20410. Communications should refer
to the above docket number and title. A copy of each communication
submitted will be available for public inspection and copying during
regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above
address. HUD will not accept comments sent by facsimile (FAX).
FOR FURTHER INFORMATION CONTACT: Joseph Bates, Director, Single Family
Servicing, Office of Housing, Room 9178, Department of Housing and
Urban Development, 451 Seventh Street SW., Washington, D.C. 20410,
telephone (202) 708-1672. Hearing- or speech-impaired individuals may
call the TDD number (202) 708-4594. (These telephone numbers are not
toll-free.)
SUPPLEMENTARY INFORMATION:
Background
The Department of Housing and Urban Development's (HUD's) inventory
of single family mortgages is large and growing. Since October 1986,
HUD's portfolio of single family mortgages has increased from
approximately 49,000 to its current level of approximately 90,000. This
portfolio consists of: (1) mortgages assigned pursuant to section 230
of the National Housing Act, (2) mortgages assigned pursuant to section
221(g)(4) of the National Housing Act (automatically assigned
mortgages), and (3) purchase money mortgages issued when HUD sold
single family properties from its own inventory or issued a mortgage in
connection with the settlement of Ferrell v. Pierce. In the future, HUD
anticipates that it will acquire between 17,000 and 20,000 new single
family mortgages each year.
Although most of the single family mortgages in HUD's inventory
have outstanding delinquencies under the mortgage, about 60 percent of
these mortgages are current under forbearance agreements. Almost 40
percent of these mortgages are in default on their mortgage obligations
under forbearance and repayment agreements. Another 20 percent have
little hope of ever paying off arrearages and so remain in danger of
foreclosure over time. The Office of Management and Budget has
acknowledged the problems associated with HUD-held single family
mortgages by designating single family loan servicing a High Risk Area.
Internal audits by HUD's Inspector General (IG) have also found
significant deficiencies with HUD's management of its portfolio of
single family mortgages, and the IG has recommended that HUD implement
a single family mortgage sale program.
In June 1994, HUD held a preliminary sale of nonperforming loans,
which benefitted HUD (and therefore the public treasury) in two ways.
First, the sale brought a price that was higher than the recovery rate
on foreclosures of these loans. Second, if HUD had kept these loans in
the Secretary-held portfolio, foreclosures would have occurred over a
period of years; therefore the sale eliminated continued debt accruals.
Furthermore, HUD's experience selling performing loans (section
221(g)(4)) leads it to believe that their value will be higher in the
private sector, where greater flexibilities in loan servicing will
increase collection rates and reduce the potential for default and
foreclosure over time. HUD also benefits from the sale of all loans
because HUD's staff is then freed to focus on more mission-critical
elements of insurance operations. Therefore, to reduce future losses to
the FHA fund and decrease HUD's inventory of assigned mortgages, HUD
intends to conduct a program of regular sales of all HUD-owned single
family mortgages. During the first 12 months following the effective
date of this sales program, HUD intends to sell approximately 40,000
performing and nonperforming mortgages totaling approximately $2.0
billion.
Section 230 Assignment Program
HUD's portfolio includes defaulted mortgages assigned to HUD
pursuant to section 230 of the National Housing Act. These mortgages
were originated by a private lender and insured by HUD under title II
of the National Housing Act. Most of these loans are market rate,
unsubsidized loans. However, a very small percentage of the loans in
HUD's portfolio are subsidized under section 235 of the National
Housing Act.
Before a mortgage can be assigned to HUD, the following conditions
must be met: (1) The mortgagor must receive a notice of the mortgagee's
intention to foreclose; (2) At least three full monthly mortgage
payments remain unpaid; (3) The property is the mortgagor's principal
place of residence; (4) The mortgagor does not own other property
subject to a mortgage insured or held by HUD; (5) Circumstances beyond
the mortgagor's control caused the default and rendered the mortgagor
unable to correct the delinquency within a reasonable time or make full
mortgage payments; and (6) There is a reasonable prospect that the
mortgagor will be able to resume full mortgage payments after a period
of reduced or suspended payments (not to exceed 36 months), and will be
able to pay the mortgage in full either by its maturity date or, if
necessary, within 10 years following the maturity date.
Under this Section 230 assignment program, HUD assumes the mortgage
lenders' rights and obligations under the mortgages (in return for
payment of the lenders' mortgage insurance claims) and works out
forbearance agreements to allow the homeowners to pay delinquencies
over the periods of the mortgages. In addition to forbearance relief,
homeowners whose mortgages are accepted for the section 230 mortgage
assignment program may be entitled to make reduced or suspended
payments for up to 36 months. After this initial 36 months, mortgagors
must pay at least
[[Page 45332]]
the full monthly amount due under the mortgage, plus an additional
amount to pay off the accrued default amount (as the mortgagor's income
permits). The mortgage term may be extended up to 120 months if
necessary to pay off the entire mortgage debt, including the accrued
default.
Section 235 Mortgages
With regard to the Section 235 mortgages, 24 CFR 235.375(a)(1)
states that the assistance payments contract shall terminate when the
insurance contract terminates (except for an assignment to the
Secretary). Therefore, HUD will not be making any assistance payments
to the purchasing mortgagees on behalf of the mortgagors for these
mortgages. However, to minimize the effect on mortgagors of the sale of
these mortgages and the termination of assistance payments, HUD will
cause a reduction in the interest rates on the mortgages to a rate that
is the higher of the floor rate that was in effect when the loan was
made or the effective rate that the mortgagor is paying at the time of
the reduction in the rate. The floor rate for each mortgage is
contained on form HUD9300.
Mortgages Acquired as Automatic Assignments
HUD's portfolio also includes automatically assigned mortgages
insured pursuant to section 221 of the National Housing Act, with
special privileges under section 221(g)(4) of that Act. Section
221(g)(4) of the National Housing Act provides a ``put'' to the holders
of certain pre-November 1983 mortgages. These lenders were granted the
right to assign FHA-insured mortgages back to FHA at par in the 21st
year of the mortgage, provided that each mortgage was not in default at
the expiration of 20 years from the date the mortgage was endorsed for
insurance, and all documentation was in order. Since automatically
assigned mortgages were current when assigned to HUD, these mortgagors
have not had occasion to request and obtain foreclosure avoidance
relief in a manner provided under the Section 230 assignment program.
Purchase Money Mortgages
HUD's portfolio also includes certain purchase money mortgages that
were given in the early 1980s to facilitate sales of HUD properties
acquired as a result of foreclosure claims. These mortgages have a
variety of terms and conditions, but the mortgagors do not have rights
under Section 230 or the Ferrell court settlements.
The remaining purchase money mortgages in HUD's portfolio resulted
from settlement of various Ferrell litigation actions. Mortgagors who
should have been accepted for mortgage assignment were provided with
mortgages similar to their foreclosed mortgage, and the replacement
purchase money mortgages were created on properties that had been in
HUD's inventory of acquired properties. These mortgagors have
continuing rights under Section 230 and the Ferrell stipulation. In
some cases there are also second mortgages recorded.
Sales Policy
HUD intends to sell any or all of these single family mortgages,
regardless of the ways in which HUD acquired them, including both
performing and nonperforming mortgages. The mortgages will be sold
without FHA insurance and without recourse to HUD. However, limited
representations and warranties may be provided as will be described in
the Mortgage Loan Sales Agreements.
For ease of marketing, and to maximize its return, HUD will package
the mortgages with the assistance of a financial advisor. These pools
of mortgages could contain any combination of performing and
nonperforming mortgages, automatically assigned mortgages, mortgages
assigned to HUD pursuant to section 230 of the National Housing Act, or
purchase money mortgages. Furthermore, nothing in this interim rule
shall be construed to prevent HUD from packaging single family
mortgages with other types of HUD assets for sale.
While HUD may pool the different categories of HUD-held mortgages
for purposes of selling the mortgage, each category of mortgages will
carry its own servicing requirements. For example, mortgagors under
section 221(g)(4) may have a future right of assignment-like relief.
Therefore, the servicer of such a mortgage would have to offer the same
or similar forbearance relief as is available in the Section 230
assignment program before being able to foreclose upon the mortgage.
Any investor determined eligible by the Secretary may bid to
purchase a pool of single family HUD-held mortgages. However, HUD will
require that the purchaser place the mortgages with a HUD-approved
mortgagee for servicing for the remaining life of the mortgages. In
addition, parties whose names currently appear on HUD's most recent
``Consolidated List of Debarred, Suspended or Ineligible Contractors
and Grantees,'' or who are on probation, under a limited denial of
participation, subject to a withdrawal of approval, or otherwise
sanctioned, are ineligible to bid, either as an individual or
participant, for any of the loan pools.
Sales Procedure
Under this interim rule, HUD will make available a sample of the
mortgage loan files to prospective bidders for due diligence work for a
period of time before the bidding deadline. The interim rule does not,
however, contain details as to the sales procedure and terms of the
sale. For each sale, HUD intends to publish the procedures for the sale
and the terms of the sale in the Bid Package.
Justification for Interim Rule
HUD generally publishes a rule for public comment before issuing a
rule for effect, in accordance with its own regulations on rulemaking
at 24 CFR part 10. However, part 10 provides that prior public
procedure will be omitted if HUD determines that it is ``impracticable,
unnecessary, or contrary to the public interest'' (24 CFR 10.1). As
noted above in the ``Background'' section of this preamble, both the
Office of Management and Budget and HUD's Inspector General have noted
the deficiencies in HUD's management of its single family mortgage
portfolio. Unless a program of regular mortgage sales is implemented
immediately, HUD's mortgage servicing problems will grow increasingly
worse, with continued losses to the FHA fund. Therefore, HUD finds that
prior public procedure would be contrary to the public interest.
However, HUD is allowing for a full 60-day public comment period, after
which it will consider the relevant issues raised by the commenters in
its development of a final rule.
In establishing this single family mortgage sales program, HUD is
acting consistently with the National Housing Goals established in
section 2 of the Housing Act of 1949 (42 U.S.C. 1441). HUD has
determined that, due to its scarce staff resources, transferring
servicing functions to the private sector will greatly improve the
servicing of these mortgages. In addition, HUD has carefully considered
the protection of mortgagors' rights to foreclosure avoidance relief,
both in the provisions of this interim rule (Sec. 291.307) and in the
terms of the sales agreements. Therefore, HUD is furthering the
national goal of providing a ``decent home and a suitable living
environment for every American family.''
HUD has adopted a policy of setting an expiration date for an
interim rule, so that the regulatory provisions will expire unless a
final rule is published before that date. This ``sunset''
[[Page 45333]]
provision appears in Sec. 291.300 of this interim rule, and provides
that the interim rule will expire on the date 13 months from
publication.
Regulatory Reform
Consistent with Executive Order 12866 and President Clinton's
memorandum of March 4, 1995 to all Federal departments and agencies on
the subject of Regulatory Reinvention, HUD is reviewing all its
regulations to determine whether they can be eliminated, streamlined,
or consolidated with other regulations. As part of this review, this
interim rule, at the final rule stage, may undergo revisions in
accordance with the President's regulatory reform initiatives. In
addition to comments on the substance of these regulations, HUD
welcomes comments on how this interim rule may be made more
understandable and less burdensome.
Other Matters
Executive Order 12866
The Office of Management and Budget (OMB) reviewed this interim
rule under Executive Order 12866, Regulatory Planning and Review. Any
changes made to the interim rule as a result of that review are clearly
identified in the docket file, which is available for public inspection
in the office of HUD's Rules Docket Clerk, Room 10276, 451 Seventh
Street, S.W., Washington, DC 20410.
Environmental Impact
In accordance with 40 CFR 1508.4 of the regulations of the Council
on Environmental Quality and 24 CFR 50.20(k) of the HUD regulations,
the policies and procedures contained in this interim rule relate only
to HUD administrative procedures, and therefore are categorically
excluded from the requirements of the National Environmental Policy
Act.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in 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.
Specifically, the requirements of this interim rule relate to the
sale of certain HUD assets, and do not impinge upon the relationship
between the Federal government and State and local governments. As a
result, the interim rule is not subject to review under the Order.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this interim rule does not
have potential for significant impact on family formation, maintenance,
and general well-being. This interim rule will protect mortgagors'
rights relative to forbearance, assistance, or reinstatement. Since
this interim rule will not significantly change the rights of
mortgagors or their families, no further review under the Order is
necessary.
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 interim
rule will not affect the ability of small entities, relative to larger
entities, to bid for and acquire HUD-held mortgages.
Regulatory Agenda
This interim rule was listed as item number 1433 in HUD's
Semiannual Agenda of Regulations published on May 8, 1995 (60 FR 23368,
23370) in accordance with Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects in 24 CFR Part 291
Community facilities, Conflict of interests, Homeless, Lead
poisoning, Low and moderate income housing, Mortgages, Reporting and
recordkeeping requirements, Surplus government property.
Accordingly, for the reasons stated in the preamble, a new subpart
D is added to 24 CFR part 291 to read as follows:
PART 291--DISPOSITION OF HUD-ACQUIRED SINGLE FAMILY PROPERTY
1. The authority citation for part 291 continues to read as
follows:
Authority: 12 U.S.C. 1709 and 1715b; 42 U.S.C. 1441, 1441a,
1551a, and 3535(d).
2. A new subpart D, consisting of Secs. 291.300 through 291.307, is
added to read as follows:
Subpart D--Sale of Hud-Held Single Family Mortgages
Sec.
291.300 Effective date.
291.301 Definitions.
291.302 Purpose and general policy.
291.303 Eligible bidders.
291.304 Bidding process.
291.305 Evaluation and selection of bids.
291.306 Closing requirements.
291.307 Servicing requirements.
Subpart D--Sale of Hud-Held Single Family Mortgages
Sec. 291.300 Effective date.
Sections 291.300 through 291.307 shall expire and shall not be in
effect after September 30, 1996, unless prior to September 30, 1996,
HUD publishes a final rule adopting the interim rule with or without
changes, or publishes a notice in the Federal Register to extend the
effective date of Secs. 291.300 through 291.307.
Sec. 291.301 Definitions.
For purposes of this part, the following definitions apply:
Single family mortgage means a mortgage on a single family property
assigned to HUD pursuant to Section 230 of the National Housing Act, a
mortgage on a single family property insured by HUD pursuant to Section
221 of the National Housing Act, a mortgage on a single family property
issued in connection with the settlement of Ferrell v. Pierce, a non-
Ferrell purchase money mortgage issued by HUD on a single family
property sold from HUD's inventory, or any other single family mortgage
owned by HUD and representing an asset to HUD's title II mortgage
insurance funds.
Single family property means a residence containing a dwelling for
one to four families.
Sec. 291.302 Purpose and general policy.
This part sets forth HUD's policy and procedures for the sale of
HUD-held single family mortgages. In general, HUD will sell both
performing and nonperforming HUD-held single family mortgages. HUD will
sell all mortgages without recourse and without FHA insurance. HUD will
package pools of single family mortgages for sale to the general public
on a competitive basis; however, HUD may sell mortgages to government-
sponsored enterprises (GSEs) on a negotiated basis. Nothing in this
part shall be construed to prevent HUD from packaging single family
mortgages with other types of HUD assets for sale. The Secretary
retains full discretion to offer any qualifying pool of mortgages for
sale and to withhold or withdraw any offered pool of mortgages from
sale. However, when HUD offers a qualifying mortgage for sale, the
procedures set out in this part and in the Bid Package will govern the
sale of HUD-held single family mortgages.
[[Page 45334]]
Sec. 291.303 Eligible bidders.
HUD will provide information on the eligibility of bidders in the
Bid Package, a Notice in the Federal Register, or other means, at the
Secretary's full discretion. However, an individual, partnership,
corporation, or other legal entity will not be eligible to bid for any
loan pool, either as an individual or a participant, if at the time of
the sale that individual or entity is:
(a) On HUD's most recent ``Consolidated List of Debarred, Suspended
or Ineligible Contractors and Grantees'';
(b) On probation or under a limited denial of participation; or
(c) Subject to a withdrawal of approval or other sanctions.
Sec. 291.304 Bidding process.
(a) Submission of bids. All bids must be submitted to HUD in
accordance with instructions in the Bid Package for a particular sale.
(b) Effect of bid. By submitting a bid, the bidder is making an
offer to purchase single family mortgage loans as presented in the Bid
Package. Submission of a bid shall constitute acceptance of the terms
and conditions set forth in the Bid Package and the Mortgage Loan Sale
Agreement.
(c) Termination of bid. HUD reserves the right to terminate an
offering in whole or in part at any time.
(d) Rejection of bids. (1) HUD may, in its sole discretion, reject
any bid under the following circumstances:
(i) If the bidder changes the documents prescribed in the Bid
Package;
(ii) If, in HUD's sole discretion, it determines that such action
would be in the best interests of the U.S. Government.
(2) HUD can also issue a conditional rejection that will become an
acceptance upon fulfillment of HUD's requests.
(e) Withdrawal of bids. A bidder may withdraw a previously
submitted bid in accordance with the instructions in the Bid Package
for a particular sale.
(f) Bids by brokers or agents. Any bid by a broker or agent for a
principal must be in the name of the principal and signed by the
broker/agent as the attorney-in-fact for the principal. All such bid
documents must be executed so as to bind the principal by the broker/
agent as the attorney-in-fact. A power of attorney satisfactory to HUD
as to form and content must be submitted with such bids on any pool.
Sec. 291.305 Evaluation and selection of bids.
HUD will evaluate bids, approve successful bids, and notify the
successful bidder in a manner set forth in the Bid Package.
Sec. 291.306 Closing requirements.
(a) Earnest money deposit. An earnest money deposit will be
required in an amount to be determined by HUD and must be submitted to
HUD by Fed Wire within 24 hours (counting only business days) of
notification of approval of the winning bid. The earnest money deposit
is nonrefundable to the winning bidder and will be credited toward the
purchase price.
(b) Execution of Mortgage Loan Sale Agreement. At closing, the
successful bidder and HUD will execute a Mortgage Loan Sale Agreement.
(c) Withdrawal of Loans. HUD reserves the right, in its sole
discretion and for any reason whatsoever, to withdraw loan assets from
a pool prior to the closing date. Any earnest money deposits relating
to withdrawn loan assets will be retained by HUD and credited toward
the total purchase price of the remaining loan assets in the pool, in
accordance with the Mortgage Loan Sale Agreement.
Sec. 291.307 Servicing requirements.
(a) Use of HUD-approved Mortgagees. All mortgages must be serviced
by HUD-approved mortgagees for the remaining life of the mortgage. A
purchaser that is not a HUD/FHA approved mortgagee must retain a HUD/
FHA approved mortgagee to service the mortgage.
(b) Continuation of Mortgagor Rights. The purchaser may take all
lawful steps to collect the amounts due under the mortgages, including
foreclosure of the mortgages. However, the purchaser and its servicer,
and any subsequent transferee of the mortgage loan, shall be fully
bound by the terms of the Mortgage Loan Sale Agreement, including those
terms that provide the mortgagor with any rights regarding forbearance,
assistance, or reinstatement of the mortgage. The Mortgage Loan Sale
Agreement will contain provisions for substantially equivalent relief
to the relief provided by section 230 of the National Housing Act, if
such relief is applicable to the mortgage.
(c) Purchasers' Protection of Mortgagor's Rights. (1) Assigned
mortgages during forbearance period. This paragraph (c)(1) explains how
a purchaser (or a servicer of a purchased mortgage) must service a
mortgage that was assigned to HUD under section 230 of the National
Housing Act, for which less than 36 months has expired since the
mortgage was assigned to the Secretary. Such a purchaser is entitled to
collect from the mortgagor a full, reduced, or suspended payment,
depending upon mortgagor income available for application to the
mortgage, under a forbearance agreement. If a mortgagor defaults under
the forbearance agreement, the purchaser may allow reinstatement if the
mortgagor pays all or a substantial part of the arrearages accrued
under the forbearance agreement, including late charges.
(2) Assigned mortgages after forbearance period. This paragraph
(c)(2) explains how a purchaser (or a servicer of a purchased mortgage)
must service a mortgage that was assigned to HUD under section 230 of
the National Housing Act, for which more than 36 months have expired
since the mortgage was assigned to the Secretary. Such a purchaser may
require a minimum payment of the full monthly payment due under the
mortgage. A purchaser may take any lawful action to ensure that
arrearages do not continue to increase. A purchaser may require a
mortgagor to pay increased monthly mortgage payments under a new
forbearance agreement to reduce the amount in arrears if the mortgagor
has available income to support the increased payments. A purchaser
shall allow a mortgagor who defaults in making required payments to
reinstate. Reinstatement is accomplished by acceptance of a payment
that represents the additional arrearage the mortgagor has incurred
from the time the mortgagor failed to make a required monthly payment
under any outstanding forbearance agreement, or under the terms of the
mortgage if the forbearance agreement has expired. If a mortgagor
repeatedly defaults in making required mortgage payments, a purchaser
may decline to allow mortgagors to reinstate the mortgages.
(3) Section 221 Mortgages. This paragraph (c)(3) explains how a
purchaser (or a servicer of a purchased mortgage) must service a
mortgage assigned to HUD under section 221(g)(4) of the National
Housing Act. Such a purchaser must provide a mortgagor who defaults
under the terms of the mortgage foreclosure avoidance relief that is
substantially equivalent to that which the mortgagor could have
otherwise sought under section 230 of the National Housing Act if the
mortgage was still insured by HUD.
(4) Non-Ferrell Purchase Money Mortgages. A purchaser of purchase
money mortgages that did not result from the settlements of the various
Ferrell litigation actions does not have to provide relief under
section 230 of the National Housing Act, as such relief is described in
paragraphs (c)(1) and (c)(2) of this section.
(d) Section 235 Mortgages. Since the assistance payments contract
will terminate upon the sale of the
[[Page 45335]]
mortgages, in accordance with 24 CFR 235.375(a)(1), the purchasing
mortgagees will not receive any assistance payments from the Secretary
on behalf of the mortgagors. However, the Secretary will cause a
reduction in the interest rates on the mortgages to a rate that is the
higher of the floor rate that is shown on the form HUD9300 for the
particular mortgage, or the effective rate of interest that the
mortgagor is paying at the time that the reduction in interest is made.
Dated: June 20, 1995.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-21449 Filed 8-30-95; 8:45 am]
BILLING CODE 4210-27-P
