News Column

HUD Amends Federal Housing Administration Multifamily Mortgage Insurance of Excess Bond Proceeds

July 30, 2014



Targeted News Service

WASHINGTON, July 30 -- The U.S. Department of Housing & Urban Development published the following rule in the Federal Register:

Federal Housing Administration (FHA) Multifamily Mortgage Insurance; Capturing Excess Bond Proceeds

A Rule by the Housing and Urban Development Department on 07/29/2014

Publication Date: Tuesday, July 29, 2014

Agency: Department of Housing and Urban Development

Entry Type: Rule

Action: Final rule.

Document Citation: 79 FR 43929

Page: 43929 -43933 (5 pages)

CFR: 24 CFR 207

Agency/Docket Number: Docket No. FR-5583-F-02

RIN: 2502-AJ16

Document Number: 2014-17742

Shorter URL: https://federalregister.gov/a/2014-17742

Action

Final Rule.

Summary

This final rule amends HUD's regulations covering the contract rights and obligations of mortgagees participating in FHA multifamily mortgage insurance programs, to address reimbursement to FHA of excess bond proceeds. When a mortgagee finances mortgages through the issuance and sale of bonds or through bond anticipation notes, the mortgagee uses the funds from the payment of a mortgage insurance claim under HUD regulations addressing FHA multifamily insurance claim payment to pay off the remaining bond debts. At times, the amount paid by the FHA multifamily insurance claim is greater than the remaining bond debts. This final rule requires mortgagees that finance a project using a project-specific trust indenture agreement to include language in the trust indenture to require that excess bond funds that remain after FHA's multifamily insurance claim payment is used to satisfy the bonds are returned to FHA. HUD requires similar payments of excess bond funds on obligations of public housing agencies and, thus, the final rule provides consistency in the administration of HUD's bond-financed mortgages.

DATES:

Effective Date: August 28, 2014.

FOR FURTHER INFORMATION CONTACT:

Claire T. Brolin, Management Analyst (Directives), Office of the Deputy Assistant Secretary for Multifamily Housing Programs, Program Administration Office, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 6106, Washington, DC 20410; telephone number 202-402-6634 (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the Federal Relay Service, toll free, at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

On July 10, 2013 (78 FR 41339), HUD published for public comment a proposed rule that would amend HUD's regulations in 24 CFR part 207 that cover the contract rights and obligations of mortgagees participating in FHA multifamily mortgage insurance programs, to address reimbursement to FHA of excess bond proceeds. [1] FHA provides mortgage insurance on loans made by FHA-approved lenders for single- family and multifamily homes. The FHA multifamily insurance program is authorized under applicable sections of Title II of the National Housing Act. HUD's regulations in 24 CFR part 207 provide that upon an assignment of the mortgage or a conveyance of the property to FHA, FHA will pay insurance benefits to the mortgagee in accordance with a regulatory formula [2] that is meant to provide only the funds needed to pay the FHA insurance claim.

However, when the loan is bond financed, the amount FHA pays to the lender may be greater than the funds needed to pay the FHA insurance claim and discharge all other obligations of the trust indenture. When FHA pays an insurance claim on a bond-financed mortgage, the lender remits the payment to the bond trustee who pays off the bond debts, debt services on the bond, and fees and expenses owed to parties (such as the trustee or the bond issuer). Most of the factors in determining the amounts required to pay the FHA insurance claim and satisfy servicer fees required to be paid by the trust indenture can be calculated with precision, but the amount of funds in the trust is not known prior to accounting for the final interest earnings on the invested trust fund balances. Funds in the trust accounts earn interest and, given the passage of time and uncertainty of short-term interest rates, it is difficult to project what the trust fund balance will be at the time the FHA multifamily insurance claim is settled and all the trust indenture obligations are finally paid. As a result, the trustee is sometimes left with additional funds, also known as "excess bond funds." Excess bond funds are distributed by the bond trustee to the mortgagor, the mortgagee, FHA, or other third parties, according to the trust indenture agreement. As a result, the mortgagor or the mortgagee may receive excess bond funds after redeeming the bonds with the FHA multifamily insurance claim proceeds.

HUD's July 10, 2013, rule proposed to establish, in the 24 CFR part 207 regulations, a new section 207.261 that would require mortgagees to remit to FHA the excess bond funds that remain after the FHA multifamily insurance claim payment is used to satisfy the bonds, which represents the funds that FHA's regulatory formula is unable to account for at the time the FHA multifamily insurance claim was settled, due to the nature of bond financing. Interested readers should refer to the preamble of the July 10, 2013, proposed rule for additional information on the proposed regulatory change.

II. This Final Rule

This final rule follows publication of the July 10, 2013, proposed rule and takes into consideration the public comments received on the proposed rule. The public comment period on the proposed rule closed on September 9, 2013, and HUD received public comments from two commenters. Section IV of this preamble discusses the comments received on the proposed rule.

At the final rule stage, HUD has decided to amend the scope of the proposed rule, to provide clarifications in response to public comments, to correct an incorrect citation, and to make some editorial changes. Specifically, HUD is limiting the application of the rule to mortgagees that finance a project through bonds and use a project-specific trust indenture agreement. This action is consistent with how HUD treats bonds governed by HUD's regulations in 24 CFR part 811, which apply only to bonds financing single projects. Although this final rule does not relieve mortgagees that finance a project through multiple-project parity bonds from being responsible for returning excess bond funds that are identified, HUD recognizes the burden that would be borne if the specific trust indenture language was applied to multiple-project parity bond structures. HUD is also clarifying that the contract rights and obligations being amended under 24 CFR part 207 apply to all FHA multifamily mortgage insurance programs, including loans on healthcare facilities insured under Sections 232, 241, and 242 of the National Housing Act.

In addition to limiting the rule's scope, the proposed rule included a parenthetical referencing "the date of issuance of the refunding bonds" as the cut-off date for exempting the originally-deposited funds. HUD takes the opportunity afforded by this rule to replace the phrase "refunding bonds" with simply "bonds" so as to not create confusion, and to clarify that the date for exempting the originally-deposited funds is limited to the bonds used to secure the FHA-insured multifamily mortgage that the mortgagee has submitted an FHA multifamily insurance claim for. HUD's proposed rule also incorrectly referenced section 207.258 as the provision in which FHA pays a FHA insurance claim, HUD at the final rule stage replaces the incorrect citation with the correct reference to section 207.259.

Lastly, HUD clarifies the exact language to be included in the trust agreement and makes some editorial changes at this final rule stage. HUD incorporates the definition of "rebate fund" into the new section 207.261 as paragraph (b) to ease implementation for FHA multifamily insurance programs that cross-reference to the provisions in 24 CFR part 207, subpart B, but exclude the subpart B definitions in 207.251.

Consistent with HUD's proposed rule, new section 207.261(a) requires mortgagees that finance housing insured under Title II of the National Housing Act through the issuance and sale of bonds or bond anticipation notes, and use a project-specific trust indenture agreement that clearly outlines the project and identifies by project the trust funds established by and administered in accordance with the terms of the trust indenture, to meet the requirements set out in paragraphs (1) and (2) of this section.

Paragraph (1) requires that the mortgagee include in the bond trust indenture language that, upon a conveyance or assignment of the mortgage to the FHA Commissioner, the bond trustee must remit to the mortgagee all remaining excess bond funds. Excess bond funds mean (1) money remaining in all funds and accounts other than a rebate fund, [3] and (2) any other funds remaining under the trust indenture after payment, or provision for payment, of debt service on the bonds and the fees and expenses of the credit enhancer, issuer, trustee, and other such parties unrelated to the mortgagor (other than funds originally deposited by the mortgagor or related parties on or before the date of issuance of the bonds).

Paragraph (2) requires that the mortgagee, upon the FHA Commissioner's payment of an FHA mortgage insurance claim under section 207.259, shall legally enforce the trust indenture to collect all of the excess bond funds; and the mortgagee must remit to FHA all excess bond funds that result from FHA's payment of an FHA insurance claim after a conveyance or assignment of the mortgage to FHA, no later than 6 months following the date of the final settlement on the FHA mortgage insurance claim.

New paragraph (b) includes the definition of "rebate fund" consistent with the proposed rule, and defines "rebate fund" as a separate fund established under a contract or agreement for tax-exempt bonds in which amounts (excess interest earnings from the tax-exempt bonds) must be deposited to make rebate payments to the federal government under the Internal Revenue Code.

[*Federal RegisterVJ 2014-07-29]

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