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DEPARTMENT OF HOUSING AND HUD to insure individual condominium II. The Proposed Rule URBAN DEVELOPMENT units under the single-family program HUD issued the proposed rule on under section 203 of the National September 28, 2016 (81 FR 66565), both 24 CFR Parts 203, 206, and 234 Housing Act (12 U.S.C. 1709). At the to codify the program, and, based on [Docket No. FR–5715–F–02] same time, HERA amended HUD’s prior experience, to offer greater flexibilities authority for condominium units, RIN 2502–AJ30 and efficiencies that would increase section 234 of the National Housing Act participation in the program and make (12 U.S.C. 1715y), to require a blanket Project Approval for Single-Family it more responsive to changes in the mortgage for the project. Due to this Condominiums marketplace. change and other restrictive AGENCY: Office of the Assistant requirements under section 234, the A. DELRAP Secretary for Housing-Federal Housing single-family mortgage insurance The rule proposed that participants in Commissioner, HUD. program under section 203 became the DELRAP must: Be a Direct Endorsement ACTION: Final rule. primary vehicle for FHA mortgage (DE) lender under 24 CFR 203.3: Have insurance for units in condominium a one-year experience requirement for SUMMARY: This final rule implements projects. all staff participating in DELRAP HUD’s authority under the single-family Section 2132 of HERA also provided approvals; have originated no fewer mortgage insurance provisions of the for implementation of section 2117 by than 10 FHA condominium loans; and National Housing Act to insure one- notice. Accordingly, HUD issued have an acceptable quality control plan. family units in a multifamily project, mortgagee letters implementing the There is also a process for first obtaining including a project in which the program (2009–46a, 2009–46b, and conditional DELRAP authority before dwelling units are attached, or are 2011–03). These were then consolidated obtaining unconditional authority based manufactured housing units, semi- into the Condominium Project Approval on performance, and periodic detached, or detached, and an and Processing Guide (the Guide), the performance monitoring. As proposed, undivided interest in the common areas current operational guideline for the HUD can take action based on non- and facilities which serve the project. program. performance, legal or rules violations, The rule provides for requirements for The Housing Opportunities Through including any action listed in § 203.3(d), lenders to obtain approval under the Modernization Act of 2016 (Pub. L. 114– or termination of DELRAP authority. Direct Endorsement Lender Review and 201) (HOTMA) became law on July 29, The proposed rule also established a Approval Process (DELRAP) authority 2016. Title III of HOTMA established by process for reinstatement. for condominiums, and for standards statute certain requirements. Among that projects must meet to be approved these was a requirement that HUD issue B. Definitions for mortgage insurance on individual a regulation within 90 days from The rule proposed new definitions for units. The rule provides for flexibility enactment (i.e., by October 27, 2016), a number of terms, including with respect to the concentration of requiring that any requests for Condominium Association (or Federal Housing Administration (FHA)- exceptions to the limitation on Association), Condominium Project, insured units, owner-occupied units, commercial space be processed under Condominium Unit, Infrastructure, and the amount that can be set aside for either the DELRAP or HUD review and Single-Unit Approval (SUA), and Site commercial and non-residential space. approval process (HRAP), and that in Condominium. The definition of This will enable HUD to vary these determining whether to grant the Condominium Association makes clear standards, within parameters, to meet exception, factors related to the that the homeowners who manage the market needs. This final rule follows a economy of the local area of the project, financial and common areas of the proposed rule published in the Federal or to the project itself, be considered. condominium project are the Register on September 28, 2016. The statute also required HUD, by Condominium Association as meant by DATES: The effective date of this rule regulation or less formal means, this rule, regardless of the name used. and the related handbook is October 15, including a mortgagee letter, to establish The proposed definition of 2019. an owner-occupancy requirement, also Condominium Project and FOR FURTHER INFORMATION CONTACT: in the same time frame. If HUD failed to Condominium Unit are based on 12 Elissa Saunders, Director, Office of do so, the statute provided that the U.S.C. 1707(a), which is also the usual Single Family Program Development, minimum owner-occupancy percentage usage of that term in the industry. The Office of Housing, Department of for a project would be 35 percent of all proposed definition of Infrastructure, Housing and Urban Development, 451 family units, including those not which is related to the requirement in 7th Street SW, Washington, DC 20410– covered by an FHA-insured mortgage. § 203.43b(d)(4) of this rule, that the 8000; telephone number 202–708–2121 On October 26, 2016, HUD issued the project or legal phase be complete and (this is not a toll-free number). Hearing- required mortgagee letter, establishing ready for occupancy, includes utilities, and speech-impaired persons may the general owner-occupancy common elements, and amenities, such access this number through TTY by percentage for an existing project at 50 as parking lots, swimming pools, golf calling the Federal Relay Service at 800– percent, unless certain specific courses, playgrounds and similar items 877–8339 (this is a toll-free number). indicators were met indicating lower called for in the project or legal phase. SUPPLEMENTARY INFORMATION: risk, and allowing for review by HUD The proposed definition of Single-Unit under HRAP, in which case the Approval is approval of one unit, in I. Background requirement could be as low as 35 accordance with § 203.43b(i) of this Section 2117 of the Housing and percent. rule, in an unapproved project. The Economic Recovery Act of 2008 (Pub. L. Title III of HOTMA also provided for proposed definition of Site 110–289) (HERA) amended the changes to HUD’s treatment of private Condominium is a single-family definition of ‘‘mortgage’’ in section transfer fees (these are in effect based on detached dwelling (without any shared 201(a) of the National Housing Act (12 statutory authority and are not part of garages or attached buildings), including U.S.C. 1707(a)) to provide authority for this rulemaking). the site and air space, which is

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encumbered by a declaration of of the ranges would be published for 30 least five dwelling units. The upper condominium covenants or days of public comment (§ 203.43b(f)). limit on single-unit approvals as condominium form of ownership. proposed would be in a range from 0 to E. Legal Phasing Finally, this rule adopts the definition 20 percent of the total number of units of Rental for Transient or Hotel As proposed, legal phasing only in the project, the exact percentage to be Purposes in section 513(e) of the would be permitted as long as the phase established by HUD through notice. National Housing Act (12 U.S.C. is fully built out and the dwelling units J. Site Condominium 1731b(e)). have a certificate of occupancy (CO). Both vertical buildings and detached or The rule proposed at § 203.43b(i) C. Eligibility for Approval semi-detached developments would be (§ 203.43(j) of this final rule) that for Section 203.43b(c), as proposed, required to be contiguous (§ 203.43b(e)). Site Condominiums, insurance and maintenance costs must be the would require approval by HUD (HRAP) F. Reserve Requirements or by a mortgagee (DELRAP). Otherwise, responsibility of the unit owner, and the project would have to meet the Generally, the proposed reserve that any common assessment collected additional requirements for a Site requirement would be at least 10 must be restricted for use solely for Condominium or for Single-Unit percent of the monthly unit amenities outside the footprint of the Approval. To be approvable, the project assessments. A lower amount could be individual site. deemed acceptable by HUD based on a would have to meet the eligibility K. Rehabilitation Loans requirements of § 203.43b(d) of this rule. reserve study completed not more than These include: Being primarily 24 months before a request for a lower The rule proposed to revise 24 CFR residential in nature; consisting entirely reserve amount is received 203.50 to permit FHA insurance under of dwelling units that are one-family (§ 203.43b(d)(6)(x)). the 203(k) program for loans to rehabilitate the interior space or install units; being in full compliance with G. Exceptions firewalls in the attic of a condominium applicable laws and local approval The rule provided in proposed requirements with respect to the unit. Such FHA mortgage insurance § 203.43b(f) (§ 203.43b(g) of this final would not cover any exteriors or areas condominium plat and development rule) that the Secretary may plans; and being complete and ready for that are the responsibility of the discretionarily grant an exception to the Association. The loan limits would be occupancy, and not subject to further requirements found in § 203.43b(d)(6), rehabilitation, construction, phasing, or those stated in § 203.50(f), and for provided that the statutory conditions condominiums that are not annexation (if the construction consists for exceptions to the commercial space of legal phases, this requirement and the manufactured homes, townhouses, or requirements enacted under HOTMA Site Condominiums, 100 percent of the requirements of § 203.43b(e) of this rule and codified under 12 U.S.C. 1709(y)(2) applies to each phase). In addition, the after-improvement value of the are met. These are that the request and condominium unit. rule proposed that HUD may establish disposition of the request for the further requirements for eligibility exception may be made at the option of L. Part 234 through notices under § 203.43b(d)(6), the requester under the DELRAP or As provided in the proposed rule, part such as insurance requirements, HRAP process; and that in determining 234 now will apply in cases where the financial condition, nature of title, the whether to allow the exception, factors project has a blanket mortgage insured existence of any pending legal action or relating to the economy for the locality by HUD. This part 203 applies to the physical property condition in which the project is located or more usual condominium configuration, (§ 203.43b(d)(6)(i) through (vi)), and specific to the project, including the that is, a one family unit and undivided such other matters as may affect the total number of family units in the interest in the common areas and viability or marketability of the project project, shall be considered. facilities. or its units (proposed § 203.43b(d)(6)(xi)). H. Recertification III. This Final Rule D. Flexibility The rule proposed to extend the After further consideration, including recertification period for an approved careful consideration of public The rule proposed to grant flexibility project from 2 to 3 years, and allow comments, HUD has made some in three key areas, to allow HUD to recertification by updating previously changes in this final rule. respond quickly to changes in market submitted information, rather than A. DELRAP Qualifications conditions. The three areas are the resubmission of all information. There amount of commercial/non-residential would be a window of 6 months before HUD received multiple comments space; the maximum percentage of FHA- to 6 months after the expiration of concerning the proposal to only allow insured units; and the minimum approval to submit a request for staff meeting the experience percentage of owner-occupied units recertification. requirement to use DELRAP authority to (§ 203.43b(d)(6)(vii), (viii), and (ix)). approve Condominium Projects. Within each range, HUD may from time I. Single-Unit Approval Commenters indicated that the to time issue a notice establishing a The rule proposed in § 203.43b(h) proposed credential requirements particular percentage or percentages. As (§ 203.43b(i) of this final rule) to allow impose a barrier for smaller lenders to proposed, the ranges are: For approvals on individual units that are fully participate in the DELRAP commercial space, between 25 and 60 not in approved projects and not in program. Given the comments received, percent of the total floor area; for units projects that have been subject to where HUD had proposed that all staff with FHA-insured mortgages, between adverse determination for significant involved in DELRAP activities had to 25 and 75 percent of the total number issues that affect the viability of the meet the experience requirements, the of units in the project; and for owner- project. The project must be complete final rule revises proposed occupied units, likewise between 25 and ready for occupancy under § 203.8(b)(1)(iv) to allow participation and 75 percent of the total units. § 203.43b(d)(4), must not be a by staff supervised by personnel that Changes in the upper and lower limits manufactured home, and must have at meet the experience requirements in

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response to public comments. Also, the rule will allow FHA to build a robust approval requirements in proposed rule provided that, to be process to proactively manage FHA § 203.43b(d)(6)(v) includes the granted unconditional DELRAP insurance concentration while allowable percentage of units in a authority, a lender would have to recognizing the need for lenders to project owned by a single owner. This complete at least five DELRAP reviews. operationalize the impact of such a comports with current practice in the HUD recognized that such a requirement early in the loan lifecycle marketplace and was recognized as a requirement may not always be so as not to affect the origination key policy consideration to prevent a necessary; therefore, this final rule, in process. financial shock that may occur in the § 203.8(b)(3), gives HUD the flexibility event of an economic failure by a single D. Secondary Residences to reduce this number where owner with a large share of units in a appropriate, for example, in the case of The proposed rule provided that units complex. a DELRAP lender with significant occupied as a principal or secondary G. Percentage Ranges experience under the current program. residence as defined under § 203.18(f)(2) This will ease potential burdens on would count towards the required This final rule, following the lenders who wish to participate and minimum percentage of owner-occupied proposed rule, sets a range within who have qualified supervisor units. As commenters indicated, the which HUD may make specific personnel. definition established under determinations on minimum owner- § 203.18(f)(2), which establishes the occupancy percentage, maximum FHA- B. Definitions definition for the purpose of permitting insured mortgage percentage for project The definitions in § 203.43b(a) of FHA financing on a secondary residence approval, maximum FHA-insured ‘‘Condominium Project’’ and which requires analysis of the lack of mortgage percentage for Single-Unit ‘‘Condominium Unit’’ have been affordable rental housing is too Approval, and maximum percentage of reworded and reorganized. restrictive and out of scope in the floor area taken by commercial or Substantively, the definition of context in which HUD or the DELRAP nonresidential space. There is an ability ‘‘Infrastructure’’ is removed and a lender is looking at the owner- to grant case-by case exceptions to any definition of ‘‘Common Elements’’ is occupancy level of the project to of these ranges under § 203.43b(g). added. In addition to typical items, the determine whether the project is Additionally, if HUD determines to definition includes a catch-all, ‘‘other approved. Thus, solely to calculate adjust the upper or lower limits of these areas described in the condominium owner-occupancy percentage, this final ranges, the rule provides for a public declaration.’’ rule provides that any unit that is comment process under § 203.43b(f). The definition of ‘‘Site occupied by the owner as his or her HUD may establish multiple limits Condominium’’ is revised to address the place of abode for any portion of the within a range for owner-occupancy and problems with air space that the public calendar year other than as a principal commercial space for differently comments identified, and to allow for residence and that is not rented for a situated projects. For example, the different Site Condominium majority of the calendar year shall count owner occupancy limit may be arrangements existing in the towards the total number of owner- established differently for newly marketplace that can potentially be occupied units. While such a definition constructed projects, in which a number approved. The inclusion of air space in for the purpose of calculating owner of units likely would not yet have the proposed rule was identified in occupancy for condominium project transferred to first owners, and for public comments to potentially create approval is more expansive, the existing projects, which are more likely conflicts with laws of certain states. definition in § 203.18(f)(2) will continue fully sold. This final rule makes some minor C. Suspension of FHA Case Numbers to be used when determining eligibility of mortgage secured by a borrower’s changes to the proposed rule regarding HUD currently monitors FHA secondary residence. the percentage ranges of owner- insurance concentration for projects that occupants and commercial/ are, or have been, FHA approved. With E. Reserve Study nonresidential space. In the case of the the introduction of the Single-Unit The proposed rule in maximum allowed percentage of units Approval process, HUD recognizes the § 203.43b(d)(6)(xi) stated that for an with FHA-insured mortgages for project need to enhance the insurance approvable project to have less than 10 approval, this final rule makes no concentration tracking mechanism to percent of the monthly unit assessments change. determine compliance with the in a reserve account, the lesser amount 1. Owner Occupancy concertation ranges allowed. A would have to be based on a reserve commenter also noted the importance of study completed within 24 months of The possible range for the minimum having a reliable tracking system in the request for the lower amount. The level of required owner-occupancy for place and available to the public to track final rule, in § 203.43b(d)(6)(x), enlarges project approval is narrowed slightly; percentages of single-unit approvals. In this time to 36 months, or, in the case the floor is set at 30 percent in this final the context of the maximum percentage of HRAP, such greater amount of time rule. This is in part because under of units with FHA-insured mortgages as the Secretary determines. This current HUD practice, the minimum under § 203.43b(d)(6)(viii), and in the change conforms with HOTMA’s owner occupancy percentage for new context of single-unit approvals under requirement that HUD streamlines the construction is 30 percent of the total § 203.43b(i)(2), this final rule adds a recertification process for approved units, and the lower end of the range statement that ‘‘HUD may suspend the properties by considering lengthening must be set to accommodate newly issuance of new FHA case numbers for the time between certifications, see 12 constructed projects. In part, it provides a mortgage on a property located in any U.S.C. 1709(y)(1). FHA with additional room to calibrate project where the number of FHA- this requirement to a level below that insured mortgages exceeds the F. Eligibility for Approval: Financial identified in HOTMA (35 percent) as the maximum.’’ The maximum percentages Condition default, if necessary, in response to that apply will be established by notice. The final rule states that the financial housing market changes. A 30 percent This additional provision to the final condition component of the further owner occupancy percentage is the

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lowest limit compatible with risk to the estate trends studies support continued approval, within the permitted range, Mutual Mortgage Insurance Fund demand for these types of projects.2 The will generally include: (MMIF). 55 percent ceiling would give HUD • FHA portfolio analysis of default The upper limit of 75 percent remains future room to grant an exception under and claim rates of loans with similar unchanged from the proposed rule. This HRAP where HUD’s review shows that attributes across different bands of upper limit flexibility is necessary to a specific case warrants it (or, under commercial/nonresidential space manage risk. Unlike Fannie Mae and DELRAP review in the case where the percentages (e.g., default and claim rates Freddie Mac (which require 50 percent exception is at the request of an eligible for purchase transactions at owner occupancy for certain types of party and the requester asks for DELRAP commercial/nonresidential percentages projects 1), HUD cannot require larger review under 12 U.S.C. 1709(y)(2)(A)), in appropriate percentage bands that down payments or higher credit scores, while still maintaining the overall HUD will select. but must manage risk to the MMIF in residential character of the project. • Analysis of FHA condominium other ways. Depending on future market The lower limit of the range for the loans across geographical areas conditions, flexibility to require 75 maximum allowable commercial space segmented by average commercial/ percent owner occupancy is needed if it remains at the proposed 25 percent. nonresidential space percentages (e.g., is determined that a lower owner- This percentage aligns with the average commercial/nonresidential occupancy rate is contributing to loan historical maximum commercial space space percentages in metropolitan areas allowed in a condominium project versus rural areas). delinquency. • If HUD determines to change the across the industry. However, mixed- Analysis of trends of financial owner-occupancy threshold within use development is an upward trend in stability of condo projects in relation to these limits, it will examine a variety of the marketplace.3 Fannie Mae recently commercial/nonresidential space market factors. These will generally increased the maximum percentage of percentages (e.g., relationship of default include: commercial space in a condominium to and claim rates when compared with • FHA portfolio analysis of default 35 percent from 25 percent,4 consistent the percentage of the residential portion and claim rates of loans with similar with this upward trend. This is also of the project financial stability and the attributes across different bands of consistent with the Emerging Trends in commercial/nonresidential space owner occupancy percentages. The Real Estate® report, which states that percentage). bands would be, for example, 10 percent there is a trend toward mixed-use HUD may consider other relevant bands of owner occupancy percentages. development with a mixture of factors as well. • Analysis of FHA condominium residential, with retail and other 3. Maximum FHA-Insured loans across geographical areas commercial uses.5 HUD believes that 25 Concentration for Project Approval segmented by average owner occupancy percent of commercial/nonresidential The final rule makes no change to the ratios (e.g., average owner occupancy space of the projects total floor area sets 25-to-75 percent range proposed for the ratios in metropolitan areas versus rural the historical lowest maximum for a maximum FHA insurance concentration areas). mixed-use project that has been used for • requirement. The upper limit of 75 Analysis of trends of financial the program to be successful. The percent is the maximum risk exposure stability of condo projects in relation to maximum percent of commercial/non- to the MMIF that HUD is willing to owner occupancy (e.g., relationship of residential space will be established accept. At the same time, the range must default and claim rates when compared within this range considering current be wide enough to accommodate with factors that determine financial and projected real estate market trends. qualified borrowers in multiple markets stability and owner occupancy The data which HUD will consider where access to affordable housing and percentages). when changing the specific percentage financing may be difficult. HUD may consider other relevant of commercial space allowed for project In changing the maximum amount of factors as well. units with FHA mortgage insurance for 2 Real Trends: The Future of Real Estate in the project approval within the allowable 2. Maximum Commercial/ United States by Urban Economics Lab and MIT’s Nonresidential Space Center for Real Estate (October 2017). The study is range, data points will generally available at https://mitcre.mit.edu/wp-content/ include: This final rule reduces the maximum uploads/2017/10/REAL-TRENDS-MIT.pdf (visited • Analysis of FHA market share of commercial space percentage upper 3/18/20190). condominium loans versus market share limit to 55 percent of the total floor area. 3 Id. at 19 (‘‘Around the globe, ‘live, work, play’ of non-condo loans. While there was substantial support for has become a fashionable mantra for urbanism and • real estate development. This trend has spurred the Analysis of FHA market share of a 50 percent limit on nonresidential rescue and redevelopment of historical condominium loans versus market share commercial space, a number of public neighborhoods. It also has yielded new and denser of non-FHA condo loans. comments supported a maximum limit mixed-use developments .... The resurgent • Analysis of default and claim rates for commercial space above 50 percent. prominence of quality urbanism in the United of loans with similar attributes across States is here to stay and will keep on energizing There are many potential benefits of a segment of the industry.’’). different bands of FHA concentration mixed-use development, and recent real 4 Fannie Mae Selling Guide B4–2.1–03: Ineligible percentages. Projects (6/5/2018). This is available at https:// • Analysis of FHA concentration 1 See Fannie Mae Selling Guide, B4–2.2–02: Full www.fanniemae.com/content/guide/selling/b4/2.1/ percentages segmented by geographical Review Process (6/5/2018) on investment 03.html. areas. properties’ 50 percent requirement. This is available 5 PWC and Urban Land Institute, Emerging • Analysis of performance of FHA at https://www.fanniemae.com/content/guide/ Trends in Real Estate®: United States and Canada selling/b4/2.2/02.html. A similar requirement for 2019 at 83 (‘‘There also is a trend toward condo to non-FHA condo loans. investment property—that at least 50 percent of the redeveloping urban malls by intensifying sites with HUD may consider other relevant total number of units in the condominium project mixed-use properties that combine retail with high- factors as well. must have been conveyed to purchasers who density residential, restaurants, community occupy their units as a primary residence or second services, green space, and experiential 4. Maximum FHA-Insured home—is at chapter 5701.5(c)(2) in the Freddie Mac attractions. . . .’’), available at https:// Concentration for Single-Unit Approval Single-Family Seller/Servicer guide. This is www.pwc.com/us/en/industries/asset-wealth- available at http://www.freddiemac.com/ management/real-estate/emerging-trends-in-real- This final rule implements the singlefamily/pdf/guide.pdf (visited 3/18/2019). estate.html (visited 3/18/2019). proposed rule’s 0-to-20 percent range

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with the addition of an allowance for a land. The rule also removes the available will help first-time de minimis number of units in projects requirement in proposed § 203.43b(i) homebuyers, including millennials, as with less than 10 units. Section that all common assessments collected well as seniors and low-to-moderate 203.43b(h) has been reorganized in this would have to be used solely for income buyers. Condominium final rule and redesignated as amenities outside the footprint of the mortgages perform better than other § 203.43b(i). The lower limit of 0 individual site; however, the single-family mortgages, so increasing percent is set as a risk control measure requirement that insurance and their availability will benefit the if, for example, evidence shows that maintenance costs of the individual housing market and the FHA insurance SUA loans show a significantly worse units must be the sole responsibility of fund. performance when compared to similar the unit owner remains (see § 203.43b(j) HUD Response: HUD recognizes that loans in approved projects. Most of this final rule). When combined with mortgages secured by condominiums projects do not have a significant the revised definition of Site currently perform better than non- proportion of FHA-insured units. Under Condominium, the requirements under condominium secured mortgages, while a 20 percent cap, 90 percent of current this rule better accommodates the Site noting that prior to FHA’s approval approved projects could have employed Condominium arrangements that exist process in 2009, the opposite was true. a single-unit loan approval. Under a in the market. Because manufactured In order to achieve the appropriate much more restrictive 10 percent home condominiums are processed balance between meeting the housing ceiling, 73 percent of current projects under the HUD review and approval needs of the borrowers FHA’s mortgage could have avoided the project-approval process, the final rule definition insurance programs were created to process through single-unit loans. Thus, clarifies that Site Condominiums do not serve and to minimize the level of risk the 20 percent limit would allow HUD include manufactured homes. undertaken relative to the insurance, great flexibility to allow single-unit this rule provides additional flexibility loans in unapproved projects. This J. Rehabilitation Loans and a basic framework for condominium would enable smaller condominium This final rule removes the exclusion project approval. HUD plans to issue projects, for whom applying for project of condominiums, other than Site additional guidance, with elements that approval might be too costly, to have Condominiums, from the 100 percent of can be changed as the market changes. similar access to FHA mortgage the after-improvement value of the unit HUD believes this approach will insurance as currently approved loan amount restriction (24 CFR alleviate this concern and allow HUD to projects. 203.50(f)(3)). achieve the right balance as market In setting or changing the maximum conditions may change. K. Home Equity Conversion Mortgages FHA concentration for single-unit Comment: Many economic analyses (HECMs) approval, data points that HUD will are showing a shortage of multifamily consider will generally include: This final rule makes technical and housing in location-efficient areas and • Analysis of SUA loan performance clarifying changes to part 206 to avoid an oversupply of detached single-family compared to the performance of loans potential confusion as to the insurability houses. The closer we get to single- made in approved condo projects. of HECM condominium loans. family and multifamily projects having • Analysis of SUA loans across the same approval requirements, the IV. Public Comments and Responses geographical areas and further more efficient our housing market will segmentation by average owner This proposed rule was published in be, the more we will get out of our occupancy ratios and financial stability. the Federal Register on September 28, developed land, the more we will HUD may consider other factors as 2016 (81 FR 66565), and the public conserve our pristine land, the more well. comment period closed on November choices we can provide for people who 28, 2016. HUD received 91 comments by may not necessarily want to use a car for H. Phasing, Contiguous/Adjoining the close of the public comment period. every errand, and the more energy- Requirement Commenters included individuals, efficient our cities will be. This Proposed in § 203.43b(d)(6)(x)(B) was mortgage companies, banks, trade proposed rule is a good first step, and a requirement that in a detached or associations, realtors, and mortgage it should be revised to go even further semi-detached development, all homes brokers. The following is a summary of towards normalizing the lending rules. in a phase must be adjoining or the significant issues raised in the HUD Response: HUD believes this contiguous. A number of public public comments. rule strikes the correct balance between comments pointed out problems with In addition to the specific issues providing flexibility while protecting this requirement, and this requirement noted, some commenters expressed the Mutual Mortgage Insurance Fund is removed in this final rule. The general support for the rule, citing the and recognizing the difference in requirements that all homes in a phase increased flexibility and opportunities ownership of single-family dwellings be separately sustainable, built out, and for homeownership. that are maintained solely by the owners ready for occupancy remain. This General versus condominium ownership that material has been reorganized and is in includes maintenance by owners and § 203.43b(e) of this final rule. Comment: HUD’s rules are too associations. restrictive and should be loosened to Comment: Due to the significance of I. Site Condominiums allow projects to participate and buyers the changes, there should be a 12-month This final rule revises the definition to have more access to affordable implementation period. of Site Condominium in § 203.43b(a) to housing. Condominiums are currently HUD Response: This final rule include projects consisting of single the strongest and least risky part of provides for a 60-day implementation family detached dwellings that do not FHA’s portfolio, yet FHA has timeframe that allows stakeholders to have shared garages or any other significantly reduced condo approvals view additional guidance provided in attached buildings, as well as single since 2009, and provisions in this rule HUD handbooks prior to family detached or townhouse-style will further decrease the FHA’s share of implementation. horizontally attached dwellings where the market. Making FHA insurance for Comment: Commenter states that the unit consist of both dwelling and condominium mortgages more widely condominiums are currently the

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strongest and least risky part of FHA’s allocate risk, HUD may potentially have of time will enable compliance and can portfolio, yet FHA has significantly to implement choices within these assist homebuilders in designing reduced condo approvals since 2009. ranges quickly. HUD believes that the condominium projects that will meet This commenter urges FHA to ease comment process adopted in the the needs of both commerce and restrictions on condominiums in many proposed rule balances the need for consumers in general keeping with areas. public involvement in the rulemaking HUD’s expectations. Also, HUD should Comment: Many families want to with the need for market flexibility. As provide additional clarity on the purchase their own home and want to to any future change HUD might make frequency of adjustments and the purchase condos; however, many to percentages within the ranges, this amount of notice that will be given prior lenders are not able to support the preamble identifies the factors that HUD to a change in the range. purchase because the condo project is will consider at section III.G of this not FHA approved. It would be nice to preamble. As to the availability of case- HUD Response: For changes to the see if FHA could allow more condo by-case exceptions, such exceptions are applicable owner-occupancy percentage projects to be allowed to participate in permitted under § 203.43b(g) of this and commercial/nonresidential space the FHA Home Loan program. It would final rule (unchanged from § 203.43b(f) percentage, factors that HUD will open doors to those that are not able to of the proposed rule). In the case of consider will include a portfolio qualify under conventional home loan exceptions to the commercial/ analysis of default and claim rates of terms. nonresidential space percentage, as loans with similar attributes across HUD Response: This final rule required by statute (12 U.S.C. different bands of owner-occupancy and provides the framework to establish 1709(y)(2)), exceptions can be granted commercial/nonresidential space flexibility, with increases and decreases, under either DELRAP or HRAP percentages; analysis of condominium in applying the rule’s standards through processing at the option of the requester, loans across geographical areas policy. It also includes the ability to and in determining whether to allow segmented by average owner occupancy obtain Single-Unit approval as an such an exception, factors relating to the ratios or average commercial/ opportunity to provide access to FHA’s economy for the locality in which the nonresidential space percentages; and programs in unapproved condominium project is located or specific to the an analysis of trends of financial projects. project, including the total number of stability of condominium projects in The Proposed Flexible Percentage family units in the project, shall be relation to each of the factors. For Ranges for Owner Occupancy, considered. changes to the maximum FHA Comment: A commenter cites the Commercial/Nonresidential Space, and concentration, the analysis would also example of Mortgagee Letter 2016–15, FHA Concentration include analyses of FHA market share, which will not have significant practical Comment: HUD states that setting a benefit for condominium associations. analyses of default and claim rates by range would allow FHA to vary the Opportunity for public comment could bands of percentages, analysis of FHA specific percentage, at will, that it have prevented such an outcome, concentration percentages segmented by believes to be responsive to market remedying limitations in this policy geographic area, and analysis of the changes. The commenter does not update. performance of FHA condominium and understand the purpose of the ranges as Comment: A commenter generally single-family non-condominium loans. it is the specific percentage that will approves of the flexibility but notes that For single-unit approvals, data would have a more direct impact on too many changes that create a moving include an analysis of single-unit condominium project eligibility for FHA target will frustrate board members and approval loan performance versus loans insurance. While HUD proposes to offer community managers. in approved condominium projects, and the public the opportunity to comment HUD Response: This final rule analysis of single-unit approval loans if it considers changes to the upper and provides the framework to establish across geographic areas and segmented lower limits of the range, it would not flexibility in applying the rule’s by average owner occupancy ratios and offer the same opportunity when standards through policy. HUD strongly financial stability. HUD may also resetting the specific percentage within believes that establishing the ranges in consider additional data. These data the range. The public should also the regulation provides the flexibility it points are also discussed in Section III receive notice and an opportunity to needs to effectively respond to market of this preamble. comment if HUD is considering a fluctuations while giving the public Where a statistically significant change in the specific percentage within information about the limits of that deviation occurs over an extended the range as the specific percentage will flexibility. Enabling HUD to respond to period of time (typically enough time to have a greater impact on buyers and market changes will benefit identify a trend, which is often, but not sellers than a change in the range. condominium communities. Further, the commenter requests always, in the 6-month to 1-year range), confirmation that the case-by-case Standards for Flexible Ranges FHA would then consider making a exceptions to specific limits allowed Comment: For the flexible ranges on change after factoring in the effects of under the Guide and subsequent commercial space percentage, FHA- any change in providing credit to Mortgagee Letters will remain in effect insured percentage, and minimum level borrowers that FHA programs were under the new regulations. of owner-occupied units, HUD should designed to serve and the impact to the HUD Response: The purpose of the broadly identify and provide more MMI Fund. FHA would also look at the proposed rule was in part to give the information on the factors it will level of deviation to determine the level public the opportunity to comment on consider and the criteria for of any change. One aspect of analysis the potential upper and lower limits of recalculations when determining would be to compare default rates of the the ranges for owner occupancy, FHA whether to increase or decrease the relevant factors across similar tier bands concentration, and nonresidential/ percentage limit. Knowing the factors and make decisions based on those commercial space. Thus, the public has HUD will consider when determining results so as to avoid excessive risk to had a chance to comment on the range the percentage of allowable commercial the MMIF as compared to the overall of possible choices. In order to correctly space in a condominium project ahead market.

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Owner Occupancy Comment: The proposed rule of a would prevent homebuilders from Comment: While having too few sliding owner occupancy rate of 25 completing projects, especially in areas owner-occupants can detract from the percent to 75 percent would create of the country with high concentrations viability of a project, requiring too many additional work for the homeowners’ of investment properties and second can harm its marketability. The ratio association (HOA) and would be more homes. This would chill employment in based on primary, secondary, or harmful for condominium construction and lead to negative investment property is still too high. developments struggling to increase economic consequences and a lack of This will not make it easier to get FHA homeownership rates. One of the choice for the consumer. Therefore, approval. unfortunate effects of the 2008 housing HUD should set the permissible Comment: HUD should increase the crisis is the ‘‘death spiral’’ many percentage range between 25 percent minimum owner-occupancy ratio from condominium developments continue and 50 percent. Comment: 75 percent would be too 25 percent to 35 percent and should to struggle with. As mortgage high an owner occupancy requirement, allow condominiums with fully funded delinquencies rose, so too did HOA fee which would be an extreme outlier and reserves pursuant to a current reserve delinquencies and foreclosures would needlessly restrict the ability of study to qualify for the exemption. HUD purchased by investors. This happened at the same time HUD tightened the owners to lease units, potentially should include Real Estate Owned FHA condo requirements. As forcing owners to sell units at discount (REO) units and owner-occupied units homebuyers discovered more condo prices while further jeopardizing in the ratio. This aligns with Fannie developments could no longer qualify consumer access to mortgage credit. Mae and Freddie Mac and protects for FHA financing, more investors HUD should reduce the maximum from FHA’s ability to play a countercyclical bought the units to rent. This helped the 75 percent to no more than 51 percent. role in times of economic distress. Condominium Association financials, Many associations amended their Commenter supports the minimum but the result was that more condominium documents to meet the acceptable level of owner occupancy at developments could not qualify under FHA 50 percent requirement; raising the 35 percent. the 50 percent owner occupancy rule. percentage above 50 percent would put Comment: Data indicate that condo Associations and homebuyers are them out of compliance and affect borrowers tend to have higher FICO looking to HUD and the FHA for clear financing options. Amending the scores than non-condo borrowers, and and consistent rules, and only a flat 25 condominium documents is difficult that since 2010 the default rate on percent owner occupancy rate will and expensive. This would impact condos has been lower than for non- provide this surety. The proposed projects that already spent considerable condo loans. These facts support FHA sliding homeownership scale is funds meeting the earlier guideline. allowing a lower percentage of owner- anything but clear and consistent. Dropping the percentage to 35 percent occupants. This commenter supports Voluntary Associations will be less will not make a big impact given the Mortgagee Letter 2016–15 allowing 35 incentivized to seek FHA approval as additional criteria, as few projects will percent and suggests that HUD should this will cause more work for them to be approved for that rate. Seventy-five monitor the use of this threshold for determine which percentage applies to percent is excessive and could create existing condos to determine if more them and if they qualify or not. Even project delays impacting costs that general application might be possible. worse, FHA requiring stronger would be passed on to consumers. HUD Response: HUD’s final rule financials to get a lower owner HUD Response: The proposal provides the framework to establish occupancy rate requirement only further regarding the range was designed to flexibility in applying owner occupancy depresses developments in communities allow HUD to react quickly if future standards through policy guidance as that are still struggling to recover. This market conditions should warrant it. market forces may dictate, as well as commenter vehemently disagrees with FHA will then establish the maximum address if such ratios vary based upon HUD’s statement that the ‘‘current limit within this range. Any proposed the construction status of the standard of 50 percent has worked in future changes to the range will have condominium. This final rule sets the the recent market.’’ To the contrary, this advance notice. lower range at which the minimum standard has led to more condo units Changes to the acceptable limit within owner-occupancy percentage could be being sold to investors and pushing the proposed ranges will be driven set at 30 percent. This is the current their developments farther from FHA primarily by performance data for the minimum occupancy requirement for qualification. The result is the reduced Mutual Mortgage Insurance Fund. Such new construction projects, and the inventory for first-time homebuyers that analysis may include: lowest limit that HUD believes would has contributed to declining • FHA portfolio analysis of default protect the MMIF from undue risk. This homeownership rates. and claim rates of loans with similar standard does not seem to be having a HUD Response: The proposed range is attributes across different bands of negative effect on HUD’s portfolio. designed to not only address current owner occupancy percentages. Issuing a final rule with standards more market conditions, but also to give HUD • Analysis of FHA condominium restrictive than the ones currently in flexibility to act quickly to revise the loans across geographical areas place, without strong justification percentage minimum in the future if segmented by average owner occupancy supported by data, will create market data indicates that this is ratios (e.g., average owner occupancy disturbance in the market, further necessary. This final rule revises the ratios in metropolitan areas versus rural impact development, and restrict access lower end of the standard to 30 percent areas). to affordable housing. Further, HUD owner occupancy, the current standard • Analysis of trends of financial must be able to set a standard that will for new construction. This gives HUD stability of condo projects in relation to accommodate recently completed and sufficient room to reduce the owner occupancy (e.g., relationship of ready for occupancy projects, at which requirement if analysis of the data default and claim rates when compared point a typical condominium project indicates that the current minimum is with percent of financial reserves and will not likely have sold all units to too high. owner occupancy percentages). None of home buyers, or even a majority of its Comment: A proposed upper limit of the requirements for owner occupancy units. 75 percent for a given project effectively maximum will require condominium

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association to update or rewrite their owner occupancy ratio. In this instance, HUD Response: HUD’s final rule legal documents. an owner/occupancy requirement is provides the framework to establish Comment: The restrictions placed on counterproductive when a property flexibility in applying owner occupancy approval for condominium projects with meets all other certification standards through policy guidance as below 50 percent owner-occupancy requirements related to financial safety market forces may dictate. To preserve levels are onerous and too restrictive. and soundness. FHA should remove the flexibility and potentially accommodate Pursuant to a recent Community current owner-occupancy requirement recently completed projects, this final Associations Institute study,6 FHA’s and align with Fannie Mae and Freddie rule allows the possibility of a 30 current requirement on reserves for Mac policy by allowing lenders to percent owner-occupant minimum. projects with greater than 50 percent review a condominium project in its HUD will consider the owner-occupancy was one of the entirety. Owner-occupancy levels, recommendations when updating future leading reasons condominium projects whether 100 percent or 0 percent, policy guidance. should be evaluated in conjunction with were unable to obtain FHA certification. Owner-Occupancy Minimum Below 50 the project’s reserves, delinquency rates, This requirement hurts the potential Percent viability of condominium properties. If etc., to determine a condominium a building cannot be certified by FHA, project’s viability. Comment: 25 percent should be the it is more difficult for sellers of HUD Response: HUD disagrees with owner occupancy percentage. Even condominium units to find eligible the recommendation. HUD insures lowering owner occupancy from 50 borrowers. Often the seller’s only mortgages for properties that are percent to 25 percent, there is still a alternative is to turn the unit into a primarily owner-occupied and has a Board of Directors of the owners that rental, thus further lowering the owner- statutory fiduciary responsibility to will be empowered with running the occupancy ratio. balance policy that promotes Association to the best of their ability. HUD Response: The range provided in homeownership while protecting the There is no risk to the FHA in making § 203.43b(d)(6)(ix) as it relates to owner- Mutual Mortgage Insurance Fund. loans to borrowers in these occupancy in a condominium project Eliminating the owner-occupancy condominium projects. The purchasers refers to a minimum requirement that requirement in its entirety solely based of these units, if they use FHA financing HUD may establish within that range on the strength of the borrower has to purchase, will be owner occupants. through notice. Historically, HUD has proven to be an unsound and inoperable Comment: To stabilize the financial been the mortgage insurance provider financial policy for FHA. viability and increase purchase options for many first-time homebuyers and While Fannie Mae and Freddie Mac for FHA borrowers, two comments establishing a minimum owner- (Government Sponsored Enterprises or support a minimum level of owner- occupancy percentage protects the GSEs) do not impose owner occupancy occupancy range between 25 and 50 investment of new homeowners. In restrictions for condominiums when the percent, while certain exceptions could addition, HUD has a fiduciary property being purchased is a primary be made for lower percentages, or for responsibility to balance policy that residence, FHA serves a narrower band extending the range to 75 percent, as promotes homeownership while of borrowers that generally have credit proposed by HUD based on criteria protecting the Mutual Mortgage profiles and equity positions below dictated in ML 2016–15. Insurance Fund. With this in mind, those that the GSEs permit. The final HUD Response: The final rule HUD’s final rule provides the rule, however, provides the framework establishes the owner occupancy range framework to establish flexibility in to establish flexibility in applying this that provides the framework to establish applying this standard through policy standard through policy guidance as flexibility in applying this standard guidance as market forces may dictate. market forces may dictate. through policy guidance as market Comment: The current 50 percent This final rule sets the allowable forces may dictate. The comments and threshold has not been a significant minimum percentage at 30 percent of recommendations will be considered barrier to approval, save for limited the units. There may be times when a when updating and drafting the specific circumstances such as developer- reduction in the owner-occupancy guidance for owner occupancy. controlled condos or condos located in percentage is an appropriate action vacation or resort areas. However, Owner-Occupancy Requirement in based on current market conditions and greater flexibility would be welcome in Strong Rental Housing Market Areas other contributing factors. HUD will this area. Lowering the current Comment: HUD should eliminate consider the comments and threshold below 50 percent would have ownership restrictions and occupancy recommendations when drafting the a detrimental effect on approvals. The requirements in an area in which rental specific policy guidance on proposed regulation does not specify housing is in strong demand. It makes condominiums. conditions in which FHA would no sense to penalize property owners Owner-Occupancy Minimum of 50 consider raising the occupancy who have tremendous value in their Percent threshold from 50 percent to a higher properties (as determined by strong Comment: HUD has provided no range. Setting the occupancy below 50 rents and low vacancies) by not letting measurable rationale for the 50 percent percent would be detrimental to the them sell them or finance them. In such requirement. In fact, both Freddie Mac commenter’s clients. This comment areas, a rental property is worth a lot supports a flexible range in the 50 and Fannie Mae have no such because there are so many prospective percent to 75 percent range. Allowing a requirement when the property is being tenants and the rules for owner- 50 percent owner/renter ratio is a valid, purchased as a primary residence. All occupancy do not work. Such properties and sound practice. If it is too difficult FHA borrowers are purchasing a may not be able to be sold because their for people to rent their condominium primary residence; their purchase will value is too high to allow third parties when life changes (i.e., death, divorce, only help to boost the association’s to obtain financing. job relocation, new baby, etc.), the Comment: To reduce barriers to obtaining a reverse mortgage, make the 6 Community Associations Institute, ‘‘Survey: property values become depressed, Federal Housing Administration (FHA) which is bad news for borrowers and owner-occupant requirement extremely Condominium Project Approval,’’ November 2016. FHA. low or non-existent (commenter states

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they are in an area where rentals are Comment: HUD’s reference to the whereby FHA indicated it would highly desired, and it will be impossible definitions of principal and secondary consider a property as owner occupied to meet HUD’s owner-occupancy homes in 24 CFR 203.18(f)(1) and (2) provided it was not ‘‘Investor Owned’’ requirement for the building). carries an implication that the for the purpose of calculating owner HUD Response: HUD disagrees with secondary residence must have an FHA occupancy ratios for Condominium the recommendation to eliminate loan on it in order to be counted in the Project approval. However, in owner-occupancy requirements. HUD owner-occupancy ratio. It does not accordance with the Housing insures mortgages for properties that are mean that a unit with a conventional Opportunity Through Modernization primarily owner-occupied and has a second loan (or even a unit that is Act (HOTMA), which was signed into fiduciary responsibility to balance mortgage free), either of which are law on July 29, 2016, the National policy that promotes homeownership secondary residences, should not be Housing Act was amended to require while protecting the Mutual Mortgage counted as owner occupied. In the HUD to use properties which were Insurance Fund. Eliminating the owner- recent past, HUD again reversed its either principal residences or Secondary occupancy requirement in its entirety decision and now allows secondary Residences ‘‘as such terms are defined solely based on the strength of the rental residences to count as owner occupied by’’ HUD (or sold to owners who intend market in an area has been proven to be (as does Fannie Mae). Because of its to meet such occupancy requirements) an unsound financial policy in the reference to 24 CFR 203.18(f)(2), it is to establish HUD’s owner occupancy marketplace with respect to both unclear as to what the Proposed Rule’s requirements. As required by HOTMA, forward and reverse mortgages. The intent is. Please state unequivocally and Mortgagee Letter 2016–15 replaced the final rule, however, provides the unambiguously that secondary requirements in ML 15–17 with the framework to establish flexibility in residences count as owner-occupied, current percentage standard. Currently, applying this standard through policy and/or that all residences which are not HUD’s definition of ‘‘Secondary guidance as market forces may dictate. investor-owned or vacation homes Residence’’ is found in 24 CFR count as owner-occupied, and/or also HOTMA and Owner Occupancy 203.18(f), and, as noted in the please state separately the definitions Comment: HUD should decrease comments, has three elements: It is (1) cited in §§ 203.18(f) (1) and (2) and omit part-time abode where the mortgagor allowable owner-occupancy limits from (f)(2)(iii). typically spends less than a majority of 50 percent to 35 percent without need Comment: 24 CFR 203.18(f)(2)(iii) the calendar year; (2) not a vacation for additional documentation as relates only to the maximum FHA loan directed by Congress under the Housing amount (24 CFR 203.18 ‘‘Maximum home; and (3) the Commissioner has Opportunities Through Modernization Mortgage Amounts’’) for a ‘‘second FHA determined it eligible for insurance to Act (HOTMA). loan’’ in the sole event that an owner avoid undue hardship to the mortgagor. HUD Response: HOTMA directed with an existing FHA loan faces ‘‘undue These standards, particularly (3), are HUD to ‘‘issue guidance regarding the hardship’’ and needs to obtain a second addressed to eligibility for mortgage percentage of units that must be FHA loan on another unit in certain insurance in accordance with Section occupied by the owners’’ by October 27, circumstances. 203(g) of the National Housing Act. This 2016, or the 35 percent requirement to HUD should establish a revised rule relates to the approval of the project which the comment refers would have owner-occupancy calculation based on to participate in the mortgage insurance become effective. HUD issued the number of the minimum allowable program; specifically, the issue of Mortgagee Letter 2016–15 prior to the investment units rather than based on a Secondary Residences comes up with statutory deadline. That mortgagee letter subdivision of classifications for owner- respect to the owner-occupancy is outside the scope of this rulemaking, occupied units, investor units, vacation percentage. In the context of project which provides for a percentage of homes, etc. This revised grouping approval, as comments noted, (3) does owner occupancy as low as 30 percent. would make it easier for lenders to not make sense; it is an assessment that However, HUD will consider this distinguish and track the number of will be made if the mortgage on the unit comment as well as then-current market primary, secondary, and investor held is submitted for insurance after the conditions in future adjustments to the units. Currently, lenders face significant project is approved to participate. percentage within the range of 30 challenges in distinguishing secondary Additionally, HUD recognizes the percent to 75 percent allowed by this residences from vacation homes and exclusion of vacation homes, while final rule. investor-owned units, and struggle to necessary for the definition found in 24 accurately validate and monitor these CFR 203.18(f)(2) to conform with the Secondary Residences units in approved projects. By requirement in section 203(g)(1) of the Comment: In prior years, HUD classifying units as (1) primary National Housing Act, 12 U.S.C. allowed secondary residences to count residences; (2) secondary residences; or 1709(g)(1), is not necessary to calculate as owner occupied. With issuance of ML (3) investor units, in line with GSE owner occupancy rates of condominium 2009–46B and 2011–22, HUD allowed a industry standards and removing the projects for project approval purposes. second home to count as owner need to distinguish vacation homes For this reason, this rule states that for occupied only if it was a secondary from secondary residences, which most project approval, any unit in which the residence with an FHA loan under 24 associations are not equipped to track, owner resides as his or her place of CFR 203.18(f)(2). A commenter states lenders will be able to more accurately abode for any portion of a calendar year that 24 CFR 203.18(f)(2)(iii) relates only track owner-occupancy levels and FHA other than as a principal residence, and to the maximum FHA loan amount (24 will be able to better manage default risk that is not rented for a majority of the CFR 203.18 ‘‘Maximum Mortgage in approved projects. calendar year, counts towards the Amounts’’) for a ‘‘second FHA loan’’ in HUD Response: HUD recognizes the owner-occupied percentage. Individual the sole event that an owner with an concern with the reference to Secondary mortgages on units in approved projects existing FHA loan faces ‘‘undue Residences, which term is unique to would still have to meet HUD’s rules, hardship’’ and needs to obtain a second FHA insured mortgages. FHA had regulations, and underwriting FHA loan on another unit in certain previously addressed this issue in requirements, as applicable, to obtain circumstances. Mortgagee Letter 2015–17 (ML 15–17), insurance on their mortgages.

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Percentage Ranges for Commercial/ HUD Response: HUD agrees that nationwide for development of such Nonresidential Space mixed-use developments that combine projects. If financing were made more commercial enterprises with residential readily available, it would have nothing Commenters Stated That HUD Should housing are increasing in popularity.7 but a positive impact on communities Not Impose a Limit on the Percentage of across the nation. This commenter Commercial/Nonresidential Space HUD notes that Fannie Mae recently increased its allowable commercial stated disagreement with HUD’s Comment: The economically optimal space percentage to 35 percent.8 With a assessment of potential negative impacts mix of residential and commercial will strong demand for residential units in on the residential character of mixed- differ both by the project and by the mixed-use projects within and outside use developments with greater than 50 community. Any such restriction on urban settings, the percent of percent of total area designated for uses can only reduce the economic commercial/nonresidential space commercial space. value of projects; it can never enhance becomes less concerning if there is no Comment: The rule should maintain it. For the purposes of underwriting, any other negative impact on the residential the current commercial/nonresidential limit on the mix of uses in a mixed-use character and financial stability of the space requirements, which are project is counterproductive and should project. consistent with National Association of be eliminated from the proposed rule. This final rule provides a sufficient Builders policy that calls for the Second, from a public health range to allow adjustments that may be allowable percentage of nonresidential perspective, there is a need for more necessary for the foreseeable future. space up to 45 percent. Setting a limit mixed-use projects in our towns, cities, HUD disagrees with the suggestion that too high could impact the residential and suburbs. Mixed-use developments HUD should not impose any upper limit character of a project and expose FHA- greatly enhance the walkability of on the percentage of commercial/non- insured units to risk should a neighborhoods, which in turn promotes residential space an acceptable project commercial tenant leave the project. health and well-being through more may have. HUD insures mortgages for Mortgagee Letter 2012–18 provides frequent social interactions, more properties that are primarily residential flexibility and HUD should maintain walking, and reduced crime. It should in nature and has a fiduciary these requirements. not be the role of HUD to place limits responsibility to balance policy that Comment: The commercial space on mixed-use projects via rulemaking. promotes homeownership while requirement should be set between 25– Comment: Mixed-use commercial/ protecting the Mutual Mortgage 50 percent, with specific guidelines to residential spaces are the cornerstone of Insurance Fund. allow exceptions for projects with up to traditional small-town America. 60 percent commercial space. Special Preserving the ‘residential Alternative Suggestions as to the consideration is needed when a project characteristics’ of a condominium is Amount of Commercial Space That seeks to use more than 50 percent of a done at the expense of creating a Should Be Approvable property’s total floor area for walkable neighborhood. People should Comment: Commenters support the commercial space due to the potential be able to apply for help to build or expansion of allowable commercial impacts of this expanded presence on renovate residences even if those space to the proposed range of 25 the characteristics of a residential residences are part of a building that is percent to 60 percent. This range, when project. more than 50 percent commercial. combined with a look at local economic Comment: Mixed-use neighborhoods Rather than protecting the ‘‘residential factors, would allow more associations are preferred, and 56 percent of character’’ of condominium projects, the to qualify for FHA approval without millennials and 46 percent of baby focus should be on underwriting necessarily increasing risk. More and boomers prefer to live in areas with a standards that are more directly related more jurisdictions are fostering mix of retail and housing options to creditworthiness of the individual. walkable, transit-oriented communities (Regional Plan Associations, ‘‘The Federal regulations must support that offer a blend of commercial and Unintended Consequences of Housing mixed-use rental housing for Finance,’’ February 2016). Mixed-use residential space. This change would affordability and walkability. neighborhoods have held up their value align FHA with emerging market Comment: Commercial space would better in the years following the Great preferences. A commenter notes an not harm the project’s financial Recession compared to solely example of a mixed-use development viability. Many of the nation’s most residential neighborhoods. Given FHA’s that is highly vibrant and desirable, but successful and in-demand mixed-use mission to promote safe and affordable would not be approved by FHA because neighborhoods are comprised of such housing, the current policy limiting the commercial space exceeds 30 projects. Increased HUD flexibility commercial space hinders efforts to percent. regarding the amount of commercial build neighborhoods that have a mix of Comment: The maximum standard for space in multi-family buildings would residential housing and businesses with commercial space should be set and help to grow and expand mixed-use access to public transit that HUD has maintained at 60 percent of the total development efforts, specifically in championed. FHA should allow up to floor area in § 203.43b(d)(6)(vii). Many areas targeted for redevelopment. 45 percent commercial space without highly successful mixed-use Furthermore, HUD should review its documentation. Greater levels of neighborhoods are comprised of a criteria for all its programs so that they commercial space should be evaluated similar commercial space to residential better reflect growing demand for holistically along with the strength of space ratio, and there is a real demand walkable, mixed-use communities; the project, but should not be capped at conform to the overall goals for mixed- a specific percentage. 7 Real Trends: The Future of Real Estate in the use, sustainable communities outlined United States by Urban Economics Lab and MIT’s Comment: To expand the pool of in the Administration’s Sustainable Center for Real Estate (October 2017), at 19. The eligible projects, HUD should set the Communities Initiative; and bolster study is available at https://mitcre.mit.edu/wp- minimum range for commercial/non- rather than stymie local government content/uploads/2017/10/REAL-TRENDS-MIT.pdf. residential space without requiring an 8 Fannie Mae Selling Guide B4–2.1–03: Ineligible efforts to preserve and grow the stock of Projects (6/5/2018), available at https:// exception from the current 25 percent to affordable housing in neighborhoods www.fanniemae.com/content/guide/selling/b4/2.1/ 35 percent. Projects with commercial that include mixed-use buildings. 03.html. space of more than 35 percent but less

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than 50 percent may request exemptions and transportation. This research has (assuming this is a temporary short-term pursuant to FHA criteria subject to also shown a correlation between a vacancy) does not make sense. HUD proposed §§ 203.43(f)(1) and (2). homeowner’s access to transportation, should set this minimum occupancy Comment: Increasing the percentage employers, and household economic rate of commercial space at 25 percent. of permissible commercial/ growth. Condominium projects with HUD Response: The rule establishes nonresidential space prior to triggering commercial components not only meet the range for commercial space, but an exception request builds on FHA’s consumer demand for access to services, does not impose a restriction on experience with the exception structure but also may improve access to jobs commercial space vacancy. As to the currently enforced in the Guide that leading to greater financial stability for percentage, please see the prior permits the jurisdictional households and the community at- response. Homeownership Centers (HOCs) to large.9 Comment: HUD should clarify that consider and approve exemptions for HUD Response: This final rule this requirement is not a minimum, but projects with commercial space that narrows the upper end of the potential an allowable maximum for the addition exceeds 25 percent but is less than 35 allowable commercial space percentage of commercial space as well as the percent of total floor area. Protecting a to 55 percent of the total floor area. This frequency with which FHA will project’s residential use and character is percentage acknowledges the future reexamine the commercial space not exclusive of consumers who view potential of mixed-use developments requirement, how much notice will be access to a broad array of services while avoiding risk to the MMIF. The provided to lenders when a change is within a project as a fundamental range gives HUD flexibility to adjust the made, and what criteria will be used to component of the project’s residential standards through policy changes as the determine recalculations. Finally, FHA use and character. Many consumers market conditions dictate. should further define the items that may place a high value on immediate access HUD believes in allowing the contribute to commercial space to to services. For these consumers, development of pedestrian oriented ensure that lenders understand what commercial space is a meaningful communities that offer the convenience features will fall into this category to aid component of enhancing the residential of commercial and residential space in in the completion of accurate experience and a motivation to the same project, so long as the commercial space calculations. purchase. residential character is not negatively HUD Response: The range provided in Comment: An upper limit of 50 impacted. Multiple commenters seem to percent should be set for the range § 203.43b(d)(6)(vii) as it relates to the agree with HUD’s assessment, noting commercial/non-residential space in a regarding commercial space. A higher that although they also agree with the percentage threatens the residential condominium project refers to an expanded range of allowable allowable maximum, not a minimum nature of a project and too closely ties commercial/non-residential space, the residential viability to the project’s requirement. Regarding the commenter’s special consideration is warranted when request for additional information on commercial success. HUD should a project seeks to use more than 50 continue to use the standard of 25 guidelines, procedures, and items that percent of a property’s total floor area contribute to commercial space, HUD percent while exercising the ability to for commercial/non-residential use. increase that threshold for certain expects to issue future guidance on such HUD will consider the issues. Section III of this preamble markets or projects as proposed in the recommendations submitted through regulation. discusses data that HUD will consider the comments when drafting specific Comment: It is possible for a project when determining a change in the policy guidance on this subject. with commercial space exceeding 50 percentage of commercial/ Comment: The HOTMA provision percent of total floor area to be nonresidential floor area. allowing lenders to make exceptions to successful in certain housing markets. the commercial space requirement Single-Unit Approval and Reserve Any exceptions granted above the 50 based on ‘‘factors relating to the Requirements percent limitation must appropriately economy for the locality in which such mitigate potential exposure to business Comment: Single-unit approvals offer project is located’’ should be cycle risk. At this time, it may not be millennials an opportunity to own immediately implemented (the deadline appropriate for FHA to approve homes, and the elderly to stay was October 28, 2016). condominiums in the upper limit of the independent, especially if the reserve HUD Response: This provision was proposed 60 percent commercial space requirement could be set lower than that proposed on September 28, 2016 (81 FR range—the agency lacks data and of Fannie Mae, perhaps 10 percent of 66565) and is made final by this rule experience concerning the sustainability the overall budget instead of 10 percent (§ 203.43b(g)(2)). of such projects. This is not the case for per annum. If the project is budgeting Comment: Most of the newer projects with 35 percent or less properly, it always has the appropriate condominium projects that have been commercial space. amount to cover its expenses already on Comment: Older business/residential built in the past 5 years in one area hand and it doesn’t make sense to put buildings help entrepreneurs live include street level commercial space. in an additional 10 percent each year. upstairs from their businesses. HUD To disqualify the ability of a purchaser Comment: HUD should consider an should lift the minimizing constraints of to purchase a condominium in this exemption from the reserve requirement space versus funding. HUD should building using FHA financing due to for single-unit loans where a project has consider doing a survey on said current commercial space vacancy been well-managed for decades, while remodeling of old tenements/downstairs approaching the capital funding issue 9 Richardson, Nela, Urban Institute/Core Logic: businesses. All old buildings need new Demand, Data, and Demographics Symposium, via special assessments. HUD could use life for sustainable development. Integrated Services and Inclusionary Housing for appraisers to speak to the historical Comment: Research shows that Changing Demographics: Can we build our way out values of units within the complex. If consumers increasingly place a price of this? (Washington DC, November 2, 2016). Data one could determine that the price deck available for download at: http:// premium on housing that is near www.urban.org/events/data-demand-and- variance is too high to meet a certain (walking distance of less than .25 miles) demographics-symposium-housing-finance-2 standard, then the exemption is not of services, including retail, healthcare, (accessed 3/18/2019). granted.

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HUD Response: This rule does not consider pertinent data to support any example, if the owner-occupant impose a minimum reserve requirement future changes to the concentration percentage is too low, single-unit for single-unit approval, but establishes limit. approvals could provide a way for the a framework for single-unit approval Comment: A commenter recommends development to build up to the required that utilizes the eligibility requirements that HUD allow an FHA concentration percentage. in 24 CFR 203.43b(d) as a baseline, up to 100 percent, especially for new With only 9,866 condominium which includes requirements for construction. In most metropolitan projects currently on FHA’s approved reserves; or a subset of these areas, the cost of a condominium is list (of 150,000 nationwide), access to requirements. HUD will consider these significantly less than a traditional condominium units with FHA-insured comments when addressing single-unit single-family home. FHA is often the mortgages is limited. Allowing single- approvals in future notices. only financing available for many unit approvals could greatly improve access and ‘‘change the trajectory of the FHA Concentration Percentage buyers, especially first-time or middle- income homebuyers who have limited FHA condominium approval trend line’’ Comment: HUD, through FHA has a resources for a down-payment. Research to the benefit of condominium responsibility as a steward of the shows that the time needed to save for associations and consumers. program to mitigate risk. Without an FHA related down payment is Comment: Most developments fail to further clarification as to existing risk or significantly higher for a single-family keep their FHA approval because it is the rationale for potentially reducing or home compared to a condominium. not in their budget and most do not expanding the concentration limits, it is Purchasing a condominium will allow have the knowledge and expertise to difficult to provide substantive many FHA borrowers faster access to keep the project approved. By comment. However, HUD is a critical homeownership, helping to build their eliminating this process, developers source of funding for buyers in wealth and stabilize their living would be able to serve more borrowers condominiums, and HUD should not situation sooner rather than later. A that are looking to use FHA financing to lower the concentration threshold from high concentration of FHA borrowers accomplish their goal of its current 50 percent level without means a high concentration of owner- homeownership. adequate data to support such a occupants, which helps the financial HUD Response: Single-unit approvals, contraction in the program. Existing soundness of the condominium project. in the appropriate circumstances, can be levels should be preserved with greater FHA does not limit the amount of beneficial, and are retained in this final flexibility for increased concentration financing available within a rule as an opportunity to provide access where appropriate. If HUD determines neighborhood of single-family to FHA’s programs in this or similar that changes are warranted, HUD should structures, nor should FHA limit situations. The rule establishes provide additional information about financing within a condominium requirements to mitigate risk to the the factors that will be considered. project. Generally, FHA condominium Mutual Mortgage Insurance Fund, while Comment: 25 percent FHA insured buyers have a stronger financial footing providing that these can be varied in the would be too low. HUD should not be than non-condominium buyers. FHA future as needed. overly concerned about FHA Comment: Because of the reluctance condominium buyers tend to have concentration in projects that are well- of condominium associations to become higher FICO scores than the non- managed and meet all FHA approval HUD-approved, single-unit approval is condominium buyers and higher criteria. Some limitation is prudent risk imperative. HUD should reconsider monthly incomes. In 2016, the average management. HUD should retain a 50 requiring any complex that shows up on monthly income for a condominium percent minimum FHA concentration HUD’s approval list to go through buyer was $1,693, versus $1,397 for limit. project approval. That will require many non-condominium buyers.10 These are HUD should maintain its current of these associations to be approached a creditworthy borrowers who deserve to guidelines to allow for 50 percent of the second time when many of them had a live in buildings and communities that total number of units in a project with bad first experience. some leniency to allow for potential meet their needs. HUD Response: HUD has a fiduciary HUD Response: HUD disagrees with cancellations. In many circumstances, responsibility to the Mutual Mortgage the recommendation to increase the HUD has already allowed for up to 75 Insurance Fund that generally precludes maximum allowable FHA concentration percent FHA financed units in allowing single-unit loans on any percentage to 100 percent. HUD has a established projects based on individual project, although the rule provides a fiduciary responsibility to balance project conditions and the associated framework for HUD to vary single-unit policy guidance with risk to the Mutual risks of this flexibility are monitored approval requirements as needed to Mortgage Insurance Fund. Allowing for and mitigated through the recertification meet market needs. process. The maximum percentage a higher FHA concentration percentage Comment: To make single-unit should be raised to 75 percent. The without careful consideration for approval as successful as it could be, flexibility provided under current additional requirements or justification HUD should do away with ‘‘loophole guidelines along with the sufficient risk may increase the Government’s risk. letters,’’ because the property manager mitigation provided through the Single-Unit Approval can refuse to provide one and kill the recertification process remains the most loans that would otherwise happen. effective approach to this calculation for Single-Unit Approval Generally HUD Response: The comment seems both lenders and FHA. Comment: Single-unit approvals to be referring to a questionnaire that is HUD Response: This final rule should be allowed in buildings that do sent to the Association. HUD implements the FHA concentration not meet current requirements, for appreciates that obtaining information range that provides the framework to from Condominium Associations can establish flexibility in applying this 10 Urban Institute, ‘‘Loosening FHA Restrictions complicate the mortgage process, but standard through policy guidance as on Condominium Financing Makes Sense,’’ recognizes that such information may November 2016, available at https:// market forces may dictate. HUD will www.urban.org/sites/default/files/publication/ not be obtainable through other evaluate these recommendations when 85936/loosening-fha-restrictions-on-condominium- methods. While this rule does not updating policy guidance and will financing-makes-sense.pdf. mandate that any specific questionnaire

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be completed by a Condominium borrowers seeking sustainable that the following common issues Association, this rule provides the homeownership. FHA should should be considered to determine what framework to establish flexibility in implement a limited review process for is required for single-unit approval: applying the proposed standards single-unit approvals and a screen • Construction Defect Litigation or through future policy guidance as within FHA Connection to collect data repairs in response to defect litigation market forces may dictate. for FHA on spot approvals to help FHA are still in process. Comment: The current approval monitor and manage these risks. Based • Owner Occupancy is between 35 process has incentivized condominium on the current proposal, a condominium percent–50 percent. boards to undertake an examination of identification number would not be • Leasing Restrictions that include: the Association finances, state of available for a single unit, and without Seasoning Clauses, Tenant-Screening, insurance policies, collections, and effective monitoring systems, both FHA short-term Rentals. other factors that are needed to obtain and participating lenders will have • Co-Insurance is used without 100 approval. This has been beneficial to significant difficulties determining percent replacement cost, but communities who have undertaken this approved unit percentages in an replacement cost can be validated using process. Providing an approval process ineligible building. There should be a Marshall-Swift or other acceptable with a lower approval threshold will way for the public to track percentages means. short circuit the larger project approval of single-unit approvals. HUD should • Bylaws are not signed. process as boards will forego the time clarify the tracking mechanism to be • Status with the Secretary of State is and effort of project approval knowing used to determine compliance with the not current. • there is a lower barrier for approval 0–20 percent range allowed. Condominium Documents were not elsewhere. This would be unfair to the HUD Response: HUD agrees that a created and or filed properly at the time communities which have undertaken reliable tracking mechanism is needed of development. project approval and provide a dueling to determine compliance with the range • Transfer fees are in place. set of standards. allowed. As a result, HUD has added a HUD Response: HUD has considered HUD Response: Providing for a provision that ‘‘HUD may suspend the these suggestions and believes that the limited number of single-unit approvals, issuance of new FHA case numbers for limitations stated in this final rule are based on standards appropriate to a mortgage on a property located in any appropriate. Single units, to be mitigate against excessive risk, should project where the number of FHA- approved for mortgage insurance, must not affect the fairness of the overall insured mortgages exceeds the not be either in a project that is already project approval process. Limiting the maximum,’’ which will allow FHA to approved, or a project that has been number of such approvals in projects proactively manage the concentration determined to have significant issues provides incentive for Associations to range. The maximum percentages that that affect the viability of the project. continue to pursue the project approval apply will be established by notice. The unit must meet the general process in projects that typically have a Also, the 0 percent possibility provides standards for approval stated in the rule, larger percentage of FHA financing. The a safety valve. This final rule provides or some subset of these standards, or increased flexibility to meet market specific criteria for single-unit approval less stringent standards, determined by needs and enlarged approval period that HUD believes will adequately HUD. The unit must be in a completed provided by this rule is expected to protect the Mutual Mortgage Insurance project that has at least 5 dwelling units. increase the number of eligible Fund, while providing needed HUD plans to issue further guidance mortgages in Condominium projects. flexibility for HUD to make changes in under the framework provided in this The lower end of the range, including the future as needed. rule. a 0 percent maximum, is available if Comment: Single-unit approval Comment: HUD should define and overly negative effects occur. However, should not undermine the project clarify the documentation requirements smaller condominium projects may approval process and should be limited. for approvals under the exception for simply not have the financial ability or While the FHA and industry have less stringent standards. expertise to apply for project approval, struggled with encouraging boards to HUD Response: The less stringent and a limited number of Single-Unit undertake project approval, the standards will be determined based on Approvals would give them a path importance and benefits of approval experience and conditions at the time. forward to provide FHA mortgage- have become more widely understood Comment: HUD should allow public insured housing units. Project approvals over the past few years. Adopting a comment on the specific criteria and will have benefits, including a degree of shortcut will undermine the process processes FHA will use to manage certainty that units will be eligible for unless more clearly delineated single-unit approvals prior to mortgage insurance; therefore HUD limitations are adopted. If the criteria implementation. The actual standards believes those projects with the ability for single-unit approvals is extremely and process that FHA adopts are critical to do so will continue to seek project loose, HUD will lose control of the to the success of single-unit approvals. approval. process and lenders will turn to single- If a single-unit approval system is to be Comment: The previous spot loan unit approval as the industry standard. successful, all market participants program led to concerns of abuse. This A comment proposed that single-unit (including lenders, condominium program should have diligent approval would be acceptable if: association boards, community monitoring and adequate system (1) The association had held FHA managers, community management enhancements to prevent abuses. approval which has been expired for companies, and other professionals who Without further guidance and clarity fewer than 3 years. support the community association regarding lender obligations, the criteria (2) The FHA approval was not housing model) must have the that will be used for unit approval withdrawn or rejected for failure to meet opportunity to review and comment on verification, and the processes that will FHA criteria. the procedures and standards to be be in place to monitor and track these (3) Other criteria FHA deems used. unit approvals, this program may result appropriate. Comment: HUD should consider in unintended risk to the Mutual Another comment stated that there adopting Freddie Mac and Fannie Mae’s Mortgage Insurance Fund, and to should be some leeway and suggests guidelines when it comes to

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condominiums, that is, limited review the Qualified Mortgage standards (of the approvals based on appraiser input of and full review for ‘‘spot approvals’’ for Dodd-Frank Wall Street Reform and marketing data. ‘‘The local appraiser’s condos not listed on the Fannie Mae Consumer Protection Act). Currently, input would properly evaluate the short PERS list. Freddie takes the reciprocal condominiums outperform most other and long-term viability of the project.’’ of Fannie Mae’s PERS approval. Review categories in FHA’s book of business When HUD ended spot approvals, should be similar to the Fannie Mae and have a lower foreclosure rate, which HECM loans became inaccessible to Condo Project Manager (CPM) review would allow HUD to expand access to many seniors. HUD should clearly (reviewing the budget, delinquencies, credit while protecting the insurance include HECM loans within the Single- litigation, etc.) for the single unit only. fund. A minimum FHA concentration Unit Approval process. The policy that HUD would benefit from the same level range of 0 percent is contrary to this HECM loans are not eligible has to do of review as the agencies and set the policy goal, and could lead to a practical with consistency with the prior policy same protocol for certain type that withdrawal of FHA from the of terminating spot loan approvals. The would need HRAP or DELRAP approval condominium market, which would be program currently prevents highly as Fannie does with PERS. Having FHA, destabilizing and contrary to FHA’s qualified borrowers from qualifying for Fannie and Freddie all on the same page countercyclical role in any future crisis loans and fulfilling the objective of the when it comes to condominium reviews to the detriment of American HECM program. It is a form of will give more flexibility to certain homeowners and communities. The discrimination. credit type borrowers, along with lower end of the range should be 10 HUD Response: While HUD does not product options. percent. agree that either a lack of single-unit If there is no guidance, some lenders HUD Response: HUD recognized the loan approvals for HECMs or a general may approve anything without any type need to establish a limited Single-Unit requirement for project approval are of review and consider the unit Approval process in its proposed rule forms of discrimination, the availability acceptable as long as it is not on HUD’s and maintains that process through this of Single-Unit Approvals under this approved list. Perhaps HUD could have final rule. HUD also recognizes that the final rule should make HECM loans in a list of staff trained in condominiums performance of mortgages secured by condominium projects more widely within each lender, or only allow condominiums had performed worse available while recognizing the DELRAP-approved lenders to issue than other single-family mortgages for a difference in ownership of single-family Single-Unit Approvals. time period prior to the elimination of dwellings that are maintained solely by HUD Response: HUD has considered FHA’s Spot Approval process and have the owners versus condominium these suggestions and believes that the shown to be prone to more volatility ownership that includes maintenance limitations stated in this final rule are than other mortgages. Establishing a by owners and associations. appropriate. Single units must be in range that includes 0 percent provides HECM mortgages may include projects that meet eligibility criteria and FHA with the necessary flexibility to condominium loans (see the definition cannot have any significant issues respond to market movements that may of ‘‘mortgage’’ in 24 CFR 206.3) and are affecting viability. HUD plans to issue put the FHA Mutual Mortgage Insurance eligible for mortgage insurance if the further guidance under the framework Fund at risk. project is acceptable to the provided in this rule. HUD has received Commissioner (24 CFR 206.51). For Single-Unit Approval With Home a number of comments on criteria for HECMs, as for forward mortgages, a Equity Conversion Mortgages (HECMs) Single-Unit Approval via this condominium loan is approvable for rulemaking, which it will consider Comment: Seniors face difficulty in insurance if it satisfies eligibility when issuing guidance going forward. obtaining HECM loans due to the requirements and is: (1) Located in a inability or unwillingness of project that is acceptable to the Single-Unit Approval and FHA condominium associations to have the Commissioner as described in Concentration projects approved by FHA due to the § 203.43b(d) of this rule, (2) for a single Comment: Is there any relationship difficulty, time, and expense of the condominium unit located in a project between the number of Single-Unit project approval process, without a that is acceptable to Commissioner as Approvals and the percentage of FHA- single-unit option. In some cases, HECM described in § 203.43b(i) of this rule, or insured loans currently in the project? loans are the only way seniors can stay (3) for a site condominium project that HUD Response: Generally, the in their home in retirement, or need the is acceptable to Commissioner as projects in which SUAs will occur must cash flow. A single-loan approval described in § 203.43b(j) of this rule. meet the eligibility requirements of process would make it relatively simple The requirements of § 203.43b of this § 203.43b(d) and (i), which place a limit for individual units to be approved. rule establish the standards for a project on the percentage of FHA-insured loans. HUD should allow Single-Unit that is acceptable to the Commissioner. This rule provides that HUD may vary Approval for a reverse mortgage in any Comment: Condominium associations the specific limit, giving HUD the condominium complex that meets the often are not interested in becoming flexibility to respond to market needs; new Single-Unit Approval criteria. HUD-approved, and therefore they the total FHA insurance concentration Eligibility for a HECM loan should be could not obtain a reverse mortgage. will include all FHA-insured mortgage based on individual creditworthiness This is a common situation (one loans in the project, whether counted rather than the condominium commenter stated that only 6–8 percent for SUAs or the overall limit. association. The current requirement for of condominium projects are HUD- Comment: The FHA concentration whole-project approval is a form of approved), resulting in an underserved range proposed for the SUA process is discrimination because a detached market. the only factor that raises the possibility homeowner who isn’t credit worthy can Some commenters stated that seniors of severely restricting the program on a more easily get a HECM loan than a were being discriminated against, and broad basis or targeting a sub-set of highly qualified senior owning a that seniors in condominiums unfairly projects for disqualification from the condominium. ‘‘Overly aggressive’’ lack the same opportunities provided to underlying program. FHA now has HUD requirements prevent highly those who live in single- family homes, greatly improved risk management due qualified borrowers from qualifying for even if the condominium owners are to improvements in data collection and loans, and HUD should go back to spot more creditworthy. These commenters

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sought the ability to obtain reverse Insurance Fund that generally precludes practice of DELRAP approval violations. mortgages, which would allow seniors allowing single-unit loans without Providing a list of material deficiencies to live near relatives but keep their considering the project. The rule found would help lenders prevent independence, and stated that there provides a framework for HUD to returning from unconditional DELRAP should be an easier way than getting the provide some Single-Unit Approvals authority to a conditional status, or entire project approved. This rule would and to vary requirements as needed to worse, a termination or other action. ‘‘re-open doors in a fiscally responsible meet market needs. If a Direct Endorsement lender has manner for many people that have been pattern of negative DELRAP outcomes, closed for too long.’’ Direct Endorsement Lender Review and it would be appropriate for the A senior with a tax lien against a Approval (DELRAP) Department to impose the proposed mortgage-free condominium unit would Commenters Questioned the Proposed additional requirements to retain likely not be able to pay the taxes past Staff Experience Requirement for DELRAP authority at that time. This has due without a HECM loan. Some DELRAP Approval the benefit of clearly communicating housing markets have become so FHA expectations, which will improve Comment: It is often standard practice expensive that even small condos are the quality of DELRAP approvals and for a lender to employ junior out of reach of many seniors if they are retain the efficiency of the DELRAP not able to use a reverse mortgage. Many underwriters with respect to approval process for FHA in periods of seniors already in a condo need to condominium projects who may not economic stability and distress. HUD access their equity for everyday living, have at least one year of experience, but should review initial DELRAP approvals medical and other expenses and long- who work under the direct supervision and engage in continued quality term care. When some large banks left of a very experienced senior assurance reviews. Greater Direct the reverse mortgage industry, the underwriter. Procedures are already in Endorsement lender participation market lost their dedicated in-house place to oversee this current system resulting from fewer barriers to entry in condominium departments, which through FHA’s quality control reviews. the project approval process, buttressed worked solely on getting condominium Accordingly, HUD should instead by the potential of penalty for non- projects approved. More and more utilize the current guideline compliance, benefits both condominium condominium associations do not want requirements with respect to this issue, households and FHA. to go through the time and expense of which call for the lender to employ staff HUD Response: This final rule revises getting approved. Single-unit loans that have knowledge and expertise in § 203.8(b)(1)(iv) to clarify that staff should come back so that older reviewing condominium projects. members that participate in the Americans can enjoy staying in their Supervision by a senior underwriter and approval of a Condominium Projects home in retirement. internal quality controls allow for using DELRAP authority must have at HUD Response: The Single-Unit underwriters with less than a year least one year of experience in Approval process under this rule is experience to work on a project while underwriting mortgages on expected to make units more easily protecting consumers and the FHA. condominiums and/or condominium available, including for HECM loans. Because each lender is responsible for project approval or be supervised by Comment: HUD should allow a the outcome of each reviewer’s actions, staff that meet such experience certain percentage of Single-Unit it is best left to each lender to determine requirement. Also, in appropriate Approvals for reverse mortgages in any if/when a reviewer is ready to make circumstances, such as where a lender complex, or, in the alternative, HUD these important decisions. HUD should has significant experience through the should consider wiping the project make no changes to current guidance. existing program, this final rule approval database for any complex Comment: HUD should consider if the provides flexibility for HUD to reduce without a status change in 2 years. proposed credentialing process the requirement of completion of five HUD Response: HUD does not believe constitutes a barrier to entry, depressing DELRAP reviews to obtain allowing a certain percentage of Single- the number of lenders eligible to process unconditional DELRAP authority. Unit Approvals solely for HECM loans DELRAP approvals. DELRAP serves the Other DELRAP Issues in all projects would be consistent with useful purpose of increasing its fiduciary duty to the Mutual administrative capacity when there are Comment: There is no specific skill or Mortgage Insurance Fund. HUD believes bottlenecks. Such administrative indication of appropriate experience that making the determination of how capacity constraints may occur when that could prove competency in many units would be Single-Unit the market is very active or when new condominium project approval. Skills Approvals based on specific factors, regulatory standards are introduced. such as understanding condominium experience, and with flexibility to The reduction of DELRAP approvals financials and governing documents, change in response to future market could have negative implications for understanding a reserve study, knowing conditions is the correct approach. For FHA’s countercyclical role in the what a major component is and whether the same reason, HUD would not agree housing finance system. FHA played a a condo project is in sound financial to wipe the approval database at any critical countercyclical role in the recent condition do not translate to other periodic intervals. financial crisis, making mortgage credit fields. The most important skills would Comment: The ability to apply for a available to households, including include HOA accounting principles, HECM loan based on individual condominium households, and community management, and great viability rather than blanket rules accounting for 26 and 22 percent of attention to detail. The use of project applicable to a whole complex is much condominium unit market originations consultants by DELRAP lenders would more democratic and would logically in 2009 and 2010, respectively. Direct be beneficial in that the DELRAP help the economy and give more people Endorsement lenders should be reviewer would get a thorough review cash flow. Allowing single-unit loans provided unconditional approval, with and the client would benefit from quick will also help the values of these the understanding that qualified approval. Mistaken DELRAP approvals condominium projects. personnel will process condominium that are later withdrawn do not benefit HUD Response: HUD has a fiduciary approvals, unless or until FHA quality anyone and add to the negative opinion responsibility to the Mutual Mortgage control reviews identify a pattern or of the process.

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HUD Response: HUD understands the stated in ML 16–15, requiring a 20 potential of a significant increase in skills required to review condominium percent reserve for capital expenditures Condominium Associations able to project applications for FHA approval and deferred maintenance will make qualify for approval. HUD should may be varied. Therefore, this rule this 50 percent owner-occupancy remove the onerous conditions for the provides the minimum requirements for threshold unusable and mostly non- 35 percent owner occupancy rate FHA approved mortgagees to become existent for the majority of the established in ML 2016–15, including DELRAP approved, but neither prohibits condominium projects. Also, the fact prohibiting the DELRAP option, nor requires the use of project that HRAP is required for approval requiring replacement reserves for consultants. below 50 percent ‘‘confuses and capital expenditures and deferred undercuts’’ the emphasis on DELRAP maintenance of 20 percent of the DELRAP Submission Process authority as outlined in the rule. Also, condominium budget, and not more Comment: Relating to conditional the Mortagee Letter has a limitation on than 10 percent of total units more than DELRAP approval, HUD should clarify arrears on association fee payments and 60 days past due. Per the intention of how a lender with conditional DELRAP requires 3 years of acceptable financial HOTMA, the owner occupancy rate for authority should submit its documents. As part of its proposed all HUD-approved condominiums recommended condominium project rulemaking, HUD should allow should be 35 percent. The comment also approvals, denials, and recertification’s comments on the Mortgagee Letter. requests confirmation that HUD will to FHA for its review. An email contact Comment: Owner-occupancy of 25 maintain its current owner-occupancy will be appreciated to speed up the percent is far from generally accepted requirement of 30 percent for existing procedure during conditional DELRAP. practice and could jeopardize the projects less than 12 months old. It would be most efficient, and provide equilibrium between owner occupants HUD Response: HOTMA mandated consistency for lenders and for FHA, if and non-owner occupants. However, certain requirements that HUD must use a centralized submission source and there are markets that could benefit to determine owner occupancy but did process is established for these purposes from a flexible standard as proposed, not mandate the actual owner for consistency. There should be and commenter supports a fair occupancy percentage that HUD could clarification of whether the material regulatory process that would permit a issue through guidance, leaving HUD must be submitted through FHA condominium to receive approval with with discretion. HUD acted based on its Connection, a homeownership center, or an owner-occupancy ratio of less than experience and in accordance with its some other avenue. 50 percent. While HUD has, as directed fiduciary duty to the Mutual Mortgage HUD Response: The specific by HOTMA, lowered the owner- Insurance Fund. The final rule provides submission requirements for conditional occupant rate to 35 percent, few the framework to establish flexibility in DELRAP authority will be detailed in condominiums will satisfy the applying this standard through policy Handbook guidance that will be issued conditions to actually be approved for guidance as market forces may dictate. following this final rule. that rate. HUD should adopt procedures HUD notes that HOTMA requires HUD and standards that would result in to base such owner occupancy DELRAP vs. HRAP condominiums actually receiving such percentage on units occupied by the Comment: Can there be flexibility an exemption. In particular, the owners as a principal residence or a where either HUD or a DELRAP lender requirement for a 20 percent reserve rate secondary residence or sold to owners approves condominiums? Can the is excessive and unnecessary. Providing who intend to meet such occupancy lender choose? an incentive to over-fund reserves could requirements, which would preclude a HUD Response: The final rule be destabilizing, and may have blanket inclusion of REO units, or any establishes the process for significant unintended tax vacant unit not sold to an owner who condominium project approval by either consequences, particularly for intends to occupy the unit as a place of a DELRAP approved mortgagee or HUD. associations using IRS form 1120. Any abode for at least a portion of the With limited exceptions (For example, association that has fully funded calendar year and does not rent the unit use of reserve studies over 36 months reserves pursuant to a current reserve for a majority of the calendar year. old, which requires HRAP under study should be considered as having HUD will consider these comments § 203.43b(d)(6)(x) or other exceptions satisfied the reserve requirement. when issuing such policy guidance. that may be contained in guidance) Comment: HUD followed the letter of Such guidance will address the specific either method may be utilized. HOTMA by allowing the owner owner occupancy ratios necessary as occupancy requirements to be as low at well as address if such ratios vary based Mortgagee Letter (ML) 2016–15 35 percent, but it did not meet the spirit upon the construction status of the Comment: HUD should not have of the law when it added the conditions condominium. issued ML 2016–15 in the middle of that many have said are onerous and Reserve Requirement rulemaking on integrally related topics unlikely to be met by many as mandated by federal legislation condominium projects. Congress called Comment: A 10 percent reserve without further opportunity for for a lower limit to increase the number requirement is excessive, and HUD interested parties to comment. of condominiums that qualify for FHA should consider lowering this amount. HUD Response: HOTMA required approval, thereby increasing the number If an association has insurance in place HUD to issue guidance within 90 days of units available to home buyers and for hazards with 100 percent of the date of enactment to establish the renters. As mentioned above, replacement cost, then ostensibly the required owner occupancy percentage condominium units are a particularly building would be covered for any for FHA approved projects. The 90-day important homeownership option for major hazards or emergencies. Further, deadline made it inevitable that this first-time and low- to moderate-income as outlined below, if the association guidance would be issued during the home buyers, i.e., HUD’s target gathers and holds 10 percent of its overall rulemaking process. HOTMA consumers. However, the addition of annual assessment income each year, allowed HUD to act by Mortgagee Letter. tighter eligibility requirements when the requiring a reserve account to be funded Comment: While supporting a 35 owner occupancy rate is below 50 with at least 10 percent of the monthly percent owner-occupancy threshold as percent essentially eliminates the assessments could have the effect and

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probability of increasing sums held in 3-year approval period. A clear As to the comments regarding failure the reserve account, and thus also provision of lender reporting to comply with requirements for increasing the amount of fidelity requirements and reporting processes approval and a lenders obligation to insurance required under the Guide. will contribute to decreased risks for report any changes, this rule establishes Comment: Most people buying both lenders and HUD. the framework for approval condominium units are not looking into Comment: This change will result in requirements and establishes the reserves before buying. The greater risks an increased number of projects recertification timeframes, but does not of collateral declining in value are approved and available for FHA lending specify the format for recertification pending legal action due to faulty with only a marginal increase in the requests. HUD plans to issue additional construction; lack of a track record for potential for significant change since the guidance regarding the recertification a new project; and a high percentage of project’s approval. It will also process as well as lenders rentals. potentially improve the customer responsibilities to monitor requirement HUD Response: This rule establishes experience as well as decrease costs to on a ‘‘loan level.’’ a reserve requirement of 10 percent of the condominium industry by reducing the monthly unit assessments, but the need for re-approvals. Objections To Extending the provides for a lower reserve amount, Comment: Two commenters state that Recertification Timeframe based on a reserve study completed the time between renewal of FHA Comment: Three years is too long for within 36 months, or such greater condominium approval should be 5 an approval or recertification. HOA’s amount of time as determined by the years, not the current 2 years or the change their budgets every year and Secretary under the HRAP review proposed 3 years. One commenter states they don’t always keep the reserves at process. that HUD and the FHA need to take into 10 percent. Litigation and delinquencies consideration how the small volunteer Required Recertification Timeframe can also be a cause for concern. Fannie HOA’s will implement the final rule. Mae approvals expire every 6 months. A number of commenters supported While a large HOA managed by a Commenter suggests staying with the 2- extending the time for recertification. professional company can easily meet year requirement. Comment: Condominium approvals the short renewal period because that is Comment: The exiting 2-year should be extended from 2 to 3 years, what they are paid to do, every recertification provides a minimal stop- making it easier to submit and get requirement acts as a disincentive for gap to discover projects that are not in condominium approvals and allowing the small HOAs. Renewing the approval compliance. Fannie Mae effectively for more flexible guidelines. Many every 3 years as proposed will have requires a lender to perform a full condominium associations prohibit little or no positive impact. The review of a project every 6 months for rentals and without FHA financing unintended consequence of the current compliance. HOA financials show that opportunities, it makes them more rule has been to limit housing inventory it is not untypical to see issues such as difficult to sell, and thus creates and hurt first-time homebuyers. One the minimum requirement for reserve plummeting values. This often creates a commenter states that the process is funds not being enforced; reserves have scenario where condominium owners daunting, the average cost of obtaining stop making mortgage and association the appropriate documents and legal not been transferred on a regular payments and creates hardships on the opinions related to the certification monthly basis from the operating association to where the repairs and process can range between $1,500 and account to the reserve account; reserve other amenities are compromised. $3,000. A 5-year approval period, rather funds have been used for purposes other Comment: Extending the provision to than the proposed 3 years, would be than allowed; special assessments; et al. a 3-year period would reduce costs to ideal for reducing the burden to the This presents a significant risk to the associations in obtaining FHA condominium associations and entice FHA insuring program if a unit is approvals. many more buildings to apply for FHA foreclosed and becomes a HUD REO, Comment: A project may experience a approval, while still maintaining safety and the HOA financial condition poses number of financial or legal changes and soundness. a risk. during the 3-year period. Special HUD Response: HUD agrees with the HUD Response: HUD has decided to assessments are frequently imposed. If comments supporting a 3-year retain the approach proposed in HUD extends the approval period, it is timeframe, and this final rule retains the § 203.43b(g)(3) in the final rule where strongly recommended that HUD approach provided in § 203.43b(g)(3) of projects may be approved for a period provide examples of what constitutes the proposed rule (§ 203.43b(h)(3) of of 3 years from the date of placement on ‘‘fails to comply with any requirement this final rule) where projects may be the list of approved condominiums (see for approval.’’ approved for a period of 3 years from § 203.43b(h)(3) of this final rule). This Comment: The change to 3 years will the date of placement on the list of determination was based considering decrease submission burdens on lenders approved condominiums. As noted by the public comments received, FHA- and review burdens on HUD. HUD the commenters, the benefits of insured condominium performance, risk should further memorialize the lenders’ increasing the project approval period to the Mutual Mortgage Insurance Fund, obligation to report known changes in by 1 year far exceed the potential risks positive impact in the industry, and circumstance through explicit language of changes to the project’s requirements increase in affordable housing in the final rule. This language should for approval while limiting the period opportunities. However, HUD will take mirror current guidelines that require beyond 3 years, which would run too the specific comments and lenders to report any known litigation, great a risk of detrimental changes to the recommendations regarding managing budget deficiencies, changes to project. This final determination was project renewals under consideration association documents that may not based on FHA-insured condominium when drafting future policy guidance. align with eligibility requirements, and performance, consideration of risk to the Comment: Does a condo project have excessive homeowners’ association Mutual Mortgage Insurance Fund, to meet the eligibility requirements only delinquencies that place the property in positive impact in the industry, and at the time of approval, or does it have financial distress as soon as they are increase in affordable housing to meet them continuously going made known to a lender throughout the opportunities. forward?

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HUD Response: The final rule and sales. However, the Department Will this practice continue under the establishes the eligibility requirements proposes to deny approval for phases new regulations? If not, condominium that must be met at time of approval and that are not contiguous to previously developers have indicated that a process then continuously going forward. HUD completed phases. This will not provide requiring separate approval of each will provide clarity regarding a significant consumer or taxpayer completed legal phase would cause mortgagee’s responsibility to monitor protections. If such decisions are to be them to abandon the FHA market. approval requirements beyond the time regulated, it should be by state and local HUD Response: HUD has clarified in of approval in future policy guidance. governments. Proposed this rule that individual legal phases Comment: One commenter stated that § 203.43b(d)(6)(x) (§ 203.43b(e) of this may be approved independently there are both positives and negatives. final rule) should be removed. without the need for the entire Negatives: With a 3-year process, more Comment: There is a potential condominium project to be fully eligibility issues may develop. Staying financial impact on projects by the complete. The establishment of the in compliance is more likely with a 2- requirement that phases must, for ability to independently approve phases year recertification. Also, the cost would detached and semi-detached ensures the ability to perform such be more likely to stay in budget. With developments, consist of ‘‘groups of approval on separate phases by multiple a 2-year process, Board Members and adjoining or contiguous homes.’’ HUD DELRAP mortgagees or by HRAP Community Managers are more likely to should be aware that buildings are often without the need to amend a current be familiar with the process and built out of order for marketing approval performed by another maintain certification. A 3-year purposes, so to require they be built in reviewer. Conversely, the rule does not recertification will require additional contiguous order would eliminate FHA prohibit such approval on separate education of new board members. financing opportunities for many phases by the same DELRAP mortgagee Positives: Potential cost savings, purchasers, especially in geographic or by HRAP where the existing although it will be minimal; more markets that do not allow for legal information on separate phases could be projects would be FHA certified at a phasing. Also, does this requirement used in the approval process of the single time. mean that legal phases must be subsequent phases. HUD Response: HUD recognizes the contiguous in their order of construction Comment: Requiring a legal phase to positive and negative factors stated by and approval? The phases should be be completed will require a separate the commenter and believes that the approved even if the units are budget for the initial phase, and a reduced burden associated with a 3-year completed out of contiguous order. HUD cumulative budget for each subsequent recertification process outweigh the should remove the requirement for phase, which is a practice required in effects related to Board Members’ contiguous units or buildings for lateral California for phased developments. knowledge of the process. (non-vertical) developments. Under this practice, the regular monthly Comment: Commenter seeks Comment: The FHA should limit the assessments for the first and initial additional public input on the need for contiguous criteria to only phase(s) can (will) be substantially recertification process and for HUD to vertical buildings, as requirements for higher than that of the subsequent phase ensure that recertification burdens are builders to construct buildings in a unit owners. This can affect the loan/ eased through simplified procedures specific order may limit the ability of a payment qualifications for the initial and the use of technology that facilitates builder to make their projects available buyers. If this rule is adopted, there providing FHA information required for to borrowers in a timely manner. This should be allowed a provision for the recertification. would limit supply and consumer developer to provide bonding to HUD Response: HUD will take this choice. subsidize the initial phases of comment under consideration for future HUD Response: HUD agrees with the development in order to provide a policy guidance and technology comments and has revised this final rule maximum assessment to the initial developments. to allow non-contiguous development phase(s) unit owners (e.g., a maximum for detached or semi-detached assessment guarantee). This is also Legal Phasing buildings. If the project is complete to practiced in California and serves to Commenters expressed concerns the extent that all units in the minimize the initial phase(s) buyers about the potential financial impact on completed legal phase are ready for needing to qualify for a mortgage based projects by requiring that phases for occupancy, the viability of the detached on the higher monthly assessments. detached and semi-detached or semi-detached project is not HUD Response: This final rule developments must consist of groups of determined by the contiguous provides the framework to establish adjoining or contiguous homes. development of the buildings. flexibility in applying the rule’s Comment: Fannie Mae will sometimes standards through policy (including allow non-contiguous developments Legal Phasing, Under-Construction standards for financial condition). Based (e.g., two parcels separated by a school) Projects, and Other Related Matters on HUD’s experience, the concern with if there are not common recreational Comment: The language regarding monthly assessments in new facilities located on one parcel for approval of legal phases is ambiguous. developments, including those that are which the unit owners would be Whether an entire condominium project built in legal phases, is that they are required to travel to the other parcel can be approved when only the initial usually subsidized by the developer as having the facilities. phase is fully complete or whether the an incentive to the buyers. Additionally, Comment: HUD has not offered entire condominium project must be any potential considerations regarding sufficient justification to limit project fully complete should be clarified. If the underwriting of borrowers is outside the approval based on phase location. This initial legal phase is complete and scope of this rule. HUD, however, will policy would deny consumers access to approved, does each subsequent legal consider these recommendations when FHA-insured mortgages. It is phase need to be submitted separately updating future guidance. appropriate that builder determine for approval? The current practice is Comment: The word ‘‘project’’ should which phases will be declared and that the approval for the initial phase be removed and only the term ‘‘phase’’ constructed based solely on the would be amended with the recorded should be used to provide the greatest builder’s assessment of market demand documents for the subsequent phases. level of transparency/clarity possible.

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HUD Response: To clarify proposed projects to delay construction of an community building, swimming pools, golf § 203.43b, proposed paragraph (d)(6)(x) amenity (such as a clubhouse) until a course, playground, etc.) and buildings is moved to a new top-level paragraph certain number of phases have already containing the condominium units has (e) in this final rule, and slightly proceeded to a point that precludes any been completed. There is a concern that major changes. reworded to more properly state the the provision, as currently drafted, relationship between projects and would require that all such amenities be Comment: In-lieu-of an phases, and other paragraphs are completed before project approval could Environmental Review, infrastructure redesignated accordingly. be obtained, impacting standard completion can be evidenced by: Comment: Clarification is needed building practices and increasing costs a. Photos of the project and site to evidence regarding what ‘‘sufficient numbers’’ (of for builders and consumers. completion status of infrastructure (streets, units in phases to be separately Furthermore, commenter notes that utility stubs to building pads, building sustainable) means. Under current tying project approvals to completion of foundations, buildings completed and under guidance, phases are appropriately a legal phase could be burdensome and construction); and/or, b. City final inspection records; or, permitted in segments as small as a problematic from a state law single building. Increasing the number c. Letter (letterhead) from city stating perspective. There is a patchwork of completion or percentage of completion, or of units to be included within a legal state laws concerning how to properly stating that the construction of the project’s phase may be detrimental to economic effect legal phasing, with varying levels infrastructure (streets, storm water viability of the planned development of difficulty depending on the state in management, water and sewage system, and and may not be in alignment with local question. This would mean that it utilities) and facilities has proceeded to a building restrictions. If a legal phase is would be a lengthier and more point that precludes any major changes; or, mandated to require a greater number of expensive process to obtain project d. Completion bond release. units, and as further stated in proposed approval in some states rather than HUD Response: HUD has removed the § 203.43b(d)(6)(x)(B), the units must be others, which would negatively impact definition of ‘‘Infrastructure’’ and built and have a certificate of consumers in those states. replaced it with the definition of occupancy, the developer will endure a HUD Response: Under § 203.43b(e) of ‘‘Common Elements’’. As a result of this significant financial hardship by this final rule, a complete legal phase is change, bonding for completion of carrying inventory for units that cannot one that is available for occupancy infrastructure is not addressed in this be financed, or it will lead to fewer (whatever that requires under local law rule. HUD will consider this comment opportunities for purchasers who would in terms of amenities and other when updating and drafting the specific benefit from FHA financing. HUD elements) and self-sustaining. This guidance and procedures that will should provide more clarity on regulation would not alter the existing govern the analysis of determining a sufficient numbers of units that allows effect of State processes on consumers. phase’s ability to be separately for several units that matches local sustainable. ordinance or that aligns with the ‘‘Infrastructure’’ and Phasing developer’s marketing plan. Comment: The word ‘‘infrastructure’’ New Construction Comment: The current phasing as it relates to legal phase approval is Allow New Construction and Proposed guidelines should remain as-they are, somewhat vague. Although a legal phase Construction, in Addition to Legal specifically for new construction may not include the building of a Phasing projects to ensure optionality and common amenity, that legal phase choice for the FHA borrower. Comment: HUD is proposing to typically has an undivided interest in remove the requirement of HUD staff HUD Response: This final rule retains common amenities that may be the proposed ability to provide project conducting Environmental Reviews for proposed in other legal phases. Are new projects which do not provide approval on phases without the need for these amenities in other phases thus approval of the entire proposed or under evidence that the infrastructure is considered infrastructure? Commenter completed to a point where HUD would construction project (this provision is states that HUD should define the term § 203.43b(e) of this final rule). A have no influence. The requirement that ‘‘infrastructure.’’ the project or legal phase be complete completed phase is built out, ready for HUD Response: HUD agrees with this prior to submitting for approval will occupancy, and independently comment. HUD has simplified the impose a hardship not only on the sustainable. The statement that there requirements specific to phasing and builder, but moreover, on the buyer must be ‘‘sufficient numbers’’ has been has removed the term ‘‘infrastructure’’. seeking to obtain an FHA loan, because removed in this final rule because that HUD has maintained the requirement this requirement means that a phase quantity may vary in individual cases. for each phase to be ready for must be completed to obtain HUD The comments and recommendations occupancy and separately sustainable. approval. However, prior HUD approval will be considered when updating and Comment: If this rule for requirement is required before the lender can obtain drafting the specific guidance and of project or phase completion is a case number, and a case number is procedures for determining independent adopted, a provision should be added to required before the lender can request sustainability in future guidance. the effect that the completion of the an FHA appraisal. Lenders typically Comment: There is a need for infrastructure can be bonded for prefer to have a cushion of 60–75 days additional clarity on what criteria completion, and/or to maintain the for the process to compete an appraisal would make a legal phase eligible due current guidelines as follows: to varying state law definitions of what and other underwriting functions, all of constitutes a phase, whether one legal a. A condominium plat or similar which are required to be completed phase or all phases must be complete development plan and any phases delineated prior to closing the loan. In the case of therein have been reviewed and approved by this proposed rule, although the unit prior to approval, and what constitutes the local jurisdiction and, if applicable, a sufficient number of units to be recorded in the land records; and, would be completed and ready for considered separately sustainable. b. The construction of the project’s occupancy, the buyer would be forced Comment: It is unclear as to how infrastructure (streets, storm water to wait significant time after the phase amenities would be treated. For management, water and sewage systems, is completed, then after it is HUD example, it is common in construction utilities), and facilities (e.g., parking lots, approved (30-day review for HRAP),

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only then could the lender order the allow FHA closings on such buildings new construction projects. In many case number and then order the when other buildings in the phase have instances, this proposal would appraisal, and then complete all not yet been completed. Moreover, some significantly impact current industry required underwriting. This also governmental authorities do not allow practices in place for the installation of increases the builder’s carrying cost or otherwise recognize legal phasing. building amenities and the timing of (interest) on the construction loan, and Comment: Although Fannie Mae project eligibility and approval. By this will have an impact on housing requires a phase to be completed, this requiring ‘‘completion,’’ borrowers, affordability. does not hamper the appraisal process. lenders, and builders would experience Comment: The current HUD process A lender can order a conventional sizeable impacts due to delays in of approving under construction, appraisal regardless of whether the approvals and closings due to the phased projects places the responsibility project is seeking Fannie Mae approval feasibility of construction. This will on the lender to determine completion, or otherwise. ultimately make it more difficult for an and it should be noted that the FHA HUD Response: This final rule makes FHA borrower to obtain a unit in a new lender must include evidence of legal phasing consistent with Fannie construction project. HUD should allow completion in the Insuring Binder Mae’s policy regarding completion of lenders to continue with the current (Certificate of Occupancy or equivalent). legal phases, even though Fannie Mae practice of approving proposed or under Based on this alone, the FHA Insuring has other underwriting requirements construction projects, despite the Program would not be at risk. that reduces their risk of exposure, such possible need for additional HUD Response: This final rule as lower loan to value (LTV) parameters environmental reviews, and maintain its maintains the requirement that a project for condominium loans. However, this current guidelines. Should HUD remain or phase be complete and ready for rule does not make changes to HUD’s concerned regarding risk management occupancy as a condition for approval. use of the status at the time of appraisal issues, HUD should require a bond or HUD recognizes this may impact a small in determining the construction status letter of credit from the builder to assure segment of the market and possibly of a property. completion. delay the time period from completion Comment: The requirement that the HUD Response: HUD recognizes that to sale, but has weighed this impact project (or initial legal phase) be fully the completion requirement may impact against the overall reduced burden for completed and the condominium legal a small segment of the market and compliance contained in this rule as documents be fully recorded for the possibly delay the time period from well as the balance required to ensure condominium to receive FHA approval completion to sale, but has weighed this appropriate risk controls to protect the will create a hardship not only on the impact against the reduced burden for Mutual Mortgage Insurance Fund. HUD builder but more importantly on the compliance of projects overall contained constantly monitors its requirements to consumer. For the builder waiting for in this rule as well as the balance ensure the right balance is achieved the full completion of construction and required to ensure appropriate risk between serving the market FHA the recording of the legal documents controls to protect the Mutual Mortgage mortgages are designed to service and will push back the processing, Insurance Fund (MMIF). HUD protecting the MMIF. HUD will take underwriting, and approval of the FHA constantly monitors its requirements to these comments under advisement in loan request by at least a month or more. ensure the right balance is achieved this manner. In addition, without FHA approval between serving the market FHA Comment: It is not clear what the during the early marketing and sales mortgages are designed to service and definition of ‘‘complete’’ is. Often cycle of an under-construction protecting the MMIF. HUD will take amenities such as recreation centers condominium, the builder will not be these comments under advisement in aren’t begun until a certain number of able to advertise the availability of FHA this manner. units are presold. Requiring adjustments insured loans. This will increase the Comment: As soon as the Certificate to this practice in effect will not just builder’s carrying cost on their of Occupancy is approved by the local impact condominium approval, but will construction loan by delaying closings government agency, the lender should require a re-evaluation of standardized that could result in added cost to the be able to start the FHA permanent and generally accepted building process consumer. Also, under the current financing for potential purchasers. This timelines across the country. process the responsibility is on the proposed rule will affect the mortgage HUD Response: A project or phase lender to determine completion by industry since: Mortgage Applications must be complete and ready for requiring that the lender include are worked with potential purchasers 60 occupancy as demonstrated by the evidence of completion in the Insuring days before the Certificate of Occupancy certificate of occupancy, or its Binder (CO or equivalent) and thus the is given by the state government (on equivalent, and includes completion of FHA insurance fund would not be put walk-ups, this will delay the process all the common elements of the project, at risk. This proposed rule will have an and clients who otherwise could move and not subject to further rehabilitation, extremely negative effect on the to their new homes); an interim construction, phasing, or annexation, consumer by delaying access to the FHA financing loan for the construction of except in cases where the project is insurance program and to the builders walk-ups project (multiple low rise) is seeking approval for a legal phase. If a by delaying closing on many FHA based on a peak (maximum loan phase, it must be self-sustaining. buyers. HUD should continue its current disbursement before repayment starts), Comment: HUD’s practice of allowing approval processing requirements for and if there is no repayment on the FHA loans on units in a completed new construction condominiums by mortgage the builder cannot continue building in a legal phase containing allowing the submission of a project (or the construction and cannot sell the multiple buildings (two or more) does initial legal phase) while construction is units. conflict with Fannie’s Mae’s still on-going and before the HUD Response: HUD recognizes that requirement that all buildings in a legal condominium legal documents have the completion requirement may impact phase must be completed (although been recorded. a small segment of the market including Fannie Mae does offer a process to allow Comment: The requirement for ‘‘walk-up’’ projects and possibly delay construction phasing via PERS completed phases would represent a the time period from completion to sale; Application). FHA should continue to dramatic change in building plans for however, HUD has weighed this impact

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against the reduced burden for Comment: A commenter states that builders and borrowers not present in compliance of project overall contained the requirement for completion often the FHA program today as well as other in this rule as well as the balance results in a senior waiting months to agencies’ programs. required to ensure appropriate risk close on a HECM unit until the Comment: Requiring all buildings in a controls to protect the Mutual Mortgage landscaping can be completed, weather phase to be completed will delay Insurance Fund. permitting. In the meantime, seniors closings. The requirement for completed Comment: A commenter states that often have a greater expense as they phases will cause a delay of 30–45 days they are unable to understand how the have to continue renting until they can for HUD approval, with an additional elimination of the environmental review move into their new home or live with 15–30 days for processing and only for HRAP applications friends or relatives causing significant underwriting of the loan, creating compensates for the total prohibition of stress. The current regulations negative consequences for consumers project approvals, HRAP and DELRAP, discriminate against seniors based on and increasing the builder’s expenses in on proposed and under construction where they live. This is a problem with carrying interest on the construction projects. If an environmental review is condominiums, Site Condominiums, loan, reflected in higher home prices. not required for an approval by a Direct and new single-family homes in cold This change will not provide any Endorsement Lender, why is it weather states. If the landscaping is the benefits to the FHA insurance fund and necessary for a HUD review and only issue, then there needs to be an will only negatively impact consumers approval? If HUD believes the exception. This issue needs to be and homebuilders. environmental review is a burden on its resolved quickly. HUD Response: This final rule staff, it seems it could be eliminated or HUD Response: Substantive changes maintains the requirement that a used in more restricted circumstances. to the HECM program, as well as local project, or phase, be complete and ready Not having FHA approval until law regarding real estate closings, are for occupancy as a condition for completion may cause builders and beyond the scope of this rulemaking. approval. HUD recognizes this may developers to abandon the market. The Single-Unit approvals and project impact a small segment of the market and possibly delay the time period from advantages of allowing proposed and approvals require that the unit be in a completion to sale but has weighed this under construction projects to be project that is complete under impact against the reduced burden for approved, and the ability for developers § 203.43b(d)(4), that is, complete and compliance of project overall contained to pre-sell units to FHA borrowers, prior ready for occupancy. If local standards in this rule as well as the balance to being fully complete far outweigh any do not require that landscaping be required to ensure appropriate risk disadvantages of environmental reviews completed in order for the project to be controls to protect the Mutual Mortgage that HUD may perceive. HUD should occupied, the project, or single units in the project, may be eligible if meeting Insurance Fund (MMIF). HUD withdraw the proposed prohibition and the requirements of this rule. constantly monitors its requirements to keep the current requirements for Comment: There are concerns about ensure the right balance is achieved proposed and under construction the rule permitting only legal phasing between serving the market FHA projects. and requiring each phase to be mortgages are designed to service and Comment: Condo approvals are too separately sustainable due to protecting the MMIF. HUD will take restrictive, resulting in decreasing implications for new construction and these comments under advisement in condo approvals. Provisions in the FHA borrowers seeking units, resulting this manner. proposed rule will further decrease in substantial closing delays. Without Comment: These provisions, if FHA’s share of the condo market. pre-approvals that are currently issued enacted, will unnecessarily delay a Specifically, the proposed changes to for ‘‘under-construction’’ or proposed consumer’s ability to close on and take proposed and under construction construction projects, a lender would possession of their condominium. approvals and Site Condominiums not be able to order a case number until Under the proposed regulations, a could result in developers leaving the a project is approved, subsequently lender would not be able to order a case FHA market to the detriment of FHA delaying the processing of a loan number or an appraisal until the project borrowers. application and resulting in significant or legal phase is completed and the HUD Response: This final rule closing delays of up to 60 days. This condominium documents have been continues to allow for approval of will ultimately limit the choices for low- recorded. The rule could delay closing completed legal phases, but does not to-moderate income borrowers, leaving by several months. It would also result permit approval of phases that are them at a disadvantage if they are in the builder having to hold onto proposed or under construction. HUD seeking new construction units. inventory longer than anticipated, constantly monitors its requirements to Comment: The requirement that all which would increase the costs to the ensure the right balance is achieved infrastructures be complete prior to builder and ultimately to the consumer. between serving the market FHA approval of the phase/project is a Equally troubling is the fact that mortgages are designed to service and significant departure from previous homebuilders often rely upon a certain protecting the Mutual Mortgage practice that may limit the usage of the amount of presold condominiums in Insurance Fund. HUD will take these program. Presently, approvals may be order to qualify for financing to comments under advisement in this made in the framing stage of building construct the condominiums. The manner and will continue to assess the and this new requirement could be an inability to obtain approval for the impact of this requirement as well as unnecessary and burdensome project or phase prior to construction any impacts related to new construction requirement. Without the ability to and recordation of the condominium projects in relation to environmental secure approval prior to completion, documents could, in fact, chill requirements in 24 CFR part 50. builders will be unable to market during construction of new condominium However, HUD believes that this rule construction and gain the necessary projects altogether. will increase participation in the mortgage approvals until the final Comment: The ability to approve program due to the added flexibility it inspection for the phase/project has condominium projects prior to provides to address future market been completed and certified. This completion benefits both home buyers changes. places an additional requirement upon and home builders. The approval of a

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proposed or under construction documents have been provided to FHA relation to environmental requirements, condominium project allows a mortgage and acknowledged in relevant systems 24 CFR part 50. application to be processed while the as having been received. The proposed Site Condominiums condominium unit is being constructed rule will disrupt this process and and decreases the time required to close introduce inefficiencies and delays for Comment: Site Condominiums should the loan after a unit is completed. consumers. The proposed policy change not be placed into the proposed Prohibiting the approval of proposed will place consumers seeking to obtain approval process. HUD should maintain and under construction projects means FHA-insured mortgage credit at a the definition and approval process that a lender will not be able to order market disadvantage, lead such currently in place. an appraisal and begin processing a consumers to more expensive mortgage HUD Response: This final rule mortgage loan application until the first loans and will delay closings for an maintains and expands the definition of phase of the condominium is undefined policy benefit. The potential ‘‘Site Condominium.’’ This final rule is completed. This is because a lender for delayed closings will also alter more inclusive of additional cannot request a case number and order builder business decisions, which may configurations of Site Condominiums an appraisal for a mortgage loan have unintended consequences for that exist in the market. Site application until a condominium consumers. It is well established there is Condominiums must meet the project has received a Project ID a lack of affordably priced housing definition in § 203.43b(a)(7) and the Number, which is not assigned until a available to lower and moderate-income basic requirements of § 203.43b(d)(1)– project has been approved. This revision households. It seems counter to federal (5). Insurance and maintenance costs to the current process will result in and state policymaker efforts to increase must be the responsibility of the owner significant delays, 60 days or longer, in the supply of affordable homes to limit as provided in § 203.43b(j). Comment: HUD’s current definition of the purchase and settlement of consumer access to FHA-insured a Site Condominium should include the condominium units whose buyers are mortgages and alter the business provisions relating to insurance, seeking FHA-insured financing. economics of the builder industry. HUD should remove § 203.43b(d)(4). maintenance, and common assessments. Developers may not be willing to offer Comment: Insurance and maintenance FHA-insured mortgage loans to buyers Comment: The proposed rule may impose an unduly high burden on new costs must be the sole responsibility of prior to approval of a project since they the owner with respect to Site cannot begin processing the mortgage construction with the requirement that the project phase be ‘‘complete and Condominiums, and any common application and the condominium may assessments collected must be restricted ultimately not be approved for months, ready for occupancy, including completion of the infrastructure of the to use solely for amenities outside of the if at all. The result will likely mean footprint of the individual site. Site fewer condominium projects submitted project or legal phase, and not subject to further rehabilitation, construction, Condominiums generally do not have for FHA-approval and home buyers master insurance policies associated interested in purchasing units in new phasing, or annexation, except to the extent that approval is sought for legal with the condominium itself; therefore, condominium projects will not have this would be consistent with industry FHA insurance as a financing option. phasing in compliance the requirements of proposed (d)(6)(x) of this section’’ and market practice. Builders will not be incented to seek HUD Response: HUD believes that the FHA approval for new construction (§ 203.43b(e) in this final rule). New construction projects do not always revised definition of Site Condominium condominiums if they can have their fully incorporate the common elements in 24 CFR 203.43b(a) combined with the under-construction projects approved of a project until there are sufficient separate regulatory requirements for for conventional financing using Fannie residents within the project to sustain unit owners in 203.43b(j) provides the Mae or Freddie Mac programs. FHA- those features. Necessitating the correct balance in addressing Site insured loans will be at a significant absolute completion of all common Condominiums based upon the market’s disadvantage to the Fannie Mae and elements would substantially limit the reaction of treatment of such properties Freddie Mac conventional financing ability for purchasers to obtain FHA as a potential substitute for other programs. This could prove a financing until the project is well detached dwellings. disadvantage to homebuyers who may established. Commenter believes that Comment: Certain provisions of the need the advantages of FHA-insured the current requirement that common definition should be clarified: (1) The financing, which include a higher debt- elements be ‘‘substantially complete’’ is word ‘‘site’’ is interpreted variously. to-income ratio, smaller down payment, sufficient and should be maintained. The comment recommends the and less-than-perfect credit HUD Response: This final rule inclusion of the word ‘‘land.’’ (2) Many requirements. continues to allow for approval of condo plans limit ownership interests in Comment: The policy of approving completed legal phases but does not land and air space by creating three- only completed projects or phases will permit approval of phases that are dimensional envelopes or modules. restrict access to FHA-insured proposed construction or under These envelopes or modules may be mortgages for consumers seeking to construction. HUD recognizes this may created in relation to sea level. The unit purchase new construction impact a small segment of the market owner’s interest remains within the condominium units. Further, FHA may and possibly delay the time period from envelope or module, and is, thus, be inappropriately influencing the completion to sale, but has weighed this limited. The areas outside of the market-based decisions of its private impact against the reduced burden for envelope or module is considered enterprise partners. Consumers benefit compliance of a project overall common area. HUD’s current definition from this earlier review and approval as contained in this rule as well as the suggests unlimited ownership of air lenders are able to process loans, balance required to ensure appropriate space and land and does not consider allowing consumers to close in a timely risk controls to protect the Mutual the typical legal construction of such manner. This advance submission and Mortgage Insurance Fund. HUD areas. approval process protects the Fund and continues to assess the impact of this Comment: Various HOC reviewers taxpayers as a mortgage may not be requirement as well as any impacts and mortgagees interpret HUD’s Site endorsed until the fully recorded legal related to new construction projects in Condominium language to mean

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‘‘ownership of air space and land that include the air space above and the simply created to comply with generally limits some other use.’’ ground beneath the structure. Likewise, California law. A condominium unit Obviously, this interpretation differs the Department of Veteran’s Affairs (VA) that fails to identify its vertical limits, from the literal language. We does not place such restrictions or as HUD appears to require for a Site recommend that HUD clarify by adding otherwise define Site Condos for Condominium, may be a violation of the words such as ‘‘unlimited’’ or ‘‘at least eligibility. Both attached and detached California Subdivision Map Act. X above sea level’’ or some other condos require VA approval. The waiver HUD has previously allowed detached language that makes clear what HUD was issued to expand project eligibility condominiums with this air space intends when envelopes or modules for those projects where the legal common area to qualify as exempt from limit ownership. governing documents required that full condominium project approval Comment: HUD’s failure to provide obtaining and maintaining the insurance under the Guide. HUD’s change of comprehensive guidance on Site was the responsibility of the unit owner. interpretation of section 1.8.1 of the Condominiums results in an uneven HUD Response: This final rule revises Guide is troubling, as California playing field among mortgagees. the Site Condominium definition under detached condominiums look and Comment: Under prior 2009 HUD § 203.43b(a)(7) to remove the function like a traditional single-family guidance, a detached condo unit was consideration of the type of air or land detached residential project where the simply defined as a completely ownership for detached units as well as homeowner wholly owns, maintains, freestanding structure. In 2011, HUD to address land ownership requirements and insures his or her residence as well then defined a Site Condominium and for townhouse style projects. HUD as all other improvements within the required certain characteristics (e.g., believes this change will substantially footprint of the detached condominium insurance, maintenance) including the reduce or eliminate the need for such unit. Neither Fannie Mae nor VA have unit must include the ground (to the Insurance Waivers and provides the such an air space requirement. The air center of the earth) and the air space (to correct balance in addressing Site space common area, and boundaries infinity), without restrictions. HUD Condominiums based upon the market’s placed below the earth’s surface, require further recognized the insurance issue reaction of treatment of such properties no maintenance and do not impair the with the ground restriction and issued as a potential substitute for other non- project’s ability to function like a single- an Insurance Waiver. Some states such condominium ownership style family detached project. It is not clear as California allow the unit site dwellings. how including air space and indefinite ownership to extend below the ground lower boundaries as a common area Air Space Common Area and Site surface and/or the air space above the would create a risk for the insurance structure to be limited, such as 50 ft. Comment: Section 1.8.1 of the Guide, fund. The fact that master insurance below and/or 50 ft. above the structure. because of the inclusion of air space, policies associated with the Site The areas beyond these limits are which may not be a common area, in the Condominiums generally do not exist common area and/or association definition of Site Condominium, supports removal of the ‘‘site and air property. The requirement that there conflicts with California law with the space’’ component. can be no restriction or limit on the result that in California, Site Commenters suggested removing ‘‘site ground beneath and the air space above Condominiums are not exempt from full and air space’’ from the definition of a structure serves no purpose and this project review, unlike Site ‘‘Site Condominium’’ in § 203.43b(a)(7), would not jeopardize the FHA insuring Condominiums generally. This will and other revisions. HUD will be better program. increase costs and time to obtain served because fewer single-family HUD partially recognized this matter approval and could cause developers to detached projects will have to be in its issuance of the Insurance Waiver, stop offering FHA financing. Under submitted for full project approval. which allowed the unit owner to be California law and that of some other Homeowners will be better served by responsible for insurance if there was a states, there is an ‘‘air space common allowing the individual homeowners to limit on the ground beneath the area’’ requirement for detached Site obtain insurance on their single-family structure or if it is common area. Condominiums that include a residence, homes instead of an association policy However, the Insurance Waiver does not yard, and other improvements that are required under full HUD–FHA take into equal consideration the air wholly owned, maintained, and insured approvals. The mention of ‘‘air space’’ is space above the structure. This may by the buyer. The vertical and not typical in the industry and any risk have been an oversight in drafting the horizontal boundaries will have no should already be addressed by FHA’s Insurance Waiver. If the current bearing on a detached condominium’s requirement that all state and local definition of a Site Condominium will value, nor do they have an impact on ordinances be followed. remain intact, we would propose that the use of the condominium by its One commenter suggests adding to the Insurance Waiver be revised and owner. Lower vertical boundaries are the end of the proposed definitions of codified to the extent of allowing the air typically placed well below the earth’s ‘‘Condominium Unit’’ and ‘‘Site space above a unit to likewise be surface, and upper vertical boundaries Condominium’’ the following: ‘‘(as deemed as common area. are placed at elevations above the unit defined under any applicable local laws Comment: HUD’s requirements are that could be of no possible use or or statutes governing the creation of too strict; HUD should mirror Fannie benefit to the unit owner. The three- common area or limited common area)’’. Mae’s guidelines. Fannie Mae does not dimensional separate interest is not Another comment suggests revising the require that detached condos must created to limit use of any area; it is definition as indicated:

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Another comment suggests: other than ‘‘common areas,’’ i.e., parks, the standard appraisal form for these Site Condominium means a single family trails, bike paths, etc. The Properties are entities. detached dwelling (which does not have a being Listed/Marketed as Single-Family HUD Response: The practices shared garage or any other attached building, Homes and more often indicated as associated with appraisal of Site including such improvements as archways, having defined Lot Sizes. This recent Condominiums are outside the scope of or breezeways), which is encumbered by a phenomenon is a result of developers this rule; however, HUD will take this declaration of condominium covenants or looking for ways around county platting comment under consideration for future condominium form of ownership, and which policy guidance. consists of the entire structure and no part of requirements that slow the the dwelling or structure, or any other development/building process. This Free Assumability and Private Transfer improvement considered to be a part of the hybrid property has all the attributes of Fees condominium unit is considered to be a a Planned Unit Development or single- Comment: 24 CFR 203.41 currently common area or limited common area (as family home, yet as it is legally a defined under any applicable local laws or prohibits mortgage insurance if a condominium and lenders are requiring mortgaged property is subject to an statutes governing the creation of common the appraisal report be developed on area or limited common area). Such Site affordability covenant that survives Condominium may have upper and lower Form 1073/465. Form 1073/465 foreclosure or certain foreclosure vertical boundaries to the extent required to encompasses the attributes of alternatives. The nation is experiencing comply with applicable State law provided developments where the owners have a growing housing affordability crisis, that all structural improvements of the Site shared ownership responsibilities that particularly in housing markets where Condominium are contained within such include site maintenance, exterior condominium projects may play a upper and lower vertical boundaries. structural maintenance, and shared productive role in meeting this need. HUD Response: HUD agrees with the structural liabilities, none of which The affordability crisis is leading many commenters and has revised the Site apply to the single-family jurisdictions to require an affordability Condominium Definition under Condominium or Site Condominium. component in new condominium § 203.43b(a)(7) to include its easily Until the lending community, and more projects and multi-family rental housing determined physical attributes and land specifically Fannie Mae/Freddie Mac, developments, reserving units for sale or ownership attributes without the address this new Property Type, the rent at affordable prices. FHA should consideration of air space. These only current form that can accurately work with local governments and revisions allow more configurations of address the attributes of the Site developers to approve all units in such Site Condominiums to be eligible. In Condominium is the 1004/70 URAR. condominium projects. Fannie Mae and addition, § 203.43b(j) of this final rule Furthermore, the use of the Freddie Mac are currently supporting (§ 203.43b(i) of the proposed rule) has Condominium Form 1073/465 could be access to affordable homeownership by been revised to require only that misleading to the reader expecting a accepting delivery of loans subject to an insurance and maintenance costs of the property that adheres to the more affordability covenant that survives individual units must be the sole traditional condominium regime. foreclosure. FHA should join this effort responsibility of the unit owner for Site and amend § 203.41 to permit FHA Condominiums, without stipulating any One commenter stated that he uses insurance for mortgages secured by a additional requirements for use of the following language in appraisal condominium unit subject to a covenant assessments. Hence the rule avoids reports: ‘‘An Extraordinary Assumption designating the unit as an affordable potential conflicts with local law and is is made that the use of the 1073/465 housing unit where the covenant clearer for the public. Accordingly, Form will not be misleading. In survives foreclosure. future guidance will reflect this new developing this report and the Opinion HUD Response: Such a consideration policy. of Value, this Appraiser has utilized a would encompass a review of such a Hypothetical Condition that the Subject requirement across all programs affected Site Condominiums—Appraisal is Single Family Residential to best by 24 CFR 203.41 and not limited to Reporting represent the Markets Perception of the only Condominium Projects, and Comment: HUD should direct lenders Subject’’. As these properties become therefore is beyond the scope of this to accept the 1004/70 URAR Appraisal more prevalent, there is a need for a rulemaking. However, current guidance Form for Condominiums. While the clear directive to the Lending/Appraisal addressing permissible restrictions on Legal Description indicates these community. Until the GSEs can address conveyance for condominiums remains properties as being Condominiums, the issue of this hybrid property type by in effect. most are marketed as, perceived as, developing a new form that Comment: Section 301 of the Housing utilized as, Single Family Homes, with encompasses the unique character of Opportunity Through Modernization front, side and back yards, no shared these properties, HUD should direct Act of 2016 (HOTMA) mandates that walls, and often no shared maintenance lenders to accept the 1004/70 URAR as with respect to mortgage insurance for

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condominiums, HUD shall utilize the issuing a regulation on this subject in condo met usual financial and guidelines developed by the Federal the future. insurance guidelines a potential Housing Finance Agency (FHFA) solution would be to waive any concern Leasing of Units regarding private transfer fees. Two regarding the first refusal issue. This comments strongly support this Comment: Limiting short-term leases would help increase the supply of provision which brings consistency and may promote the residential use and affordable housing. clarity regarding private fees across the character of a condominium project and Comment: Since 2013, the Atlanta industry. Therefore, HUD should the commenter recommends that HUD HOC has taken the position that the confirm whether this provision is self- revise regulations at 24 CFR 203.41 to condominium associations have to effectuating. If HUD believes that it incorporate permissible leasing change their governing documents to needs to take action to effectuate this restrictions currently provided in remove the right of first refusal. provision, HUD should do so swiftly, in section 1.8.9 of the Condominium Changing the bylaws for a condominium order to avoid unnecessary confusion in Project Approval and Processing Guide. association of any size can only be the industry. Furthermore, HUD should Comment: HUD should reconsider its accomplished once a year at the time consider applying these FHFA private blanket objection to Association review association board elections are held. transfer fee standards across all of of leases. Without prior notice or Doing so entails significant expense, HUD’s programs, including, but not approval, a condominium board has no including substantial legal fees and limited to, single-family mortgage ability to enforce leasing restrictions to costs that are eventually borne by the insurance (for all FHA programs). This ensure the project continues to meet individual unit owners through will provide one standard for the FHA owner occupancy requirements. increased assessments to maintain the treatment of private transfer fees Condominium boards have an ongoing association budget. Also, while the legal interest in maintaining FHA approval throughout the industry, reducing structure of some condominium criteria and FHA’s general view that any unnecessary complexity and confusion associations may vary, most require the condominium where the board has to the consumer’s benefit. Lacking affirmative vote of 100 percent of all either direct or indirect approval direction from HUD, the industry is owners to agree to modify the bylaws, authority of a lease is contrary to this subject to inconsistent application of which is impractical in a community of interest. In taking this position, FHA is guidelines between lenders which can any size. Many Florida condominium elevating one-unit owner’s interest negatively impact consumers due to association boards are willing to execute above the interests of all other owners. unnecessarily limiting products and/or a formal and binding certification on an Allowing a well-defined and limited lender availability in certain annual basis that the association does authority to act in a manner that communities. not and will not utilize any of the right preserves FHA approval benefits owners of first refusal provisions in its charter. Comment: The immediate adoption of and consumers. HUD should revise FHFA’s rule will provide consistent In this way, such associations would not regulations at 24 CFR 203.41 to provide be required to amend their charters if a guidelines for the industry and will for a limited prior approval of leasing by a resident desires FHA financing. expansion of eligible projects, so long as condominium association board to the Therefore, the final rule should clarify the private transfer fees are to the extent exercise of such authority will that boards of Florida condominium benefit of the borrower (i.e., retain the condominium’s project associations whose charters contain maintenance fees). The Mortgage compliance with FHA owner occupancy rights of first refusal may execute a Bankers Association believes that this requirements. formal and binding certification on an change will create clearer and consistent HUD Response: HUD appreciates the annual basis that the association does guidelines across agencies, making it recommendation and will take it under not and will not utilize any of the right easier for lenders and FHA to serve the consideration for future policy of first refusal provisions, so that units FHA borrower. guidance. Such a consideration should can be approved for FHA-insured Comment: Private transfer fees that encompass a review of such a financing. simply provide income to the developer requirement across all programs affected Comment: Approximately 75 percent or another entity are problematic. by 24 CFR 203.41 and not limited to of the condominiums in Florida have a However, there are many private only Condominium Projects, and right of first refusal, which is major transfer fees that support the therefore is beyond the scope of this obstacle to HECMs. There is less than a condominium facilities or provide rulemaking. one percent chance of getting these lease tangible benefits to the homeowner. Right of First Refusal restrictions changed. HUD should drop Acceptable of these ‘‘good’’ transfer fees, this leasing language as part of its SUA but rejection of the ‘‘bad’’ transfer fees Comment: One of the main reasons for process. is the standard employed by the FHFA. condo non-approval in Florida has been HUD Response: HUD does not address HOTMA requires HUD to adopt the the insertion of language stating that the rights of first refusal in this rulemaking; ‘‘existing standards of the FHFA relating condo board has the right to reject however, the existing guidance to encumbrances under private transfer potential tenants and purchasers. Since permitting the right of first refusal for fee covenants.’’ The commenter agrees 2013, there has been a zero-tolerance condominium project approval will be with HUD that this provision is policy for any right of first refusal (the continued in effect. HUD will address immediately effective. commenter states that this is based on rights of first refusal generally in a Comment: This rule should address the Fair Housing Act). This has resulted future rulemaking, as this topic is transfer fees as it is a requirement by in condos with good financials being outside the scope of this rulemaking. HOTMA. HUD should either revise 24 denied approval. It is difficult to change CFR 203.41 in this rulemaking, even if a condo’s governing documents. Fannie Approval by the State another 30-day comment period is and Freddie do not have this issue. The Comment: If a project meets the immediately effective. condominium board could sign a requirements of the relevant State HUD Response: Section 301 of certification that it does not utilize the oversight agency, that should be HOTMA on private transfer fees is self- objectionable provisions. In the instance sufficient for approval. There could be implementing. HUD may consider of a spot approval, assuming that the a document covering single-unit loans

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to determine the current operating case is different and would have to be HUD Response: Although fidelity status of the project. assessed on its own merits. insurance is not specifically addressed in this final rule, it would be covered Comment: HUD should insure loans Condominium Associations Unwilling under the general insurance in condominium projects approved by To Cooperate With Project Approval the Department of Business and requirements under § 203.43b(d)(6)(iii). Professional Regulation (DBPR) in each Comment: A commenter, a reverse HUD appreciates the comment but State of the U.S. In Florida, this could mortgage loan originator, provides an disagrees with commenter’s overarching be accomplished by HUD officials example of a client living in an upscale recommendation to eliminate the working with officials at the Division of condominium in town. The owner has requirement for fidelity insurance Condominiums, Time Shares and a tax lien certificate against her (which insures against losses for fraud Mobile Homes which is a Division mortgage free condominium unit for or dishonesty) based upon the prevalent within the DBPR. After HUD/FHA is 2015 property taxes that are past due, use of direct deposit into an FDIC assured that the State requirements for and it is unlikely that she will be able insured accounts, which are insured condominium approval are sufficient, pay the 2016 property taxes as well. The against loss due to bank failure. an identification number issued by the commenter and owner have both tried Accordingly, HUD has implemented the State could be used for loan processing. for months to get the condo association aforementioned section of the final rule Compliance with Fair Housing laws will to help, but the process has stopped. as proposed. be the responsibility of all parties to the The commenter states that it will be a Comment: We note that the Insurance real estate transaction such as the shame that this senior will eventually Waiver is not included as part of the Realtor, Lender, Condominium have to vacate her residence and lose Proposed Rules. Will the Insurance Association Board, etc. the lifestyle she is accustomed to Waiver currently in effect, and due to expire on January 5, 2017, be codified HUD Response: HUD disagrees with because of those in power are not as part of the Proposed Rules and/or the recommendation of insuring loans willing to help. There has to be a better appear permanently as part of the in condominium projects that are way. Single-Family Housing Policy approved by the state agency Comment: Many formerly FHA approved condominium projects have Handbook 4000.1? responsible for regulating HUD Response: This final rule does expired and associations do not or condominiums in every state. By HUD not provide for specific standards, but cannot get the projects re-approved. adopting national standards for for a framework to establish HUD’s This limits the supply of housing to condominium project approvals, specific requirements through policy. first-time buyers who require FHA loans industry members would benefit from HUD will consider this comment when clear, consistent, and enforceable to purchase a new condominium drafting further policy guidance. standards that would reduce confusion effectively locking them out of many and increase efficiency in the market. In homes and limiting their housing Exceptions Under Proposed § 203.43b(f) addition, the condominium standards options. HUD is to be applauded for Generally and processes that will be established taking concrete steps to solve this Comment: HUD should clarify the through this rule are similar to the problem. Further, we urge HUD to adopt process by which exceptions are conventional market’s processes, and Fannie Mae and Freddie Mac approval requested and approved and provide HUD believes that such consistency will processes. This will create a more additional guidance on the limits of the have the least impact on the industry. uniform and fair condominium approval Secretary’s exception authority, if not in process across the home mortgage Lender Liability Post-Approval the rule itself then in guidance. This spectrum. It will allow low- and will prevent situations where Comment: If a lender that obtains moderate-income home buyers access to condominium associations surmise the DELRAP approval under the new more financing options that currently project will not meet all approval guidelines approves a condo are they exist. standards and, therefore, decline to seek later liable for loans approved by HUD Response: HUD appreciates the project approval, and limit instances another lender? This example would comment. The final rule includes the where associations incur additional assume that Lender A properly approves ability to obtain Single-Unit approval in expenses to get into full compliance a condo project and that all an unapproved condominium project as when they would have been eligible for documentation is in order. Lender B an opportunity to provide access to an exception. Clear guidance will also later underwrites an FHA loan in this FHA’s programs in this or similar ease processing burdens by limiting project and their underwriting is situations. exception requests where HUD will not faulty—the loan goes into default and Insurance Requirements approve. Clear guidance will indicate causes a claim to the MMI fund. In this that FHA is a reliable partner. Therefore, example, is lender A still liable? Clarity Comment: One commenter stated that HUD should provide a standardized around this issue would be welcome as there is no reason to continue the exception request process that clearly making lenders liable for underwriting requirement for a fidelity bond of 3 identifies the approval criteria for which errors beyond their control would cause months’ aggregate assessments plus an exception will be contemplated, and many of them to rethink DELRAP reserve funds, unless state law mandates publish clear guidance concerning the approval. required coverage. In today’s practice, exception process and provide examples HUD Response: Based on the most condominium association dues are and reasonable conditions that may commenter’s example, Lender A would directly deposited electronically into an result in approval of an exception not be liable for Lender B’s faulty FDIC-insured bank account, and such request. underwriting of an FHA loan. A lender accounts are insured up to $250,000. HUD Response: HUD appreciates the with DELRAP approval that approves a Given this expedited and more secured recommendations and will clarify condominium in accordance with the cash flow based on more prevalent and exception process requirements in the new guidelines does not have loan-level modern electronic payment practices, in policy handbook that will be issued as liability for another lender’s our view, there is no reason to continue a result of this final rule. However, HUD underwriting errors. Of course, each the requirement. believes the rule addresses the factors

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that must be considered in determining HUD handbooks prior to The information collection whether to grant an exception while implementation. requirements of this rule revise a currently approved information contemplating that such exceptions will V. Findings and Certifications be considered on a case by case basis collection (OMB Control No. 2502– which precludes the use of any one Information Collection Requirements 0610). This information collection standard. The information collection reorganizes and consolidates, in a less requirements contained in this rule have burdensome and more user-friendly Implementation Timeframe been submitted to the Office of format, the information currently required in form 96027, Condominium Comment: A 12-month Management and Budget (OMB) under Project Approval Document/Checklist; implementation period will be needed the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520). In accordance form 96028, Condominium Project given multiple significant industry Annexation Checklist; 96017, Program compliance changes. with the Paperwork Reduction Act, an agency may not conduct or sponsor, and Certification; form 96018, Loan Level HUD Response: This final rule a person is not required to respond to, certification; and form 96019, Pre-Sale provides for a 60-day implementation a collection of information unless the certification. timeframe that allows stakeholders to collection displays a currently valid The burden of the information view additional guidance provided in OMB control number. collections is estimated as follows:

Current information collection Burden hours Burden hours (OMB approval No. 2502–0610) New information collection (current) (new) Net change

Package preparation ...... 2.00 1.00 ¥1.00 Package review ...... 1.00 1.00 0.00 935.2c AFFH Plan ...... 6.00 3.00 ¥3.00 92541 Builder’s Certification ...... 0.10 0.10 0.00 92544 Warranty of Completion of Construc- ...... 0.03 0.03 0.00 tion. 96029 Condominium Rider ...... 0.10 0.10 0.00 96017 Program Certification/Project Certifi- ...... 0.10 0.00 ¥0.10 cation. Loan level certification ...... 0.30 0.00 ¥0.30 Pre-sale certification ...... 1.00 0.00 ¥1.00 96027 Condominium Project Approval Cover ...... 1.00 0.00 ¥1.00 Document/Checklist. 96028 Condominium Project Annexation ...... 0.30 0.00 ¥0.30 Checklist. Model FHA Condominium Loan Level/Single- ...... 75 .75 1 Unit Approval Questionnaire. Model HRAP–DELRAP FHA Condominium ...... 1 1 Project Approval Questionnaire.

Total ...... 11.93 6.98 ¥4.95

Total hours per annum ...... 90,660 22,000 ¥68,660

In accordance with 5 CFR requirements in this rule. Comments timely receipt by HUD, and enables 1320.8(d)(1), HUD is soliciting must refer to the proposal by name and HUD to make them immediately comments from members of the public docket number (FR–5563) and must be available to the public. Comments and affected agencies concerning this sent to: submitted electronically through the collection of information to: (1) Evaluate HUD Desk Officer, Office of http://www.regulations.gov website can whether the proposed collection of Management and Budget, New be viewed by other commenters and information is necessary for the proper Executive Office Building, interested members of the public. performance of the functions of the Washington, DC 20503, Fax: (202) Commenters should follow the agency, including whether the 395–6947; and instructions provided on that site to information will have practical utility; Reports Liaison Officer, Office of Public submit comments electronically. (2) Evaluate the accuracy of the agency’s and Indian Housing, Department of estimate of the burden of the proposed Housing and Urban Development, Executive Order 13771 collection of information; (3) Enhance Room, 451 7th Street SW, Executive Order (E.O.) 13771, entitled the quality, utility, and clarity of the Washington, DC 20410. ‘‘Reducing Regulation and Controlling information to be collected; and (4) Interested persons may submit Regulatory Costs,’’ was issued on Minimize the burden of the collection of comments regarding the information January 30, 2017. This final rule is information on those who are to collection requirements electronically considered an E.O. 13771 deregulatory respond, including through the use of through the Federal eRulemaking Portal action. Details on the estimated cost appropriate automated collection at http://www.regulations.gov. HUD savings and deregulatory effect of this techniques or other forms of information strongly encourages commenters to proposed rule can be found below in the technology, e.g., permitting electronic submit comments electronically. Summary of Regulatory Impact, submission of responses. Interested Electronic submission of comments Benefits, and Costs, and in the separate persons are invited to submit comments allows the commenter maximum time to Regulatory Impact Analysis. regarding the information collection prepare and submit a comment, ensures

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Summary of Regulatory Impact, a household’s budget. Any distortionary monetized benefit of increased policy Benefits, and Costs regulatory costs that do not serve a flexibility. By adjusting to market This rulemaking addresses a market greater public purpose reduce social conditions, FHA will be able to strike failure that occurs when lenders ration welfare. the correct balance between providing The proportion of FHA-approved credit instead of charging the affordable housing and risk condominiums relative to the estimated appropriate risk premium; that is; when management. size of the condominium market in the lenders consider denying a loan to be a United States provides an indicator of Regulatory Planning and Review superior business decision than raising the need for FHA guidance that OMB reviewed this rule under prices. In the mortgage insurance simplifies the FHA condominium Executive Order 12866 (entitled market, such a market failure occurs project approval process. In 2001, 8.4 ‘‘Regulatory Planning and Review’’). when borrowers are willing to buy percent of FHA loans were for condos, This rule was determined to be a insurance at an actuarially fair price, but but the share has dropped since then, ‘‘significant regulatory action,’’ as suppliers cannot sell at the cost of reaching its low of 2.1 percent of all defined in 3(f) of the order (although not providing the insurance. One reason FHA loans in the most recent complete an economically significant regulatory this occurs is lack of information. year of 2018. action, as provided under section 3(f)(1) Adverse selection occurs because The rule addresses this market failure of the order). The docket file is available borrowers who are attracted to higher by deregulating some of the more for public inspection between the hours LTV loans are less able to withstand burdensome aspects of the approval of 8 a.m. and 5 p.m. weekdays in the financial shocks. However, even with process to allow more condominium Regulations Division, Office of General information about the household’s units to be purchased with FHA-insured Counsel, Department of Housing and resources, it is difficult for private mortgages. The rule will reduce the Urban Development, 451 7th Street SW, insurers and lenders to predict the compliance costs of condominium Room 10276, Washington, DC 20410– probability of default, which depends lending. Analysis shows, however, that 0500. Due to security measures at the on trends in financial and real estate this will be a limited effect which will HUD Headquarters building, an advance markets. This can cause a contraction of not result in an outsized market share appointment to review the public supply such that the equilibrium market for FHA. It is extremely unlikely that comments must be scheduled by calling response is an undersupply of credit the maximum volume would exceed the the Regulations Division at (202) 708– and limitation of housing choices. In historic peak of 73,000 loans in 2010, so 3055 (this is not a toll-free number). such periods, low-income households that could be regarded as the potential Individuals with speech or hearing wishing to buy affordable homes, such upper limit. HUD would not expect the impairments may access this number as condominiums, would be the first to equilibrium share of condo loans to be via TTY by calling the Federal Relay be excluded from the market. greater than the market average given by Service at (800) 877–8339. The FHA’s role with respect to market FNMA’s condo share of 10 percent, Regulatory Impact Analysis (RIA) failure due to an undersupply of credit which would require an increase of prepared for this rule is also available is a countercyclical one. FHA serves to 71,000 condo purchase loans. More for public inspection in the Regulations reduce market imperfections due to likely, the rule is expected to have a Division and may be viewed online at information asymmetry. When risk moderate effect on volume with a www.regulations.gov, under the docket increases in the presence of information maximum impact ranging from 20,000 number above. asymmetries, lenders ration credit to 60,000 loans. (withdraw from the market) as opposed The deregulatory changes to the Unfunded Mandates Reform Act to adjusting interest rates. FHA provides program, while burden reducing, are not Title II of the Unfunded Mandates a buffer in such circumstances; FHA’s so great as to significantly change the Reform Act of 1995 (2 U.S.C. 1531– market share varies inversely with the nation’s housing choices. The 1538) (UMRA) establishes requirements ease of credit. Greater access to credit measurable expansionary impacts of the for Federal agencies to assess the effects can be considered a benefit. rule are small relative to the market, of their regulatory actions on state, Mortgage insurance is required for where annual combined cooperative local, and tribal governments and the high LTV loans. FHA provides mortgage and condominium sales are about private sector. This rule does not insurance at average cost to qualified 600,000 units and are counterbalanced impose any Federal mandate on any borrowers. FHA does not crowd out or to a degree by risk-management state, local, or tribal government or the replace the private sector, but instead strategies (such as the requirement for private sector within the meaning of fulfills unmet demand for mortgage review by HUD or qualified, UMRA. insurance when private insurers experienced DELRAP lenders). Also, withdraw from the market. Similarly, some FHA condominium borrowers will Environmental Review FHA’s market share declines when there substitute from FHA single-family A Finding of No Significant Impact is less uncertainty in the real estate and homes. with respect to the environment has mortgage markets. This rule will result in savings from been made in accordance with HUD Condominiums provide an affordable increasing the periodicity of approval regulations at 24 CFR part 50, which homeownership option for borrowers from 2 to 3 years equal to $1.5 million implement section 102(2)(C) of the who may qualify for FHA mortgage annually. Reducing environmental National Environmental Policy Act of insurance in high-cost or dense areas. reviews could save as much as $2.1 1969 (42 U.S.C. 4332(2)(C)). The Evidence suggests that there is an million annually. Quantified costs Finding of No Significant Impact is imbalance in FHA’s treatment of reductions are therefore about $3.6 available online at www.regulations.gov. condominiums in relation to single- million annually. The costs of requiring The Finding of No Significant Impact is family housing. Creating a level playing project approvals are an estimated also available at for public inspection field is important in facilitating paperwork burden cost of $2.7 million during regular business hours in the consumer choice, especially in the annually. The overall quantified cost Regulations Division, Office of General housing market where spending on savings of this rule are therefore about Counsel, Department of Housing and housing represents a large proportion of $900,000 annually. There is also a non- Urban Development, 451 Seventh Street

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SW, Room 10276, Washington, DC impact to small firms. Additionally, does not impose substantial direct 20410–0500. Due to security measures approval as a DELRAP lender is not compliance costs on state and local at the HUD Headquarters building, required in order to perform any of the governments or preempt state law please schedule an appointment to functions of a DE Lender including the within the meaning of the Executive review the Finding by calling the ability to originate mortgages under Order. Regulations Division at (202) 402–3055 Single Unit Approval or on units in Catalog of Federal Domestic Assistance (this is not a toll-free number). projects approved under, HRAP or Number Individuals with speech or hearing DELRAP authority of another lender. impairments may access this number Other elements of the rule lift The Catalog of Federal Domestic via TTY by calling the Federal Relay regulatory burdens. First, allowing Assistance number for 24 CFR parts 203 Service at (800) 877–8339. Single-Unit Approval enables small and 234 is 14.117. lenders business opportunities without List of Subjects Regulatory Flexibility Act the cost of seeking approval for an entire The Regulatory Flexibility Act (RFA) condominium project. HUD estimates 24 CFR Part 203 (5 U.S.C. 601 et seq.), generally requires that project approval will take Hawaiian Natives, Home an agency to conduct a regulatory approximately 3 hours at $64/hour, for improvement, Indians-lands, Loan flexibility analysis of any rule subject to a total cost of about $192 per project. programs-housing and community notice and comment rulemaking Single-unit approval is estimated to take development, Mortgage insurance, requirements, unless the agency certifies approximately 1.5 hours, also at $64 per Reporting and recordkeeping that the rule will not have a significant hour, for a total of about $96 per unit. requirements, Solar energy. economic impact on a substantial Second, by providing that only number of small entities. completed projects may be approved, 24 CFR Part 206 This rule establishes regulations for this rule eliminates the need for HUD to Aged, Condominiums, Loan single-family mortgage insurance of require an environmental review as a programs-housing and community condominium units pursuant to 12 condition of approval. If the rule had development, Mortgage insurance, U.S.C. 1707 and 1709. However, HUD allowed approvals of uncompleted new Reporting and recordkeeping has been providing mortgage insurance construction projects, in the case of requirements. for this purpose pursuant to statute and DELRAP processing, lenders, including the Condominium Approval and small lenders, would have been 24 CFR Part 234 Processing Guide published in 2011. responsible for ensuring that Condominiums, Mortgage insurance, The rule codifies requirements for environmental reviews were completed Reporting and recordkeeping DELRAP lenders, many of which are according to applicable State and local requirements. small entities. However, it is worth requirements. Thus, the rule eliminates For the reasons stated in the foregoing noting that many of these lenders are a potential cost with respect to those preamble, HUD amends 24 CFR parts likely affiliated with much larger condominium projects approved 203, 206, and 234 as follows: financial institutions, based on the through DELRAP. Based on the costs to names associated with the IDs. Of the the government of an environmental PART 203—SINGLE FAMILY few thousand unique originating review, HUD estimates the potential MORTGAGE INSURANCE mortgagee IDs in each year from 2001 to costs that would be saved per project 2018, the median number of mortgages reviewed as follows. The fixed cost for ■ 1. The authority citation for part 203 is always under 100. Additionally, for an environmental review, including is revised to read as follows: originating mortgages from 2012 travel per review, is approximately Authority: 12 U.S.C. 1707, 1709, 1710, through 2018, the median number of $500. The average number of staff hours 1715b, 1715z–16, 1715u, and 1715z–21; 15 condo mortgages is exactly 1 in each per review is 16 hours, and the labor U.S.C. 1639c; 42 U.S.C. 3535(d). year. While this data may seem to make cost per review is $64 per hour, for a Subpart A—Eligibility Requirements a strong case for the prevalence of small total labor cost of $1,024 per review. and Underwriting Procedures entities, these entities likely have The total labor and fixed costs that resources at their disposal that are not would be saved are $1,524 per review. ■ 2. Add § 203.8 before the available to a typical small entity in Also, participation in condominium undesignated center heading other industries. insurance, like HUD’s other mortgage To be qualified for Direct ‘‘Miscellaneous Regulations’’ to read as insurance programs, is purely voluntary. follows: Endorsement authority, a mortgagee Therefore, the undersigned certifies must satisfy the following that this rule does not have a significant § 203.8 Approval of mortgagees for Direct characteristics: Possess at least one year economic impact on a substantial Endorsement Lender Review and Approval of experience in condo loans; have number of small entities. Process (DELRAP). made at least 10 FHA approved condo (a) General. Each mortgagee that loans; possess a quality control plan; Executive Order 13132, Federalism chooses to participate in the review and and participating staff must possess or Executive Order 13132 (entitled approval of Condominium Projects, as be supervised by those with prior ‘‘Federalism’’) prohibits, to the extent set forth in § 203.43b, must be granted experience. All of these requirements practicable and permitted by law, an authority to participate in the Direct would be easier to meet by larger firms agency from promulgating a regulation Endorsement Lender Review and with greater capacity. Nonetheless, that has federalism implications and Approval Process (DELRAP). small firms that have at least occasional either imposes substantial direct (b) DELRAP Authority—(1) Eligibility. experience should be able to satisfy the compliance costs on state and local To be granted DELRAP authority, as requirements without undue burden. governments and is not required by described in § 203.43b, a mortgagee The ability to have staff supervised by statute or preempts state law, unless the must be unconditionally approved for those with experience in lieu of relevant requirements of section 6 of the the Direct Endorsement program as requiring all participating staff to have Executive Order are met. This rule does provided in § 203.3 and meet the experience will substantially lessen the not have federalism implications and following requirements:

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(i) Have staff with at least one year of established by the Secretary for managing the financial and common- experience in underwriting mortgages mortgagees approved to participate in area assets. on condominiums and/or Condominium DELRAP, the Direct Endorsement (2) Condominium Project means the Project approval; program, or the Title II Single Family project in which one-family dwelling (ii) Have originated no fewer than 10 mortgage insurance program; or units are attached, semi-detached, condominium loans in projects (ii) HUD determines that other good detached, or manufactured housing approved by the Commissioner; cause exists. units, and in which owners hold an (iii) Have an acceptable quality (2) Such termination will be effective undivided interest in the Common control plan that includes specific upon the date of receipt of HUD’s notice Elements. provisions related to DELRAP; and advising of the termination. (3) Condominium Unit means real (iv) Ensure that staff members that (3) Notwithstanding any provisions of estate consisting of a one-family participate in the approval of a this section, the Commissioner reserves dwelling unit in a Condominium Condominium Project using DELRAP the right to take administrative action, Project. authority meet the above requirements including revocation of DELRAP (4) Common Elements means the in paragraph (b)(1)(i) of this section or authority, against any mortgagee and Condominium Project’s common areas are supervised by staff that meet such staff reviewer because of unacceptable and facilities including: Underlying requirements. performance. Any termination instituted land and buildings, driveways, parking (2) Conditional DELRAP Authority. under this section is distinct from areas, elevators, outside hallways, Mortgagees will be granted conditional withdrawal of mortgagee approval by recreation and landscaped areas, and DELRAP authority upon provision of the Mortgagee Review Board under 24 other elements described in the notice to the Commissioner of the intent CFR part 25. condominium declaration. to use DELRAP. Mortgagees with (e) Reinstatement. A mortgagee whose (5) Rental for Transient or Hotel conditional DELRAP authority must DELRAP authority is terminated under Purposes shall have the meaning given submit all recommended Condominium this section may request reinstatement if in section 513(e) of the National Project approvals, denials, and the mortgagee’s DELRAP authority has Housing Act (12 U.S.C. 1731b(e)). recertifications to FHA for review. If been terminated for at least 6 months. In (6) Single-Unit Approval means FHA agrees with the mortgagee’s addition to addressing the eligibility approval of one unit in an unapproved recommendation, it will advise the criteria specified in paragraph (b)(1) of Condominium Project under paragraph mortgagee that it may proceed with the this section, the application for (i) of this section. recommended decision on the reinstatement must be accompanied by (7) Site Condominium means: (i) A Condominium Project that Condominium Project. a corrective action plan addressing the (3) Unconditional DELRAP Authority. issues that led to the termination of the consists entirely of single-family Mortgagees will be granted mortgagee’s DELRAP authority, along detached dwellings that have no shared garages or any other attached buildings; unconditional DELRAP authority after with evidence that the mortgagee has or completing at least five (5) DELRAP implemented the corrective action plan. (ii) A Condominium Project that: reviews, or such lower number of The Commissioner may grant (A) Consists of single family detached DELRAP reviews as HUD may specify, conditional DELRAP authority if the or horizontally attached (townhouse) to the satisfaction of HUD, and may then mortgagee’s application is complete and dwellings where the unit consists of the exercise DELRAP authority to approve the Commissioner determines that the dwelling and land; and projects in accordance with underlying causes for the termination (B) Is encumbered by a declaration of requirements of HUD. have been satisfactorily remedied. The condominium covenants or (c) Reviews. HUD will monitor a mortgagee will be required to complete condominium form of ownership and mortgagee’s performance in DELRAP on successfully at least five DELRAP does not contain any manufactured an ongoing basis. reviews in accordance with paragraph housing units. (1) If the review shows that there are (b)(2) of this section in order to receive (b) Eligibility. A mortgage secured by no material deficiencies, subsequent unconditional DELRAP authority as a Condominium Unit shall be eligible project approvals, denials, or provided in paragraph (b)(3) of this for insurance under section 203 of the recertifications may be selected for post- section. National Housing Act if it meets the action review based on a percentage as ■ 3. In § 203.17, revise paragraph (a)(1) requirements of this subpart, except as determined by the Commissioner. to read as follows: modified by this section. (2) If the review shows that there are (c) Approval required. To be eligible material deficiencies in the mortgagee’s § 203.17 Mortgage provisions. for insurance under this section, a DELRAP performance, the mortgagee (a) * * * Condominium Unit must be located in may be returned to conditional DELRAP (1) The term ‘‘mortgage’’ as used in a Condominium Project approved by status. this part, except § 203.43c, shall have HUD or a DELRAP mortgagee approved (3) If additional reviews continue to the meaning given in Section 201 of the under § 203.8, or meet the additional show material deficiencies in the National Housing Act, as amended (12 requirements for approval as a Site mortgagee’s DELRAP performance, the U.S.C. 1707). Condominium or Single-Unit Approval. mortgagee’s authority to participate in * * * * * (d) Condominium Project Approval: DELRAP may be terminated or other ■ 4. Add § 203.43b to read as follows: Eligibility Requirements. To be eligible action taken against the mortgagee or for Condominium Project approval, the responsible staff reviewer. § 203.43b Eligibility of mortgages on Condominium Project must: (d) Termination of DELRAP Authority. single-family condominium units. (1) Be primarily residential in nature (1) HUD may immediately terminate the (a) Definitions. As used in this part: and not be intended for rental for mortgagee’s authority to participate in (1) Condominium Association Transient or Hotel Purposes; DELRAP or take any action listed in 24 (Association) means the organization, (2) Consist of units that are solely one- CFR 203.3(d) if: regardless of its formal legal name that family units; (i) The mortgagee violates any of the consists of homeowners within a (3) Be in full compliance with all requirements and procedures Condominium Project for the purpose of applicable Federal, State, and local laws

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with respect to zoning, Fair Housing, mortgages within that range to be through (ix) of this section in a notice and accessibility for persons with established by HUD through notice. published for 30 days of public disabilities, including, but not limited HUD may suspend the issuance of new comment. After considering the to, the Fair Housing Act, 42 U.S.C. 3601 FHA case numbers for a mortgage on a comments, the Department will publish et seq., Section 504 of the Rehabilitation property located in any project where a final notice announcing the new Act, 29 U.S.C. 794, and the Americans the number of FHA-insured mortgages overall upper and lower limits of the with Disabilities Act, 42 U.S.C. 12101 et exceeds the maximum insurance range of percentages being seq., where relevant; concentration established by HUD. implemented, and the date on which the (4) Be complete and ready for (ix) Acceptable minimum level of new standard becomes effective. occupancy, including completion of all owner occupancy, which shall include (g) The Secretary may grant an the common elements of the project, units occupied as a principal or exception to any specifically prescribed and not subject to further rehabilitation, secondary residence or sold to an owner requirements within paragraph (d)(6) of construction, phasing, or annexation, who intends to meet such occupancy this section on a case-by-case basis in except to the extent that approval is requirements. Such acceptable HUD’s discretion, provided that: sought for legal phasing in compliance minimum levels shall be within a range (1) In the case of an exception to the with the requirements of paragraph (e) between 30 and 75 percent of the total approval requirements for the of this section; number of units in the project (which commercial/nonresidential space (5) Be reviewed and approved by the range may be changed following the percentage that HUD establishes under local jurisdiction with respect to the procedures in paragraph (f) of this paragraph (d)(6)(vii) of this section, any condominium plat or similar section), with a specific minimum request for such an exception and the development plan and any phases; if percentage to be established by HUD determination of the disposition of such applicable, the approved plat or through notice. For the sole purpose of request may be made, at the option of development plan must have been calculating the owner-occupancy the requester, under the Direct recorded in the land records of the percentage under this paragraph, any Endorsement Lender Review and jurisdiction; and unit that is occupied by the owner as his Approval process or under the HUD (6) Meet such further approval or her place of abode for any portion of review and approval process through requirements as provided by the the calendar year other than as a the applicable field office of the Commissioner through notices with principal residence and that is not Department; and respect to: rented for a majority of the calendar (2) In determining whether to allow (i) Nature of title to realty or leasehold year shall count towards the total such an exception, factors relating to the interests; number of secondary residences. economy for the locality in which the (ii) Control over, and organization of, (x) Reserve requirements, provided project is located or specific to the the Condominium Association; the reserve account is funded with at project, including the total number of (iii) Minimum insurance coverage for least 10 percent of the monthly unit family units in the project, shall be the Condominium Project; assessments, unless a lower amount is considered. A DELRAP lender, in (iv) Planned or actual special deemed acceptable by HUD based on a determining whether to grant a assessments; reserve study completed not more than requested exception, shall follow any (v) Financial condition of the 36 months before a request for a lower procedures that HUD may establish. Condominium Project, including, but amount is received, or such greater (h) Application for Condominium not limited to, the allowable percentage amount of time as determined by the Project approval and Renewal of of units owned by a single owner or Secretary under the HUD review and Approval. (1) In order to become group of related owners; approval process. approved, an application for (vi) Existence of any pending legal (xi) Such other matters that may affect Condominium Project approval, in action, or physical property condition; the viability or marketability of the accordance with the requirements of the (vii) Acceptable maximum project or its units. Commissioner, must be submitted to percentages of commercial/non- (e) Phases of a project are approvable, either HUD or a DELRAP mortgagee, if residential space, which must be within provided that only legal phasing is used. consistent with the mortgagee’s a range between 25 and 55 percent of Individual phases must be separately DELRAP approval. the total floor area (which range may be sustainable as required by HUD, so that (2) The application will be reviewed changed following the procedures in the insurance fund is not put at undue and if all eligibility criteria have been paragraph (f) of this section), with the risk. In determining whether to accept met, the Condominium Project will be specific maximum and minimum legal phasing, HUD will assess the approved and placed on the list of HUD- percentages within that range to be potential risk to the insurance fund and approved Condominium Projects. established by HUD through notice, other factors that HUD may publish in (3) Unless otherwise specified in provided that such commercial/non- notices. Phases must meet HUD’s writing by HUD, Condominium Projects residential space does not negatively requirements for approval in paragraph are approved for a period of 3 years impact the residential use of the project (d) of this section and must at a from the date of placement on the list or create adverse conditions to the minimum be: of approved condominiums. HUD may occupants of individual condominium (1) In a vertical building, contiguous, rescind a Condominium Project’s units. with all units built out and having a approval at any time if the project fails (viii) Acceptable maximum certificate of occupancy; or to comply with any requirement for percentages of units with FHA-insured (2) In a detached or semi-detached approval. mortgages, which must be within a development, where all homes in the (4) Eligible parties may request range between 25 and 75 percent of the phase are built out and have a certificate renewal of the approval of an approved total number of units in the project of occupancy; Condominium Project by submitting a (which range may be changed following (f) The Secretary will publish any request for recertification no earlier than the procedures in paragraph (f) of this generally applicable change in the 6 months prior to expiration of the section), with the specific maximum upper and lower limits of the ranges of approval or no later than 6 months after percentage of units with FHA-insured percentages in paragraphs (d)(6)(vii) expiration of the approval. HUD shall

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specify the format for the recertification (1) The term rehabilitation loan ■ 7. Revise § 206.51 to read as follows: request, which shall allow the request to means a loan, advance of credit, or be supported by updating previously purchase of an obligation representing a § 206.51 Eligibility of mortgages involving a dwelling unit in a condominium. submitted information, rather than loan or advancement of credit, made for resubmission of all information. the purpose of financing: If the mortgage involves a dwelling However, if the request for (i) The rehabilitation of an existing unit in a condominium, the project in recertification is not submitted within 6 one-to-four-unit structure which will be which the unit is located must be months after the expiration of the used primarily for residential purposes; acceptable to the Commissioner as set Condominium Project’s approval, a (ii) The rehabilitation of such a forth in 24 CFR 203.43b. complete, new approval application is structure and refinancing of the ■ 8. In § 206.131, revise paragraphs required. outstanding indebtedness on such (c)(3) and (d) to read as follows: (i) Single-Unit Approval—(1) Single- structure and the real property on which Unit Approvals. Mortgagees must ensure the structure is located; § 206.131 Contract rights and obligations that the Condominium Unit is located in (iii) The rehabilitation of such a for mortgages on individual dwelling units in a condominium. a Condominium Project that meets the structure and the purchase of the eligibility requirements for approval as structure and the real property on which * * * * * set forth in paragraph (d) of this section it is located; or (c) * * * as modified by this paragraph, except (iv) The rehabilitation of the interior (3) To the condition of the property as that HUD may provide that Single-Unit space of a condominium unit, as of the date the assignment is filed for Approvals may be approved by meeting defined in § 203.43b, excluding any record. For units in projects with a subset of these standards, or less areas that are the responsibility of the mortgages insured under 24 CFR part stringent standards, as stated by notice. Association; and 234, § 234.275 of this chapter In addition, a unit may be eligible for * * * * * concerning the certification of condition Single-Unit Approval if it: (f) The loan may not exceed an applies. (i) Is not in a Condominium Project amount which, when added to any (d) Condition of the multifamily that is on the list of FHA-approved outstanding indebtedness of the structure. In projects with mortgages Condominium Projects; and borrower that is secured by the insured under 24 CFR part 234, the (ii) Is not in a project that has been property, creates an outstanding provisions of § 234.270(a) and (b) of this identified by HUD as subject to adverse indebtedness in excess of the lesser of: chapter concerning the condition of the determination for significant issues that (1)(i) The limits prescribed in multifamily structure in which the affect the viability of the project; and § 203.18(a)(1) and (3) (in the case of a property is located shall be applicable to (iii) Is in a project that is complete dwelling to be occupied as a principal mortgages insured under this part which under paragraph (d)(4) of this section; residence, as defined in § 203.18(f)(1)); are assigned to the Commissioner. (ii) The limits prescribed in (iv) Is not a manufactured home; and § 203.18(a)(1) and (4) (in the case of a (v) Is in a project that has at least five PART 234—CONDOMINIUM dwelling to be occupied as a secondary (5) dwelling units. OWNERSHIP MORTGAGE INSURANCE residence, as defined in § 203.18(f)(2)); (2) Limit on Single-Unit Approvals. (iii) Eighty-five (85) percent of the ■ HUD may suspend the issuance of new 9. The authority citation for part 234 limits prescribed in § 203.18(c), or such continues to read as follows: FHA case numbers for mortgages in higher limit, not to exceed the limits set Condominium Projects with Single-Unit forth in § 203.18(a)(1) and (3), as the Authority: 12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d). Approvals where the number of FHA- Secretary may prescribe (in the case of insured mortgages exceeds the an eligible non-occupant mortgagor as maximum insurance concentration Subpart A—Eligibility Requirements— defined in § 203.18(f)(3)); Individually Owned Units established by HUD. Such acceptable (iv) The limits prescribed in maximum insurance concentration shall § 203.18a, based upon the sum of the ■ 10. Add § 234.2 to read as follows: be within a range between 0 to 20 estimated cost of rehabilitation and the percent of units with FHA-insured Commissioner’s estimate of the value of § 234.2 Savings clause. mortgages for Condominium Projects the property before rehabilitation; HUD’s regulations at § 203.43b of this with 10 or more units, with the exact (2) The limits prescribed in the chapter govern approval of real estate percentage within that range to be authorities listed in this paragraph (f), consisting of a one-family unit in a determined by HUD through notice; or based upon 110 percent of the multifamily project, and an undivided shall not exceed two FHA-insured Commissioner’s estimate of the value of interest in the common areas and mortgages for Condominium Projects the property after rehabilitation; or facilities which serve the project, except with fewer than 10 units. (3) For any Condominium Unit that is where the project has a blanket (j) Site Condominium. Site not a Site Condominium (as defined in mortgage insured under section 234(d) Condominiums must meet all of the § 203.43b), 100 percent of the after- of the National Housing Act, 12 U.S.C. requirements of paragraphs (d)(1) improvement value of the 1715y(d) (section 234(d)). Where the through (d)(5) of this section for Condominium Unit. project has a blanket mortgage insured approval, except that insurance and * * * * * by HUD under section 234(d), this 24 maintenance costs of the individual CFR part 234 applies to the approval of units must be the sole responsibility of PART 206—HOME EQUITY a one-family unit in such project. the unit owner. CONVERSION MORTGAGE Dated: August 6, 2019. ■ 5. In § 203.50, revise paragraphs (a)(1) INSURANCE and (f) to read as follows: Brian D. Montgomery, ■ 6. The authority citation for part 206 Assistant Secretary for Housing—Federal § 203.50 Eligibility of rehabilitation loans. continues to read as follows: Housing Commissioner. * * * * * Authority: 12 U.S.C. 1715b, 1715z–20; 42 [FR Doc. 2019–17213 Filed 8–13–19; 8:45 am] (a) * * * U.S.C. 3535(d). BILLING CODE 4210–67–P

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