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This final rule implements HUD’s authority under the single-family mortgage insurance provisions of the National Housing Act to insure one-family units in a multifamily project, including a project in which the dwelling units are attached, or are manufactured housing units, semi-detached, or detached, and an undivided interest in the common areas and facilities which serve the project. The rule provides for requirements for lenders to obtain approval under the Direct Endorsement Lender Review and Approval Process (DELRAP) authority for condominiums, and for standards that projects must meet to be approved for mortgage insurance on individual units. The rule provides for flexibility with respect to the concentration of FHA-insured units, owner-occupied units, and the amount that can be set aside for commercial and non-residential space. This will enable HUD to vary these standards, within parameters, to meet market needs.

Statement of Need:

The Housing Opportunities through Modernization Act of 2016 requires HUD to issue regulations on the commercial space requirements for condominium projects; these regulations would be codified in HUD’s Code of Federal Regulations (CFR) volume.  Having one portion of the basic program rules codified in the CFR and others not codified would be confusing and unfriendly to the public.  Additionally, the current program rules are overly rigid.  The rule will add needed flexibility and logically codify the basic rules of the program, similar to HUD’s other single-family programs. 

Summary of the Legal Basis:

The legal basis (in addition to HUD’s general rulemaking authority under 42 U.S.C. 3535(d)) is the definition of mortgage in section 201 of the Act (12 U.S.C. 1707), which definition also applies to section 203 of the Act (12 U.S.C. 1709).  The definition was revised by the Housing and Economic Recovery Act of 2008 (Public Law 110-289, approved July 30, 2008) to include a mortgages on a one-family unit in a multifamily project, and an undivided interest in the common areas and facilities which serve the project (this is the arrangement that characterizes the large majority of condo projects).  More recently, the Housing Opportunity Through Modernization Act (Public Law 114-201, approved July 29, 2016), requires HUD to: streamline the condominium recertification process; issue regulations to amend the limitations on commercial space to allow such requests to be processed under either HUD or lender review; and to consider factors relating to the economy for the locality in which such project is located or specific to project, including the total number of family units in the project. HUD will be addressing these issues through the regulation. 

Alternatives:

None.

Anticipated Costs and Benefits:

The rule will produce cost savings of $1 million per year by reducing the paperwork required for recertification of an approved project.  There are some costs associated with qualifying to participate in the Direct Endorsement Lender Review and Approval Process (DELRAP).  However, HUD anticipates that many provisions of the rule, such as single-unit approvals, and flexible standards, would reduce or eliminate the compliance costs of the rule. 

Risks:

The DELRAP process (which gives underwriting responsibility to qualified lenders) and single unit approvals (which allow HUD to insure mortgages in unapproved condominium projects) could increase the risk of defaults.  However, the rule would add safeguards to fully mitigate these risks.  The participating DELRAP lenders would have to meet qualification standards, and HUD would monitor their performance on an ongoing basis, and would have authority to take corrective actions if a lender’s performance is deficient.  In addition, single unit approvals would require that HUD not insure mortgages in an unapproved project if the percentage of such mortgages exceeds an amount determined by the Commissioner to be necessary for the protection of the insurance fund.