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Through this rule, HUD will amend its policies and procedures for projects to be approved as condominiums in which individual units would be eligible for mortgage insurance. Insurance of condominiums in approved projects was first authorized by the Housing and Economic Recovery Act (HERA) of 2008. HERA moved the insurance of a single unit condominium unit in a project without a blanket mortgage from Section 234 of the National Housing Act.  There are no existing regulations under section 203.  While HERA permitted the program to be operated via guidance pending the issuance of regulations, more recently, the Housing Opportunity Through Modernization Act of 2016, Public Law 114-201 (HOTMA) contains specific provisions regarding condominiums under section 203.  Relevant to this rule, HOTMA requires: changes in requirements for project recertification; requests for exceptions to the commercial space percentage requirement to be made either through the HUD review process or through the lender review and approval process; and for HUD to issue guidance, by rule, notice, or mortgagee letter, regarding the percentage of units that must be owner-occupied, including as a secondary residence. The rule also includes a savings provision preserving section 234 insurance where the project has a blanket mortgage.

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, flexible standards, and a longer interval for condominium approvals 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.