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Proposed Rule

Federal Housing Administration (FHA): Refinancing an Existing Cooperative Under Section 207 Pursuant to Section 223(f) of the National Housing Act

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AGENCY:

Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD.

ACTION:

Proposed rule.

SUMMARY:

HUD proposes to revise its regulations governing the eligibility for FHA insurance of mortgages used for the purchase or refinancing of existing multifamily housing projects. Although the statutory language authorizing such insurance does not distinguish between rental or cooperative multifamily projects, HUD's current regulations limit FHA insurance to existing rental projects. Given the current crisis in the capital markets and the significant downturn in the multifamily market, the Department has determined that this is an appropriate time to reconsider this regulatory imposed limitation with respect to the mortgage insurance for the refinancing of cooperative projects. As mortgage lenders strive to increase capital reserves and tighten underwriting standards, the availability of financing for multifamily housing has been reduced. FHA mortgage insurance could significantly improve the availability of funds and permit more favorable interest rates than would otherwise be likely. Accordingly, this proposed rule would revise HUD's regulations to enable existing multifamily cooperative project owners to obtain FHA insurance for the refinancing of existing indebtedness.

DATES:

Comment Due Date: April 4, 2011.

ADDRESSES:

Interested persons are invited to submit comments regarding this proposed rule to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500. Communications must refer to the above docket number and title. There are two methods for submitting public comments. All submissions must refer to the above docket number and title.

1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 Start Printed Page 55197th Street, SW., Room 10276, Washington, DC 20410-0500.

2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at http://www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

Note:

To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule.

No Facsimile Comments. Facsimile (FAX) comments are not acceptable.

Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an appointment to review the public comments must be scheduled in advance by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Information Relay Service at 800-877-8339. Copies of all comments submitted are available for inspection and downloading at http://www.regulations.gov.

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FOR FURTHER INFORMATION CONTACT:

Joyce Allen, Director, Office of Multifamily Housing Development, Department of Housing and Urban Development, 451 7th Street, SW., Room 6134, Washington, DC 20410-8000; telephone number 202-708-1142 (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at 800-877-8339.

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SUPPLEMENTARY INFORMATION:

I. Background

Under section 223(f)(1) of the National Housing Act (12 U.S.C. 1715n(f)(1)) (NHA), FHA is authorized to insure mortgages executed in connection with the purchase or refinancing of an existing multifamily housing project. The existing multifamily housing project to be purchased or refinanced may have been financed originally with conventional debt, equity, or FHA insured mortgages. The section 223(f) program insures lenders against loss on mortgage defaults and allows for long term mortgages (up to 35 years). In general, a project is eligible for section 223(f) mortgage insurance if the sponsor can demonstrate that there is a definite market demand, and that the project is economically self-sufficient.

HUD's regulations implementing the section 223(f) program are codified at 24 CFR part 207 (entitled “Multifamily Housing Mortgage Insurance”). Section 207.1 of these regulations cross references to the eligibility requirements for existing projects contained in 24 CFR 200.24 and makes the eligibility requirements applicable to multifamily project mortgages insured under section 24 CFR part 207.[1] Section 200.24 provides that “a mortgage financing the purchase or refinance of an existing rental housing project * * * may be insured pursuant to the provisions of section 223(f) of the [National Housing] Act * * *” (emphasis added). Thus, while the statutory language of section 223(f) authorizes FHA mortgage insurance for existing multifamily housing projects, irrespective of whether the project is for rental or cooperative housing, HUD's regulations limit section 223(f) financing to rental housing.

Given the current downturn in the mortgage lending market, HUD has decided to reconsider the regulatory imposed limitation on section 223(f) mortgage financing to rental projects. A recent HUD report on U.S. Housing Market Conditions [2] indicated that performance in the multifamily (five or more units) housing sector continued to be weak in the third quarter of 2009. The report further notes that:

During the years of rapid home price appreciation from 2004 through 2006 (and possibly into 2008 for multifamily housing) the aggressive underwriting standards that characterized the subprime home mortgage market were mirrored in the multifamily mortgage market. While subprime mortgagees used hybrid adjustable-rate mortgages to help borrowers afford higher priced single-family homes, some multifamily lenders employed pro-forma underwriting based on aggressive estimates of future earnings and 5 to 10 year, interest only balloon and other short-term mortgages to support rising property prices in similarly overheated multifamily housing markets. Some of these mortgages will be due in the next few years.[3]

Like single-family housing financing, multifamily housing is thus facing a credit crunch. Lenders' efforts to increase capital reserves and loan committee efforts to tighten underwriting standards both reduce the availability of financing for all multifamily housing. Credit constraints thus exacerbate trends in an already weak multifamily market. FHA mortgage insurance could both improve the availability of funds to this sector and permit more favorable interest rates than would otherwise be likely. This credit enhancement would provide needed support to a market segment which is currently experiencing diminished operating cash flows and depreciated collateral values.

The lack of financing is a particular problem for cooperatives. Cooperatives contend with legal restrictions on cooperative share transfers and many require approval by the board of a cooperative for some membership or operational changes. These issues raise concerns with traditional financial institutions. In addition, “affordable” cooperatives, which have low initial purchase prices, limited maintenance fees, and a cap on unit resale prices, face further challenges because the potential for generating new income through turnover of units and additional assessments is low. HUD has received inquiries from several existing cooperatives that have expressed an interest in refinancing their underlying mortgages. The average age of these projects is 35 years.

Refinancing at the current low interest rates could improve the viability of these types of cooperative housing projects in several ways. By reducing the servicing cost of their underlying mortgage, often substantially due to a high rate when the loan was originally made, a board of directors can accomplish a number of desirable goals. Shareholders could finance the cost of necessary capital improvement projects, such as façade restoration or elevator Start Printed Page 5520renovations. Refinancing would also allow cooperative boards to avoid special assessments, a source of unexpected financial stress for many residents when doubled up with existing monthly maintenance fees. These types of assessments can be particularly painful during economic downturns when unemployment is relatively high in some urban areas.

Facilitating the refinancing of cooperatives through mortgage insurance issued under section 223(f) of the NHA would thus help to further HUD's mission of preserving affordable housing by assisting eligible cooperative projects to obtain refinancing to make necessary repairs and/or consolidate more expensive outstanding debt, thereby preserving affordable housing stock. Therefore, HUD is currently proposing to remove this regulatory limitation in recognition of cooperative financing needs.

II. This Proposed Rule

This proposed rule would revise § 200.24 of HUD's regulations to enable owners of cooperative projects to obtain FHA insurance for their mortgage loans. Specifically, the proposed rule would amend § 200.24 to provide that “a mortgage financing the purchase or refinance of an existing rental housing project or refinance of the existing debt of an existing cooperative project under Section 207 of the [National Housing] Act, or for refinancing the existing debt of an existing nursing home, intermediate care facility, assisted living facility, or board and care home, or any combination thereof, under Section 232 of the [National Housing] Act, may be insured pursuant to provisions of Section 223(f) of the [National Housing] Act and such terms and conditions established by HUD.” Extending the section 223(f) mortgage insurance program to refinancing of the debt of multifamily cooperative housing projects is consistent with HUD's strategic goals of recreating a strong housing finance system and promoting affordable, financially sustainable multifamily housing options. When combined with judicious use of reserves to make capital improvements to maintain the property, the credit enhancement provided by this proposed rule will help rejuvenate properties and enhance the economic life of multifamily cooperative housing projects.

III. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

The Office of Management and Budget (OMB) reviewed this proposed rule under Executive Order 12866 (entitled “Regulatory Planning and Review”). This proposed rule was determined to be a “significant regulatory action,” as defined in section 3(f) of the Order (although not economically significant, as provided in section 3(f)(1) of the Order).

The docket file is available for public inspection in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the docket file by calling the Regulations Division at 202-402-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Information Relay Service at 800-877-8339.

Regulatory Flexibility Act—Small Business

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. As discussed above, the purpose of the proposed rule is to expand eligibility for financing under section 223(f) to enable owners of multifamily cooperative housing projects to refinance their existing mortgage debt with FHA insurance. Owners of such projects will be able to obtain 223(f) financing under the same terms and conditions as currently eligible owners of multifamily rental projects. Cooperative housing owners will not be subject to any additional procedures or required to incur any additional costs.

Accordingly, the undersigned certifies that this rule will not have a significant economic impact on a substantial number of small entities. Notwithstanding HUD's determination that this rule will not have a significant effect on a substantial number of small entities, HUD specifically invites comments regarding any less burdensome alternatives to this rule that will meet HUD's objectives as described in the preamble to this rule.

Environmental Impact

A Finding of No Significant Impact (FONSI) with respect to the environment has been made in accordance with HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of No Significant Impact is available for public inspection between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office of General Counsel, Room 10276, Department of Housing and Urban Development, 451 7th Street, SW., Washington, DC 20410. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the FONSI by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Information Relay Service at (800) 877-8339.

Executive Order 13132, Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either (1) imposes substantial direct compliance costs on state and local governments, and is not required by statute, or (2) the rule preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This proposed rule would not have federalism implications and would not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) (UMRA) establishes requirements for federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments, and on the private sector. This proposed rule would not impose any federal mandates on any state, local, or tribal governments, or on the private sector, within the meaning of the UMRA.

Paperwork Reduction Act

The information collection requirements for this proposed rule have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-XXXX. In accordance with the Paperwork Reduction Act, an agency may not Start Printed Page 5521conduct or sponsor, and a person is not required to respond to, a collection of information, unless the collection displays a currently valid OMB control number.

Catalogue of Federal Domestic Assistance

The Catalogue of Federal Domestic Assistance Number for the principal FHA mortgage insurance program is 14.155.

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List of Subjects in 24 CFR Part 200

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Accordingly, for the reasons stated above, HUD proposes to amend 24 CFR part 200 as follows:

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PART 200—INTRODUCTION TO FHA PROGRAMS

1. The authority citation for 24 CFR part 200 continues to read as follows:

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Authority: 12 U.S.C. 1703, 1709, and 1715b; 42 U.S.C. 3535(d).

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2. Revise § 200.24 to read as follows:

Existing projects.

A mortgage financing the purchase or refinance of an existing rental housing project or refinance of the existing debt of an existing cooperative project under section 207 of the Act, or for refinancing the existing debt of an existing nursing home, intermediate care facility, assisted living facility, or board and care home, or any combination thereof, under section 232 of the Act, may be insured pursuant to provisions of section 223(f) of the Act and such terms and conditions established by HUD.

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Dated: December 20, 2010.

David H. Stevens,

Assistant Secretary for Housing—Federal Housing Commissioner.

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Footnotes

1.  The regulations codified at 24 CFR part 200 (entitled “Introduction to FHA Programs”) set forth, in a single location of the Code of Federal Regulations, requirements that are generally applicable to FHA programs. Section 207.1 actually cross-references to the “eligibility requirements set forth in 24 CFR part 200, subpart A * * *” Section 200.24 is the relevant eligibility provision for existing multifamily projects in subpart A of 24 CFR part 200.

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2.  2009 HUD Office of Policy Development and Research, U.S. Housing Market Conditions November 2009 p. 4, 5. The report notes that in the production sector, building permits, starts, and completions all declined. The absorption rate of new rental units fell during the third quarter, and the rental vacancy rate increased sharply.

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3.  See page 5 of the report referenced in footnote 2.

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[FR Doc. 2011-2170 Filed 1-31-11; 8:45 am]

BILLING CODE 4210-67-P