September 28, 1992                    

                  U. S. Department of Housing and Urban Development

                          Washington, D.C. 20410-8000


                                               MORTGAGEE LETTER 92-33





SUBJECT:  Single Family Loan Production - Clarifications and

            Modifications to the 203(k) Rehabilitation Program



The purpose of this Mortgagee Letter is to make clarifications and

modifications to the Department's policies described in HUD Handbook 4240.4

REV-2, dated December 6, 1991.


1.   ACCOUNTING OF 203(k) REHABILITATION FUNDS.  In Handbook 4240.4 (para.

  1-20), the lender is required to provide to the local HUD Field Office

  the method(s) they will use to account for the release of

  Rehabilitation Escrow Funds.  The accounting system acceptable to HUD

  must properly record all transactions from the escrow account.  An

  accounting of the escrowed funds must be made on each Draw Request and

  copies of the record of transactions must be distributed to the

  originating lender, the borrower and to HUD.


The accounting system must show the amount escrowed for each category

  listed below.  The total amount of all categories should agree with

  line B-14 of Form HUD 92700.  The accounting system must provide:  (1)

  Borrowers name and property address; (2) FHA case number; (3) Closing

  date; (4) Scheduled completion date (no more than 6 months from the

  closing date); and (5) Amount of funds in the rehabilitation escrow

  account (line B-14 of Form HUD 92700).


A.   Repairs.  Show the total amount in the Repair escrow.  Provide a

       description and date of each draw request and include the total

       amount released at each Draw.  Show the amount of Holdback on

       each Draw and the amount of funds disbursed (the difference

       between the total amount released and the 10 percent holdback

       amount).  The balance remaining in the repair amount must be

       properly shown.


B.   Contingency Reserve.  Indicate the percent of repair funds

       allocated for contingency reserve.  Also indicate the total

       amount of funds in the Contingency Reserve Account and if they

       were paid by the borrower or out of mortgage proceeds.  Provide a

       description and date of each Change Order (Form HUD 92577)

       approved for contingency reserve.  Show the amount of funds

       disbursed and the balance remaining in the Contingency Reserve



C.   Inspection Fees.  Show the total amount of inspection fees.  Also

       show the number of inspections scheduled and the cost of each

       inspection.  Provide a description and date of each inspection.

       Show the amount of funds disbursed and the balance remaining in

       the Inspection Account.


D.   Title Update Fees.  Show the total amount of Title Update fees.

       Also show the number of updates scheduled and the cost of each

       update.  Provide a description and date of each update.  Show the

       amount of funds disbursed and the balance remaining in the Title

       Update Account.


E.   Mortgage Payments.  Show the total amount of Mortgage Payment

       funds (PITI) that are escrowed.  Indicate the number of months

       scheduled for mortgage payments as long as the property is not

       occupied.  Provide a description and date of each payment.  Show

       amount of funds disbursed and the balance remaining in the

       Mortgage Payment Account.


F.   Other Fees.  The amount of allowable fees (i.e., Architectural

       and Engineering fees, Independent Consultant fees, Permits, Plan

       Review fees, Supplemental Origination fee and Discount Points on

       repair costs) necessary for the rehabilitation work, broken down

       by category.  These fees may be released at closing with

       sufficient documentation (i.e., paid receipt for permits, bills

       from an Architect or consultant, etc.), but cannot exceed the

       accepted costs on the 203(k) Maximum Mortgage Worksheet, Form HUD

       92700.  Show the cost allowed for each item, the amount of funds

       disbursed and the balance remaining for each item in the account.


G.   Final Accounting of the rehabilitation escrow account must be

       made after the final inspection and final draw.  Any amount

       remaining in the categories listed above must be properly

       disbursed to paydown the outstanding principal balance of the

       mortgage where applicable.  The final accounting should show the

       payout of any holdback according to handbook procedures.


H.   Interest on Escrow.  Since the escrow funds must be placed in an

       interest bearing account, the interest earned must be accounted

       for and distributed to the borrower.  Show the interest rate

       provided on the escrow account.  For each draw on the escrow

       account, show the number of days in escrow and the amount of

       money in the account.  Also show the interest earned for the

       applicable time period.  List disbursements accordingly and the

       balance of interest remaining in the account.



Form HUD 92700, Section 203(k) Maximum Mortgage Worksheet (Attachment

  1)  has been revised.  In particular, the Discount Points on Refinance

  in line D-3 was removed.  This was placed on the form in error.  The

  only time discount points can be included in the mortgage is in line

  B-12 (discount points on repair costs and fees) and D-1 (discount

  points on refinance when existing debt is the controlling factor).


Additional changes to the Form HUD 92700 have also been made to make

  it easier to use with the sale of a HUD-owned home.  The new form

  should be used immediately to ensure compliance with program



The value placed on Form HUD 92800.5B should be (1) for a purchase

  transaction, line C-3 or (2) for a refinance transaction, the lesser

  of line D-1 minus the closing costs and discount points or line D-2.

  The lender should provide the Maximum Mortgage Worksheet to the Field

  Office with information such as the contract sales price, amount of

  discount points on the loan, estimated closing costs, how many

  inspections are requested, title updates, and how many mortgage

  payments will be escrowed.  The Maximum Mortgage Worksheet must be

  completed and signed by a HUD representative or the DE Underwriter and

  attached to the Conditional Commitment/ DE Statement of Appraised

  Value (Form HUD 92800.5B).  Also, for the firm commitment (Form HUD

  92900), the Maximum Mortgage Worksheet should be revised and attached

  to the Firm Commitment.  These forms must be carefully prepared to

  ensure the rehabilitation escrow account is properly established and

  the loan is properly closed by the lender.  On the Mortgage Credit

  Analysis Worksheet, Form HUD 92900-WS, lines 14a through 14d and

  14f(1) and (2) will be left blank.  For a purchase transaction, the

  total acquisition costs (sum of C3 + C4 on Form HUD 92700) is placed

  in line 14e; the maximum mortgage amount (line C5 on Form HUD 92700)

  is put in line 14g.


3.   ALLOWABLE DISCOUNT POINTS.  It has come to our attention that some

  lenders processing Section 203(k) rehabilitation loans are

  manipulating their discount fee structure to take advantage of the

  program's feature permitting discount points on the rehabilitation

  portion of the loan to be financed into the mortgage.  Although

  Handbook 4240.4 (para. 1-10.B) permits borrowers to include "discounts

  ... on that portion of the mortgage proceeds allocated to the

  rehabilitation," it does not permit lenders to charge a higher

  discount percentage on the rehabilitation portion (which may be

  financed) as opposed to a lower discount on that portion of the

  mortgage not attributable to rehabilitation (which may not be



HUD will not permit, for example, a lender to obtain a yield of two

  (2) discount points on a $100,000 loan by charging five (5) points on

  the $40,000 rehabilitation cost rather than applying discounts to the

  entire mortgage amount.  While the Department recognizes that the

  seller of the property may be paying discount points (and only on that

  portion attributable to the borrower's acquisition of the property),

  the loan transaction may not allocate discount points to the

  rehabilitation costs to simply reduce the borrower's cash



Consequently, the number of discount points charged to repair costs

  and fees (line B-12 of the Section 203(k) Maximum Mortgage Worksheet,

  Form HUD 92700) may not exceed the number of discount points charged

  to the non-rehabilitation portion of the mortgage.  The borrower is

  not obligated to include discount points on rehabilitation costs in

  the loan, and can decide to pay all or part of the discount points.

  The HUD-1 must show the amount of discount points to be paid

  out-of-pocket by the borrower or seller, because the discounts on

  rehabilitation are already included in the loan proceeds.  The Firm

  Commitment (Form HUD 92900) or the Addendum (For HUD 92900-A) must

  show the total of all discount points allowed on the loan.


Sales and financing concessions must be properly applied to reduce the

  sales price or discount points prior to placing the allowable amounts

  on the 203(k) Maximum Mortgage Worksheet, Form HUD 92700.  See

  Handbook 4155.1 REV-4 (para. 1-7B) for additional information.



  When HUD's Property Disposition (PD) Branch decides to allow sales

  incentives (e.g., prepaids for excessive property taxes) as part of

  the mortgage, then Form HUD 92700 can be modified to reflect this



The award letter must clearly state which incentives are allowed.  The

  maximum mortgage is calculated based upon the sum of the sales price,

  the cost of repairs, and any incentives the borrower is allowed to

  include into the loan amount as stated in the award letter.  If the

  seller (HUD) pays part of the closing costs, the estimated closing

  costs in C-4 should be reduced to reflect only those costs paid by the

  borrower at closing.  The downpayment requirements, as shown in the

  HUD accepted sales contract, are then applied.  The total mortgage

  amount cannot exceed the local maximum loan limits.


The following hypothetical mortgage calculation (for a HUD-owned

  properly only) for Form HUD 92700 is provided for your information:


C.1. Lesser of Sales Price (A1) or

         As-is Value (A2)........................................$63,000

        (Use the sales price agreed to between the HUD PD Branch and

          the purchaser of a HUD-owned property (shown in item 3, Sales

          Contract, Form HUD 9548).  No "As-is" appraisal is required on

          a HUD-owned property sale)

C.2. Total Rehabilitation Cost (B14)............................14,000

C.3. Lesser of Sum of C1 + C2 ($77,000) or

         110% of After-Improved Value (A4)........................77,000

C.4. Estimated Closing Costs ($3,845 (A5) - 1,250 paid by HUD

         (item 5, sales contract)) + Prepaids for Excessive

         Property Taxes Required Upfront Prior

         to Closing ($1,075).......................................3,670

C.5. Maximum Mortgage Amount:

         Sum of C3 + C4 ($80,670) less $500 (downpayment

         shown on sales contract).................................80,170

          Maximum Mortgage Amount cannot exceed $80,150, rounded down

            to the nearest $50.  This amount cannot exceed the local

            maximum loan limits.


5.   PLAN REVIEWER CERTIFICATION.  The following certification must be

  completed prior to returning the exhibits to the lender or forwarding

  them to the appraiser.  The plan reviewer can certify on their own

  letterhead or on the Draw Request, Form HUD 9746-A.  The appraisal

  cannot be made without this certification.

    "I certify that I have carefully inspected the property located at

      ____________________________________ on ________________(date).  I

      have reviewed the attached architectural exhibits and the

      estimated rehabilitation costs listed in column two below; they

      are acceptable for the rehabilitation of this property.  I have no

      personal interest, present or prospective, in the property,

      applicant, or proceeds of the mortgage.  To the best of my

      knowledge, I have reported all items requiring correction and that

      the rehabilitation proposal now meets all HUD requirements for

      203(k) Rehabilitation Mortgage Insurance."


6.   "CASH BACK" FROM REHABILITATION FUNDS.  HUD Field Offices have noticed

  several cases where investors have received excessive "cash back" as a

  result of over-estimating the rehabilitation costs.


Handbook 4240.4 REV-2 (para. 3-2.F.) discusses the use of cost data

  publications from R.S. Means "Repair and Remodeling Cost Data" book

  and the "Home-Tech Remodeling and Renovation Cost Estimator."  The

  cost estimates include overhead and profit for a contractor or a

  mortgagor doing their own work.  Where the HUD Field Office has

  determined that these cost estimating books are excessive for certain

  localities in their jurisdiction, they now have the authority to

  require further justification from borrowers to ensure the cost

  estimates are reasonable.  The Field Office will notify the 203(k)

  lender and plan reviewer if additional information is required for a

  particular case.


To guard against over-estimates of rehabilitation costs, the amount of

  funds requested for a draw inspection cannot exceed the actual cost of

  rehabilitation and/or the actual percent of completion of the

  rehabilitation.  On each draw, the mortgagor must certify the actual

  costs and completion percentage for each line item used on the revised

  Draw Request, Form HUD 9746-A (Attachment 2).


Where costs savings occur, the savings can be allocated to items that

  have experienced cost overruns or to pay for additional improvements

  to the property that are approved by a Change Order on Form HUD 92577.

  The 10 percent holdback is still applicable on all draws.  The

  mortgagor can be paid for their own labor, where it was approved by

  the lender prior to closing the loan.  On the final draw:


    A mortgagor acting as the general contractor can receive the

      holdback and request an additional 10 percent for the cost of

      administering the rehabilitation of the property, not to exceed

      the estimated cost of rehabilitation.  On any line item where the

      borrower is doing their own work or has an "identity of interest"

      with the contractor (or subcontractor), the additional cost of

      administering the loan is not allowed, because the profit and

      overhead is already their estimated cost of rehabilitation for

      that line item.  Any remaining cost savings must be applied to the

      mortgage principal.  For an investor/builder who is using the

      Escrow Commitment Procedure, the cost savings will

     be added to the escrow amount that is held by the lender for

       release when an acceptable owner-occupant assumes the loan.


Cost savings that are not used must be applied to prepay the mortgage

  principal to create greater equity in the property for the investor.

  For the investor/builder using the Escrow Commitment Procedure, the

  cost savings will be added to the escrow amount that is held by the

  lender for release when an acceptable owner-occupant assumes the loan.


The Draw Request, Form HUD 9476-A (Attachment 2), is being revised to

  include a certification of actual costs.  Columns 4 and 5 cannot

  exceed the actual cost of rehabilitation.  The columns should show

  the percentage for the completion of construction.  In column 6, the

  inspector will verify the percentage of completion and approve an

  amount no greater than that percentage, and no greater than what is

  requested.  The following certification must be provided prior to the

  release of any inspection draws:


     "I hereby certify that the actual costs of rehabilitation are as

                 shown on the Draw Request, Form HUD 9746-A.  I

                 understand I cannot obtain additional monies from the

                 rehabilitation account without the approval of the

                 lender.  After the final inspection, the monies in the

                 escrow account will be distributed as required by the

                 203(k) program procedures."



       Mortgagor's signature                              Date


Lenders are responsible to assure the mortgagor certifies to the

  actual cost of rehabilitation on each draw request.  Although the

  mortgagor is not required to submit documentation to substantiate the

  actual cost, the lender may request such documentation where there is

  a question as to the validity of the amounts.


7.   SECONDARY LENDERS.  The volume of 203(k) activity continues to

  increase.  In fiscal year 1988, the Department issued Mortgage

  Insurance Certificates (MIC) on 432 loans.  In fiscal year 1992, which

  ends September 30th, the activity has increased to about 3000

  mortgages.  The reason for the increase is attributed to more lenders

  processing 203(k) insured loans.


The Department continues to get calls from originating lenders

  requesting information about which secondary lenders buy 203(k)

  insured loans.  A list of secondary lenders that have indicated an

  interest in purchasing Section 203(k) insured mortgages is attached as

  Exhibit 4 to this letter.  If other lenders would like to be added to

  the list, please contact Kenneth Crandall of my staff at the telephone

  number listed below.


If you have any questions concerning this letter, please call your

local HUD Office or the Valuation and Technical Support Branch in

Headquarters at (202) 708-2720.


                            Very sincerely yours,


                            Arthur J. Hill

                              Assistant Secretary of Housing

                                - Federal Housing Commissioner



                    203(k) SECONDARY LENDERS

                        (September 1, 1992)

     1.  Broadview Mortgage (Ohio Lenders Only)

           965 High Street

           Columbus, OH 43215

         Contact: Lenny Zangardi (614) 436-2008

     2.  Federal Savings Bank and Mortgage

           2800 Cantrell Road, Suite 500

           Little Rock, AR 72202

         Contact: Dennis Mills (501) 280-3500

                                (800) 395-6001

     3.  Liberty Mortgage Company

           473 E. Rich Street

           Columbus, OH 43215

         Contact: Vickie Harmon (614) 224-4000

     4.  MLA, Incorporated

           24315 Northwestern Highway

           Southfield, MI 48075

         Contact: Jack Goodman (800) 877-2130

                    Jim Milliken (800) 366-6522

     5.  Simmons First Mortgage Company

           11101 Anderson Drive

           Little Rock, AR 72212

         Contact: Renee White (501) 223-4200

                                (800) 847-0058

     6.  Miami Valley Bank

           P.O. Box 5000

           Lakeview, OH 43331-5000

         Contact: Bill Gibson (513) 843-4000

     7.  Malone Mortgage Corporation

           8214 Westchester, Suite 606

           Dallas,  75225

         Contact: Ron Evans (214) 696-0386

     8.  Statewide Funding Corporation

           P.O. Box 390

           Clifton Park, NY 12065

         Contact: Jane King (518) 877-3500

                              (800) 755-5851

                              (800) 726-5626


                                                     Attachment 1


203(K) Maximum Mortgage



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              ref: Handbook 4240.4           form HUD-927000 (09/09/92)




Draw Request

  Section 203(K)


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