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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410

May 6, 1982
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING - FEDERAL HOUSING COMMISSIONER             IN REPLY REFER TO:
Mortgagee Letter 82-7
TO:       All Approved  Mortgagees
SUBJECT:  Mortgagee Letter 81-23, Escrows Established to
          Reduce Monthly Interest Charges to the Buyer
 
     This is to clarify HUD's position regarding concerns which have
surfaced in reference to the subject Mortgagee Letter.  In
particular, numerous questions have been asked about the requirements
that the funds be placed in an escrow account with a financial
institution which is neither the originating nor servicing mortgagee
and is supervised by a Federal or state agency.  HUD has no objection
to the mortgagee holding and administering the escrow for up to 60
days when there is an outstanding forward commitment to sell the
mortgage.  This will permit the parties to the escrow agreement to
avoid the additional expense of establishing a temporary escrow
account with a supervised financial institution and then almost
immediately transferring it to another qualified financial
institution that will handle the escrow account on a permanent basis.
The mortgagee's intention to do this should be indicated at the time
of the application for firm commitment.
 
     At the time endorsement is requested, the mortgage lender must
submit a letter stating that it is holding the funds temporarily
pending the sale of the mortgage loan and that under the terms of the
escrow agreement, the account will be deposited with a supervised
financial institution when the sale of the mortgage is accomplished.
 
     There has also been some misunderstanding regarding who may act
as the escrow agent when the funds are being held in a supervised
financial institution.  The mortgagee may not administer the escrow
account (except in a temporary capacity as outlined above), nor may
the mortgagee control the disbursement of the funds except in
accordance with a specific disbursement schedule provided for in the
agreement.  Full responsibility for maintenance and administration of
the account must rest with a third party, and there may be no
identity of interest between that third party and the originating or
servicing mortgagee.  Subsidiaries or affiliates of the mortgagee may
administer the accounts only if they are separate corporate entities
with no common officers and the collective voting authority of any
board members who serve on both boards of directors must be less than
one-half of the voting authority of each board.
 
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     Current policy does not indicate that undistributed escrow funds
may be applied to the outstanding principal balance on the mortgage
loan except when the mortgagee has received them and they are applied
to the balance due in order to reduce the claim in the event of
foreclosure.  This has created a problem for loan originators who
deal with FNMA.  In order to eliminate this problem and to enable
FNMA to accept the buy-down escrow, HUD will permit any undisbursed
escrow funds to be applied to the balance due on the mortgage at the
time the mortgage is prepaid in full for any reason.
 
     If you have any questions regarding this Mortgagee Letter, you
may contact the Director of the Single Family Development Division,
Washington, D.C. 20410; telephone (202) 755-6720.
 
                       Sincerely,
 
                       Philip Abrams
                       General Deputy Assistant
                       Secretary-Deputy Federal Housing Commissioner
 
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