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

May 20, 1982
OFFICE OF THE ASSISTANT SECRETARY FOR              IN REPLY REFER TO:
HOUSING - FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 82-8
TO:  ALL APPROVED MORTGAGEES
SUBJECT:  Escrow Deposits for Change Orders
 
     A recent review of the operations of several mortgagees
regarding the origination and processing of HUD-FHA insured
multifamily mortgages disclosed serious deficiencies in the
processing of change orders.  The purpose of this letter is to advise
mortgagees of HUD requirements concerning the establishment of any
required escrow for change orders approved by the Department.
 
     As you are aware, the inherent complexity in the planning and
construction of a multifamily project may require changes in the
contract plans and specifications during construction.  All proposed
changes must be submitted on Form FHA 2437, Request for Construction
Changes-Project Mortgages, and require approval by the contractor,
architect, mortgagor and mortgagee before the Form may be submitted
to HUD for review and approval.
 
     If the net effect of the acceptable changes is to increase the
cost of the project $2,500 or more, HUD requires the mortgagor to
deposit, with the mortgagee, the sum needed to cover HUD's estimate
of the increased cost.  Where the acceptance of previously processed
change orders is conditioned upon a deposit to cover the net increase
in cost resulting from construction changes, the required deposit
must be in cash unless the Commissioner specifically authorizes
acceptance of a letter of credit.  Otherwise, neither a letter of
credit nor a promissory note received by the mortgagee from the
mortgagor is an acceptable substitute.
 
     You are reminded that future advances from mortgage proceeds may
not be approved until the deposit in question has been made by the
mortgagor and the field office so notified.  Mortgagees who cannot or
will not adhere to current processing requirements in an acceptable
manner may be recommended to HUD's Mortgagee Review Board for
sanctions.  Your full cooperation is requested and appreciated.
 
                              Sincerely,
 
                              Philip Abrams
                              General Deputy Assistant
                              Secretary for Housing - Deputy
                                Federal Housing Commissioner, HD