www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 83-24 OCT 25 1983 TO: ALL APPROVED MORTGAGEES ATTENTION: Multifamily Mortgagees SUBJECT: Requirements for Multifamily Insured Projects 1. Property Insurance Requirements 2. Increases in Replacement Reserve Deposits 3. Investment of Replacement Reserves and Residual Receipts 4. Distribution of Form HUD-9807, Request for Termination of Multifamily Mortgage Insurance 1. Clarification of Property Insurance Requirements. 24 CFR 207.260(c) requires that all projects encumbered by FHA insured mortgages must carry hazard insurance policies which meet the requirements of the Federal Housing Commissioner. Since those regulations also make mortgagees responsible for monitoring the adequacy of the coverage and for obtaining insurance when mortgagors fail to do so, several mortgage companies have asked the Department to clarify its insurance requirements for multifamily projects. That clarification follows. Section 207.10 of the Regulations requires that multifamily projects carry a fire and extended coverage insurance policy in an amount that meets the coinsurance requirements of the insurer and is at least equal to 80 percent of the actual cash value of the project's insurable improvements and equipment. These insurance requirements apply as long as the mortgage is insured by HUD and regardless of the unpaid principal balance of the mortgage. To determine the amount of insurance required at project completion, mortgagees must use the estimate of insurable value shown on Form HUD-92329, Property Insurance Schedule. In later years Form HUD-92329's insurable value figures must be updated to reflect changes in construction costs that have occurred since project completion. After the first year of project operation, HUD will consider insurance coverage to be adequate if the insurance coverage met the insurer's coinsurance requirements at the time the policy was issued and: (a) the policy is endorsed with an agreed amount clause in which the insurer acknowledges the adequacy of the insurance coverage and agrees not to invoke any coinsurance penalty; (b) the insurer annually certifies that the insurance coverage meets its coinsurance requirements; or (c) the mortgagor/the insurance agent/the mortgagee annually correctly recomputes the projects insurable value by applying cost factors published in one of the nationally _____________________________________________________________________ 2 recognized building cost indices and insurance coverage is increased to 80% (or any higher percentage required by the insurer's coinsurance clause) of the revised insurable value. If the mortgagor refuses to pay any higher premiums associated with required increases in insurance coverage, the mortgagee must pay the additional premiums and bill the mortgagor for those premiums. 2. Increases in Monthly Deposits to the Reserve for Replacements. All projects subject to the replacement reserve provisions of the revised Section 8 New Construction or Substantial Rehabilitation regulations must increase their monthly deposits to the replacement reserve annually by the percentage amount of the annual adjustment approved for that project. The revised regulations apply to all older Section 8 projects whose owners voluntarily opted to be bound by those regulations and, except as noted below, all insured and non-insured projects for which Agreements to Enter Into Housing Assistance Payments Contracts (AHAPs) were executed on or after November 5, 1979 for New Construction projects or February 20, 1980 for Substantial Rehabilitation projects. The replacement reserve requirements of the revised Section 8 regulations do not apply to previously HUD-owned projects sold pursuant to Section 886 (Subpart C), partially assisted projects, or Section 202/8 projects. While HUD regulations do not require increases in deposits on other projects, regulatory agreements on insured and HUD-held projects do authorize HUD Field staff to approve changes in the amounts of the monthly deposits. When processing rental increases, HUD staff will analyze the adequacy of the deposits and suggest that owners increase the deposits if the increases are needed to meet replacement needs of the project. Whenever deposits are increased pursuant to either of the two preceding paragraphs, the Field Office will send the mortgagee a Form HUD-9250, Reserve for Replacements Authorization. This Form will specify the amount and effective date of the new deposit. 3. Investment of Reserves for Replacements and Residual Receipts. a. Replacement Reserves. The revised Section 8 regulations require that projects subject to those regulations invest the Reserve for Replacements. While HUD regulations do not mandate that other projects invest their Replacement Reserves, HUD encourages owners to do so as prudent investment can offset inflationary increases in repair costs and enhance a project's financial condition. If an owner elects to invest the Replacement Reserve, the Mortgagee's Certificate (Form HUD-92434) provides that the mortgagee must permit the investment. Either the mortgagee or the mortgagor may effect the investment. Mortgagors subject to the revised Section 8 regulations must retain any investment earnings in the Reserve. _____________________________________________________________________ 3 Mortgagors not subject to the revised Section 8 regulations must deposit investment earnings in either the project's operating account or the Reserve for Replacements; the choice rests with the mortgagor. Investment earnings may not be distributed directly to mortgagors without regard to surplus cash considerations. b. Residual Receipts. In the past only projects subject to Subpart F of the revised Section 8 regulations were required to invest Residual Receipts. While the Regulatory Agreements for other projects give HUD control over the use and investment of Residual Receipt funds, in the past HUD has elected to allow those mortgagors to choose to invest or not to invest these funds. We are now changing our policy for these projects. Effective immediately, we are requiring that all projects' Residual Receipts be invested and that any earnings on the investment be credited to the Residual Receipts account. Residual Receipts may be invested only in the accounts or securities listed under Paragraph c below. While mortgagors relinquished control over Residual Receipts when they signed the project Regulatory Agreement, at the present time HUD will allow the mortgagors to select among the authorized forms of investment so long as the mortgagor exercises due care and attempts to maximize earnings to the extent consistent with the project's liquidity needs. c. Forms of Investment. Reserves for Replacement and Residual Receipts may be invested in Treasury securities, securities issued by a a Federal agency or deposits which are insured by an agency of the Federal government. Acceptable forms of investments are listed in Paragraphs (1) through (4) below. Neither Residual Receipts nor Replacement Reserves may be invested in Repurchase Agreements (REPOS). Investments must be established so as to: (1) permit the mortgagee to convert the investment to cash at any time; and (2) provide that the investments will at all times be under the control of the mortgagee. (1) Direct Obligations of the Federal Government Backed by the Full Faith and Credit of the United States. These include U.S. Treasury Bills, Notes and Bonds. (2) Obligations of Federal Government Agencies. These include, for example, GNMA Mortgage-Backed Securities, GNMA Participation Bonds and Farm Credit Administration issues. (3) Demand and Savings Deposits. Demand and savings deposits at commercial banks, mutual savings banks, savings and loan associations and credit unions are permitted, provided that the entire deposit is insured by the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Share Insurance Fund (NCUSIF) or the Federal _____________________________________________________________________ 4 Savings and Loan Insurance Corporation (FSLIC). (4) Insured Money Market Deposit Accounts. Investment in money market accounts is permitted, provided that the account is insured by one of the Federal agencies identified in Subparagraph 3c(3) above. d. Choosing Among Available Forms of Investment. Except as noted below, the mortgagor has the right to determine which of the investments discussed in Paragraph 3c will be used and a mortgagee may not restrict the mortgagor's choice. A mortgagor may authorize a lender to select the form of investment, if the lender is willing to accept that responsibility. If a mortgagor retains the authority to choose among authorized forms of investment, the mortgagee may require the mortgagor to provide written directions as to the type of investment desired. A mortgagee may refuse to honor mortgagor's request for a specific investment only if: (1) the mortgagee determines that the mortgagor's choice of investment will significantly increase the lender's cost of administering the reserve, and the mortgagee identifies another investment which offers liquidity, security and yield equal to or better than that proposed by the mortgagor; or (2) the proposed investment does not meet the criteria discussed in Paragraph 3.c. above. e. Mortgagee Fees. The mortgagee may charge a fee for administering invested residual receipts or replacement reserves if the fee is acceptable to the mortgagor. If there is an identity-of-interest between the mortgagee and either the mortgagor or its management agent, the mortgagor must assure that such fees do not exceed the amounts commonly charged when there is no identity-of-interest between the mortgagee and mortgagor. The mortgagor must disclose any such fees in the Replacement Reserve or Residual Receipts supporting schedules to the annual financial statement. 4. Distribution of Form HUD-9807, Request for Termination of Multifamily Mortgage Insurance. The mortgagee is required to submit Form HUD-9807 when the mortgage is prepaid or the mortgagor and mortgagee agree to terminate the mortgage insurance. Instructions printed on Form HUD-9807 direct mortgagees to mail the form only to HUD Headquarters. To increase the accuracy of Field Office portfolio listings and address lists, we are now asking that mortgagees _____________________________________________________________________ 5 mail all HUD-9807 requests to both HUD Headquarters and the HUD Field Office having jurisdiction over the project in question. The Field Office's copy should be sent to the attention of the Housing Division Director. Sincerely, W. Calvert Brand General Deputy Assistant Secretary _____________________________________________________________________