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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

July 28, 1987
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 87 - 22
       TO:  ALL APPROVED MORTGAGEES
       SUBJECT:  Use of Project Reserve/Residual Receipt Accounts
                  to Cure A Potential Mortgage Default
 
            Preserving the FHA Insurance fund is one of the prime
       objectives of this Department.  In 1984, in order to prevent
       needless claims on the insurance fund, HUD proposed that
       owners of multifamily projects with HUD-insured loans effect
       an amendment to the Regulatory Agreement to give HUD pre-
       authorization to use funds in a project's reserve for
       replacement to cure a delinquent mortgage payment.
 
            Consistent with this policy of preventing avoidable
       claims, the Department hereby establishes the following new
       procedures:
 
            1. Reserve for Replacements Under the Regulatory
               Agreement the mortgagor, with HUD's approval may
               direct the disbursement of reserve funds for
               allowable purposes.  In cases where the mortgagor and
               HUD have executed the Regulatory Agreement amendment
               referred to above, mortgagees shall accept telephone
               approval from the HUD Field Offices to use reserve
               funds to cure a default.  (HUD Field Office staff have
               records indicating which mortgagors have executed the
               amendment.) HUD will promptly confirm the telephone
               approval in writing.
 
            2. Residual Receipts.  The Regulatory Agreement further
               provides that the residual receipts fund shall be
               under the control of the Commissioner, and may be used
               for "such purposes as he may determine."  Consistent
               with the Department's new policy, the following new
               procedure is established concerning use of residual
               receipts.  In cases where the mortgagee has not
               received payment from the mortgagor by the second to
               the last business day of the month in which it is due,
               the mortgagee is hereby directed to automatically
               transfer funds from the residual receipts account
               (where funds are available) to cure the default.
               Where a mortgagee has taken this action, it should
               immediately inform the local HUD Office of its action.
 
            3. Notice to Mortgagors Pending the issuance of formal
               regulations to that effect, mortgagees are requested
               to send a copy of the Delinquency Alert prescribed by
               Mortgagee Letter 83-1 , dated January 12, 1983, to the
               mortgagor, or his agent, in order to ensure that the
 
               mortgagor is aware that the mortgage is in default.
               This notification will prevent avoidable claims in
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               cases where the mortgagor has sufficient funds in the
               project account to make the mortgage payment, but
               payment in the proper amount has not been received due
               to being lost in the mail or other error.
 
       All of these measures can materially assist in reducing the
number of avoidable insurance claims where the problem which
precipitated the default can be cured in a relatively short time.
The Department appreciates your assistance in this matter.
 
       If you have any questions concerning this letter, please
contact the Office of Multifamily Housing Management, Planning and
Procedures Division, at (202) 426-3944.
 
               Sincerely yours,
 
               Thomas T. Demery
               Assistant Secretary
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