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U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

 
January 23, 1996
 
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
 
MORTGAGEE LETTER 96-3
 
TO:  ALL APPROVED MORTGAGEES
 
ATTENTION:     MULTIFAMILY MORTGAGEES
 
SUBJECT:  Holding and Investing Reserve for Replacement Funds and Residual
          Receipts
 
     HUD encourages, and in many programs requires, owners to invest Reserve
for Replacement funds and Residual Receipts in order to offset inflationary
increases in repairs and replacement costs and to enhance a project's
financial condition.
 
     HUD has issued a revised policy to both the Asset Management Handbook
4350.1 and the Mortgagee's Servicing Handbook 4350.4 for holding and
investing funds in the Reserve for Replacement Account and Residual Receipts
Account.  This policy is consistent with program regulations, the Mortgagee's
Certificate, and the Regulatory Agreement which requires the funds in the
Reserve for Replacement Account to be maintained by, and under the control
of, the mortgagee.  Investment options should be determined jointly by the
mortgagor and the mortgagee.  The Regulatory Agreement requires, "such fund,
whether in the form of a cash deposit, or invested in obligations of, or
fully guaranteed by the United States of America, shall at all times be under
the control of the mortgagee." The revised policy suspends this provision of
the Regulatory Agreement by authorizing the mortgagee to invest funds in
excess of $100,000 in U.S. Government-backed securities and to hold funds in
excess of $100,000 in institutions under the control of, and whose deposits
are insured by, the Federal Deposit Insurance Corporation, National Credit
Union Association, or other U.S. government insurance corporations under the
following conditions:
 
     1.   Mortgagees must determine that the institution has a rating
          consistent at all times with current minimally acceptable ratings
          as established and published by Government National Mortgage
                    Association (GNMA).
                                                                 2
 
     2.   Mortgagees must monitor the institution's ratings no less than on
          a quarterly basis, and change institutions when necessary.  The
          mortgagee must document the ratings of the institutions where the
          funds are deposited and maintain the documentation in the
          administrative record for three years, including the current year.
 
     3.   If the mortgagee does not perform the required quarterly review of
          the institutions where there are deposits in excess of $100,000 and
          does not maintain the funds in an institution with a rating
          consistent with current minimally acceptable ratings as established
          and published by GNMA, and the institution fails, the mortgagee is
          held responsible for replacing any lost funds.  In addition, the
          mortgagee shall be subject to sanctions.  In the event the
          mortgagee fails to replace the lost funds, HUD will seek all
          available remedies to recover whatever funds are lost as a result
          of the failed institution.
 
     The above language is not deemed a modification of the Regulatory
Agreement Therefore, HUD reserves the right to invoke this Regulatory
Agreement provision and make it Operational in the future through notice or
handbook change, if it is determined that such a Policy is necessary or
desirable.
 
     Also included in the recently issued changes to Handbook 4350.4, is a
new policy relating to Late Charges which states: All monthly payments are
due on the first of the month.  If the monthly payment is received more than
15 days after the due date, more than once during a calendar year, the
mortgagee may deduct Late Charges from the interest accruing to either the
Reserve for Replacement Fund or the Residual Receipts Account without the
express written consent of HUD or the mortgagor for any subsequent late
monthly payments during the calendar year.
 
     Questions on the above may be addressed to your local HUD Office or the
Office of Asset Management and Property Disposition, Program Management
Division, (202) 708-4162.
 
                                   Sincerely yours,
 
                                   Assistant Secretary for Housing-
                                    Federal Housing Commissioner