Published Final Rule (Project Approval for Single-Family Condos)

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Federal Register / Vol. 84, No. 158 / Thursday, August 15, 2019 / Rules and Regulations

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Parts 203, 206, and 234
[Docket No. FR–5715–F–02]
RIN 2502–AJ30

Project Approval for Single-Family
Condominiums
Office of the Assistant
Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
AGENCY:

This final rule implements
HUD’s authority under the single-family
mortgage insurance provisions of the
National Housing Act to insure onefamily units in a multifamily project,
including a project in which the
dwelling units are attached, or are
manufactured housing units, semidetached, or detached, and an
undivided interest in the common areas
and facilities which serve the project.
The rule provides for requirements for
lenders to obtain approval under the
Direct Endorsement Lender Review and
Approval Process (DELRAP) authority
for condominiums, and for standards
that projects must meet to be approved
for mortgage insurance on individual
units. The rule provides for flexibility
with respect to the concentration of
Federal Housing Administration (FHA)insured units, owner-occupied units,
and the amount that can be set aside for
commercial and non-residential space.
This will enable HUD to vary these
standards, within parameters, to meet
market needs. This final rule follows a
proposed rule published in the Federal
Register on September 28, 2016.
DATES: The effective date of this rule
and the related handbook is October 15,
2019.
FOR FURTHER INFORMATION CONTACT:
Elissa Saunders, Director, Office of
Single Family Program Development,
Office of Housing, Department of
Housing and Urban Development, 451
7th Street SW, Washington, DC 20410–
8000; telephone number 202–708–2121
(this is not a toll-free number). Hearingand speech-impaired persons may
access this number through TTY by
calling the Federal Relay Service at 800–
877–8339 (this is a toll-free number).
SUPPLEMENTARY INFORMATION:
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SUMMARY:

I. Background
Section 2117 of the Housing and
Economic Recovery Act of 2008 (Pub. L.
110–289) (HERA) amended the
definition of ‘‘mortgage’’ in section
201(a) of the National Housing Act (12
U.S.C. 1707(a)) to provide authority for

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HUD to insure individual condominium
units under the single-family program
under section 203 of the National
Housing Act (12 U.S.C. 1709). At the
same time, HERA amended HUD’s prior
authority for condominium units,
section 234 of the National Housing Act
(12 U.S.C. 1715y), to require a blanket
mortgage for the project. Due to this
change and other restrictive
requirements under section 234, the
single-family mortgage insurance
program under section 203 became the
primary vehicle for FHA mortgage
insurance for units in condominium
projects.
Section 2132 of HERA also provided
for implementation of section 2117 by
notice. Accordingly, HUD issued
mortgagee letters implementing the
program (2009–46a, 2009–46b, and
2011–03). These were then consolidated
into the Condominium Project Approval
and Processing Guide (the Guide), the
current operational guideline for the
program.
The Housing Opportunities Through
Modernization Act of 2016 (Pub. L. 114–
201) (HOTMA) became law on July 29,
2016. Title III of HOTMA established by
statute certain requirements. Among
these was a requirement that HUD issue
a regulation within 90 days from
enactment (i.e., by October 27, 2016),
requiring that any requests for
exceptions to the limitation on
commercial space be processed under
either the DELRAP or HUD review and
approval process (HRAP), and that in
determining whether to grant the
exception, factors related to the
economy of the local area of the project,
or to the project itself, be considered.
The statute also required HUD, by
regulation or less formal means,
including a mortgagee letter, to establish
an owner-occupancy requirement, also
in the same time frame. If HUD failed to
do so, the statute provided that the
minimum owner-occupancy percentage
for a project would be 35 percent of all
family units, including those not
covered by an FHA-insured mortgage.
On October 26, 2016, HUD issued the
required mortgagee letter, establishing
the general owner-occupancy
percentage for an existing project at 50
percent, unless certain specific
indicators were met indicating lower
risk, and allowing for review by HUD
under HRAP, in which case the
requirement could be as low as 35
percent.
Title III of HOTMA also provided for
changes to HUD’s treatment of private
transfer fees (these are in effect based on
statutory authority and are not part of
this rulemaking).

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II. The Proposed Rule
HUD issued the proposed rule on
September 28, 2016 (81 FR 66565), both
to codify the program, and, based on
experience, to offer greater flexibilities
and efficiencies that would increase
participation in the program and make
it more responsive to changes in the
marketplace.
A. DELRAP
The rule proposed that participants in
DELRAP must: Be a Direct Endorsement
(DE) lender under 24 CFR 203.3: Have
a one-year experience requirement for
all staff participating in DELRAP
approvals; have originated no fewer
than 10 FHA condominium loans; and
have an acceptable quality control plan.
There is also a process for first obtaining
conditional DELRAP authority before
obtaining unconditional authority based
on performance, and periodic
performance monitoring. As proposed,
HUD can take action based on nonperformance, legal or rules violations,
including any action listed in § 203.3(d),
or termination of DELRAP authority.
The proposed rule also established a
process for reinstatement.
B. Definitions
The rule proposed new definitions for
a number of terms, including
Condominium Association (or
Association), Condominium Project,
Condominium Unit, Infrastructure,
Single-Unit Approval (SUA), and Site
Condominium. The definition of
Condominium Association makes clear
that the homeowners who manage the
financial and common areas of the
condominium project are the
Condominium Association as meant by
this rule, regardless of the name used.
The proposed definition of
Condominium Project and
Condominium Unit are based on 12
U.S.C. 1707(a), which is also the usual
usage of that term in the industry. The
proposed definition of Infrastructure,
which is related to the requirement in
§ 203.43b(d)(4) of this rule, that the
project or legal phase be complete and
ready for occupancy, includes utilities,
common elements, and amenities, such
as parking lots, swimming pools, golf
courses, playgrounds and similar items
called for in the project or legal phase.
The proposed definition of Single-Unit
Approval is approval of one unit, in
accordance with § 203.43b(i) of this
rule, in an unapproved project. The
proposed definition of Site
Condominium is a single-family
detached dwelling (without any shared
garages or attached buildings), including
the site and air space, which is

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Federal Register / Vol. 84, No. 158 / Thursday, August 15, 2019 / Rules and Regulations
of the ranges would be published for 30
days of public comment (§ 203.43b(f)).

encumbered by a declaration of
condominium covenants or
condominium form of ownership.
Finally, this rule adopts the definition
of Rental for Transient or Hotel
Purposes in section 513(e) of the
National Housing Act (12 U.S.C.
1731b(e)).
C. Eligibility for Approval
Section 203.43b(c), as proposed,
would require approval by HUD (HRAP)
or by a mortgagee (DELRAP). Otherwise,
the project would have to meet the
additional requirements for a Site
Condominium or for Single-Unit
Approval. To be approvable, the project
would have to meet the eligibility
requirements of § 203.43b(d) of this rule.
These include: Being primarily
residential in nature; consisting entirely
of dwelling units that are one-family
units; being in full compliance with
applicable laws and local approval
requirements with respect to the
condominium plat and development
plans; and being complete and ready for
occupancy, and not subject to further
rehabilitation, construction, phasing, or
annexation (if the construction consists
of legal phases, this requirement and the
requirements of § 203.43b(e) of this rule
applies to each phase). In addition, the
rule proposed that HUD may establish
further requirements for eligibility
through notices under § 203.43b(d)(6),
such as insurance requirements,
financial condition, nature of title, the
existence of any pending legal action or
physical property condition
(§ 203.43b(d)(6)(i) through (vi)), and
such other matters as may affect the
viability or marketability of the project
or its units (proposed
§ 203.43b(d)(6)(xi)).

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D. Flexibility
The rule proposed to grant flexibility
in three key areas, to allow HUD to
respond quickly to changes in market
conditions. The three areas are the
amount of commercial/non-residential
space; the maximum percentage of FHAinsured units; and the minimum
percentage of owner-occupied units
(§ 203.43b(d)(6)(vii), (viii), and (ix)).
Within each range, HUD may from time
to time issue a notice establishing a
particular percentage or percentages. As
proposed, the ranges are: For
commercial space, between 25 and 60
percent of the total floor area; for units
with FHA-insured mortgages, between
25 and 75 percent of the total number
of units in the project; and for owneroccupied units, likewise between 25
and 75 percent of the total units.
Changes in the upper and lower limits

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E. Legal Phasing
As proposed, legal phasing only
would be permitted as long as the phase
is fully built out and the dwelling units
have a certificate of occupancy (CO).
Both vertical buildings and detached or
semi-detached developments would be
required to be contiguous (§ 203.43b(e)).
F. Reserve Requirements
Generally, the proposed reserve
requirement would be at least 10
percent of the monthly unit
assessments. A lower amount could be
deemed acceptable by HUD based on a
reserve study completed not more than
24 months before a request for a lower
reserve amount is received
(§ 203.43b(d)(6)(x)).
G. Exceptions
The rule provided in proposed
§ 203.43b(f) (§ 203.43b(g) of this final
rule) that the Secretary may
discretionarily grant an exception to the
requirements found in § 203.43b(d)(6),
provided that the statutory conditions
for exceptions to the commercial space
requirements enacted under HOTMA
and codified under 12 U.S.C. 1709(y)(2)
are met. These are that the request and
disposition of the request for the
exception may be made at the option of
the requester under the DELRAP or
HRAP process; and that in determining
whether to allow the exception, factors
relating to the economy for the locality
in which the project is located or
specific to the project, including the
total number of family units in the
project, shall be considered.
H. Recertification
The rule proposed to extend the
recertification period for an approved
project from 2 to 3 years, and allow
recertification by updating previously
submitted information, rather than
resubmission of all information. There
would be a window of 6 months before
to 6 months after the expiration of
approval to submit a request for
recertification.
I. Single-Unit Approval
The rule proposed in § 203.43b(h)
(§ 203.43b(i) of this final rule) to allow
approvals on individual units that are
not in approved projects and not in
projects that have been subject to
adverse determination for significant
issues that affect the viability of the
project. The project must be complete
and ready for occupancy under
§ 203.43b(d)(4), must not be a
manufactured home, and must have at

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least five dwelling units. The upper
limit on single-unit approvals as
proposed would be in a range from 0 to
20 percent of the total number of units
in the project, the exact percentage to be
established by HUD through notice.
J. Site Condominium
The rule proposed at § 203.43b(i)
(§ 203.43(j) of this final rule) that for
Site Condominiums, insurance and
maintenance costs must be the
responsibility of the unit owner, and
that any common assessment collected
must be restricted for use solely for
amenities outside the footprint of the
individual site.
K. Rehabilitation Loans
The rule proposed to revise 24 CFR
203.50 to permit FHA insurance under
the 203(k) program for loans to
rehabilitate the interior space or install
firewalls in the attic of a condominium
unit. Such FHA mortgage insurance
would not cover any exteriors or areas
that are the responsibility of the
Association. The loan limits would be
those stated in § 203.50(f), and for
condominiums that are not
manufactured homes, townhouses, or
Site Condominiums, 100 percent of the
after-improvement value of the
condominium unit.
L. Part 234
As provided in the proposed rule, part
234 now will apply in cases where the
project has a blanket mortgage insured
by HUD. This part 203 applies to the
more usual condominium configuration,
that is, a one family unit and undivided
interest in the common areas and
facilities.
III. This Final Rule
After further consideration, including
careful consideration of public
comments, HUD has made some
changes in this final rule.
A. DELRAP Qualifications
HUD received multiple comments
concerning the proposal to only allow
staff meeting the experience
requirement to use DELRAP authority to
approve Condominium Projects.
Commenters indicated that the
proposed credential requirements
impose a barrier for smaller lenders to
fully participate in the DELRAP
program. Given the comments received,
where HUD had proposed that all staff
involved in DELRAP activities had to
meet the experience requirements, the
final rule revises proposed
§ 203.8(b)(1)(iv) to allow participation
by staff supervised by personnel that
meet the experience requirements in

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response to public comments. Also, the
proposed rule provided that, to be
granted unconditional DELRAP
authority, a lender would have to
complete at least five DELRAP reviews.
HUD recognized that such a
requirement may not always be
necessary; therefore, this final rule, in
§ 203.8(b)(3), gives HUD the flexibility
to reduce this number where
appropriate, for example, in the case of
a DELRAP lender with significant
experience under the current program.
This will ease potential burdens on
lenders who wish to participate and
who have qualified supervisor
personnel.

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B. Definitions
The definitions in § 203.43b(a) of
‘‘Condominium Project’’ and
‘‘Condominium Unit’’ have been
reworded and reorganized.
Substantively, the definition of
‘‘Infrastructure’’ is removed and a
definition of ‘‘Common Elements’’ is
added. In addition to typical items, the
definition includes a catch-all, ‘‘other
areas described in the condominium
declaration.’’
The definition of ‘‘Site
Condominium’’ is revised to address the
problems with air space that the public
comments identified, and to allow for
different Site Condominium
arrangements existing in the
marketplace that can potentially be
approved. The inclusion of air space in
the proposed rule was identified in
public comments to potentially create
conflicts with laws of certain states.
C. Suspension of FHA Case Numbers
HUD currently monitors FHA
insurance concentration for projects that
are, or have been, FHA approved. With
the introduction of the Single-Unit
Approval process, HUD recognizes the
need to enhance the insurance
concentration tracking mechanism to
determine compliance with the
concertation ranges allowed. A
commenter also noted the importance of
having a reliable tracking system in
place and available to the public to track
percentages of single-unit approvals. In
the context of the maximum percentage
of units with FHA-insured mortgages
under § 203.43b(d)(6)(viii), and in the
context of single-unit approvals under
§ 203.43b(i)(2), this final rule adds a
statement that ‘‘HUD may suspend the
issuance of new FHA case numbers for
a mortgage on a property located in any
project where the number of FHAinsured mortgages exceeds the
maximum.’’ The maximum percentages
that apply will be established by notice.
This additional provision to the final

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rule will allow FHA to build a robust
process to proactively manage FHA
insurance concentration while
recognizing the need for lenders to
operationalize the impact of such a
requirement early in the loan lifecycle
so as not to affect the origination
process.
D. Secondary Residences
The proposed rule provided that units
occupied as a principal or secondary
residence as defined under § 203.18(f)(2)
would count towards the required
minimum percentage of owner-occupied
units. As commenters indicated, the
definition established under
§ 203.18(f)(2), which establishes the
definition for the purpose of permitting
FHA financing on a secondary residence
which requires analysis of the lack of
affordable rental housing is too
restrictive and out of scope in the
context in which HUD or the DELRAP
lender is looking at the owneroccupancy level of the project to
determine whether the project is
approved. Thus, solely to calculate
owner-occupancy percentage, this final
rule provides that any unit that is
occupied by the owner as his or her
place of abode for any portion of the
calendar year other than as a principal
residence and that is not rented for a
majority of the calendar year shall count
towards the total number of owneroccupied units. While such a definition
for the purpose of calculating owner
occupancy for condominium project
approval is more expansive, the
definition in § 203.18(f)(2) will continue
to be used when determining eligibility
of mortgage secured by a borrower’s
secondary residence.
E. Reserve Study
The proposed rule in
§ 203.43b(d)(6)(xi) stated that for an
approvable project to have less than 10
percent of the monthly unit assessments
in a reserve account, the lesser amount
would have to be based on a reserve
study completed within 24 months of
the request for the lower amount. The
final rule, in § 203.43b(d)(6)(x), enlarges
this time to 36 months, or, in the case
of HRAP, such greater amount of time
as the Secretary determines. This
change conforms with HOTMA’s
requirement that HUD streamlines the
recertification process for approved
properties by considering lengthening
the time between certifications, see 12
U.S.C. 1709(y)(1).
F. Eligibility for Approval: Financial
Condition
The final rule states that the financial
condition component of the further

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approval requirements in
§ 203.43b(d)(6)(v) includes the
allowable percentage of units in a
project owned by a single owner. This
comports with current practice in the
marketplace and was recognized as a
key policy consideration to prevent a
financial shock that may occur in the
event of an economic failure by a single
owner with a large share of units in a
complex.
G. Percentage Ranges
This final rule, following the
proposed rule, sets a range within
which HUD may make specific
determinations on minimum owneroccupancy percentage, maximum FHAinsured mortgage percentage for project
approval, maximum FHA-insured
mortgage percentage for Single-Unit
Approval, and maximum percentage of
floor area taken by commercial or
nonresidential space. There is an ability
to grant case-by case exceptions to any
of these ranges under § 203.43b(g).
Additionally, if HUD determines to
adjust the upper or lower limits of these
ranges, the rule provides for a public
comment process under § 203.43b(f).
HUD may establish multiple limits
within a range for owner-occupancy and
commercial space for differently
situated projects. For example, the
owner occupancy limit may be
established differently for newly
constructed projects, in which a number
of units likely would not yet have
transferred to first owners, and for
existing projects, which are more likely
fully sold.
This final rule makes some minor
changes to the proposed rule regarding
the percentage ranges of owneroccupants and commercial/
nonresidential space. In the case of the
maximum allowed percentage of units
with FHA-insured mortgages for project
approval, this final rule makes no
change.
1. Owner Occupancy
The possible range for the minimum
level of required owner-occupancy for
project approval is narrowed slightly;
the floor is set at 30 percent in this final
rule. This is in part because under
current HUD practice, the minimum
owner occupancy percentage for new
construction is 30 percent of the total
units, and the lower end of the range
must be set to accommodate newly
constructed projects. In part, it provides
FHA with additional room to calibrate
this requirement to a level below that
identified in HOTMA (35 percent) as the
default, if necessary, in response to
housing market changes. A 30 percent
owner occupancy percentage is the

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lowest limit compatible with risk to the
Mutual Mortgage Insurance Fund
(MMIF).
The upper limit of 75 percent remains
unchanged from the proposed rule. This
upper limit flexibility is necessary to
manage risk. Unlike Fannie Mae and
Freddie Mac (which require 50 percent
owner occupancy for certain types of
projects 1), HUD cannot require larger
down payments or higher credit scores,
but must manage risk to the MMIF in
other ways. Depending on future market
conditions, flexibility to require 75
percent owner occupancy is needed if it
is determined that a lower owneroccupancy rate is contributing to loan
delinquency.
If HUD determines to change the
owner-occupancy threshold within
these limits, it will examine a variety of
market factors. These will generally
include:
• FHA portfolio analysis of default
and claim rates of loans with similar
attributes across different bands of
owner occupancy percentages. The
bands would be, for example, 10 percent
bands of owner occupancy percentages.
• Analysis of FHA condominium
loans across geographical areas
segmented by average owner occupancy
ratios (e.g., average owner occupancy
ratios in metropolitan areas versus rural
areas).
• Analysis of trends of financial
stability of condo projects in relation to
owner occupancy (e.g., relationship of
default and claim rates when compared
with factors that determine financial
stability and owner occupancy
percentages).
HUD may consider other relevant
factors as well.
2. Maximum Commercial/
Nonresidential Space

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This final rule reduces the maximum
commercial space percentage upper
limit to 55 percent of the total floor area.
While there was substantial support for
a 50 percent limit on nonresidential
commercial space, a number of public
comments supported a maximum limit
for commercial space above 50 percent.
There are many potential benefits of
mixed-use development, and recent real
1 See Fannie Mae Selling Guide, B4–2.2–02: Full
Review Process (6/5/2018) on investment
properties’ 50 percent requirement. This is available
at https://www.fanniemae.com/content/guide/
selling/b4/2.2/02.html. A similar requirement for
investment property—that at least 50 percent of the
total number of units in the condominium project
must have been conveyed to purchasers who
occupy their units as a primary residence or second
home—is at chapter 5701.5(c)(2) in the Freddie Mac
Single-Family Seller/Servicer guide. This is
available at http://www.freddiemac.com/
singlefamily/pdf/guide.pdf (visited 3/18/2019).

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estate trends studies support continued
demand for these types of projects.2 The
55 percent ceiling would give HUD
future room to grant an exception under
HRAP where HUD’s review shows that
a specific case warrants it (or, under
DELRAP review in the case where the
exception is at the request of an eligible
party and the requester asks for DELRAP
review under 12 U.S.C. 1709(y)(2)(A)),
while still maintaining the overall
residential character of the project.
The lower limit of the range for the
maximum allowable commercial space
remains at the proposed 25 percent.
This percentage aligns with the
historical maximum commercial space
allowed in a condominium project
across the industry. However, mixeduse development is an upward trend in
the marketplace.3 Fannie Mae recently
increased the maximum percentage of
commercial space in a condominium to
35 percent from 25 percent,4 consistent
with this upward trend. This is also
consistent with the Emerging Trends in
Real Estate® report, which states that
there is a trend toward mixed-use
development with a mixture of
residential, with retail and other
commercial uses.5 HUD believes that 25
percent of commercial/nonresidential
space of the projects total floor area sets
the historical lowest maximum for a
mixed-use project that has been used for
the program to be successful. The
maximum percent of commercial/nonresidential space will be established
within this range considering current
and projected real estate market trends.
The data which HUD will consider
when changing the specific percentage
of commercial space allowed for project
2 Real Trends: The Future of Real Estate in the
United States by Urban Economics Lab and MIT’s
Center for Real Estate (October 2017). The study is
available at https://mitcre.mit.edu/wp-content/
uploads/2017/10/REAL-TRENDS-MIT.pdf (visited
3/18/20190).
3 Id. at 19 (‘‘Around the globe, ‘live, work, play’
has become a fashionable mantra for urbanism and
real estate development. This trend has spurred the
rescue and redevelopment of historical
neighborhoods. It also has yielded new and denser
mixed-use developments . . . . The resurgent
prominence of quality urbanism in the United
States is here to stay and will keep on energizing
a segment of the industry.’’).
4 Fannie Mae Selling Guide B4–2.1–03: Ineligible
Projects (6/5/2018). This is available at https://
www.fanniemae.com/content/guide/selling/b4/2.1/
03.html.
5 PWC and Urban Land Institute, Emerging
Trends in Real Estate®: United States and Canada
2019 at 83 (‘‘There also is a trend toward
redeveloping urban malls by intensifying sites with
mixed-use properties that combine retail with highdensity residential, restaurants, community
services, green space, and experiential
attractions. . . .’’), available at https://
www.pwc.com/us/en/industries/asset-wealthmanagement/real-estate/emerging-trends-in-realestate.html (visited 3/18/2019).

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approval, within the permitted range,
will generally include:
• FHA portfolio analysis of default
and claim rates of loans with similar
attributes across different bands of
commercial/nonresidential space
percentages (e.g., default and claim rates
for purchase transactions at
commercial/nonresidential percentages
in appropriate percentage bands that
HUD will select.
• Analysis of FHA condominium
loans across geographical areas
segmented by average commercial/
nonresidential space percentages (e.g.,
average commercial/nonresidential
space percentages in metropolitan areas
versus rural areas).
• Analysis of trends of financial
stability of condo projects in relation to
commercial/nonresidential space
percentages (e.g., relationship of default
and claim rates when compared with
the percentage of the residential portion
of the project financial stability and the
commercial/nonresidential space
percentage).
HUD may consider other relevant
factors as well.
3. Maximum FHA-Insured
Concentration for Project Approval
The final rule makes no change to the
25-to-75 percent range proposed for the
maximum FHA insurance concentration
requirement. The upper limit of 75
percent is the maximum risk exposure
to the MMIF that HUD is willing to
accept. At the same time, the range must
be wide enough to accommodate
qualified borrowers in multiple markets
where access to affordable housing and
financing may be difficult.
In changing the maximum amount of
units with FHA mortgage insurance for
project approval within the allowable
range, data points will generally
include:
• Analysis of FHA market share of
condominium loans versus market share
of non-condo loans.
• Analysis of FHA market share of
condominium loans versus market share
of non-FHA condo loans.
• Analysis of default and claim rates
of loans with similar attributes across
different bands of FHA concentration
percentages.
• Analysis of FHA concentration
percentages segmented by geographical
areas.
• Analysis of performance of FHA
condo to non-FHA condo loans.
HUD may consider other relevant
factors as well.
4. Maximum FHA-Insured
Concentration for Single-Unit Approval
This final rule implements the
proposed rule’s 0-to-20 percent range

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with the addition of an allowance for a
de minimis number of units in projects
with less than 10 units. Section
203.43b(h) has been reorganized in this
final rule and redesignated as
§ 203.43b(i). The lower limit of 0
percent is set as a risk control measure
if, for example, evidence shows that
SUA loans show a significantly worse
performance when compared to similar
loans in approved projects. Most
projects do not have a significant
proportion of FHA-insured units. Under
a 20 percent cap, 90 percent of current
approved projects could have employed
a single-unit loan approval. Under a
much more restrictive 10 percent
ceiling, 73 percent of current projects
could have avoided the project-approval
process through single-unit loans. Thus,
the 20 percent limit would allow HUD
great flexibility to allow single-unit
loans in unapproved projects. This
would enable smaller condominium
projects, for whom applying for project
approval might be too costly, to have
similar access to FHA mortgage
insurance as currently approved
projects.
In setting or changing the maximum
FHA concentration for single-unit
approval, data points that HUD will
consider will generally include:
• Analysis of SUA loan performance
compared to the performance of loans
made in approved condo projects.
• Analysis of SUA loans across
geographical areas and further
segmentation by average owner
occupancy ratios and financial stability.
HUD may consider other factors as
well.

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H. Phasing, Contiguous/Adjoining
Requirement
Proposed in § 203.43b(d)(6)(x)(B) was
a requirement that in a detached or
semi-detached development, all homes
in a phase must be adjoining or
contiguous. A number of public
comments pointed out problems with
this requirement, and this requirement
is removed in this final rule. The
requirements that all homes in a phase
be separately sustainable, built out, and
ready for occupancy remain. This
material has been reorganized and is in
§ 203.43b(e) of this final rule.
I. Site Condominiums
This final rule revises the definition
of Site Condominium in § 203.43b(a) to
include projects consisting of single
family detached dwellings that do not
have shared garages or any other
attached buildings, as well as single
family detached or townhouse-style
horizontally attached dwellings where
the unit consist of both dwelling and

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land. The rule also removes the
requirement in proposed § 203.43b(i)
that all common assessments collected
would have to be used solely for
amenities outside the footprint of the
individual site; however, the
requirement that insurance and
maintenance costs of the individual
units must be the sole responsibility of
the unit owner remains (see § 203.43b(j)
of this final rule). When combined with
the revised definition of Site
Condominium, the requirements under
this rule better accommodates the Site
Condominium arrangements that exist
in the market. Because manufactured
home condominiums are processed
under the HUD review and approval
process, the final rule definition
clarifies that Site Condominiums do not
include manufactured homes.
J. Rehabilitation Loans
This final rule removes the exclusion
of condominiums, other than Site
Condominiums, from the 100 percent of
the after-improvement value of the unit
loan amount restriction (24 CFR
203.50(f)(3)).
K. Home Equity Conversion Mortgages
(HECMs)
This final rule makes technical and
clarifying changes to part 206 to avoid
potential confusion as to the insurability
of HECM condominium loans.
IV. Public Comments and Responses
This proposed rule was published in
the Federal Register on September 28,
2016 (81 FR 66565), and the public
comment period closed on November
28, 2016. HUD received 91 comments by
the close of the public comment period.
Commenters included individuals,
mortgage companies, banks, trade
associations, realtors, and mortgage
brokers. The following is a summary of
the significant issues raised in the
public comments.
In addition to the specific issues
noted, some commenters expressed
general support for the rule, citing the
increased flexibility and opportunities
for homeownership.
General
Comment: HUD’s rules are too
restrictive and should be loosened to
allow projects to participate and buyers
to have more access to affordable
housing. Condominiums are currently
the strongest and least risky part of
FHA’s portfolio, yet FHA has
significantly reduced condo approvals
since 2009, and provisions in this rule
will further decrease the FHA’s share of
the market. Making FHA insurance for
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available will help first-time
homebuyers, including millennials, as
well as seniors and low-to-moderate
income buyers. Condominium
mortgages perform better than other
single-family mortgages, so increasing
their availability will benefit the
housing market and the FHA insurance
fund.
HUD Response: HUD recognizes that
mortgages secured by condominiums
currently perform better than noncondominium secured mortgages, while
noting that prior to FHA’s approval
process in 2009, the opposite was true.
In order to achieve the appropriate
balance between meeting the housing
needs of the borrowers FHA’s mortgage
insurance programs were created to
serve and to minimize the level of risk
undertaken relative to the insurance,
this rule provides additional flexibility
and a basic framework for condominium
project approval. HUD plans to issue
additional guidance, with elements that
can be changed as the market changes.
HUD believes this approach will
alleviate this concern and allow HUD to
achieve the right balance as market
conditions may change.
Comment: Many economic analyses
are showing a shortage of multifamily
housing in location-efficient areas and
an oversupply of detached single-family
houses. The closer we get to singlefamily and multifamily projects having
the same approval requirements, the
more efficient our housing market will
be, the more we will get out of our
developed land, the more we will
conserve our pristine land, the more
choices we can provide for people who
may not necessarily want to use a car for
every errand, and the more energyefficient our cities will be. This
proposed rule is a good first step, and
it should be revised to go even further
towards normalizing the lending rules.
HUD Response: HUD believes this
rule strikes the correct balance between
providing flexibility while protecting
the Mutual Mortgage Insurance Fund
and recognizing the difference in
ownership of single-family dwellings
that are maintained solely by the owners
versus condominium ownership that
includes maintenance by owners and
associations.
Comment: Due to the significance of
the changes, there should be a 12-month
implementation period.
HUD Response: This final rule
provides for a 60-day implementation
timeframe that allows stakeholders to
view additional guidance provided in
HUD handbooks prior to
implementation.
Comment: Commenter states that
condominiums are currently the

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strongest and least risky part of FHA’s
portfolio, yet FHA has significantly
reduced condo approvals since 2009.
This commenter urges FHA to ease
restrictions on condominiums in many
areas.
Comment: Many families want to
purchase their own home and want to
purchase condos; however, many
lenders are not able to support the
purchase because the condo project is
not FHA approved. It would be nice to
see if FHA could allow more condo
projects to be allowed to participate in
the FHA Home Loan program. It would
open doors to those that are not able to
qualify under conventional home loan
terms.
HUD Response: This final rule
provides the framework to establish
flexibility, with increases and decreases,
in applying the rule’s standards through
policy. It also includes the ability to
obtain Single-Unit approval as an
opportunity to provide access to FHA’s
programs in unapproved condominium
projects.
The Proposed Flexible Percentage
Ranges for Owner Occupancy,
Commercial/Nonresidential Space, and
FHA Concentration
Comment: HUD states that setting a
range would allow FHA to vary the
specific percentage, at will, that it
believes to be responsive to market
changes. The commenter does not
understand the purpose of the ranges as
it is the specific percentage that will
have a more direct impact on
condominium project eligibility for FHA
insurance. While HUD proposes to offer
the public the opportunity to comment
if it considers changes to the upper and
lower limits of the range, it would not
offer the same opportunity when
resetting the specific percentage within
the range. The public should also
receive notice and an opportunity to
comment if HUD is considering a
change in the specific percentage within
the range as the specific percentage will
have a greater impact on buyers and
sellers than a change in the range.
Further, the commenter requests
confirmation that the case-by-case
exceptions to specific limits allowed
under the Guide and subsequent
Mortgagee Letters will remain in effect
under the new regulations.
HUD Response: The purpose of the
proposed rule was in part to give the
public the opportunity to comment on
the potential upper and lower limits of
the ranges for owner occupancy, FHA
concentration, and nonresidential/
commercial space. Thus, the public has
had a chance to comment on the range
of possible choices. In order to correctly

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allocate risk, HUD may potentially have
to implement choices within these
ranges quickly. HUD believes that the
comment process adopted in the
proposed rule balances the need for
public involvement in the rulemaking
with the need for market flexibility. As
to any future change HUD might make
to percentages within the ranges, this
preamble identifies the factors that HUD
will consider at section III.G of this
preamble. As to the availability of caseby-case exceptions, such exceptions are
permitted under § 203.43b(g) of this
final rule (unchanged from § 203.43b(f)
of the proposed rule). In the case of
exceptions to the commercial/
nonresidential space percentage, as
required by statute (12 U.S.C.
1709(y)(2)), exceptions can be granted
under either DELRAP or HRAP
processing at the option of the requester,
and in determining whether to allow
such an exception, factors relating to the
economy for the locality in which the
project is located or specific to the
project, including the total number of
family units in the project, shall be
considered.
Comment: A commenter cites the
example of Mortgagee Letter 2016–15,
which will not have significant practical
benefit for condominium associations.
Opportunity for public comment could
have prevented such an outcome,
remedying limitations in this policy
update.
Comment: A commenter generally
approves of the flexibility but notes that
too many changes that create a moving
target will frustrate board members and
community managers.
HUD Response: This final rule
provides the framework to establish
flexibility in applying the rule’s
standards through policy. HUD strongly
believes that establishing the ranges in
the regulation provides the flexibility it
needs to effectively respond to market
fluctuations while giving the public
information about the limits of that
flexibility. Enabling HUD to respond to
market changes will benefit
condominium communities.
Standards for Flexible Ranges
Comment: For the flexible ranges on
commercial space percentage, FHAinsured percentage, and minimum level
of owner-occupied units, HUD should
broadly identify and provide more
information on the factors it will
consider and the criteria for
recalculations when determining
whether to increase or decrease the
percentage limit. Knowing the factors
HUD will consider when determining
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of time will enable compliance and can
assist homebuilders in designing
condominium projects that will meet
the needs of both commerce and
consumers in general keeping with
HUD’s expectations. Also, HUD should
provide additional clarity on the
frequency of adjustments and the
amount of notice that will be given prior
to a change in the range.
HUD Response: For changes to the
applicable owner-occupancy percentage
and commercial/nonresidential space
percentage, factors that HUD will
consider will include a portfolio
analysis of default and claim rates of
loans with similar attributes across
different bands of owner-occupancy and
commercial/nonresidential space
percentages; analysis of condominium
loans across geographical areas
segmented by average owner occupancy
ratios or average commercial/
nonresidential space percentages; and
an analysis of trends of financial
stability of condominium projects in
relation to each of the factors. For
changes to the maximum FHA
concentration, the analysis would also
include analyses of FHA market share,
analyses of default and claim rates by
bands of percentages, analysis of FHA
concentration percentages segmented by
geographic area, and analysis of the
performance of FHA condominium and
single-family non-condominium loans.
For single-unit approvals, data would
include an analysis of single-unit
approval loan performance versus loans
in approved condominium projects, and
analysis of single-unit approval loans
across geographic areas and segmented
by average owner occupancy ratios and
financial stability. HUD may also
consider additional data. These data
points are also discussed in Section III
of this preamble.
Where a statistically significant
deviation occurs over an extended
period of time (typically enough time to
identify a trend, which is often, but not
always, in the 6-month to 1-year range),
FHA would then consider making a
change after factoring in the effects of
any change in providing credit to
borrowers that FHA programs were
designed to serve and the impact to the
MMI Fund. FHA would also look at the
level of deviation to determine the level
of any change. One aspect of analysis
would be to compare default rates of the
relevant factors across similar tier bands
and make decisions based on those
results so as to avoid excessive risk to
the MMIF as compared to the overall
market.

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Owner Occupancy
Comment: While having too few
owner-occupants can detract from the
viability of a project, requiring too many
can harm its marketability. The ratio
based on primary, secondary, or
investment property is still too high.
This will not make it easier to get FHA
approval.
Comment: HUD should increase the
minimum owner-occupancy ratio from
25 percent to 35 percent and should
allow condominiums with fully funded
reserves pursuant to a current reserve
study to qualify for the exemption. HUD
should include Real Estate Owned
(REO) units and owner-occupied units
in the ratio. This aligns with Fannie
Mae and Freddie Mac and protects
FHA’s ability to play a countercyclical
role in times of economic distress.
Commenter supports the minimum
acceptable level of owner occupancy at
35 percent.
Comment: Data indicate that condo
borrowers tend to have higher FICO
scores than non-condo borrowers, and
that since 2010 the default rate on
condos has been lower than for noncondo loans. These facts support FHA
allowing a lower percentage of owneroccupants. This commenter supports
Mortgagee Letter 2016–15 allowing 35
percent and suggests that HUD should
monitor the use of this threshold for
existing condos to determine if more
general application might be possible.
HUD Response: HUD’s final rule
provides the framework to establish
flexibility in applying owner occupancy
standards through policy guidance as
market forces may dictate, as well as
address if such ratios vary based upon
the construction status of the
condominium. This final rule sets the
lower range at which the minimum
owner-occupancy percentage could be
set at 30 percent. This is the current
minimum occupancy requirement for
new construction projects, and the
lowest limit that HUD believes would
protect the MMIF from undue risk. This
standard does not seem to be having a
negative effect on HUD’s portfolio.
Issuing a final rule with standards more
restrictive than the ones currently in
place, without strong justification
supported by data, will create
disturbance in the market, further
impact development, and restrict access
to affordable housing. Further, HUD
must be able to set a standard that will
accommodate recently completed and
ready for occupancy projects, at which
point a typical condominium project
will not likely have sold all units to
home buyers, or even a majority of its
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Comment: The proposed rule of a
sliding owner occupancy rate of 25
percent to 75 percent would create
additional work for the homeowners’
association (HOA) and would be more
harmful for condominium
developments struggling to increase
homeownership rates. One of the
unfortunate effects of the 2008 housing
crisis is the ‘‘death spiral’’ many
condominium developments continue
to struggle with. As mortgage
delinquencies rose, so too did HOA fee
delinquencies and foreclosures
purchased by investors. This happened
at the same time HUD tightened the
FHA condo requirements. As
homebuyers discovered more condo
developments could no longer qualify
for FHA financing, more investors
bought the units to rent. This helped the
Condominium Association financials,
but the result was that more
developments could not qualify under
the 50 percent owner occupancy rule.
Associations and homebuyers are
looking to HUD and the FHA for clear
and consistent rules, and only a flat 25
percent owner occupancy rate will
provide this surety. The proposed
sliding homeownership scale is
anything but clear and consistent.
Voluntary Associations will be less
incentivized to seek FHA approval as
this will cause more work for them to
determine which percentage applies to
them and if they qualify or not. Even
worse, FHA requiring stronger
financials to get a lower owner
occupancy rate requirement only further
depresses developments in communities
that are still struggling to recover. This
commenter vehemently disagrees with
HUD’s statement that the ‘‘current
standard of 50 percent has worked in
the recent market.’’ To the contrary, this
standard has led to more condo units
being sold to investors and pushing
their developments farther from FHA
qualification. The result is the reduced
inventory for first-time homebuyers that
has contributed to declining
homeownership rates.
HUD Response: The proposed range is
designed to not only address current
market conditions, but also to give HUD
flexibility to act quickly to revise the
percentage minimum in the future if
market data indicates that this is
necessary. This final rule revises the
lower end of the standard to 30 percent
owner occupancy, the current standard
for new construction. This gives HUD
sufficient room to reduce the
requirement if analysis of the data
indicates that the current minimum is
too high.
Comment: A proposed upper limit of
75 percent for a given project effectively

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would prevent homebuilders from
completing projects, especially in areas
of the country with high concentrations
of investment properties and second
homes. This would chill employment in
construction and lead to negative
economic consequences and a lack of
choice for the consumer. Therefore,
HUD should set the permissible
percentage range between 25 percent
and 50 percent.
Comment: 75 percent would be too
high an owner occupancy requirement,
which would be an extreme outlier and
would needlessly restrict the ability of
owners to lease units, potentially
forcing owners to sell units at discount
prices while further jeopardizing
consumer access to mortgage credit.
HUD should reduce the maximum from
75 percent to no more than 51 percent.
Many associations amended their
condominium documents to meet the
FHA 50 percent requirement; raising the
percentage above 50 percent would put
them out of compliance and affect
financing options. Amending the
condominium documents is difficult
and expensive. This would impact
projects that already spent considerable
funds meeting the earlier guideline.
Dropping the percentage to 35 percent
will not make a big impact given the
additional criteria, as few projects will
be approved for that rate. Seventy-five
percent is excessive and could create
project delays impacting costs that
would be passed on to consumers.
HUD Response: The proposal
regarding the range was designed to
allow HUD to react quickly if future
market conditions should warrant it.
FHA will then establish the maximum
limit within this range. Any proposed
future changes to the range will have
advance notice.
Changes to the acceptable limit within
the proposed ranges will be driven
primarily by performance data for the
Mutual Mortgage Insurance Fund. Such
analysis may include:
• FHA portfolio analysis of default
and claim rates of loans with similar
attributes across different bands of
owner occupancy percentages.
• Analysis of FHA condominium
loans across geographical areas
segmented by average owner occupancy
ratios (e.g., average owner occupancy
ratios in metropolitan areas versus rural
areas).
• Analysis of trends of financial
stability of condo projects in relation to
owner occupancy (e.g., relationship of
default and claim rates when compared
with percent of financial reserves and
owner occupancy percentages). None of
the requirements for owner occupancy
maximum will require condominium

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association to update or rewrite their
legal documents.
Comment: The restrictions placed on
approval for condominium projects with
below 50 percent owner-occupancy
levels are onerous and too restrictive.
Pursuant to a recent Community
Associations Institute study,6 FHA’s
current requirement on reserves for
projects with greater than 50 percent
owner-occupancy was one of the
leading reasons condominium projects
were unable to obtain FHA certification.
This requirement hurts the potential
viability of condominium properties. If
a building cannot be certified by FHA,
it is more difficult for sellers of
condominium units to find eligible
borrowers. Often the seller’s only
alternative is to turn the unit into a
rental, thus further lowering the owneroccupancy ratio.
HUD Response: The range provided in
§ 203.43b(d)(6)(ix) as it relates to owneroccupancy in a condominium project
refers to a minimum requirement that
HUD may establish within that range
through notice. Historically, HUD has
been the mortgage insurance provider
for many first-time homebuyers and
establishing a minimum owneroccupancy percentage protects the
investment of new homeowners. In
addition, HUD has a fiduciary
responsibility to balance policy that
promotes homeownership while
protecting the Mutual Mortgage
Insurance Fund. With this in mind,
HUD’s final rule provides the
framework to establish flexibility in
applying this standard through policy
guidance as market forces may dictate.
This final rule sets the allowable
minimum percentage at 30 percent of
the units. There may be times when a
reduction in the owner-occupancy
percentage is an appropriate action
based on current market conditions and
other contributing factors. HUD will
consider the comments and
recommendations when drafting the
specific policy guidance on
condominiums.
Owner-Occupancy Minimum of 50
Percent
Comment: HUD has provided no
measurable rationale for the 50 percent
requirement. In fact, both Freddie Mac
and Fannie Mae have no such
requirement when the property is being
purchased as a primary residence. All
FHA borrowers are purchasing a
primary residence; their purchase will
only help to boost the association’s
6 Community Associations Institute, ‘‘Survey:
Federal Housing Administration (FHA)
Condominium Project Approval,’’ November 2016.

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owner occupancy ratio. In this instance,
an owner/occupancy requirement is
counterproductive when a property
meets all other certification
requirements related to financial safety
and soundness. FHA should remove the
current owner-occupancy requirement
and align with Fannie Mae and Freddie
Mac policy by allowing lenders to
review a condominium project in its
entirety. Owner-occupancy levels,
whether 100 percent or 0 percent,
should be evaluated in conjunction with
the project’s reserves, delinquency rates,
etc., to determine a condominium
project’s viability.
HUD Response: HUD disagrees with
the recommendation. HUD insures
mortgages for properties that are
primarily owner-occupied and has a
statutory fiduciary responsibility to
balance policy that promotes
homeownership while protecting the
Mutual Mortgage Insurance Fund.
Eliminating the owner-occupancy
requirement in its entirety solely based
on the strength of the borrower has
proven to be an unsound and inoperable
financial policy for FHA.
While Fannie Mae and Freddie Mac
(Government Sponsored Enterprises or
GSEs) do not impose owner occupancy
restrictions for condominiums when the
property being purchased is a primary
residence, FHA serves a narrower band
of borrowers that generally have credit
profiles and equity positions below
those that the GSEs permit. The final
rule, however, provides the framework
to establish flexibility in applying this
standard through policy guidance as
market forces may dictate.
Comment: The current 50 percent
threshold has not been a significant
barrier to approval, save for limited
circumstances such as developercontrolled condos or condos located in
vacation or resort areas. However,
greater flexibility would be welcome in
this area. Lowering the current
threshold below 50 percent would have
a detrimental effect on approvals. The
proposed regulation does not specify
conditions in which FHA would
consider raising the occupancy
threshold from 50 percent to a higher
range. Setting the occupancy below 50
percent would be detrimental to the
commenter’s clients. This comment
supports a flexible range in the 50
percent to 75 percent range. Allowing a
50 percent owner/renter ratio is a valid,
and sound practice. If it is too difficult
for people to rent their condominium
when life changes (i.e., death, divorce,
job relocation, new baby, etc.), the
property values become depressed,
which is bad news for borrowers and
FHA.

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HUD Response: HUD’s final rule
provides the framework to establish
flexibility in applying owner occupancy
standards through policy guidance as
market forces may dictate. To preserve
flexibility and potentially accommodate
recently completed projects, this final
rule allows the possibility of a 30
percent owner-occupant minimum.
HUD will consider the
recommendations when updating future
policy guidance.
Owner-Occupancy Minimum Below 50
Percent
Comment: 25 percent should be the
owner occupancy percentage. Even
lowering owner occupancy from 50
percent to 25 percent, there is still a
Board of Directors of the owners that
will be empowered with running the
Association to the best of their ability.
There is no risk to the FHA in making
loans to borrowers in these
condominium projects. The purchasers
of these units, if they use FHA financing
to purchase, will be owner occupants.
Comment: To stabilize the financial
viability and increase purchase options
for FHA borrowers, two comments
support a minimum level of owneroccupancy range between 25 and 50
percent, while certain exceptions could
be made for lower percentages, or for
extending the range to 75 percent, as
proposed by HUD based on criteria
dictated in ML 2016–15.
HUD Response: The final rule
establishes the owner occupancy range
that provides the framework to establish
flexibility in applying this standard
through policy guidance as market
forces may dictate. The comments and
recommendations will be considered
when updating and drafting the specific
guidance for owner occupancy.
Owner-Occupancy Requirement in
Strong Rental Housing Market Areas
Comment: HUD should eliminate
ownership restrictions and occupancy
requirements in an area in which rental
housing is in strong demand. It makes
no sense to penalize property owners
who have tremendous value in their
properties (as determined by strong
rents and low vacancies) by not letting
them sell them or finance them. In such
areas, a rental property is worth a lot
because there are so many prospective
tenants and the rules for owneroccupancy do not work. Such properties
may not be able to be sold because their
value is too high to allow third parties
to obtain financing.
Comment: To reduce barriers to
obtaining a reverse mortgage, make the
owner-occupant requirement extremely
low or non-existent (commenter states

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they are in an area where rentals are
highly desired, and it will be impossible
to meet HUD’s owner-occupancy
requirement for the building).
HUD Response: HUD disagrees with
the recommendation to eliminate
owner-occupancy requirements. HUD
insures mortgages for properties that are
primarily owner-occupied and has a
fiduciary responsibility to balance
policy that promotes homeownership
while protecting the Mutual Mortgage
Insurance Fund. Eliminating the owneroccupancy requirement in its entirety
solely based on the strength of the rental
market in an area has been proven to be
an unsound financial policy in the
marketplace with respect to both
forward and reverse mortgages. The
final rule, however, provides the
framework to establish flexibility in
applying this standard through policy
guidance as market forces may dictate.

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HOTMA and Owner Occupancy
Comment: HUD should decrease
allowable owner-occupancy limits from
50 percent to 35 percent without need
for additional documentation as
directed by Congress under the Housing
Opportunities Through Modernization
Act (HOTMA).
HUD Response: HOTMA directed
HUD to ‘‘issue guidance regarding the
percentage of units that must be
occupied by the owners’’ by October 27,
2016, or the 35 percent requirement to
which the comment refers would have
become effective. HUD issued
Mortgagee Letter 2016–15 prior to the
statutory deadline. That mortgagee letter
is outside the scope of this rulemaking,
which provides for a percentage of
owner occupancy as low as 30 percent.
However, HUD will consider this
comment as well as then-current market
conditions in future adjustments to the
percentage within the range of 30
percent to 75 percent allowed by this
final rule.
Secondary Residences
Comment: In prior years, HUD
allowed secondary residences to count
as owner occupied. With issuance of ML
2009–46B and 2011–22, HUD allowed a
second home to count as owner
occupied only if it was a secondary
residence with an FHA loan under 24
CFR 203.18(f)(2). A commenter states
that 24 CFR 203.18(f)(2)(iii) relates only
to the maximum FHA loan amount (24
CFR 203.18 ‘‘Maximum Mortgage
Amounts’’) for a ‘‘second FHA loan’’ in
the sole event that an owner with an
existing FHA loan faces ‘‘undue
hardship’’ and needs to obtain a second
FHA loan on another unit in certain
circumstances.

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Comment: HUD’s reference to the
definitions of principal and secondary
homes in 24 CFR 203.18(f)(1) and (2)
carries an implication that the
secondary residence must have an FHA
loan on it in order to be counted in the
owner-occupancy ratio. It does not
mean that a unit with a conventional
second loan (or even a unit that is
mortgage free), either of which are
secondary residences, should not be
counted as owner occupied. In the
recent past, HUD again reversed its
decision and now allows secondary
residences to count as owner occupied
(as does Fannie Mae). Because of its
reference to 24 CFR 203.18(f)(2), it is
unclear as to what the Proposed Rule’s
intent is. Please state unequivocally and
unambiguously that secondary
residences count as owner-occupied,
and/or that all residences which are not
investor-owned or vacation homes
count as owner-occupied, and/or also
please state separately the definitions
cited in §§ 203.18(f) (1) and (2) and omit
(f)(2)(iii).
Comment: 24 CFR 203.18(f)(2)(iii)
relates only to the maximum FHA loan
amount (24 CFR 203.18 ‘‘Maximum
Mortgage Amounts’’) for a ‘‘second FHA
loan’’ in the sole event that an owner
with an existing FHA loan faces ‘‘undue
hardship’’ and needs to obtain a second
FHA loan on another unit in certain
circumstances.
HUD should establish a revised
owner-occupancy calculation based on
the number of the minimum allowable
investment units rather than based on a
subdivision of classifications for owneroccupied units, investor units, vacation
homes, etc. This revised grouping
would make it easier for lenders to
distinguish and track the number of
primary, secondary, and investor held
units. Currently, lenders face significant
challenges in distinguishing secondary
residences from vacation homes and
investor-owned units, and struggle to
accurately validate and monitor these
units in approved projects. By
classifying units as (1) primary
residences; (2) secondary residences; or
(3) investor units, in line with GSE
industry standards and removing the
need to distinguish vacation homes
from secondary residences, which most
associations are not equipped to track,
lenders will be able to more accurately
track owner-occupancy levels and FHA
will be able to better manage default risk
in approved projects.
HUD Response: HUD recognizes the
concern with the reference to Secondary
Residences, which term is unique to
FHA insured mortgages. FHA had
previously addressed this issue in
Mortgagee Letter 2015–17 (ML 15–17),

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whereby FHA indicated it would
consider a property as owner occupied
provided it was not ‘‘Investor Owned’’
for the purpose of calculating owner
occupancy ratios for Condominium
Project approval. However, in
accordance with the Housing
Opportunity Through Modernization
Act (HOTMA), which was signed into
law on July 29, 2016, the National
Housing Act was amended to require
HUD to use properties which were
either principal residences or Secondary
Residences ‘‘as such terms are defined
by’’ HUD (or sold to owners who intend
to meet such occupancy requirements)
to establish HUD’s owner occupancy
requirements. As required by HOTMA,
Mortgagee Letter 2016–15 replaced the
requirements in ML 15–17 with the
current percentage standard. Currently,
HUD’s definition of ‘‘Secondary
Residence’’ is found in 24 CFR
203.18(f), and, as noted in the
comments, has three elements: It is (1)
part-time abode where the mortgagor
typically spends less than a majority of
the calendar year; (2) not a vacation
home; and (3) the Commissioner has
determined it eligible for insurance to
avoid undue hardship to the mortgagor.
These standards, particularly (3), are
addressed to eligibility for mortgage
insurance in accordance with Section
203(g) of the National Housing Act. This
rule relates to the approval of the project
to participate in the mortgage insurance
program; specifically, the issue of
Secondary Residences comes up with
respect to the owner-occupancy
percentage. In the context of project
approval, as comments noted, (3) does
not make sense; it is an assessment that
will be made if the mortgage on the unit
is submitted for insurance after the
project is approved to participate.
Additionally, HUD recognizes the
exclusion of vacation homes, while
necessary for the definition found in 24
CFR 203.18(f)(2) to conform with the
requirement in section 203(g)(1) of the
National Housing Act, 12 U.S.C.
1709(g)(1), is not necessary to calculate
owner occupancy rates of condominium
projects for project approval purposes.
For this reason, this rule states that for
project approval, any unit in which the
owner resides as his or her place of
abode for any portion of a calendar year
other than as a principal residence, and
that is not rented for a majority of the
calendar year, counts towards the
owner-occupied percentage. Individual
mortgages on units in approved projects
would still have to meet HUD’s rules,
regulations, and underwriting
requirements, as applicable, to obtain
insurance on their mortgages.

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Percentage Ranges for Commercial/
Nonresidential Space
Commenters Stated That HUD Should
Not Impose a Limit on the Percentage of
Commercial/Nonresidential Space
Comment: The economically optimal
mix of residential and commercial will
differ both by the project and by the
community. Any such restriction on
uses can only reduce the economic
value of projects; it can never enhance
it. For the purposes of underwriting, any
limit on the mix of uses in a mixed-use
project is counterproductive and should
be eliminated from the proposed rule.
Second, from a public health
perspective, there is a need for more
mixed-use projects in our towns, cities,
and suburbs. Mixed-use developments
greatly enhance the walkability of
neighborhoods, which in turn promotes
health and well-being through more
frequent social interactions, more
walking, and reduced crime. It should
not be the role of HUD to place limits
on mixed-use projects via rulemaking.
Comment: Mixed-use commercial/
residential spaces are the cornerstone of
traditional small-town America.
Preserving the ‘residential
characteristics’ of a condominium is
done at the expense of creating a
walkable neighborhood. People should
be able to apply for help to build or
renovate residences even if those
residences are part of a building that is
more than 50 percent commercial.
Rather than protecting the ‘‘residential
character’’ of condominium projects, the
focus should be on underwriting
standards that are more directly related
to creditworthiness of the individual.
Federal regulations must support
mixed-use rental housing for
affordability and walkability.
Comment: Commercial space would
not harm the project’s financial
viability. Many of the nation’s most
successful and in-demand mixed-use
neighborhoods are comprised of such
projects. Increased HUD flexibility
regarding the amount of commercial
space in multi-family buildings would
help to grow and expand mixed-use
development efforts, specifically in
areas targeted for redevelopment.
Furthermore, HUD should review its
criteria for all its programs so that they
better reflect growing demand for
walkable, mixed-use communities;
conform to the overall goals for mixeduse, sustainable communities outlined
in the Administration’s Sustainable
Communities Initiative; and bolster
rather than stymie local government
efforts to preserve and grow the stock of
affordable housing in neighborhoods
that include mixed-use buildings.

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HUD Response: HUD agrees that
mixed-use developments that combine
commercial enterprises with residential
housing are increasing in popularity.7
HUD notes that Fannie Mae recently
increased its allowable commercial
space percentage to 35 percent.8 With a
strong demand for residential units in
mixed-use projects within and outside
urban settings, the percent of
commercial/nonresidential space
becomes less concerning if there is no
other negative impact on the residential
character and financial stability of the
project.
This final rule provides a sufficient
range to allow adjustments that may be
necessary for the foreseeable future.
HUD disagrees with the suggestion that
HUD should not impose any upper limit
on the percentage of commercial/nonresidential space an acceptable project
may have. HUD insures mortgages for
properties that are primarily residential
in nature and has a fiduciary
responsibility to balance policy that
promotes homeownership while
protecting the Mutual Mortgage
Insurance Fund.
Alternative Suggestions as to the
Amount of Commercial Space That
Should Be Approvable
Comment: Commenters support the
expansion of allowable commercial
space to the proposed range of 25
percent to 60 percent. This range, when
combined with a look at local economic
factors, would allow more associations
to qualify for FHA approval without
necessarily increasing risk. More and
more jurisdictions are fostering
walkable, transit-oriented communities
that offer a blend of commercial and
residential space. This change would
align FHA with emerging market
preferences. A commenter notes an
example of a mixed-use development
that is highly vibrant and desirable, but
would not be approved by FHA because
the commercial space exceeds 30
percent.
Comment: The maximum standard for
commercial space should be set and
maintained at 60 percent of the total
floor area in § 203.43b(d)(6)(vii). Many
highly successful mixed-use
neighborhoods are comprised of a
similar commercial space to residential
space ratio, and there is a real demand
7 Real Trends: The Future of Real Estate in the
United States by Urban Economics Lab and MIT’s
Center for Real Estate (October 2017), at 19. The
study is available at https://mitcre.mit.edu/wpcontent/uploads/2017/10/REAL-TRENDS-MIT.pdf.
8 Fannie Mae Selling Guide B4–2.1–03: Ineligible
Projects (6/5/2018), available at https://
www.fanniemae.com/content/guide/selling/b4/2.1/
03.html.

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nationwide for development of such
projects. If financing were made more
readily available, it would have nothing
but a positive impact on communities
across the nation. This commenter
stated disagreement with HUD’s
assessment of potential negative impacts
on the residential character of mixeduse developments with greater than 50
percent of total area designated for
commercial space.
Comment: The rule should maintain
the current commercial/nonresidential
space requirements, which are
consistent with National Association of
Builders policy that calls for the
allowable percentage of nonresidential
space up to 45 percent. Setting a limit
too high could impact the residential
character of a project and expose FHAinsured units to risk should a
commercial tenant leave the project.
Mortgagee Letter 2012–18 provides
flexibility and HUD should maintain
these requirements.
Comment: The commercial space
requirement should be set between 25–
50 percent, with specific guidelines to
allow exceptions for projects with up to
60 percent commercial space. Special
consideration is needed when a project
seeks to use more than 50 percent of a
property’s total floor area for
commercial space due to the potential
impacts of this expanded presence on
the characteristics of a residential
project.
Comment: Mixed-use neighborhoods
are preferred, and 56 percent of
millennials and 46 percent of baby
boomers prefer to live in areas with a
mix of retail and housing options
(Regional Plan Associations, ‘‘The
Unintended Consequences of Housing
Finance,’’ February 2016). Mixed-use
neighborhoods have held up their value
better in the years following the Great
Recession compared to solely
residential neighborhoods. Given FHA’s
mission to promote safe and affordable
housing, the current policy limiting
commercial space hinders efforts to
build neighborhoods that have a mix of
residential housing and businesses with
access to public transit that HUD has
championed. FHA should allow up to
45 percent commercial space without
documentation. Greater levels of
commercial space should be evaluated
holistically along with the strength of
the project, but should not be capped at
a specific percentage.
Comment: To expand the pool of
eligible projects, HUD should set the
minimum range for commercial/nonresidential space without requiring an
exception from the current 25 percent to
35 percent. Projects with commercial
space of more than 35 percent but less

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than 50 percent may request exemptions
pursuant to FHA criteria subject to
proposed §§ 203.43(f)(1) and (2).
Comment: Increasing the percentage
of permissible commercial/
nonresidential space prior to triggering
an exception request builds on FHA’s
experience with the exception structure
currently enforced in the Guide that
permits the jurisdictional
Homeownership Centers (HOCs) to
consider and approve exemptions for
projects with commercial space that
exceeds 25 percent but is less than 35
percent of total floor area. Protecting a
project’s residential use and character is
not exclusive of consumers who view
access to a broad array of services
within a project as a fundamental
component of the project’s residential
use and character. Many consumers
place a high value on immediate access
to services. For these consumers,
commercial space is a meaningful
component of enhancing the residential
experience and a motivation to
purchase.
Comment: An upper limit of 50
percent should be set for the range
regarding commercial space. A higher
percentage threatens the residential
nature of a project and too closely ties
the residential viability to the project’s
commercial success. HUD should
continue to use the standard of 25
percent while exercising the ability to
increase that threshold for certain
markets or projects as proposed in the
regulation.
Comment: It is possible for a project
with commercial space exceeding 50
percent of total floor area to be
successful in certain housing markets.
Any exceptions granted above the 50
percent limitation must appropriately
mitigate potential exposure to business
cycle risk. At this time, it may not be
appropriate for FHA to approve
condominiums in the upper limit of the
proposed 60 percent commercial space
range—the agency lacks data and
experience concerning the sustainability
of such projects. This is not the case for
projects with 35 percent or less
commercial space.
Comment: Older business/residential
buildings help entrepreneurs live
upstairs from their businesses. HUD
should lift the minimizing constraints of
space versus funding. HUD should
consider doing a survey on said
remodeling of old tenements/downstairs
businesses. All old buildings need new
life for sustainable development.
Comment: Research shows that
consumers increasingly place a price
premium on housing that is near
(walking distance of less than .25 miles)
of services, including retail, healthcare,

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and transportation. This research has
also shown a correlation between a
homeowner’s access to transportation,
employers, and household economic
growth. Condominium projects with
commercial components not only meet
consumer demand for access to services,
but also may improve access to jobs
leading to greater financial stability for
households and the community atlarge.9
HUD Response: This final rule
narrows the upper end of the potential
allowable commercial space percentage
to 55 percent of the total floor area. This
percentage acknowledges the future
potential of mixed-use developments
while avoiding risk to the MMIF. The
range gives HUD flexibility to adjust the
standards through policy changes as the
market conditions dictate.
HUD believes in allowing the
development of pedestrian oriented
communities that offer the convenience
of commercial and residential space in
the same project, so long as the
residential character is not negatively
impacted. Multiple commenters seem to
agree with HUD’s assessment, noting
that although they also agree with the
expanded range of allowable
commercial/non-residential space,
special consideration is warranted when
a project seeks to use more than 50
percent of a property’s total floor area
for commercial/non-residential use.
HUD will consider the
recommendations submitted through
the comments when drafting specific
policy guidance on this subject.
Comment: The HOTMA provision
allowing lenders to make exceptions to
the commercial space requirement
based on ‘‘factors relating to the
economy for the locality in which such
project is located’’ should be
immediately implemented (the deadline
was October 28, 2016).
HUD Response: This provision was
proposed on September 28, 2016 (81 FR
66565) and is made final by this rule
(§ 203.43b(g)(2)).
Comment: Most of the newer
condominium projects that have been
built in the past 5 years in one area
include street level commercial space.
To disqualify the ability of a purchaser
to purchase a condominium in this
building using FHA financing due to
current commercial space vacancy
9 Richardson, Nela, Urban Institute/Core Logic:
Demand, Data, and Demographics Symposium,
Integrated Services and Inclusionary Housing for
Changing Demographics: Can we build our way out
of this? (Washington DC, November 2, 2016). Data
deck available for download at: http://
www.urban.org/events/data-demand-anddemographics-symposium-housing-finance-2
(accessed 3/18/2019).

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(assuming this is a temporary short-term
vacancy) does not make sense. HUD
should set this minimum occupancy
rate of commercial space at 25 percent.
HUD Response: The rule establishes
the range for commercial space, but
does not impose a restriction on
commercial space vacancy. As to the
percentage, please see the prior
response.
Comment: HUD should clarify that
this requirement is not a minimum, but
an allowable maximum for the addition
of commercial space as well as the
frequency with which FHA will
reexamine the commercial space
requirement, how much notice will be
provided to lenders when a change is
made, and what criteria will be used to
determine recalculations. Finally, FHA
should further define the items that may
contribute to commercial space to
ensure that lenders understand what
features will fall into this category to aid
in the completion of accurate
commercial space calculations.
HUD Response: The range provided in
§ 203.43b(d)(6)(vii) as it relates to the
commercial/non-residential space in a
condominium project refers to an
allowable maximum, not a minimum
requirement. Regarding the commenter’s
request for additional information on
guidelines, procedures, and items that
contribute to commercial space, HUD
expects to issue future guidance on such
issues. Section III of this preamble
discusses data that HUD will consider
when determining a change in the
percentage of commercial/
nonresidential floor area.
Single-Unit Approval and Reserve
Requirements
Comment: Single-unit approvals offer
millennials an opportunity to own
homes, and the elderly to stay
independent, especially if the reserve
requirement could be set lower than that
of Fannie Mae, perhaps 10 percent of
the overall budget instead of 10 percent
per annum. If the project is budgeting
properly, it always has the appropriate
amount to cover its expenses already on
hand and it doesn’t make sense to put
in an additional 10 percent each year.
Comment: HUD should consider an
exemption from the reserve requirement
for single-unit loans where a project has
been well-managed for decades, while
approaching the capital funding issue
via special assessments. HUD could use
appraisers to speak to the historical
values of units within the complex. If
one could determine that the price
variance is too high to meet a certain
standard, then the exemption is not
granted.

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HUD Response: This rule does not
impose a minimum reserve requirement
for single-unit approval, but establishes
a framework for single-unit approval
that utilizes the eligibility requirements
in 24 CFR 203.43b(d) as a baseline,
which includes requirements for
reserves; or a subset of these
requirements. HUD will consider these
comments when addressing single-unit
approvals in future notices.
FHA Concentration Percentage
Comment: HUD, through FHA has a
responsibility as a steward of the
program to mitigate risk. Without
further clarification as to existing risk or
the rationale for potentially reducing or
expanding the concentration limits, it is
difficult to provide substantive
comment. However, HUD is a critical
source of funding for buyers in
condominiums, and HUD should not
lower the concentration threshold from
its current 50 percent level without
adequate data to support such a
contraction in the program. Existing
levels should be preserved with greater
flexibility for increased concentration
where appropriate. If HUD determines
that changes are warranted, HUD should
provide additional information about
the factors that will be considered.
Comment: 25 percent FHA insured
would be too low. HUD should not be
overly concerned about FHA
concentration in projects that are wellmanaged and meet all FHA approval
criteria. Some limitation is prudent risk
management. HUD should retain a 50
percent minimum FHA concentration
limit.
HUD should maintain its current
guidelines to allow for 50 percent of the
total number of units in a project with
some leniency to allow for potential
cancellations. In many circumstances,
HUD has already allowed for up to 75
percent FHA financed units in
established projects based on individual
project conditions and the associated
risks of this flexibility are monitored
and mitigated through the recertification
process. The maximum percentage
should be raised to 75 percent. The
flexibility provided under current
guidelines along with the sufficient risk
mitigation provided through the
recertification process remains the most
effective approach to this calculation for
both lenders and FHA.
HUD Response: This final rule
implements the FHA concentration
range that provides the framework to
establish flexibility in applying this
standard through policy guidance as
market forces may dictate. HUD will
evaluate these recommendations when
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consider pertinent data to support any
future changes to the concentration
limit.
Comment: A commenter recommends
that HUD allow an FHA concentration
up to 100 percent, especially for new
construction. In most metropolitan
areas, the cost of a condominium is
significantly less than a traditional
single-family home. FHA is often the
only financing available for many
buyers, especially first-time or middleincome homebuyers who have limited
resources for a down-payment. Research
shows that the time needed to save for
an FHA related down payment is
significantly higher for a single-family
home compared to a condominium.
Purchasing a condominium will allow
many FHA borrowers faster access to
homeownership, helping to build their
wealth and stabilize their living
situation sooner rather than later. A
high concentration of FHA borrowers
means a high concentration of owneroccupants, which helps the financial
soundness of the condominium project.
FHA does not limit the amount of
financing available within a
neighborhood of single-family
structures, nor should FHA limit
financing within a condominium
project. Generally, FHA condominium
buyers have a stronger financial footing
than non-condominium buyers. FHA
condominium buyers tend to have
higher FICO scores than the noncondominium buyers and higher
monthly incomes. In 2016, the average
monthly income for a condominium
buyer was $1,693, versus $1,397 for
non-condominium buyers.10 These are
creditworthy borrowers who deserve to
live in buildings and communities that
meet their needs.
HUD Response: HUD disagrees with
the recommendation to increase the
maximum allowable FHA concentration
percentage to 100 percent. HUD has a
fiduciary responsibility to balance
policy guidance with risk to the Mutual
Mortgage Insurance Fund. Allowing for
a higher FHA concentration percentage
without careful consideration for
additional requirements or justification
may increase the Government’s risk.
Single-Unit Approval
Single-Unit Approval Generally
Comment: Single-unit approvals
should be allowed in buildings that do
not meet current requirements, for
10 Urban Institute, ‘‘Loosening FHA Restrictions
on Condominium Financing Makes Sense,’’
November 2016, available at https://
www.urban.org/sites/default/files/publication/
85936/loosening-fha-restrictions-on-condominiumfinancing-makes-sense.pdf.

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example, if the owner-occupant
percentage is too low, single-unit
approvals could provide a way for the
development to build up to the required
percentage.
With only 9,866 condominium
projects currently on FHA’s approved
list (of 150,000 nationwide), access to
condominium units with FHA-insured
mortgages is limited. Allowing singleunit approvals could greatly improve
access and ‘‘change the trajectory of the
FHA condominium approval trend line’’
to the benefit of condominium
associations and consumers.
Comment: Most developments fail to
keep their FHA approval because it is
not in their budget and most do not
have the knowledge and expertise to
keep the project approved. By
eliminating this process, developers
would be able to serve more borrowers
that are looking to use FHA financing to
accomplish their goal of
homeownership.
HUD Response: Single-unit approvals,
in the appropriate circumstances, can be
beneficial, and are retained in this final
rule as an opportunity to provide access
to FHA’s programs in this or similar
situations. The rule establishes
requirements to mitigate risk to the
Mutual Mortgage Insurance Fund, while
providing that these can be varied in the
future as needed.
Comment: Because of the reluctance
of condominium associations to become
HUD-approved, single-unit approval is
imperative. HUD should reconsider
requiring any complex that shows up on
HUD’s approval list to go through
project approval. That will require many
of these associations to be approached a
second time when many of them had a
bad first experience.
HUD Response: HUD has a fiduciary
responsibility to the Mutual Mortgage
Insurance Fund that generally precludes
allowing single-unit loans on any
project, although the rule provides a
framework for HUD to vary single-unit
approval requirements as needed to
meet market needs.
Comment: To make single-unit
approval as successful as it could be,
HUD should do away with ‘‘loophole
letters,’’ because the property manager
can refuse to provide one and kill the
loans that would otherwise happen.
HUD Response: The comment seems
to be referring to a questionnaire that is
sent to the Association. HUD
appreciates that obtaining information
from Condominium Associations can
complicate the mortgage process, but
recognizes that such information may
not be obtainable through other
methods. While this rule does not
mandate that any specific questionnaire

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be completed by a Condominium
Association, this rule provides the
framework to establish flexibility in
applying the proposed standards
through future policy guidance as
market forces may dictate.
Comment: The current approval
process has incentivized condominium
boards to undertake an examination of
the Association finances, state of
insurance policies, collections, and
other factors that are needed to obtain
approval. This has been beneficial to
communities who have undertaken this
process. Providing an approval process
with a lower approval threshold will
short circuit the larger project approval
process as boards will forego the time
and effort of project approval knowing
there is a lower barrier for approval
elsewhere. This would be unfair to the
communities which have undertaken
project approval and provide a dueling
set of standards.
HUD Response: Providing for a
limited number of single-unit approvals,
based on standards appropriate to
mitigate against excessive risk, should
not affect the fairness of the overall
project approval process. Limiting the
number of such approvals in projects
provides incentive for Associations to
continue to pursue the project approval
process in projects that typically have a
larger percentage of FHA financing. The
increased flexibility to meet market
needs and enlarged approval period
provided by this rule is expected to
increase the number of eligible
mortgages in Condominium projects.
The lower end of the range, including
a 0 percent maximum, is available if
overly negative effects occur. However,
smaller condominium projects may
simply not have the financial ability or
expertise to apply for project approval,
and a limited number of Single-Unit
Approvals would give them a path
forward to provide FHA mortgageinsured housing units. Project approvals
will have benefits, including a degree of
certainty that units will be eligible for
mortgage insurance; therefore HUD
believes those projects with the ability
to do so will continue to seek project
approval.
Comment: The previous spot loan
program led to concerns of abuse. This
program should have diligent
monitoring and adequate system
enhancements to prevent abuses.
Without further guidance and clarity
regarding lender obligations, the criteria
that will be used for unit approval
verification, and the processes that will
be in place to monitor and track these
unit approvals, this program may result
in unintended risk to the Mutual
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borrowers seeking sustainable
homeownership. FHA should
implement a limited review process for
single-unit approvals and a screen
within FHA Connection to collect data
for FHA on spot approvals to help FHA
monitor and manage these risks. Based
on the current proposal, a condominium
identification number would not be
available for a single unit, and without
effective monitoring systems, both FHA
and participating lenders will have
significant difficulties determining
approved unit percentages in an
ineligible building. There should be a
way for the public to track percentages
of single-unit approvals. HUD should
clarify the tracking mechanism to be
used to determine compliance with the
0–20 percent range allowed.
HUD Response: HUD agrees that a
reliable tracking mechanism is needed
to determine compliance with the range
allowed. As a result, HUD has added a
provision that ‘‘HUD may suspend the
issuance of new FHA case numbers for
a mortgage on a property located in any
project where the number of FHAinsured mortgages exceeds the
maximum,’’ which will allow FHA to
proactively manage the concentration
range. The maximum percentages that
apply will be established by notice.
Also, the 0 percent possibility provides
a safety valve. This final rule provides
specific criteria for single-unit approval
that HUD believes will adequately
protect the Mutual Mortgage Insurance
Fund, while providing needed
flexibility for HUD to make changes in
the future as needed.
Comment: Single-unit approval
should not undermine the project
approval process and should be limited.
While the FHA and industry have
struggled with encouraging boards to
undertake project approval, the
importance and benefits of approval
have become more widely understood
over the past few years. Adopting a
shortcut will undermine the process
unless more clearly delineated
limitations are adopted. If the criteria
for single-unit approvals is extremely
loose, HUD will lose control of the
process and lenders will turn to singleunit approval as the industry standard.
A comment proposed that single-unit
approval would be acceptable if:
(1) The association had held FHA
approval which has been expired for
fewer than 3 years.
(2) The FHA approval was not
withdrawn or rejected for failure to meet
FHA criteria.
(3) Other criteria FHA deems
appropriate.
Another comment stated that there
should be some leeway and suggests

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that the following common issues
should be considered to determine what
is required for single-unit approval:
• Construction Defect Litigation or
repairs in response to defect litigation
are still in process.
• Owner Occupancy is between 35
percent–50 percent.
• Leasing Restrictions that include:
Seasoning Clauses, Tenant-Screening,
short-term Rentals.
• Co-Insurance is used without 100
percent replacement cost, but
replacement cost can be validated using
Marshall-Swift or other acceptable
means.
• Bylaws are not signed.
• Status with the Secretary of State is
not current.
• Condominium Documents were not
created and or filed properly at the time
of development.
• Transfer fees are in place.
HUD Response: HUD has considered
these suggestions and believes that the
limitations stated in this final rule are
appropriate. Single units, to be
approved for mortgage insurance, must
not be either in a project that is already
approved, or a project that has been
determined to have significant issues
that affect the viability of the project.
The unit must meet the general
standards for approval stated in the rule,
or some subset of these standards, or
less stringent standards, determined by
HUD. The unit must be in a completed
project that has at least 5 dwelling units.
HUD plans to issue further guidance
under the framework provided in this
rule.
Comment: HUD should define and
clarify the documentation requirements
for approvals under the exception for
less stringent standards.
HUD Response: The less stringent
standards will be determined based on
experience and conditions at the time.
Comment: HUD should allow public
comment on the specific criteria and
processes FHA will use to manage
single-unit approvals prior to
implementation. The actual standards
and process that FHA adopts are critical
to the success of single-unit approvals.
If a single-unit approval system is to be
successful, all market participants
(including lenders, condominium
association boards, community
managers, community management
companies, and other professionals who
support the community association
housing model) must have the
opportunity to review and comment on
the procedures and standards to be
used.
Comment: HUD should consider
adopting Freddie Mac and Fannie Mae’s
guidelines when it comes to

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condominiums, that is, limited review
and full review for ‘‘spot approvals’’ for
condos not listed on the Fannie Mae
PERS list. Freddie takes the reciprocal
of Fannie Mae’s PERS approval. Review
should be similar to the Fannie Mae
Condo Project Manager (CPM) review
(reviewing the budget, delinquencies,
litigation, etc.) for the single unit only.
HUD would benefit from the same level
of review as the agencies and set the
same protocol for certain type that
would need HRAP or DELRAP approval
as Fannie does with PERS. Having FHA,
Fannie and Freddie all on the same page
when it comes to condominium reviews
will give more flexibility to certain
credit type borrowers, along with
product options.
If there is no guidance, some lenders
may approve anything without any type
of review and consider the unit
acceptable as long as it is not on HUD’s
approved list. Perhaps HUD could have
a list of staff trained in condominiums
within each lender, or only allow
DELRAP-approved lenders to issue
Single-Unit Approvals.
HUD Response: HUD has considered
these suggestions and believes that the
limitations stated in this final rule are
appropriate. Single units must be in
projects that meet eligibility criteria and
cannot have any significant issues
affecting viability. HUD plans to issue
further guidance under the framework
provided in this rule. HUD has received
a number of comments on criteria for
Single-Unit Approval via this
rulemaking, which it will consider
when issuing guidance going forward.
Single-Unit Approval and FHA
Concentration
Comment: Is there any relationship
between the number of Single-Unit
Approvals and the percentage of FHAinsured loans currently in the project?
HUD Response: Generally, the
projects in which SUAs will occur must
meet the eligibility requirements of
§ 203.43b(d) and (i), which place a limit
on the percentage of FHA-insured loans.
This rule provides that HUD may vary
the specific limit, giving HUD the
flexibility to respond to market needs;
the total FHA insurance concentration
will include all FHA-insured mortgage
loans in the project, whether counted
for SUAs or the overall limit.
Comment: The FHA concentration
range proposed for the SUA process is
the only factor that raises the possibility
of severely restricting the program on a
broad basis or targeting a sub-set of
projects for disqualification from the
underlying program. FHA now has
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the Qualified Mortgage standards (of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act). Currently,
condominiums outperform most other
categories in FHA’s book of business
and have a lower foreclosure rate, which
would allow HUD to expand access to
credit while protecting the insurance
fund. A minimum FHA concentration
range of 0 percent is contrary to this
policy goal, and could lead to a practical
withdrawal of FHA from the
condominium market, which would be
destabilizing and contrary to FHA’s
countercyclical role in any future crisis
to the detriment of American
homeowners and communities. The
lower end of the range should be 10
percent.
HUD Response: HUD recognized the
need to establish a limited Single-Unit
Approval process in its proposed rule
and maintains that process through this
final rule. HUD also recognizes that the
performance of mortgages secured by
condominiums had performed worse
than other single-family mortgages for a
time period prior to the elimination of
FHA’s Spot Approval process and have
shown to be prone to more volatility
than other mortgages. Establishing a
range that includes 0 percent provides
FHA with the necessary flexibility to
respond to market movements that may
put the FHA Mutual Mortgage Insurance
Fund at risk.
Single-Unit Approval With Home
Equity Conversion Mortgages (HECMs)
Comment: Seniors face difficulty in
obtaining HECM loans due to the
inability or unwillingness of
condominium associations to have the
projects approved by FHA due to the
difficulty, time, and expense of the
project approval process, without a
single-unit option. In some cases, HECM
loans are the only way seniors can stay
in their home in retirement, or need the
cash flow. A single-loan approval
process would make it relatively simple
for individual units to be approved.
HUD should allow Single-Unit
Approval for a reverse mortgage in any
condominium complex that meets the
new Single-Unit Approval criteria.
Eligibility for a HECM loan should be
based on individual creditworthiness
rather than the condominium
association. The current requirement for
whole-project approval is a form of
discrimination because a detached
homeowner who isn’t credit worthy can
more easily get a HECM loan than a
highly qualified senior owning a
condominium. ‘‘Overly aggressive’’
HUD requirements prevent highly
qualified borrowers from qualifying for
loans, and HUD should go back to spot

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approvals based on appraiser input of
marketing data. ‘‘The local appraiser’s
input would properly evaluate the short
and long-term viability of the project.’’
When HUD ended spot approvals,
HECM loans became inaccessible to
many seniors. HUD should clearly
include HECM loans within the SingleUnit Approval process. The policy that
HECM loans are not eligible has to do
with consistency with the prior policy
of terminating spot loan approvals. The
program currently prevents highly
qualified borrowers from qualifying for
loans and fulfilling the objective of the
HECM program. It is a form of
discrimination.
HUD Response: While HUD does not
agree that either a lack of single-unit
loan approvals for HECMs or a general
requirement for project approval are
forms of discrimination, the availability
of Single-Unit Approvals under this
final rule should make HECM loans in
condominium projects more widely
available while recognizing the
difference in ownership of single-family
dwellings that are maintained solely by
the owners versus condominium
ownership that includes maintenance
by owners and associations.
HECM mortgages may include
condominium loans (see the definition
of ‘‘mortgage’’ in 24 CFR 206.3) and are
eligible for mortgage insurance if the
project is acceptable to the
Commissioner (24 CFR 206.51). For
HECMs, as for forward mortgages, a
condominium loan is approvable for
insurance if it satisfies eligibility
requirements and is: (1) Located in a
project that is acceptable to the
Commissioner as described in
§ 203.43b(d) of this rule, (2) for a single
condominium unit located in a project
that is acceptable to Commissioner as
described in § 203.43b(i) of this rule, or
(3) for a site condominium project that
is acceptable to Commissioner as
described in § 203.43b(j) of this rule.
The requirements of § 203.43b of this
rule establish the standards for a project
that is acceptable to the Commissioner.
Comment: Condominium associations
often are not interested in becoming
HUD-approved, and therefore they
could not obtain a reverse mortgage.
This is a common situation (one
commenter stated that only 6–8 percent
of condominium projects are HUDapproved), resulting in an underserved
market.
Some commenters stated that seniors
were being discriminated against, and
that seniors in condominiums unfairly
lack the same opportunities provided to
those who live in single- family homes,
even if the condominium owners are
more creditworthy. These commenters

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sought the ability to obtain reverse
mortgages, which would allow seniors
to live near relatives but keep their
independence, and stated that there
should be an easier way than getting the
entire project approved. This rule would
‘‘re-open doors in a fiscally responsible
manner for many people that have been
closed for too long.’’
A senior with a tax lien against a
mortgage-free condominium unit would
likely not be able to pay the taxes past
due without a HECM loan. Some
housing markets have become so
expensive that even small condos are
out of reach of many seniors if they are
not able to use a reverse mortgage. Many
seniors already in a condo need to
access their equity for everyday living,
medical and other expenses and longterm care. When some large banks left
the reverse mortgage industry, the
market lost their dedicated in-house
condominium departments, which
worked solely on getting condominium
projects approved. More and more
condominium associations do not want
to go through the time and expense of
getting approved. Single-unit loans
should come back so that older
Americans can enjoy staying in their
home in retirement.
HUD Response: The Single-Unit
Approval process under this rule is
expected to make units more easily
available, including for HECM loans.
Comment: HUD should allow a
certain percentage of Single-Unit
Approvals for reverse mortgages in any
complex, or, in the alternative, HUD
should consider wiping the project
approval database for any complex
without a status change in 2 years.
HUD Response: HUD does not believe
allowing a certain percentage of SingleUnit Approvals solely for HECM loans
in all projects would be consistent with
its fiduciary duty to the Mutual
Mortgage Insurance Fund. HUD believes
that making the determination of how
many units would be Single-Unit
Approvals based on specific factors,
experience, and with flexibility to
change in response to future market
conditions is the correct approach. For
the same reason, HUD would not agree
to wipe the approval database at any
periodic intervals.
Comment: The ability to apply for a
HECM loan based on individual
viability rather than blanket rules
applicable to a whole complex is much
more democratic and would logically
help the economy and give more people
cash flow. Allowing single-unit loans
will also help the values of these
condominium projects.
HUD Response: HUD has a fiduciary
responsibility to the Mutual Mortgage

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Insurance Fund that generally precludes
allowing single-unit loans without
considering the project. The rule
provides a framework for HUD to
provide some Single-Unit Approvals
and to vary requirements as needed to
meet market needs.
Direct Endorsement Lender Review and
Approval (DELRAP)
Commenters Questioned the Proposed
Staff Experience Requirement for
DELRAP Approval
Comment: It is often standard practice
for a lender to employ junior
underwriters with respect to
condominium projects who may not
have at least one year of experience, but
who work under the direct supervision
of a very experienced senior
underwriter. Procedures are already in
place to oversee this current system
through FHA’s quality control reviews.
Accordingly, HUD should instead
utilize the current guideline
requirements with respect to this issue,
which call for the lender to employ staff
that have knowledge and expertise in
reviewing condominium projects.
Supervision by a senior underwriter and
internal quality controls allow for
underwriters with less than a year
experience to work on a project while
protecting consumers and the FHA.
Because each lender is responsible for
the outcome of each reviewer’s actions,
it is best left to each lender to determine
if/when a reviewer is ready to make
these important decisions. HUD should
make no changes to current guidance.
Comment: HUD should consider if the
proposed credentialing process
constitutes a barrier to entry, depressing
the number of lenders eligible to process
DELRAP approvals. DELRAP serves the
useful purpose of increasing
administrative capacity when there are
bottlenecks. Such administrative
capacity constraints may occur when
the market is very active or when new
regulatory standards are introduced.
The reduction of DELRAP approvals
could have negative implications for
FHA’s countercyclical role in the
housing finance system. FHA played a
critical countercyclical role in the recent
financial crisis, making mortgage credit
available to households, including
condominium households, and
accounting for 26 and 22 percent of
condominium unit market originations
in 2009 and 2010, respectively. Direct
Endorsement lenders should be
provided unconditional approval, with
the understanding that qualified
personnel will process condominium
approvals, unless or until FHA quality
control reviews identify a pattern or

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practice of DELRAP approval violations.
Providing a list of material deficiencies
found would help lenders prevent
returning from unconditional DELRAP
authority to a conditional status, or
worse, a termination or other action.
If a Direct Endorsement lender has
pattern of negative DELRAP outcomes,
it would be appropriate for the
Department to impose the proposed
additional requirements to retain
DELRAP authority at that time. This has
the benefit of clearly communicating
FHA expectations, which will improve
the quality of DELRAP approvals and
retain the efficiency of the DELRAP
approval process for FHA in periods of
economic stability and distress. HUD
should review initial DELRAP approvals
and engage in continued quality
assurance reviews. Greater Direct
Endorsement lender participation
resulting from fewer barriers to entry in
the project approval process, buttressed
by the potential of penalty for noncompliance, benefits both condominium
households and FHA.
HUD Response: This final rule revises
§ 203.8(b)(1)(iv) to clarify that staff
members that participate in the
approval of a Condominium Projects
using DELRAP authority must have at
least one year of experience in
underwriting mortgages on
condominiums and/or condominium
project approval or be supervised by
staff that meet such experience
requirement. Also, in appropriate
circumstances, such as where a lender
has significant experience through the
existing program, this final rule
provides flexibility for HUD to reduce
the requirement of completion of five
DELRAP reviews to obtain
unconditional DELRAP authority.
Other DELRAP Issues
Comment: There is no specific skill or
indication of appropriate experience
that could prove competency in
condominium project approval. Skills
such as understanding condominium
financials and governing documents,
understanding a reserve study, knowing
what a major component is and whether
a condo project is in sound financial
condition do not translate to other
fields. The most important skills would
include HOA accounting principles,
community management, and great
attention to detail. The use of project
consultants by DELRAP lenders would
be beneficial in that the DELRAP
reviewer would get a thorough review
and the client would benefit from quick
approval. Mistaken DELRAP approvals
that are later withdrawn do not benefit
anyone and add to the negative opinion
of the process.

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HUD Response: HUD understands the
skills required to review condominium
project applications for FHA approval
may be varied. Therefore, this rule
provides the minimum requirements for
FHA approved mortgagees to become
DELRAP approved, but neither prohibits
nor requires the use of project
consultants.
DELRAP Submission Process
Comment: Relating to conditional
DELRAP approval, HUD should clarify
how a lender with conditional DELRAP
authority should submit its
recommended condominium project
approvals, denials, and recertification’s
to FHA for its review. An email contact
will be appreciated to speed up the
procedure during conditional DELRAP.
It would be most efficient, and provide
consistency for lenders and for FHA, if
a centralized submission source and
process is established for these purposes
for consistency. There should be
clarification of whether the material
must be submitted through FHA
Connection, a homeownership center, or
some other avenue.
HUD Response: The specific
submission requirements for conditional
DELRAP authority will be detailed in
Handbook guidance that will be issued
following this final rule.

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DELRAP vs. HRAP
Comment: Can there be flexibility
where either HUD or a DELRAP lender
approves condominiums? Can the
lender choose?
HUD Response: The final rule
establishes the process for
condominium project approval by either
a DELRAP approved mortgagee or HUD.
With limited exceptions (For example,
use of reserve studies over 36 months
old, which requires HRAP under
§ 203.43b(d)(6)(x) or other exceptions
that may be contained in guidance)
either method may be utilized.
Mortgagee Letter (ML) 2016–15
Comment: HUD should not have
issued ML 2016–15 in the middle of
rulemaking on integrally related topics
as mandated by federal legislation
without further opportunity for
interested parties to comment.
HUD Response: HOTMA required
HUD to issue guidance within 90 days
of the date of enactment to establish the
required owner occupancy percentage
for FHA approved projects. The 90-day
deadline made it inevitable that this
guidance would be issued during the
overall rulemaking process. HOTMA
allowed HUD to act by Mortgagee Letter.
Comment: While supporting a 35
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stated in ML 16–15, requiring a 20
percent reserve for capital expenditures
and deferred maintenance will make
this 50 percent owner-occupancy
threshold unusable and mostly nonexistent for the majority of the
condominium projects. Also, the fact
that HRAP is required for approval
below 50 percent ‘‘confuses and
undercuts’’ the emphasis on DELRAP
authority as outlined in the rule. Also,
the Mortagee Letter has a limitation on
arrears on association fee payments and
requires 3 years of acceptable financial
documents. As part of its proposed
rulemaking, HUD should allow
comments on the Mortgagee Letter.
Comment: Owner-occupancy of 25
percent is far from generally accepted
practice and could jeopardize the
equilibrium between owner occupants
and non-owner occupants. However,
there are markets that could benefit
from a flexible standard as proposed,
and commenter supports a fair
regulatory process that would permit a
condominium to receive approval with
an owner-occupancy ratio of less than
50 percent. While HUD has, as directed
by HOTMA, lowered the owneroccupant rate to 35 percent, few
condominiums will satisfy the
conditions to actually be approved for
that rate. HUD should adopt procedures
and standards that would result in
condominiums actually receiving such
an exemption. In particular, the
requirement for a 20 percent reserve rate
is excessive and unnecessary. Providing
an incentive to over-fund reserves could
be destabilizing, and may have
significant unintended tax
consequences, particularly for
associations using IRS form 1120. Any
association that has fully funded
reserves pursuant to a current reserve
study should be considered as having
satisfied the reserve requirement.
Comment: HUD followed the letter of
HOTMA by allowing the owner
occupancy requirements to be as low at
35 percent, but it did not meet the spirit
of the law when it added the conditions
that many have said are onerous and
unlikely to be met by many
condominium projects. Congress called
for a lower limit to increase the number
of condominiums that qualify for FHA
approval, thereby increasing the number
of units available to home buyers and
renters. As mentioned above,
condominium units are a particularly
important homeownership option for
first-time and low- to moderate-income
home buyers, i.e., HUD’s target
consumers. However, the addition of
tighter eligibility requirements when the
owner occupancy rate is below 50
percent essentially eliminates the

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potential of a significant increase in
Condominium Associations able to
qualify for approval. HUD should
remove the onerous conditions for the
35 percent owner occupancy rate
established in ML 2016–15, including
prohibiting the DELRAP option,
requiring replacement reserves for
capital expenditures and deferred
maintenance of 20 percent of the
condominium budget, and not more
than 10 percent of total units more than
60 days past due. Per the intention of
HOTMA, the owner occupancy rate for
all HUD-approved condominiums
should be 35 percent. The comment also
requests confirmation that HUD will
maintain its current owner-occupancy
requirement of 30 percent for existing
projects less than 12 months old.
HUD Response: HOTMA mandated
certain requirements that HUD must use
to determine owner occupancy but did
not mandate the actual owner
occupancy percentage that HUD could
issue through guidance, leaving HUD
with discretion. HUD acted based on its
experience and in accordance with its
fiduciary duty to the Mutual Mortgage
Insurance Fund. The final rule provides
the framework to establish flexibility in
applying this standard through policy
guidance as market forces may dictate.
HUD notes that HOTMA requires HUD
to base such owner occupancy
percentage on units occupied by the
owners as a principal residence or a
secondary residence or sold to owners
who intend to meet such occupancy
requirements, which would preclude a
blanket inclusion of REO units, or any
vacant unit not sold to an owner who
intends to occupy the unit as a place of
abode for at least a portion of the
calendar year and does not rent the unit
for a majority of the calendar year.
HUD will consider these comments
when issuing such policy guidance.
Such guidance will address the specific
owner occupancy ratios necessary as
well as address if such ratios vary based
upon the construction status of the
condominium.
Reserve Requirement
Comment: A 10 percent reserve
requirement is excessive, and HUD
should consider lowering this amount.
If an association has insurance in place
for hazards with 100 percent
replacement cost, then ostensibly the
building would be covered for any
major hazards or emergencies. Further,
as outlined below, if the association
gathers and holds 10 percent of its
annual assessment income each year,
requiring a reserve account to be funded
with at least 10 percent of the monthly
assessments could have the effect and

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probability of increasing sums held in
the reserve account, and thus also
increasing the amount of fidelity
insurance required under the Guide.
Comment: Most people buying
condominium units are not looking into
reserves before buying. The greater risks
of collateral declining in value are
pending legal action due to faulty
construction; lack of a track record for
a new project; and a high percentage of
rentals.
HUD Response: This rule establishes
a reserve requirement of 10 percent of
the monthly unit assessments, but
provides for a lower reserve amount,
based on a reserve study completed
within 36 months, or such greater
amount of time as determined by the
Secretary under the HRAP review
process.
Required Recertification Timeframe
A number of commenters supported
extending the time for recertification.
Comment: Condominium approvals
should be extended from 2 to 3 years,
making it easier to submit and get
condominium approvals and allowing
for more flexible guidelines. Many
condominium associations prohibit
rentals and without FHA financing
opportunities, it makes them more
difficult to sell, and thus creates
plummeting values. This often creates a
scenario where condominium owners
stop making mortgage and association
payments and creates hardships on the
association to where the repairs and
other amenities are compromised.
Comment: Extending the provision to
a 3-year period would reduce costs to
associations in obtaining FHA
approvals.
Comment: A project may experience a
number of financial or legal changes
during the 3-year period. Special
assessments are frequently imposed. If
HUD extends the approval period, it is
strongly recommended that HUD
provide examples of what constitutes
‘‘fails to comply with any requirement
for approval.’’
Comment: The change to 3 years will
decrease submission burdens on lenders
and review burdens on HUD. HUD
should further memorialize the lenders’
obligation to report known changes in
circumstance through explicit language
in the final rule. This language should
mirror current guidelines that require
lenders to report any known litigation,
budget deficiencies, changes to
association documents that may not
align with eligibility requirements, and
excessive homeowners’ association
delinquencies that place the property in
financial distress as soon as they are
made known to a lender throughout the

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3-year approval period. A clear
provision of lender reporting
requirements and reporting processes
will contribute to decreased risks for
both lenders and HUD.
Comment: This change will result in
an increased number of projects
approved and available for FHA lending
with only a marginal increase in the
potential for significant change since the
project’s approval. It will also
potentially improve the customer
experience as well as decrease costs to
the condominium industry by reducing
the need for re-approvals.
Comment: Two commenters state that
the time between renewal of FHA
condominium approval should be 5
years, not the current 2 years or the
proposed 3 years. One commenter states
that HUD and the FHA need to take into
consideration how the small volunteer
HOA’s will implement the final rule.
While a large HOA managed by a
professional company can easily meet
the short renewal period because that is
what they are paid to do, every
requirement acts as a disincentive for
the small HOAs. Renewing the approval
every 3 years as proposed will have
little or no positive impact. The
unintended consequence of the current
rule has been to limit housing inventory
and hurt first-time homebuyers. One
commenter states that the process is
daunting, the average cost of obtaining
the appropriate documents and legal
opinions related to the certification
process can range between $1,500 and
$3,000. A 5-year approval period, rather
than the proposed 3 years, would be
ideal for reducing the burden to the
condominium associations and entice
many more buildings to apply for FHA
approval, while still maintaining safety
and soundness.
HUD Response: HUD agrees with the
comments supporting a 3-year
timeframe, and this final rule retains the
approach provided in § 203.43b(g)(3) of
the proposed rule (§ 203.43b(h)(3) of
this final rule) where projects may be
approved for a period of 3 years from
the date of placement on the list of
approved condominiums. As noted by
the commenters, the benefits of
increasing the project approval period
by 1 year far exceed the potential risks
of changes to the project’s requirements
for approval while limiting the period
beyond 3 years, which would run too
great a risk of detrimental changes to the
project. This final determination was
based on FHA-insured condominium
performance, consideration of risk to the
Mutual Mortgage Insurance Fund,
positive impact in the industry, and
increase in affordable housing
opportunities.

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As to the comments regarding failure
to comply with requirements for
approval and a lenders obligation to
report any changes, this rule establishes
the framework for approval
requirements and establishes the
recertification timeframes, but does not
specify the format for recertification
requests. HUD plans to issue additional
guidance regarding the recertification
process as well as lenders
responsibilities to monitor requirement
on a ‘‘loan level.’’
Objections To Extending the
Recertification Timeframe
Comment: Three years is too long for
an approval or recertification. HOA’s
change their budgets every year and
they don’t always keep the reserves at
10 percent. Litigation and delinquencies
can also be a cause for concern. Fannie
Mae approvals expire every 6 months.
Commenter suggests staying with the 2year requirement.
Comment: The exiting 2-year
recertification provides a minimal stopgap to discover projects that are not in
compliance. Fannie Mae effectively
requires a lender to perform a full
review of a project every 6 months for
compliance. HOA financials show that
it is not untypical to see issues such as
the minimum requirement for reserve
funds not being enforced; reserves have
not been transferred on a regular
monthly basis from the operating
account to the reserve account; reserve
funds have been used for purposes other
than allowed; special assessments; et al.
This presents a significant risk to the
FHA insuring program if a unit is
foreclosed and becomes a HUD REO,
and the HOA financial condition poses
a risk.
HUD Response: HUD has decided to
retain the approach proposed in
§ 203.43b(g)(3) in the final rule where
projects may be approved for a period
of 3 years from the date of placement on
the list of approved condominiums (see
§ 203.43b(h)(3) of this final rule). This
determination was based considering
the public comments received, FHAinsured condominium performance, risk
to the Mutual Mortgage Insurance Fund,
positive impact in the industry, and
increase in affordable housing
opportunities. However, HUD will take
the specific comments and
recommendations regarding managing
project renewals under consideration
when drafting future policy guidance.
Comment: Does a condo project have
to meet the eligibility requirements only
at the time of approval, or does it have
to meet them continuously going
forward?

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HUD Response: The final rule
establishes the eligibility requirements
that must be met at time of approval and
then continuously going forward. HUD
will provide clarity regarding a
mortgagee’s responsibility to monitor
approval requirements beyond the time
of approval in future policy guidance.
Comment: One commenter stated that
there are both positives and negatives.
Negatives: With a 3-year process, more
eligibility issues may develop. Staying
in compliance is more likely with a 2year recertification. Also, the cost would
be more likely to stay in budget. With
a 2-year process, Board Members and
Community Managers are more likely to
be familiar with the process and
maintain certification. A 3-year
recertification will require additional
education of new board members.
Positives: Potential cost savings,
although it will be minimal; more
projects would be FHA certified at a
single time.
HUD Response: HUD recognizes the
positive and negative factors stated by
the commenter and believes that the
reduced burden associated with a 3-year
recertification process outweigh the
effects related to Board Members’
knowledge of the process.
Comment: Commenter seeks
additional public input on the
recertification process and for HUD to
ensure that recertification burdens are
eased through simplified procedures
and the use of technology that facilitates
providing FHA information required for
recertification.
HUD Response: HUD will take this
comment under consideration for future
policy guidance and technology
developments.
Legal Phasing
Commenters expressed concerns
about the potential financial impact on
projects by requiring that phases for
detached and semi-detached
developments must consist of groups of
adjoining or contiguous homes.
Comment: Fannie Mae will sometimes
allow non-contiguous developments
(e.g., two parcels separated by a school)
if there are not common recreational
facilities located on one parcel for
which the unit owners would be
required to travel to the other parcel
having the facilities.
Comment: HUD has not offered
sufficient justification to limit project
approval based on phase location. This
policy would deny consumers access to
FHA-insured mortgages. It is
appropriate that builder determine
which phases will be declared and
constructed based solely on the
builder’s assessment of market demand

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and sales. However, the Department
proposes to deny approval for phases
that are not contiguous to previously
completed phases. This will not provide
significant consumer or taxpayer
protections. If such decisions are to be
regulated, it should be by state and local
governments. Proposed
§ 203.43b(d)(6)(x) (§ 203.43b(e) of this
final rule) should be removed.
Comment: There is a potential
financial impact on projects by the
requirement that phases must, for
detached and semi-detached
developments, consist of ‘‘groups of
adjoining or contiguous homes.’’ HUD
should be aware that buildings are often
built out of order for marketing
purposes, so to require they be built in
contiguous order would eliminate FHA
financing opportunities for many
purchasers, especially in geographic
markets that do not allow for legal
phasing. Also, does this requirement
mean that legal phases must be
contiguous in their order of construction
and approval? The phases should be
approved even if the units are
completed out of contiguous order. HUD
should remove the requirement for
contiguous units or buildings for lateral
(non-vertical) developments.
Comment: The FHA should limit the
need for contiguous criteria to only
vertical buildings, as requirements for
builders to construct buildings in a
specific order may limit the ability of a
builder to make their projects available
to borrowers in a timely manner. This
would limit supply and consumer
choice.
HUD Response: HUD agrees with the
comments and has revised this final rule
to allow non-contiguous development
for detached or semi-detached
buildings. If the project is complete to
the extent that all units in the
completed legal phase are ready for
occupancy, the viability of the detached
or semi-detached project is not
determined by the contiguous
development of the buildings.
Legal Phasing, Under-Construction
Projects, and Other Related Matters
Comment: The language regarding
approval of legal phases is ambiguous.
Whether an entire condominium project
can be approved when only the initial
phase is fully complete or whether the
entire condominium project must be
fully complete should be clarified. If the
initial legal phase is complete and
approved, does each subsequent legal
phase need to be submitted separately
for approval? The current practice is
that the approval for the initial phase
would be amended with the recorded
documents for the subsequent phases.

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Will this practice continue under the
new regulations? If not, condominium
developers have indicated that a process
requiring separate approval of each
completed legal phase would cause
them to abandon the FHA market.
HUD Response: HUD has clarified in
this rule that individual legal phases
may be approved independently
without the need for the entire
condominium project to be fully
complete. The establishment of the
ability to independently approve phases
ensures the ability to perform such
approval on separate phases by multiple
DELRAP mortgagees or by HRAP
without the need to amend a current
approval performed by another
reviewer. Conversely, the rule does not
prohibit such approval on separate
phases by the same DELRAP mortgagee
or by HRAP where the existing
information on separate phases could be
used in the approval process of the
subsequent phases.
Comment: Requiring a legal phase to
be completed will require a separate
budget for the initial phase, and a
cumulative budget for each subsequent
phase, which is a practice required in
California for phased developments.
Under this practice, the regular monthly
assessments for the first and initial
phase(s) can (will) be substantially
higher than that of the subsequent phase
unit owners. This can affect the loan/
payment qualifications for the initial
buyers. If this rule is adopted, there
should be allowed a provision for the
developer to provide bonding to
subsidize the initial phases of
development in order to provide a
maximum assessment to the initial
phase(s) unit owners (e.g., a maximum
assessment guarantee). This is also
practiced in California and serves to
minimize the initial phase(s) buyers
needing to qualify for a mortgage based
on the higher monthly assessments.
HUD Response: This final rule
provides the framework to establish
flexibility in applying the rule’s
standards through policy (including
standards for financial condition). Based
on HUD’s experience, the concern with
monthly assessments in new
developments, including those that are
built in legal phases, is that they are
usually subsidized by the developer as
an incentive to the buyers. Additionally,
any potential considerations regarding
underwriting of borrowers is outside the
scope of this rule. HUD, however, will
consider these recommendations when
updating future guidance.
Comment: The word ‘‘project’’ should
be removed and only the term ‘‘phase’’
should be used to provide the greatest
level of transparency/clarity possible.

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HUD Response: To clarify proposed
§ 203.43b, proposed paragraph (d)(6)(x)
is moved to a new top-level paragraph
(e) in this final rule, and slightly
reworded to more properly state the
relationship between projects and
phases, and other paragraphs are
redesignated accordingly.
Comment: Clarification is needed
regarding what ‘‘sufficient numbers’’ (of
units in phases to be separately
sustainable) means. Under current
guidance, phases are appropriately
permitted in segments as small as a
single building. Increasing the number
of units to be included within a legal
phase may be detrimental to economic
viability of the planned development
and may not be in alignment with local
building restrictions. If a legal phase is
mandated to require a greater number of
units, and as further stated in proposed
§ 203.43b(d)(6)(x)(B), the units must be
built and have a certificate of
occupancy, the developer will endure a
significant financial hardship by
carrying inventory for units that cannot
be financed, or it will lead to fewer
opportunities for purchasers who would
benefit from FHA financing. HUD
should provide more clarity on
sufficient numbers of units that allows
for several units that matches local
ordinance or that aligns with the
developer’s marketing plan.
Comment: The current phasing
guidelines should remain as-they are,
specifically for new construction
projects to ensure optionality and
choice for the FHA borrower.
HUD Response: This final rule retains
the proposed ability to provide project
approval on phases without the need for
approval of the entire proposed or under
construction project (this provision is
§ 203.43b(e) of this final rule). A
completed phase is built out, ready for
occupancy, and independently
sustainable. The statement that there
must be ‘‘sufficient numbers’’ has been
removed in this final rule because that
quantity may vary in individual cases.
The comments and recommendations
will be considered when updating and
drafting the specific guidance and
procedures for determining independent
sustainability in future guidance.
Comment: There is a need for
additional clarity on what criteria
would make a legal phase eligible due
to varying state law definitions of what
constitutes a phase, whether one legal
phase or all phases must be complete
prior to approval, and what constitutes
a sufficient number of units to be
considered separately sustainable.
Comment: It is unclear as to how
amenities would be treated. For
example, it is common in construction

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projects to delay construction of an
amenity (such as a clubhouse) until a
certain number of phases have already
been completed. There is a concern that
the provision, as currently drafted,
would require that all such amenities be
completed before project approval could
be obtained, impacting standard
building practices and increasing costs
for builders and consumers.
Furthermore, commenter notes that
tying project approvals to completion of
a legal phase could be burdensome and
problematic from a state law
perspective. There is a patchwork of
state laws concerning how to properly
effect legal phasing, with varying levels
of difficulty depending on the state in
question. This would mean that it
would be a lengthier and more
expensive process to obtain project
approval in some states rather than
others, which would negatively impact
consumers in those states.
HUD Response: Under § 203.43b(e) of
this final rule, a complete legal phase is
one that is available for occupancy
(whatever that requires under local law
in terms of amenities and other
elements) and self-sustaining. This
regulation would not alter the existing
effect of State processes on consumers.
‘‘Infrastructure’’ and Phasing
Comment: The word ‘‘infrastructure’’
as it relates to legal phase approval is
somewhat vague. Although a legal phase
may not include the building of a
common amenity, that legal phase
typically has an undivided interest in
common amenities that may be
proposed in other legal phases. Are
these amenities in other phases thus
considered infrastructure? Commenter
states that HUD should define the term
‘‘infrastructure.’’
HUD Response: HUD agrees with this
comment. HUD has simplified the
requirements specific to phasing and
has removed the term ‘‘infrastructure’’.
HUD has maintained the requirement
for each phase to be ready for
occupancy and separately sustainable.
Comment: If this rule for requirement
of project or phase completion is
adopted, a provision should be added to
the effect that the completion of the
infrastructure can be bonded for
completion, and/or to maintain the
current guidelines as follows:
a. A condominium plat or similar
development plan and any phases delineated
therein have been reviewed and approved by
the local jurisdiction and, if applicable,
recorded in the land records; and,
b. The construction of the project’s
infrastructure (streets, storm water
management, water and sewage systems,
utilities), and facilities (e.g., parking lots,

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community building, swimming pools, golf
course, playground, etc.) and buildings
containing the condominium units has
proceeded to a point that precludes any
major changes.

Comment: In-lieu-of an
Environmental Review, infrastructure
completion can be evidenced by:
a. Photos of the project and site to evidence
completion status of infrastructure (streets,
utility stubs to building pads, building
foundations, buildings completed and under
construction); and/or,
b. City final inspection records; or,
c. Letter (letterhead) from city stating
completion or percentage of completion, or
stating that the construction of the project’s
infrastructure (streets, storm water
management, water and sewage system, and
utilities) and facilities has proceeded to a
point that precludes any major changes; or,
d. Completion bond release.

HUD Response: HUD has removed the
definition of ‘‘Infrastructure’’ and
replaced it with the definition of
‘‘Common Elements’’. As a result of this
change, bonding for completion of
infrastructure is not addressed in this
rule. HUD will consider this comment
when updating and drafting the specific
guidance and procedures that will
govern the analysis of determining a
phase’s ability to be separately
sustainable.
New Construction
Allow New Construction and Proposed
Construction, in Addition to Legal
Phasing
Comment: HUD is proposing to
remove the requirement of HUD staff
conducting Environmental Reviews for
new projects which do not provide
evidence that the infrastructure is
completed to a point where HUD would
have no influence. The requirement that
the project or legal phase be complete
prior to submitting for approval will
impose a hardship not only on the
builder, but moreover, on the buyer
seeking to obtain an FHA loan, because
this requirement means that a phase
must be completed to obtain HUD
approval. However, prior HUD approval
is required before the lender can obtain
a case number, and a case number is
required before the lender can request
an FHA appraisal. Lenders typically
prefer to have a cushion of 60–75 days
for the process to compete an appraisal
and other underwriting functions, all of
which are required to be completed
prior to closing the loan. In the case of
this proposed rule, although the unit
would be completed and ready for
occupancy, the buyer would be forced
to wait significant time after the phase
is completed, then after it is HUD
approved (30-day review for HRAP),

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only then could the lender order the
case number and then order the
appraisal, and then complete all
required underwriting. This also
increases the builder’s carrying cost
(interest) on the construction loan, and
this will have an impact on housing
affordability.
Comment: The current HUD process
of approving under construction,
phased projects places the responsibility
on the lender to determine completion,
and it should be noted that the FHA
lender must include evidence of
completion in the Insuring Binder
(Certificate of Occupancy or equivalent).
Based on this alone, the FHA Insuring
Program would not be at risk.
HUD Response: This final rule
maintains the requirement that a project
or phase be complete and ready for
occupancy as a condition for approval.
HUD recognizes this may impact a small
segment of the market and possibly
delay the time period from completion
to sale, but has weighed this impact
against the overall reduced burden for
compliance contained in this rule as
well as the balance required to ensure
appropriate risk controls to protect the
Mutual Mortgage Insurance Fund. HUD
constantly monitors its requirements to
ensure the right balance is achieved
between serving the market FHA
mortgages are designed to service and
protecting the MMIF. HUD will take
these comments under advisement in
this manner.
Comment: It is not clear what the
definition of ‘‘complete’’ is. Often
amenities such as recreation centers
aren’t begun until a certain number of
units are presold. Requiring adjustments
to this practice in effect will not just
impact condominium approval, but will
require a re-evaluation of standardized
and generally accepted building process
timelines across the country.
HUD Response: A project or phase
must be complete and ready for
occupancy as demonstrated by the
certificate of occupancy, or its
equivalent, and includes completion of
all the common elements of the project,
and not subject to further rehabilitation,
construction, phasing, or annexation,
except in cases where the project is
seeking approval for a legal phase. If a
phase, it must be self-sustaining.
Comment: HUD’s practice of allowing
FHA loans on units in a completed
building in a legal phase containing
multiple buildings (two or more) does
conflict with Fannie’s Mae’s
requirement that all buildings in a legal
phase must be completed (although
Fannie Mae does offer a process to allow
construction phasing via PERS
Application). FHA should continue to

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allow FHA closings on such buildings
when other buildings in the phase have
not yet been completed. Moreover, some
governmental authorities do not allow
or otherwise recognize legal phasing.
Comment: Although Fannie Mae
requires a phase to be completed, this
does not hamper the appraisal process.
A lender can order a conventional
appraisal regardless of whether the
project is seeking Fannie Mae approval
or otherwise.
HUD Response: This final rule makes
legal phasing consistent with Fannie
Mae’s policy regarding completion of
legal phases, even though Fannie Mae
has other underwriting requirements
that reduces their risk of exposure, such
as lower loan to value (LTV) parameters
for condominium loans. However, this
rule does not make changes to HUD’s
use of the status at the time of appraisal
in determining the construction status
of a property.
Comment: The requirement that the
project (or initial legal phase) be fully
completed and the condominium legal
documents be fully recorded for the
condominium to receive FHA approval
will create a hardship not only on the
builder but more importantly on the
consumer. For the builder waiting for
the full completion of construction and
the recording of the legal documents
will push back the processing,
underwriting, and approval of the FHA
loan request by at least a month or more.
In addition, without FHA approval
during the early marketing and sales
cycle of an under-construction
condominium, the builder will not be
able to advertise the availability of FHA
insured loans. This will increase the
builder’s carrying cost on their
construction loan by delaying closings
that could result in added cost to the
consumer. Also, under the current
process the responsibility is on the
lender to determine completion by
requiring that the lender include
evidence of completion in the Insuring
Binder (CO or equivalent) and thus the
FHA insurance fund would not be put
at risk. This proposed rule will have an
extremely negative effect on the
consumer by delaying access to the FHA
insurance program and to the builders
by delaying closing on many FHA
buyers. HUD should continue its current
approval processing requirements for
new construction condominiums by
allowing the submission of a project (or
initial legal phase) while construction is
still on-going and before the
condominium legal documents have
been recorded.
Comment: The requirement for
completed phases would represent a
dramatic change in building plans for

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new construction projects. In many
instances, this proposal would
significantly impact current industry
practices in place for the installation of
building amenities and the timing of
project eligibility and approval. By
requiring ‘‘completion,’’ borrowers,
lenders, and builders would experience
sizeable impacts due to delays in
approvals and closings due to the
feasibility of construction. This will
ultimately make it more difficult for an
FHA borrower to obtain a unit in a new
construction project. HUD should allow
lenders to continue with the current
practice of approving proposed or under
construction projects, despite the
possible need for additional
environmental reviews, and maintain its
current guidelines. Should HUD remain
concerned regarding risk management
issues, HUD should require a bond or
letter of credit from the builder to assure
completion.
HUD Response: HUD recognizes that
the completion requirement may impact
a small segment of the market and
possibly delay the time period from
completion to sale, but has weighed this
impact against the reduced burden for
compliance of projects overall contained
in this rule as well as the balance
required to ensure appropriate risk
controls to protect the Mutual Mortgage
Insurance Fund (MMIF). HUD
constantly monitors its requirements to
ensure the right balance is achieved
between serving the market FHA
mortgages are designed to service and
protecting the MMIF. HUD will take
these comments under advisement in
this manner.
Comment: As soon as the Certificate
of Occupancy is approved by the local
government agency, the lender should
be able to start the FHA permanent
financing for potential purchasers. This
proposed rule will affect the mortgage
industry since: Mortgage Applications
are worked with potential purchasers 60
days before the Certificate of Occupancy
is given by the state government (on
walk-ups, this will delay the process
and clients who otherwise could move
to their new homes); an interim
financing loan for the construction of
walk-ups project (multiple low rise) is
based on a peak (maximum loan
disbursement before repayment starts),
and if there is no repayment on the
mortgage the builder cannot continue
the construction and cannot sell the
units.
HUD Response: HUD recognizes that
the completion requirement may impact
a small segment of the market including
‘‘walk-up’’ projects and possibly delay
the time period from completion to sale;
however, HUD has weighed this impact

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against the reduced burden for
compliance of project overall contained
in this rule as well as the balance
required to ensure appropriate risk
controls to protect the Mutual Mortgage
Insurance Fund.
Comment: A commenter states that
they are unable to understand how the
elimination of the environmental review
only for HRAP applications
compensates for the total prohibition of
project approvals, HRAP and DELRAP,
on proposed and under construction
projects. If an environmental review is
not required for an approval by a Direct
Endorsement Lender, why is it
necessary for a HUD review and
approval? If HUD believes the
environmental review is a burden on its
staff, it seems it could be eliminated or
used in more restricted circumstances.
Not having FHA approval until
completion may cause builders and
developers to abandon the market. The
advantages of allowing proposed and
under construction projects to be
approved, and the ability for developers
to pre-sell units to FHA borrowers, prior
to being fully complete far outweigh any
disadvantages of environmental reviews
that HUD may perceive. HUD should
withdraw the proposed prohibition and
keep the current requirements for
proposed and under construction
projects.
Comment: Condo approvals are too
restrictive, resulting in decreasing
condo approvals. Provisions in the
proposed rule will further decrease
FHA’s share of the condo market.
Specifically, the proposed changes to
proposed and under construction
approvals and Site Condominiums
could result in developers leaving the
FHA market to the detriment of FHA
borrowers.
HUD Response: This final rule
continues to allow for approval of
completed legal phases, but does not
permit approval of phases that are
proposed or under construction. HUD
constantly monitors its requirements to
ensure the right balance is achieved
between serving the market FHA
mortgages are designed to service and
protecting the Mutual Mortgage
Insurance Fund. HUD will take these
comments under advisement in this
manner and will continue to assess the
impact of this requirement as well as
any impacts related to new construction
projects in relation to environmental
requirements in 24 CFR part 50.
However, HUD believes that this rule
will increase participation in the
program due to the added flexibility it
provides to address future market
changes.

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Comment: A commenter states that
the requirement for completion often
results in a senior waiting months to
close on a HECM unit until the
landscaping can be completed, weather
permitting. In the meantime, seniors
often have a greater expense as they
have to continue renting until they can
move into their new home or live with
friends or relatives causing significant
stress. The current regulations
discriminate against seniors based on
where they live. This is a problem with
condominiums, Site Condominiums,
and new single-family homes in cold
weather states. If the landscaping is the
only issue, then there needs to be an
exception. This issue needs to be
resolved quickly.
HUD Response: Substantive changes
to the HECM program, as well as local
law regarding real estate closings, are
beyond the scope of this rulemaking.
Single-Unit approvals and project
approvals require that the unit be in a
project that is complete under
§ 203.43b(d)(4), that is, complete and
ready for occupancy. If local standards
do not require that landscaping be
completed in order for the project to be
occupied, the project, or single units in
the project, may be eligible if meeting
the requirements of this rule.
Comment: There are concerns about
the rule permitting only legal phasing
and requiring each phase to be
separately sustainable due to
implications for new construction and
FHA borrowers seeking units, resulting
in substantial closing delays. Without
pre-approvals that are currently issued
for ‘‘under-construction’’ or proposed
construction projects, a lender would
not be able to order a case number until
a project is approved, subsequently
delaying the processing of a loan
application and resulting in significant
closing delays of up to 60 days. This
will ultimately limit the choices for lowto-moderate income borrowers, leaving
them at a disadvantage if they are
seeking new construction units.
Comment: The requirement that all
infrastructures be complete prior to
approval of the phase/project is a
significant departure from previous
practice that may limit the usage of the
program. Presently, approvals may be
made in the framing stage of building
and this new requirement could be an
unnecessary and burdensome
requirement. Without the ability to
secure approval prior to completion,
builders will be unable to market during
construction and gain the necessary
mortgage approvals until the final
inspection for the phase/project has
been completed and certified. This
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builders and borrowers not present in
the FHA program today as well as other
agencies’ programs.
Comment: Requiring all buildings in a
phase to be completed will delay
closings. The requirement for completed
phases will cause a delay of 30–45 days
for HUD approval, with an additional
15–30 days for processing and
underwriting of the loan, creating
negative consequences for consumers
and increasing the builder’s expenses in
carrying interest on the construction
loan, reflected in higher home prices.
This change will not provide any
benefits to the FHA insurance fund and
will only negatively impact consumers
and homebuilders.
HUD Response: This final rule
maintains the requirement that a
project, or phase, be complete and ready
for occupancy as a condition for
approval. HUD recognizes this may
impact a small segment of the market
and possibly delay the time period from
completion to sale but has weighed this
impact against the reduced burden for
compliance of project overall contained
in this rule as well as the balance
required to ensure appropriate risk
controls to protect the Mutual Mortgage
Insurance Fund (MMIF). HUD
constantly monitors its requirements to
ensure the right balance is achieved
between serving the market FHA
mortgages are designed to service and
protecting the MMIF. HUD will take
these comments under advisement in
this manner.
Comment: These provisions, if
enacted, will unnecessarily delay a
consumer’s ability to close on and take
possession of their condominium.
Under the proposed regulations, a
lender would not be able to order a case
number or an appraisal until the project
or legal phase is completed and the
condominium documents have been
recorded. The rule could delay closing
by several months. It would also result
in the builder having to hold onto
inventory longer than anticipated,
which would increase the costs to the
builder and ultimately to the consumer.
Equally troubling is the fact that
homebuilders often rely upon a certain
amount of presold condominiums in
order to qualify for financing to
construct the condominiums. The
inability to obtain approval for the
project or phase prior to construction
and recordation of the condominium
documents could, in fact, chill
construction of new condominium
projects altogether.
Comment: The ability to approve
condominium projects prior to
completion benefits both home buyers
and home builders. The approval of a

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proposed or under construction
condominium project allows a mortgage
application to be processed while the
condominium unit is being constructed
and decreases the time required to close
the loan after a unit is completed.
Prohibiting the approval of proposed
and under construction projects means
that a lender will not be able to order
an appraisal and begin processing a
mortgage loan application until the first
phase of the condominium is
completed. This is because a lender
cannot request a case number and order
an appraisal for a mortgage loan
application until a condominium
project has received a Project ID
Number, which is not assigned until a
project has been approved. This revision
to the current process will result in
significant delays, 60 days or longer, in
the purchase and settlement of
condominium units whose buyers are
seeking FHA-insured financing.
Developers may not be willing to offer
FHA-insured mortgage loans to buyers
prior to approval of a project since they
cannot begin processing the mortgage
application and the condominium may
ultimately not be approved for months,
if at all. The result will likely mean
fewer condominium projects submitted
for FHA-approval and home buyers
interested in purchasing units in new
condominium projects will not have
FHA insurance as a financing option.
Builders will not be incented to seek
FHA approval for new construction
condominiums if they can have their
under-construction projects approved
for conventional financing using Fannie
Mae or Freddie Mac programs. FHAinsured loans will be at a significant
disadvantage to the Fannie Mae and
Freddie Mac conventional financing
programs. This could prove a
disadvantage to homebuyers who may
need the advantages of FHA-insured
financing, which include a higher debtto-income ratio, smaller down payment,
and less-than-perfect credit
requirements.
Comment: The policy of approving
only completed projects or phases will
restrict access to FHA-insured
mortgages for consumers seeking to
purchase new construction
condominium units. Further, FHA may
be inappropriately influencing the
market-based decisions of its private
enterprise partners. Consumers benefit
from this earlier review and approval as
lenders are able to process loans,
allowing consumers to close in a timely
manner. This advance submission and
approval process protects the Fund and
taxpayers as a mortgage may not be
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documents have been provided to FHA
and acknowledged in relevant systems
as having been received. The proposed
rule will disrupt this process and
introduce inefficiencies and delays for
consumers. The proposed policy change
will place consumers seeking to obtain
FHA-insured mortgage credit at a
market disadvantage, lead such
consumers to more expensive mortgage
loans and will delay closings for an
undefined policy benefit. The potential
for delayed closings will also alter
builder business decisions, which may
have unintended consequences for
consumers. It is well established there is
a lack of affordably priced housing
available to lower and moderate-income
households. It seems counter to federal
and state policymaker efforts to increase
the supply of affordable homes to limit
consumer access to FHA-insured
mortgages and alter the business
economics of the builder industry. HUD
should remove § 203.43b(d)(4).
Comment: The proposed rule may
impose an unduly high burden on new
construction with the requirement that
the project phase be ‘‘complete and
ready for occupancy, including
completion of the infrastructure of the
project or legal phase, and not subject to
further rehabilitation, construction,
phasing, or annexation, except to the
extent that approval is sought for legal
phasing in compliance the requirements
of proposed (d)(6)(x) of this section’’
(§ 203.43b(e) in this final rule). New
construction projects do not always
fully incorporate the common elements
of a project until there are sufficient
residents within the project to sustain
those features. Necessitating the
absolute completion of all common
elements would substantially limit the
ability for purchasers to obtain FHA
financing until the project is well
established. Commenter believes that
the current requirement that common
elements be ‘‘substantially complete’’ is
sufficient and should be maintained.
HUD Response: This final rule
continues to allow for approval of
completed legal phases but does not
permit approval of phases that are
proposed construction or under
construction. HUD recognizes this may
impact a small segment of the market
and possibly delay the time period from
completion to sale, but has weighed this
impact against the reduced burden for
compliance of a project overall
contained in this rule as well as the
balance required to ensure appropriate
risk controls to protect the Mutual
Mortgage Insurance Fund. HUD
continues to assess the impact of this
requirement as well as any impacts
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relation to environmental requirements,
24 CFR part 50.
Site Condominiums
Comment: Site Condominiums should
not be placed into the proposed
approval process. HUD should maintain
the definition and approval process
currently in place.
HUD Response: This final rule
maintains and expands the definition of
‘‘Site Condominium.’’ This final rule is
more inclusive of additional
configurations of Site Condominiums
that exist in the market. Site
Condominiums must meet the
definition in § 203.43b(a)(7) and the
basic requirements of § 203.43b(d)(1)–
(5). Insurance and maintenance costs
must be the responsibility of the owner
as provided in § 203.43b(j).
Comment: HUD’s current definition of
a Site Condominium should include the
provisions relating to insurance,
maintenance, and common assessments.
Comment: Insurance and maintenance
costs must be the sole responsibility of
the owner with respect to Site
Condominiums, and any common
assessments collected must be restricted
to use solely for amenities outside of the
footprint of the individual site. Site
Condominiums generally do not have
master insurance policies associated
with the condominium itself; therefore,
this would be consistent with industry
and market practice.
HUD Response: HUD believes that the
revised definition of Site Condominium
in 24 CFR 203.43b(a) combined with the
separate regulatory requirements for
unit owners in 203.43b(j) provides the
correct balance in addressing Site
Condominiums based upon the market’s
reaction of treatment of such properties
as a potential substitute for other
detached dwellings.
Comment: Certain provisions of the
definition should be clarified: (1) The
word ‘‘site’’ is interpreted variously.
The comment recommends the
inclusion of the word ‘‘land.’’ (2) Many
condo plans limit ownership interests in
land and air space by creating threedimensional envelopes or modules.
These envelopes or modules may be
created in relation to sea level. The unit
owner’s interest remains within the
envelope or module, and is, thus,
limited. The areas outside of the
envelope or module is considered
common area. HUD’s current definition
suggests unlimited ownership of air
space and land and does not consider
the typical legal construction of such
areas.
Comment: Various HOC reviewers
and mortgagees interpret HUD’s Site
Condominium language to mean

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‘‘ownership of air space and land that
generally limits some other use.’’
Obviously, this interpretation differs
from the literal language. We
recommend that HUD clarify by adding
words such as ‘‘unlimited’’ or ‘‘at least
X above sea level’’ or some other
language that makes clear what HUD
intends when envelopes or modules
limit ownership.
Comment: HUD’s failure to provide
comprehensive guidance on Site
Condominiums results in an uneven
playing field among mortgagees.
Comment: Under prior 2009 HUD
guidance, a detached condo unit was
simply defined as a completely
freestanding structure. In 2011, HUD
then defined a Site Condominium and
required certain characteristics (e.g.,
insurance, maintenance) including the
unit must include the ground (to the
center of the earth) and the air space (to
infinity), without restrictions. HUD
further recognized the insurance issue
with the ground restriction and issued
an Insurance Waiver. Some states such
as California allow the unit site
ownership to extend below the ground
surface and/or the air space above the
structure to be limited, such as 50 ft.
below and/or 50 ft. above the structure.
The areas beyond these limits are
common area and/or association
property. The requirement that there
can be no restriction or limit on the
ground beneath and the air space above
a structure serves no purpose and this
would not jeopardize the FHA insuring
program.
HUD partially recognized this matter
in its issuance of the Insurance Waiver,
which allowed the unit owner to be
responsible for insurance if there was a
limit on the ground beneath the
structure or if it is common area.
However, the Insurance Waiver does not
take into equal consideration the air
space above the structure. This may
have been an oversight in drafting the
Insurance Waiver. If the current
definition of a Site Condominium will
remain intact, we would propose that
the Insurance Waiver be revised and
codified to the extent of allowing the air
space above a unit to likewise be
deemed as common area.
Comment: HUD’s requirements are
too strict; HUD should mirror Fannie
Mae’s guidelines. Fannie Mae does not
require that detached condos must

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include the air space above and the
ground beneath the structure. Likewise,
the Department of Veteran’s Affairs (VA)
does not place such restrictions or
otherwise define Site Condos for
eligibility. Both attached and detached
condos require VA approval. The waiver
was issued to expand project eligibility
for those projects where the legal
governing documents required that
obtaining and maintaining the insurance
was the responsibility of the unit owner.
HUD Response: This final rule revises
the Site Condominium definition under
§ 203.43b(a)(7) to remove the
consideration of the type of air or land
ownership for detached units as well as
to address land ownership requirements
for townhouse style projects. HUD
believes this change will substantially
reduce or eliminate the need for such
Insurance Waivers and provides the
correct balance in addressing Site
Condominiums based upon the market’s
reaction of treatment of such properties
as a potential substitute for other noncondominium ownership style
dwellings.
Air Space Common Area and Site
Comment: Section 1.8.1 of the Guide,
because of the inclusion of air space,
which may not be a common area, in the
definition of Site Condominium,
conflicts with California law with the
result that in California, Site
Condominiums are not exempt from full
project review, unlike Site
Condominiums generally. This will
increase costs and time to obtain
approval and could cause developers to
stop offering FHA financing. Under
California law and that of some other
states, there is an ‘‘air space common
area’’ requirement for detached Site
Condominiums that include a residence,
yard, and other improvements that are
wholly owned, maintained, and insured
by the buyer. The vertical and
horizontal boundaries will have no
bearing on a detached condominium’s
value, nor do they have an impact on
the use of the condominium by its
owner. Lower vertical boundaries are
typically placed well below the earth’s
surface, and upper vertical boundaries
are placed at elevations above the unit
that could be of no possible use or
benefit to the unit owner. The threedimensional separate interest is not
created to limit use of any area; it is

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simply created to comply with
California law. A condominium unit
that fails to identify its vertical limits,
as HUD appears to require for a Site
Condominium, may be a violation of the
California Subdivision Map Act.
HUD has previously allowed detached
condominiums with this air space
common area to qualify as exempt from
full condominium project approval
under the Guide. HUD’s change of
interpretation of section 1.8.1 of the
Guide is troubling, as California
detached condominiums look and
function like a traditional single-family
detached residential project where the
homeowner wholly owns, maintains,
and insures his or her residence as well
as all other improvements within the
footprint of the detached condominium
unit. Neither Fannie Mae nor VA have
such an air space requirement. The air
space common area, and boundaries
placed below the earth’s surface, require
no maintenance and do not impair the
project’s ability to function like a singlefamily detached project. It is not clear
how including air space and indefinite
lower boundaries as a common area
would create a risk for the insurance
fund. The fact that master insurance
policies associated with the Site
Condominiums generally do not exist
supports removal of the ‘‘site and air
space’’ component.
Commenters suggested removing ‘‘site
and air space’’ from the definition of
‘‘Site Condominium’’ in § 203.43b(a)(7),
and other revisions. HUD will be better
served because fewer single-family
detached projects will have to be
submitted for full project approval.
Homeowners will be better served by
allowing the individual homeowners to
obtain insurance on their single-family
homes instead of an association policy
required under full HUD–FHA
approvals. The mention of ‘‘air space’’ is
not typical in the industry and any risk
should already be addressed by FHA’s
requirement that all state and local
ordinances be followed.
One commenter suggests adding to
the end of the proposed definitions of
‘‘Condominium Unit’’ and ‘‘Site
Condominium’’ the following: ‘‘(as
defined under any applicable local laws
or statutes governing the creation of
common area or limited common area)’’.
Another comment suggests revising the
definition as indicated:

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HUD Response: HUD agrees with the
commenters and has revised the Site
Condominium Definition under
§ 203.43b(a)(7) to include its easily
determined physical attributes and land
ownership attributes without the
consideration of air space. These
revisions allow more configurations of
Site Condominiums to be eligible. In
addition, § 203.43b(j) of this final rule
(§ 203.43b(i) of the proposed rule) has
been revised to require only that
insurance and maintenance costs of the
individual units must be the sole
responsibility of the unit owner for Site
Condominiums, without stipulating any
additional requirements for use of
assessments. Hence the rule avoids
potential conflicts with local law and is
clearer for the public. Accordingly,
future guidance will reflect this new
policy.
Site Condominiums—Appraisal
Reporting
Comment: HUD should direct lenders
to accept the 1004/70 URAR Appraisal
Form for Condominiums. While the
Legal Description indicates these
properties as being Condominiums,
most are marketed as, perceived as,
utilized as, Single Family Homes, with
front, side and back yards, no shared
walls, and often no shared maintenance

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other than ‘‘common areas,’’ i.e., parks,
trails, bike paths, etc. The Properties are
being Listed/Marketed as Single-Family
Homes and more often indicated as
having defined Lot Sizes. This recent
phenomenon is a result of developers
looking for ways around county platting
requirements that slow the
development/building process. This
hybrid property has all the attributes of
a Planned Unit Development or singlefamily home, yet as it is legally a
condominium and lenders are requiring
the appraisal report be developed on
Form 1073/465. Form 1073/465
encompasses the attributes of
developments where the owners have
shared ownership responsibilities that
include site maintenance, exterior
structural maintenance, and shared
structural liabilities, none of which
apply to the single-family
Condominium or Site Condominium.
Until the lending community, and more
specifically Fannie Mae/Freddie Mac,
address this new Property Type, the
only current form that can accurately
address the attributes of the Site
Condominium is the 1004/70 URAR.
Furthermore, the use of the
Condominium Form 1073/465 could be
misleading to the reader expecting a
property that adheres to the more
traditional condominium regime.
One commenter stated that he uses
the following language in appraisal
reports: ‘‘An Extraordinary Assumption
is made that the use of the 1073/465
Form will not be misleading. In
developing this report and the Opinion
of Value, this Appraiser has utilized a
Hypothetical Condition that the Subject
is Single Family Residential to best
represent the Markets Perception of the
Subject’’. As these properties become
more prevalent, there is a need for a
clear directive to the Lending/Appraisal
community. Until the GSEs can address
the issue of this hybrid property type by
developing a new form that
encompasses the unique character of
these properties, HUD should direct
lenders to accept the 1004/70 URAR as

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the standard appraisal form for these
entities.
HUD Response: The practices
associated with appraisal of Site
Condominiums are outside the scope of
this rule; however, HUD will take this
comment under consideration for future
policy guidance.
Free Assumability and Private Transfer
Fees
Comment: 24 CFR 203.41 currently
prohibits mortgage insurance if a
mortgaged property is subject to an
affordability covenant that survives
foreclosure or certain foreclosure
alternatives. The nation is experiencing
a growing housing affordability crisis,
particularly in housing markets where
condominium projects may play a
productive role in meeting this need.
The affordability crisis is leading many
jurisdictions to require an affordability
component in new condominium
projects and multi-family rental housing
developments, reserving units for sale or
rent at affordable prices. FHA should
work with local governments and
developers to approve all units in such
condominium projects. Fannie Mae and
Freddie Mac are currently supporting
access to affordable homeownership by
accepting delivery of loans subject to an
affordability covenant that survives
foreclosure. FHA should join this effort
and amend § 203.41 to permit FHA
insurance for mortgages secured by a
condominium unit subject to a covenant
designating the unit as an affordable
housing unit where the covenant
survives foreclosure.
HUD Response: Such a consideration
would encompass a review of such a
requirement across all programs affected
by 24 CFR 203.41 and not limited to
only Condominium Projects, and
therefore is beyond the scope of this
rulemaking. However, current guidance
addressing permissible restrictions on
conveyance for condominiums remains
in effect.
Comment: Section 301 of the Housing
Opportunity Through Modernization
Act of 2016 (HOTMA) mandates that
with respect to mortgage insurance for

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Another comment suggests:
Site Condominium means a single family
detached dwelling (which does not have a
shared garage or any other attached building,
including such improvements as archways,
or breezeways), which is encumbered by a
declaration of condominium covenants or
condominium form of ownership, and which
consists of the entire structure and no part of
the dwelling or structure, or any other
improvement considered to be a part of the
condominium unit is considered to be a
common area or limited common area (as
defined under any applicable local laws or
statutes governing the creation of common
area or limited common area). Such Site
Condominium may have upper and lower
vertical boundaries to the extent required to
comply with applicable State law provided
that all structural improvements of the Site
Condominium are contained within such
upper and lower vertical boundaries.

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condominiums, HUD shall utilize the
guidelines developed by the Federal
Housing Finance Agency (FHFA)
regarding private transfer fees. Two
comments strongly support this
provision which brings consistency and
clarity regarding private fees across the
industry. Therefore, HUD should
confirm whether this provision is selfeffectuating. If HUD believes that it
needs to take action to effectuate this
provision, HUD should do so swiftly, in
order to avoid unnecessary confusion in
the industry. Furthermore, HUD should
consider applying these FHFA private
transfer fee standards across all of
HUD’s programs, including, but not
limited to, single-family mortgage
insurance (for all FHA programs). This
will provide one standard for the
treatment of private transfer fees
throughout the industry, reducing
unnecessary complexity and confusion
to the consumer’s benefit. Lacking
direction from HUD, the industry is
subject to inconsistent application of
guidelines between lenders which can
negatively impact consumers due to
unnecessarily limiting products and/or
lender availability in certain
communities.
Comment: The immediate adoption of
FHFA’s rule will provide consistent
guidelines for the industry and will for
expansion of eligible projects, so long as
the private transfer fees are to the
benefit of the borrower (i.e.,
maintenance fees). The Mortgage
Bankers Association believes that this
change will create clearer and consistent
guidelines across agencies, making it
easier for lenders and FHA to serve the
FHA borrower.
Comment: Private transfer fees that
simply provide income to the developer
or another entity are problematic.
However, there are many private
transfer fees that support the
condominium facilities or provide
tangible benefits to the homeowner.
Acceptable of these ‘‘good’’ transfer fees,
but rejection of the ‘‘bad’’ transfer fees
is the standard employed by the FHFA.
HOTMA requires HUD to adopt the
‘‘existing standards of the FHFA relating
to encumbrances under private transfer
fee covenants.’’ The commenter agrees
with HUD that this provision is
immediately effective.
Comment: This rule should address
transfer fees as it is a requirement by
HOTMA. HUD should either revise 24
CFR 203.41 in this rulemaking, even if
another 30-day comment period is
immediately effective.
HUD Response: Section 301 of
HOTMA on private transfer fees is selfimplementing. HUD may consider

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issuing a regulation on this subject in
the future.
Leasing of Units
Comment: Limiting short-term leases
may promote the residential use and
character of a condominium project and
the commenter recommends that HUD
revise regulations at 24 CFR 203.41 to
incorporate permissible leasing
restrictions currently provided in
section 1.8.9 of the Condominium
Project Approval and Processing Guide.
Comment: HUD should reconsider its
blanket objection to Association review
of leases. Without prior notice or
approval, a condominium board has no
ability to enforce leasing restrictions to
ensure the project continues to meet
FHA owner occupancy requirements.
Condominium boards have an ongoing
interest in maintaining FHA approval
criteria and FHA’s general view that any
condominium where the board has
either direct or indirect approval
authority of a lease is contrary to this
interest. In taking this position, FHA is
elevating one-unit owner’s interest
above the interests of all other owners.
Allowing a well-defined and limited
authority to act in a manner that
preserves FHA approval benefits owners
and consumers. HUD should revise
regulations at 24 CFR 203.41 to provide
a limited prior approval of leasing by a
condominium association board to the
extent exercise of such authority will
retain the condominium’s project
compliance with FHA owner occupancy
requirements.
HUD Response: HUD appreciates the
recommendation and will take it under
consideration for future policy
guidance. Such a consideration should
encompass a review of such a
requirement across all programs affected
by 24 CFR 203.41 and not limited to
only Condominium Projects, and
therefore is beyond the scope of this
rulemaking.
Right of First Refusal
Comment: One of the main reasons for
condo non-approval in Florida has been
the insertion of language stating that the
condo board has the right to reject
potential tenants and purchasers. Since
2013, there has been a zero-tolerance
policy for any right of first refusal (the
commenter states that this is based on
the Fair Housing Act). This has resulted
in condos with good financials being
denied approval. It is difficult to change
a condo’s governing documents. Fannie
and Freddie do not have this issue. The
condominium board could sign a
certification that it does not utilize the
objectionable provisions. In the instance
of a spot approval, assuming that the

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condo met usual financial and
insurance guidelines a potential
solution would be to waive any concern
regarding the first refusal issue. This
would help increase the supply of
affordable housing.
Comment: Since 2013, the Atlanta
HOC has taken the position that the
condominium associations have to
change their governing documents to
remove the right of first refusal.
Changing the bylaws for a condominium
association of any size can only be
accomplished once a year at the time
association board elections are held.
Doing so entails significant expense,
including substantial legal fees and
costs that are eventually borne by the
individual unit owners through
increased assessments to maintain the
association budget. Also, while the legal
structure of some condominium
associations may vary, most require the
affirmative vote of 100 percent of all
owners to agree to modify the bylaws,
which is impractical in a community of
any size. Many Florida condominium
association boards are willing to execute
a formal and binding certification on an
annual basis that the association does
not and will not utilize any of the right
of first refusal provisions in its charter.
In this way, such associations would not
be required to amend their charters if a
resident desires FHA financing.
Therefore, the final rule should clarify
that boards of Florida condominium
associations whose charters contain
rights of first refusal may execute a
formal and binding certification on an
annual basis that the association does
not and will not utilize any of the right
of first refusal provisions, so that units
can be approved for FHA-insured
financing.
Comment: Approximately 75 percent
of the condominiums in Florida have a
right of first refusal, which is major
obstacle to HECMs. There is less than a
one percent chance of getting these lease
restrictions changed. HUD should drop
this leasing language as part of its SUA
process.
HUD Response: HUD does not address
rights of first refusal in this rulemaking;
however, the existing guidance
permitting the right of first refusal for
condominium project approval will be
continued in effect. HUD will address
rights of first refusal generally in a
future rulemaking, as this topic is
outside the scope of this rulemaking.
Approval by the State
Comment: If a project meets the
requirements of the relevant State
oversight agency, that should be
sufficient for approval. There could be
a document covering single-unit loans

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Federal Register / Vol. 84, No. 158 / Thursday, August 15, 2019 / Rules and Regulations
to determine the current operating
status of the project.
Comment: HUD should insure loans
in condominium projects approved by
the Department of Business and
Professional Regulation (DBPR) in each
State of the U.S. In Florida, this could
be accomplished by HUD officials
working with officials at the Division of
Condominiums, Time Shares and
Mobile Homes which is a Division
within the DBPR. After HUD/FHA is
assured that the State requirements for
condominium approval are sufficient,
an identification number issued by the
State could be used for loan processing.
Compliance with Fair Housing laws will
be the responsibility of all parties to the
real estate transaction such as the
Realtor, Lender, Condominium
Association Board, etc.
HUD Response: HUD disagrees with
the recommendation of insuring loans
in condominium projects that are
approved by the state agency
responsible for regulating
condominiums in every state. By HUD
adopting national standards for
condominium project approvals,
industry members would benefit from
clear, consistent, and enforceable
standards that would reduce confusion
and increase efficiency in the market. In
addition, the condominium standards
and processes that will be established
through this rule are similar to the
conventional market’s processes, and
HUD believes that such consistency will
have the least impact on the industry.

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Lender Liability Post-Approval
Comment: If a lender that obtains
DELRAP approval under the new
guidelines approves a condo are they
later liable for loans approved by
another lender? This example would
assume that Lender A properly approves
a condo project and that all
documentation is in order. Lender B
later underwrites an FHA loan in this
project and their underwriting is
faulty—the loan goes into default and
causes a claim to the MMI fund. In this
example, is lender A still liable? Clarity
around this issue would be welcome as
making lenders liable for underwriting
errors beyond their control would cause
many of them to rethink DELRAP
approval.
HUD Response: Based on the
commenter’s example, Lender A would
not be liable for Lender B’s faulty
underwriting of an FHA loan. A lender
with DELRAP approval that approves a
condominium in accordance with the
new guidelines does not have loan-level
liability for another lender’s
underwriting errors. Of course, each

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case is different and would have to be
assessed on its own merits.
Condominium Associations Unwilling
To Cooperate With Project Approval
Comment: A commenter, a reverse
mortgage loan originator, provides an
example of a client living in an upscale
condominium in town. The owner has
a tax lien certificate against her
mortgage free condominium unit for
2015 property taxes that are past due,
and it is unlikely that she will be able
pay the 2016 property taxes as well. The
commenter and owner have both tried
for months to get the condo association
to help, but the process has stopped.
The commenter states that it will be a
shame that this senior will eventually
have to vacate her residence and lose
the lifestyle she is accustomed to
because of those in power are not
willing to help. There has to be a better
way.
Comment: Many formerly FHA
approved condominium projects have
expired and associations do not or
cannot get the projects re-approved.
This limits the supply of housing to
first-time buyers who require FHA loans
to purchase a new condominium
effectively locking them out of many
homes and limiting their housing
options. HUD is to be applauded for
taking concrete steps to solve this
problem. Further, we urge HUD to adopt
Fannie Mae and Freddie Mac approval
processes. This will create a more
uniform and fair condominium approval
process across the home mortgage
spectrum. It will allow low- and
moderate-income home buyers access to
more financing options that currently
exist.
HUD Response: HUD appreciates the
comment. The final rule includes the
ability to obtain Single-Unit approval in
an unapproved condominium project as
an opportunity to provide access to
FHA’s programs in this or similar
situations.
Insurance Requirements
Comment: One commenter stated that
there is no reason to continue the
requirement for a fidelity bond of 3
months’ aggregate assessments plus
reserve funds, unless state law mandates
required coverage. In today’s practice,
most condominium association dues are
directly deposited electronically into an
FDIC-insured bank account, and such
accounts are insured up to $250,000.
Given this expedited and more secured
cash flow based on more prevalent and
modern electronic payment practices, in
our view, there is no reason to continue
the requirement.

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HUD Response: Although fidelity
insurance is not specifically addressed
in this final rule, it would be covered
under the general insurance
requirements under § 203.43b(d)(6)(iii).
HUD appreciates the comment but
disagrees with commenter’s overarching
recommendation to eliminate the
requirement for fidelity insurance
(which insures against losses for fraud
or dishonesty) based upon the prevalent
use of direct deposit into an FDIC
insured accounts, which are insured
against loss due to bank failure.
Accordingly, HUD has implemented the
aforementioned section of the final rule
as proposed.
Comment: We note that the Insurance
Waiver is not included as part of the
Proposed Rules. Will the Insurance
Waiver currently in effect, and due to
expire on January 5, 2017, be codified
as part of the Proposed Rules and/or
appear permanently as part of the
Single-Family Housing Policy
Handbook 4000.1?
HUD Response: This final rule does
not provide for specific standards, but
for a framework to establish HUD’s
specific requirements through policy.
HUD will consider this comment when
drafting further policy guidance.
Exceptions Under Proposed § 203.43b(f)
Generally
Comment: HUD should clarify the
process by which exceptions are
requested and approved and provide
additional guidance on the limits of the
Secretary’s exception authority, if not in
the rule itself then in guidance. This
will prevent situations where
condominium associations surmise the
project will not meet all approval
standards and, therefore, decline to seek
project approval, and limit instances
where associations incur additional
expenses to get into full compliance
when they would have been eligible for
an exception. Clear guidance will also
ease processing burdens by limiting
exception requests where HUD will not
approve. Clear guidance will indicate
that FHA is a reliable partner. Therefore,
HUD should provide a standardized
exception request process that clearly
identifies the approval criteria for which
an exception will be contemplated, and
publish clear guidance concerning the
exception process and provide examples
and reasonable conditions that may
result in approval of an exception
request.
HUD Response: HUD appreciates the
recommendations and will clarify
exception process requirements in the
policy handbook that will be issued as
a result of this final rule. However, HUD
believes the rule addresses the factors

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that must be considered in determining
whether to grant an exception while
contemplating that such exceptions will
be considered on a case by case basis
which precludes the use of any one
standard.
Implementation Timeframe

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Comment: A 12-month
implementation period will be needed
given multiple significant industry
compliance changes.
HUD Response: This final rule
provides for a 60-day implementation
timeframe that allows stakeholders to
view additional guidance provided in

HUD handbooks prior to
implementation.
V. Findings and Certifications
Information Collection Requirements
The information collection
requirements contained in this rule have
been submitted to the Office of
Management and Budget (OMB) under
the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520). In accordance
with the Paperwork Reduction Act, an
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless the
collection displays a currently valid
OMB control number.

The information collection
requirements of this rule revise a
currently approved information
collection (OMB Control No. 2502–
0610). This information collection
reorganizes and consolidates, in a less
burdensome and more user-friendly
format, the information currently
required in form 96027, Condominium
Project Approval Document/Checklist;
form 96028, Condominium Project
Annexation Checklist; 96017, Program
Certification; form 96018, Loan Level
certification; and form 96019, Pre-Sale
certification.
The burden of the information
collections is estimated as follows:

Current information collection
(OMB approval No. 2502–0610)

New information collection

Package preparation .......................................
Package review ...............................................
935.2c AFFH Plan ..........................................
92541 Builder’s Certification ...........................
92544 Warranty of Completion of Construction.
96029 Condominium Rider .............................
96017 Program Certification/Project Certification.
Loan level certification ....................................
Pre-sale certification .......................................
96027 Condominium Project Approval Cover
Document/Checklist.
96028 Condominium Project Annexation
Checklist.

.........................................................................
.........................................................................
.........................................................................
.........................................................................
.........................................................................

2.00
1.00
6.00
0.10
0.03

1.00
1.00
3.00
0.10
0.03

¥1.00
0.00
¥3.00
0.00
0.00

.........................................................................
.........................................................................

0.10
0.10

0.10
0.00

0.00
¥0.10

.........................................................................
.........................................................................
.........................................................................

0.30
1.00
1.00

0.00
0.00
0.00

¥0.30
¥1.00
¥1.00

.........................................................................

0.30

0.00

¥0.30

Model FHA Condominium Loan Level/Single1 Unit Approval Questionnaire.
Model HRAP–DELRAP FHA Condominium
Project Approval Questionnaire.

........................

.75

.75

........................

1

1

Total .........................................................

.........................................................................

11.93

6.98

¥4.95

Total hours per annum .....................

.........................................................................

90,660

22,000

¥68,660

In accordance with 5 CFR
1320.8(d)(1), HUD is soliciting
comments from members of the public
and affected agencies concerning this
collection of information to: (1) Evaluate
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(2) Evaluate the accuracy of the agency’s
estimate of the burden of the proposed
collection of information; (3) Enhance
the quality, utility, and clarity of the
information to be collected; and (4)
Minimize the burden of the collection of
information on those who are to
respond, including through the use of
appropriate automated collection
techniques or other forms of information
technology, e.g., permitting electronic
submission of responses. Interested
persons are invited to submit comments
regarding the information collection

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Burden hours
(current)

requirements in this rule. Comments
must refer to the proposal by name and
docket number (FR–5563) and must be
sent to:
HUD Desk Officer, Office of
Management and Budget, New
Executive Office Building,
Washington, DC 20503, Fax: (202)
395–6947; and
Reports Liaison Officer, Office of Public
and Indian Housing, Department of
Housing and Urban Development,
Room, 451 7th Street SW,
Washington, DC 20410.
Interested persons may submit
comments regarding the information
collection requirements electronically
through the Federal eRulemaking Portal
at http://www.regulations.gov. HUD
strongly encourages commenters to
submit comments electronically.
Electronic submission of comments
allows the commenter maximum time to
prepare and submit a comment, ensures

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Burden hours
(new)

Net change

timely receipt by HUD, and enables
HUD to make them immediately
available to the public. Comments
submitted electronically through the
http://www.regulations.gov website can
be viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.
Executive Order 13771
Executive Order (E.O.) 13771, entitled
‘‘Reducing Regulation and Controlling
Regulatory Costs,’’ was issued on
January 30, 2017. This final rule is
considered an E.O. 13771 deregulatory
action. Details on the estimated cost
savings and deregulatory effect of this
proposed rule can be found below in the
Summary of Regulatory Impact,
Benefits, and Costs, and in the separate
Regulatory Impact Analysis.

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Federal Register / Vol. 84, No. 158 / Thursday, August 15, 2019 / Rules and Regulations
Summary of Regulatory Impact,
Benefits, and Costs
This rulemaking addresses a market
failure that occurs when lenders ration
credit instead of charging the
appropriate risk premium; that is; when
lenders consider denying a loan to be a
superior business decision than raising
prices. In the mortgage insurance
market, such a market failure occurs
when borrowers are willing to buy
insurance at an actuarially fair price, but
suppliers cannot sell at the cost of
providing the insurance. One reason
this occurs is lack of information.
Adverse selection occurs because
borrowers who are attracted to higher
LTV loans are less able to withstand
financial shocks. However, even with
information about the household’s
resources, it is difficult for private
insurers and lenders to predict the
probability of default, which depends
on trends in financial and real estate
markets. This can cause a contraction of
supply such that the equilibrium market
response is an undersupply of credit
and limitation of housing choices. In
such periods, low-income households
wishing to buy affordable homes, such
as condominiums, would be the first to
be excluded from the market.
FHA’s role with respect to market
failure due to an undersupply of credit
is a countercyclical one. FHA serves to
reduce market imperfections due to
information asymmetry. When risk
increases in the presence of information
asymmetries, lenders ration credit
(withdraw from the market) as opposed
to adjusting interest rates. FHA provides
a buffer in such circumstances; FHA’s
market share varies inversely with the
ease of credit. Greater access to credit
can be considered a benefit.
Mortgage insurance is required for
high LTV loans. FHA provides mortgage
insurance at average cost to qualified
borrowers. FHA does not crowd out or
replace the private sector, but instead
fulfills unmet demand for mortgage
insurance when private insurers
withdraw from the market. Similarly,
FHA’s market share declines when there
is less uncertainty in the real estate and
mortgage markets.
Condominiums provide an affordable
homeownership option for borrowers
who may qualify for FHA mortgage
insurance in high-cost or dense areas.
Evidence suggests that there is an
imbalance in FHA’s treatment of
condominiums in relation to singlefamily housing. Creating a level playing
field is important in facilitating
consumer choice, especially in the
housing market where spending on
housing represents a large proportion of

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a household’s budget. Any distortionary
regulatory costs that do not serve a
greater public purpose reduce social
welfare.
The proportion of FHA-approved
condominiums relative to the estimated
size of the condominium market in the
United States provides an indicator of
the need for FHA guidance that
simplifies the FHA condominium
project approval process. In 2001, 8.4
percent of FHA loans were for condos,
but the share has dropped since then,
reaching its low of 2.1 percent of all
FHA loans in the most recent complete
year of 2018.
The rule addresses this market failure
by deregulating some of the more
burdensome aspects of the approval
process to allow more condominium
units to be purchased with FHA-insured
mortgages. The rule will reduce the
compliance costs of condominium
lending. Analysis shows, however, that
this will be a limited effect which will
not result in an outsized market share
for FHA. It is extremely unlikely that
the maximum volume would exceed the
historic peak of 73,000 loans in 2010, so
that could be regarded as the potential
upper limit. HUD would not expect the
equilibrium share of condo loans to be
greater than the market average given by
FNMA’s condo share of 10 percent,
which would require an increase of
71,000 condo purchase loans. More
likely, the rule is expected to have a
moderate effect on volume with a
maximum impact ranging from 20,000
to 60,000 loans.
The deregulatory changes to the
program, while burden reducing, are not
so great as to significantly change the
nation’s housing choices. The
measurable expansionary impacts of the
rule are small relative to the market,
where annual combined cooperative
and condominium sales are about
600,000 units and are counterbalanced
to a degree by risk-management
strategies (such as the requirement for
review by HUD or qualified,
experienced DELRAP lenders). Also,
some FHA condominium borrowers will
substitute from FHA single-family
homes.
This rule will result in savings from
increasing the periodicity of approval
from 2 to 3 years equal to $1.5 million
annually. Reducing environmental
reviews could save as much as $2.1
million annually. Quantified costs
reductions are therefore about $3.6
million annually. The costs of requiring
project approvals are an estimated
paperwork burden cost of $2.7 million
annually. The overall quantified cost
savings of this rule are therefore about
$900,000 annually. There is also a non-

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monetized benefit of increased policy
flexibility. By adjusting to market
conditions, FHA will be able to strike
the correct balance between providing
affordable housing and risk
management.
Regulatory Planning and Review
OMB reviewed this rule under
Executive Order 12866 (entitled
‘‘Regulatory Planning and Review’’).
This rule was determined to be a
‘‘significant regulatory action,’’ as
defined in 3(f) of the order (although not
an economically significant regulatory
action, as provided under section 3(f)(1)
of the order). The docket file is available
for public inspection between the hours
of 8 a.m. and 5 p.m. weekdays in the
Regulations Division, Office of General
Counsel, Department of Housing and
Urban Development, 451 7th Street SW,
Room 10276, Washington, DC 20410–
0500. Due to security measures at the
HUD Headquarters building, an advance
appointment to review the public
comments must be scheduled by calling
the Regulations Division at (202) 708–
3055 (this is not a toll-free number).
Individuals with speech or hearing
impairments may access this number
via TTY by calling the Federal Relay
Service at (800) 877–8339. The
Regulatory Impact Analysis (RIA)
prepared for this rule is also available
for public inspection in the Regulations
Division and may be viewed online at
www.regulations.gov, under the docket
number above.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (2 U.S.C. 1531–
1538) (UMRA) establishes requirements
for Federal agencies to assess the effects
of their regulatory actions on state,
local, and tribal governments and the
private sector. This rule does not
impose any Federal mandate on any
state, local, or tribal government or the
private sector within the meaning of
UMRA.
Environmental Review
A Finding of No Significant Impact
with respect to the environment has
been made in accordance with HUD
regulations at 24 CFR part 50, which
implement section 102(2)(C) of the
National Environmental Policy Act of
1969 (42 U.S.C. 4332(2)(C)). The
Finding of No Significant Impact is
available online at www.regulations.gov.
The Finding of No Significant Impact is
also available at for public inspection
during regular business hours in the
Regulations Division, Office of General
Counsel, Department of Housing and
Urban Development, 451 Seventh Street

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SW, Room 10276, Washington, DC
20410–0500. Due to security measures
at the HUD Headquarters building,
please schedule an appointment to
review the Finding by calling the
Regulations Division at (202) 402–3055
(this is not a toll-free number).
Individuals with speech or hearing
impairments may access this number
via TTY by calling the Federal Relay
Service at (800) 877–8339.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
(5 U.S.C. 601 et seq.), generally requires
an agency to conduct a regulatory
flexibility analysis of any rule subject to
notice and comment rulemaking
requirements, unless the agency certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities.
This rule establishes regulations for
single-family mortgage insurance of
condominium units pursuant to 12
U.S.C. 1707 and 1709. However, HUD
has been providing mortgage insurance
for this purpose pursuant to statute and
the Condominium Approval and
Processing Guide published in 2011.
The rule codifies requirements for
DELRAP lenders, many of which are
small entities. However, it is worth
noting that many of these lenders are
likely affiliated with much larger
financial institutions, based on the
names associated with the IDs. Of the
few thousand unique originating
mortgagee IDs in each year from 2001 to
2018, the median number of mortgages
is always under 100. Additionally, for
originating mortgages from 2012
through 2018, the median number of
condo mortgages is exactly 1 in each
year. While this data may seem to make
a strong case for the prevalence of small
entities, these entities likely have
resources at their disposal that are not
available to a typical small entity in
other industries.
To be qualified for Direct
Endorsement authority, a mortgagee
must satisfy the following
characteristics: Possess at least one year
of experience in condo loans; have
made at least 10 FHA approved condo
loans; possess a quality control plan;
and participating staff must possess or
be supervised by those with prior
experience. All of these requirements
would be easier to meet by larger firms
with greater capacity. Nonetheless,
small firms that have at least occasional
experience should be able to satisfy the
requirements without undue burden.
The ability to have staff supervised by
those with experience in lieu of
requiring all participating staff to have
experience will substantially lessen the

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impact to small firms. Additionally,
approval as a DELRAP lender is not
required in order to perform any of the
functions of a DE Lender including the
ability to originate mortgages under
Single Unit Approval or on units in
projects approved under, HRAP or
DELRAP authority of another lender.
Other elements of the rule lift
regulatory burdens. First, allowing
Single-Unit Approval enables small
lenders business opportunities without
the cost of seeking approval for an entire
condominium project. HUD estimates
that project approval will take
approximately 3 hours at $64/hour, for
a total cost of about $192 per project.
Single-unit approval is estimated to take
approximately 1.5 hours, also at $64 per
hour, for a total of about $96 per unit.
Second, by providing that only
completed projects may be approved,
this rule eliminates the need for HUD to
require an environmental review as a
condition of approval. If the rule had
allowed approvals of uncompleted new
construction projects, in the case of
DELRAP processing, lenders, including
small lenders, would have been
responsible for ensuring that
environmental reviews were completed
according to applicable State and local
requirements. Thus, the rule eliminates
a potential cost with respect to those
condominium projects approved
through DELRAP. Based on the costs to
the government of an environmental
review, HUD estimates the potential
costs that would be saved per project
reviewed as follows. The fixed cost for
an environmental review, including
travel per review, is approximately
$500. The average number of staff hours
per review is 16 hours, and the labor
cost per review is $64 per hour, for a
total labor cost of $1,024 per review.
The total labor and fixed costs that
would be saved are $1,524 per review.
Also, participation in condominium
insurance, like HUD’s other mortgage
insurance programs, is purely voluntary.
Therefore, the undersigned certifies
that this rule does not have a significant
economic impact on a substantial
number of small entities.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits, to the extent
practicable and permitted by law, an
agency from promulgating a regulation
that has federalism implications and
either imposes substantial direct
compliance costs on state and local
governments and is not required by
statute or preempts state law, unless the
relevant requirements of section 6 of the
Executive Order are met. This rule does
not have federalism implications and

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does not impose substantial direct
compliance costs on state and local
governments or preempt state law
within the meaning of the Executive
Order.
Catalog of Federal Domestic Assistance
Number
The Catalog of Federal Domestic
Assistance number for 24 CFR parts 203
and 234 is 14.117.
List of Subjects
24 CFR Part 203
Hawaiian Natives, Home
improvement, Indians-lands, Loan
programs-housing and community
development, Mortgage insurance,
Reporting and recordkeeping
requirements, Solar energy.
24 CFR Part 206
Aged, Condominiums, Loan
programs-housing and community
development, Mortgage insurance,
Reporting and recordkeeping
requirements.
24 CFR Part 234
Condominiums, Mortgage insurance,
Reporting and recordkeeping
requirements.
For the reasons stated in the foregoing
preamble, HUD amends 24 CFR parts
203, 206, and 234 as follows:
PART 203—SINGLE FAMILY
MORTGAGE INSURANCE
1. The authority citation for part 203
is revised to read as follows:

■

Authority: 12 U.S.C. 1707, 1709, 1710,
1715b, 1715z–16, 1715u, and 1715z–21; 15
U.S.C. 1639c; 42 U.S.C. 3535(d).

Subpart A—Eligibility Requirements
and Underwriting Procedures
2. Add § 203.8 before the
undesignated center heading
‘‘Miscellaneous Regulations’’ to read as
follows:

■

§ 203.8 Approval of mortgagees for Direct
Endorsement Lender Review and Approval
Process (DELRAP).

(a) General. Each mortgagee that
chooses to participate in the review and
approval of Condominium Projects, as
set forth in § 203.43b, must be granted
authority to participate in the Direct
Endorsement Lender Review and
Approval Process (DELRAP).
(b) DELRAP Authority—(1) Eligibility.
To be granted DELRAP authority, as
described in § 203.43b, a mortgagee
must be unconditionally approved for
the Direct Endorsement program as
provided in § 203.3 and meet the
following requirements:

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(i) Have staff with at least one year of
experience in underwriting mortgages
on condominiums and/or Condominium
Project approval;
(ii) Have originated no fewer than 10
condominium loans in projects
approved by the Commissioner;
(iii) Have an acceptable quality
control plan that includes specific
provisions related to DELRAP; and
(iv) Ensure that staff members that
participate in the approval of a
Condominium Project using DELRAP
authority meet the above requirements
in paragraph (b)(1)(i) of this section or
are supervised by staff that meet such
requirements.
(2) Conditional DELRAP Authority.
Mortgagees will be granted conditional
DELRAP authority upon provision of
notice to the Commissioner of the intent
to use DELRAP. Mortgagees with
conditional DELRAP authority must
submit all recommended Condominium
Project approvals, denials, and
recertifications to FHA for review. If
FHA agrees with the mortgagee’s
recommendation, it will advise the
mortgagee that it may proceed with the
recommended decision on the
Condominium Project.
(3) Unconditional DELRAP Authority.
Mortgagees will be granted
unconditional DELRAP authority after
completing at least five (5) DELRAP
reviews, or such lower number of
DELRAP reviews as HUD may specify,
to the satisfaction of HUD, and may then
exercise DELRAP authority to approve
projects in accordance with
requirements of HUD.
(c) Reviews. HUD will monitor a
mortgagee’s performance in DELRAP on
an ongoing basis.
(1) If the review shows that there are
no material deficiencies, subsequent
project approvals, denials, or
recertifications may be selected for postaction review based on a percentage as
determined by the Commissioner.
(2) If the review shows that there are
material deficiencies in the mortgagee’s
DELRAP performance, the mortgagee
may be returned to conditional DELRAP
status.
(3) If additional reviews continue to
show material deficiencies in the
mortgagee’s DELRAP performance, the
mortgagee’s authority to participate in
DELRAP may be terminated or other
action taken against the mortgagee or
responsible staff reviewer.
(d) Termination of DELRAP Authority.
(1) HUD may immediately terminate the
mortgagee’s authority to participate in
DELRAP or take any action listed in 24
CFR 203.3(d) if:
(i) The mortgagee violates any of the
requirements and procedures

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established by the Secretary for
mortgagees approved to participate in
DELRAP, the Direct Endorsement
program, or the Title II Single Family
mortgage insurance program; or
(ii) HUD determines that other good
cause exists.
(2) Such termination will be effective
upon the date of receipt of HUD’s notice
advising of the termination.
(3) Notwithstanding any provisions of
this section, the Commissioner reserves
the right to take administrative action,
including revocation of DELRAP
authority, against any mortgagee and
staff reviewer because of unacceptable
performance. Any termination instituted
under this section is distinct from
withdrawal of mortgagee approval by
the Mortgagee Review Board under 24
CFR part 25.
(e) Reinstatement. A mortgagee whose
DELRAP authority is terminated under
this section may request reinstatement if
the mortgagee’s DELRAP authority has
been terminated for at least 6 months. In
addition to addressing the eligibility
criteria specified in paragraph (b)(1) of
this section, the application for
reinstatement must be accompanied by
a corrective action plan addressing the
issues that led to the termination of the
mortgagee’s DELRAP authority, along
with evidence that the mortgagee has
implemented the corrective action plan.
The Commissioner may grant
conditional DELRAP authority if the
mortgagee’s application is complete and
the Commissioner determines that the
underlying causes for the termination
have been satisfactorily remedied. The
mortgagee will be required to complete
successfully at least five DELRAP
reviews in accordance with paragraph
(b)(2) of this section in order to receive
unconditional DELRAP authority as
provided in paragraph (b)(3) of this
section.
■ 3. In § 203.17, revise paragraph (a)(1)
to read as follows:
§ 203.17

Mortgage provisions.

(a) * * *
(1) The term ‘‘mortgage’’ as used in
this part, except § 203.43c, shall have
the meaning given in Section 201 of the
National Housing Act, as amended (12
U.S.C. 1707).
*
*
*
*
*
■ 4. Add § 203.43b to read as follows:
§ 203.43b Eligibility of mortgages on
single-family condominium units.

(a) Definitions. As used in this part:
(1) Condominium Association
(Association) means the organization,
regardless of its formal legal name that
consists of homeowners within a
Condominium Project for the purpose of

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managing the financial and commonarea assets.
(2) Condominium Project means the
project in which one-family dwelling
units are attached, semi-detached,
detached, or manufactured housing
units, and in which owners hold an
undivided interest in the Common
Elements.
(3) Condominium Unit means real
estate consisting of a one-family
dwelling unit in a Condominium
Project.
(4) Common Elements means the
Condominium Project’s common areas
and facilities including: Underlying
land and buildings, driveways, parking
areas, elevators, outside hallways,
recreation and landscaped areas, and
other elements described in the
condominium declaration.
(5) Rental for Transient or Hotel
Purposes shall have the meaning given
in section 513(e) of the National
Housing Act (12 U.S.C. 1731b(e)).
(6) Single-Unit Approval means
approval of one unit in an unapproved
Condominium Project under paragraph
(i) of this section.
(7) Site Condominium means:
(i) A Condominium Project that
consists entirely of single-family
detached dwellings that have no shared
garages or any other attached buildings;
or
(ii) A Condominium Project that:
(A) Consists of single family detached
or horizontally attached (townhouse)
dwellings where the unit consists of the
dwelling and land; and
(B) Is encumbered by a declaration of
condominium covenants or
condominium form of ownership and
does not contain any manufactured
housing units.
(b) Eligibility. A mortgage secured by
a Condominium Unit shall be eligible
for insurance under section 203 of the
National Housing Act if it meets the
requirements of this subpart, except as
modified by this section.
(c) Approval required. To be eligible
for insurance under this section, a
Condominium Unit must be located in
a Condominium Project approved by
HUD or a DELRAP mortgagee approved
under § 203.8, or meet the additional
requirements for approval as a Site
Condominium or Single-Unit Approval.
(d) Condominium Project Approval:
Eligibility Requirements. To be eligible
for Condominium Project approval, the
Condominium Project must:
(1) Be primarily residential in nature
and not be intended for rental for
Transient or Hotel Purposes;
(2) Consist of units that are solely onefamily units;
(3) Be in full compliance with all
applicable Federal, State, and local laws

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with respect to zoning, Fair Housing,
and accessibility for persons with
disabilities, including, but not limited
to, the Fair Housing Act, 42 U.S.C. 3601
et seq., Section 504 of the Rehabilitation
Act, 29 U.S.C. 794, and the Americans
with Disabilities Act, 42 U.S.C. 12101 et
seq., where relevant;
(4) Be complete and ready for
occupancy, including completion of all
the common elements of the project,
and not subject to further rehabilitation,
construction, phasing, or annexation,
except to the extent that approval is
sought for legal phasing in compliance
with the requirements of paragraph (e)
of this section;
(5) Be reviewed and approved by the
local jurisdiction with respect to the
condominium plat or similar
development plan and any phases; if
applicable, the approved plat or
development plan must have been
recorded in the land records of the
jurisdiction; and
(6) Meet such further approval
requirements as provided by the
Commissioner through notices with
respect to:
(i) Nature of title to realty or leasehold
interests;
(ii) Control over, and organization of,
the Condominium Association;
(iii) Minimum insurance coverage for
the Condominium Project;
(iv) Planned or actual special
assessments;
(v) Financial condition of the
Condominium Project, including, but
not limited to, the allowable percentage
of units owned by a single owner or
group of related owners;
(vi) Existence of any pending legal
action, or physical property condition;
(vii) Acceptable maximum
percentages of commercial/nonresidential space, which must be within
a range between 25 and 55 percent of
the total floor area (which range may be
changed following the procedures in
paragraph (f) of this section), with the
specific maximum and minimum
percentages within that range to be
established by HUD through notice,
provided that such commercial/nonresidential space does not negatively
impact the residential use of the project
or create adverse conditions to the
occupants of individual condominium
units.
(viii) Acceptable maximum
percentages of units with FHA-insured
mortgages, which must be within a
range between 25 and 75 percent of the
total number of units in the project
(which range may be changed following
the procedures in paragraph (f) of this
section), with the specific maximum
percentage of units with FHA-insured

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mortgages within that range to be
established by HUD through notice.
HUD may suspend the issuance of new
FHA case numbers for a mortgage on a
property located in any project where
the number of FHA-insured mortgages
exceeds the maximum insurance
concentration established by HUD.
(ix) Acceptable minimum level of
owner occupancy, which shall include
units occupied as a principal or
secondary residence or sold to an owner
who intends to meet such occupancy
requirements. Such acceptable
minimum levels shall be within a range
between 30 and 75 percent of the total
number of units in the project (which
range may be changed following the
procedures in paragraph (f) of this
section), with a specific minimum
percentage to be established by HUD
through notice. For the sole purpose of
calculating the owner-occupancy
percentage under this paragraph, any
unit that is occupied by the owner as his
or her place of abode for any portion of
the calendar year other than as a
principal residence and that is not
rented for a majority of the calendar
year shall count towards the total
number of secondary residences.
(x) Reserve requirements, provided
the reserve account is funded with at
least 10 percent of the monthly unit
assessments, unless a lower amount is
deemed acceptable by HUD based on a
reserve study completed not more than
36 months before a request for a lower
amount is received, or such greater
amount of time as determined by the
Secretary under the HUD review and
approval process.
(xi) Such other matters that may affect
the viability or marketability of the
project or its units.
(e) Phases of a project are approvable,
provided that only legal phasing is used.
Individual phases must be separately
sustainable as required by HUD, so that
the insurance fund is not put at undue
risk. In determining whether to accept
legal phasing, HUD will assess the
potential risk to the insurance fund and
other factors that HUD may publish in
notices. Phases must meet HUD’s
requirements for approval in paragraph
(d) of this section and must at a
minimum be:
(1) In a vertical building, contiguous,
with all units built out and having a
certificate of occupancy; or
(2) In a detached or semi-detached
development, where all homes in the
phase are built out and have a certificate
of occupancy;
(f) The Secretary will publish any
generally applicable change in the
upper and lower limits of the ranges of
percentages in paragraphs (d)(6)(vii)

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through (ix) of this section in a notice
published for 30 days of public
comment. After considering the
comments, the Department will publish
a final notice announcing the new
overall upper and lower limits of the
range of percentages being
implemented, and the date on which the
new standard becomes effective.
(g) The Secretary may grant an
exception to any specifically prescribed
requirements within paragraph (d)(6) of
this section on a case-by-case basis in
HUD’s discretion, provided that:
(1) In the case of an exception to the
approval requirements for the
commercial/nonresidential space
percentage that HUD establishes under
paragraph (d)(6)(vii) of this section, any
request for such an exception and the
determination of the disposition of such
request may be made, at the option of
the requester, under the Direct
Endorsement Lender Review and
Approval process or under the HUD
review and approval process through
the applicable field office of the
Department; and
(2) In determining whether to allow
such an exception, factors relating to the
economy for the locality in which the
project is located or specific to the
project, including the total number of
family units in the project, shall be
considered. A DELRAP lender, in
determining whether to grant a
requested exception, shall follow any
procedures that HUD may establish.
(h) Application for Condominium
Project approval and Renewal of
Approval. (1) In order to become
approved, an application for
Condominium Project approval, in
accordance with the requirements of the
Commissioner, must be submitted to
either HUD or a DELRAP mortgagee, if
consistent with the mortgagee’s
DELRAP approval.
(2) The application will be reviewed
and if all eligibility criteria have been
met, the Condominium Project will be
approved and placed on the list of HUDapproved Condominium Projects.
(3) Unless otherwise specified in
writing by HUD, Condominium Projects
are approved for a period of 3 years
from the date of placement on the list
of approved condominiums. HUD may
rescind a Condominium Project’s
approval at any time if the project fails
to comply with any requirement for
approval.
(4) Eligible parties may request
renewal of the approval of an approved
Condominium Project by submitting a
request for recertification no earlier than
6 months prior to expiration of the
approval or no later than 6 months after
expiration of the approval. HUD shall

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specify the format for the recertification
request, which shall allow the request to
be supported by updating previously
submitted information, rather than
resubmission of all information.
However, if the request for
recertification is not submitted within 6
months after the expiration of the
Condominium Project’s approval, a
complete, new approval application is
required.
(i) Single-Unit Approval—(1) SingleUnit Approvals. Mortgagees must ensure
that the Condominium Unit is located in
a Condominium Project that meets the
eligibility requirements for approval as
set forth in paragraph (d) of this section
as modified by this paragraph, except
that HUD may provide that Single-Unit
Approvals may be approved by meeting
a subset of these standards, or less
stringent standards, as stated by notice.
In addition, a unit may be eligible for
Single-Unit Approval if it:
(i) Is not in a Condominium Project
that is on the list of FHA-approved
Condominium Projects; and
(ii) Is not in a project that has been
identified by HUD as subject to adverse
determination for significant issues that
affect the viability of the project; and
(iii) Is in a project that is complete
under paragraph (d)(4) of this section;
(iv) Is not a manufactured home; and
(v) Is in a project that has at least five
(5) dwelling units.
(2) Limit on Single-Unit Approvals.
HUD may suspend the issuance of new
FHA case numbers for mortgages in
Condominium Projects with Single-Unit
Approvals where the number of FHAinsured mortgages exceeds the
maximum insurance concentration
established by HUD. Such acceptable
maximum insurance concentration shall
be within a range between 0 to 20
percent of units with FHA-insured
mortgages for Condominium Projects
with 10 or more units, with the exact
percentage within that range to be
determined by HUD through notice; or
shall not exceed two FHA-insured
mortgages for Condominium Projects
with fewer than 10 units.
(j) Site Condominium. Site
Condominiums must meet all of the
requirements of paragraphs (d)(1)
through (d)(5) of this section for
approval, except that insurance and
maintenance costs of the individual
units must be the sole responsibility of
the unit owner.
■ 5. In § 203.50, revise paragraphs (a)(1)
and (f) to read as follows:
§ 203.50

*

Eligibility of rehabilitation loans.

*
*
(a) * * *

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*

*

18:32 Aug 14, 2019

(1) The term rehabilitation loan
means a loan, advance of credit, or
purchase of an obligation representing a
loan or advancement of credit, made for
the purpose of financing:
(i) The rehabilitation of an existing
one-to-four-unit structure which will be
used primarily for residential purposes;
(ii) The rehabilitation of such a
structure and refinancing of the
outstanding indebtedness on such
structure and the real property on which
the structure is located;
(iii) The rehabilitation of such a
structure and the purchase of the
structure and the real property on which
it is located; or
(iv) The rehabilitation of the interior
space of a condominium unit, as
defined in § 203.43b, excluding any
areas that are the responsibility of the
Association; and
*
*
*
*
*
(f) The loan may not exceed an
amount which, when added to any
outstanding indebtedness of the
borrower that is secured by the
property, creates an outstanding
indebtedness in excess of the lesser of:
(1)(i) The limits prescribed in
§ 203.18(a)(1) and (3) (in the case of a
dwelling to be occupied as a principal
residence, as defined in § 203.18(f)(1));
(ii) The limits prescribed in
§ 203.18(a)(1) and (4) (in the case of a
dwelling to be occupied as a secondary
residence, as defined in § 203.18(f)(2));
(iii) Eighty-five (85) percent of the
limits prescribed in § 203.18(c), or such
higher limit, not to exceed the limits set
forth in § 203.18(a)(1) and (3), as the
Secretary may prescribe (in the case of
an eligible non-occupant mortgagor as
defined in § 203.18(f)(3));
(iv) The limits prescribed in
§ 203.18a, based upon the sum of the
estimated cost of rehabilitation and the
Commissioner’s estimate of the value of
the property before rehabilitation;
(2) The limits prescribed in the
authorities listed in this paragraph (f),
based upon 110 percent of the
Commissioner’s estimate of the value of
the property after rehabilitation; or
(3) For any Condominium Unit that is
not a Site Condominium (as defined in
§ 203.43b), 100 percent of the afterimprovement value of the
Condominium Unit.
*
*
*
*
*
PART 206—HOME EQUITY
CONVERSION MORTGAGE
INSURANCE
6. The authority citation for part 206
continues to read as follows:

■

Authority: 12 U.S.C. 1715b, 1715z–20; 42
U.S.C. 3535(d).

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7. Revise § 206.51 to read as follows:

§ 206.51 Eligibility of mortgages involving
a dwelling unit in a condominium.

If the mortgage involves a dwelling
unit in a condominium, the project in
which the unit is located must be
acceptable to the Commissioner as set
forth in 24 CFR 203.43b.
■ 8. In § 206.131, revise paragraphs
(c)(3) and (d) to read as follows:
§ 206.131 Contract rights and obligations
for mortgages on individual dwelling units
in a condominium.

*

*
*
*
*
(c) * * *
(3) To the condition of the property as
of the date the assignment is filed for
record. For units in projects with
mortgages insured under 24 CFR part
234, § 234.275 of this chapter
concerning the certification of condition
applies.
(d) Condition of the multifamily
structure. In projects with mortgages
insured under 24 CFR part 234, the
provisions of § 234.270(a) and (b) of this
chapter concerning the condition of the
multifamily structure in which the
property is located shall be applicable to
mortgages insured under this part which
are assigned to the Commissioner.
PART 234—CONDOMINIUM
OWNERSHIP MORTGAGE INSURANCE
9. The authority citation for part 234
continues to read as follows:

■

Authority: 12 U.S.C. 1715b and 1715y; 42
U.S.C. 3535(d).

Subpart A—Eligibility Requirements—
Individually Owned Units
■

10. Add § 234.2 to read as follows:

§ 234.2

Savings clause.

HUD’s regulations at § 203.43b of this
chapter govern approval of real estate
consisting of a one-family unit in a
multifamily project, and an undivided
interest in the common areas and
facilities which serve the project, except
where the project has a blanket
mortgage insured under section 234(d)
of the National Housing Act, 12 U.S.C.
1715y(d) (section 234(d)). Where the
project has a blanket mortgage insured
by HUD under section 234(d), this 24
CFR part 234 applies to the approval of
a one-family unit in such project.
Dated: August 6, 2019.
Brian D. Montgomery,
Assistant Secretary for Housing—Federal
Housing Commissioner.
[FR Doc. 2019–17213 Filed 8–13–19; 8:45 am]
BILLING CODE 4210–67–P

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