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Proposed Rule for Capturing Excess Claim Proceeds

HUD’s proposed rule, “Federal Housing Administration (FHA) Multifamily Mortgage Insurance; Capturing Excess Claim Proceeds,” is intended to address a concern that a multifamily project owner and lender may benefit from the mortgage default. It would require mortgagees to reimburse FHA for the excess bond funds that remain after the insurance claim payment is used to satisfy the bonds. Because HUD requires similar payments of excess bond funds on obligations of public housing agencies, the Department believes the proposed rule would not only rectify the possibility that a mortgagor or mortgagee benefits from the mortgage default, but would also provide consistency in the administration of HUD’s bond financing programs. Specific regulatory amendments that would be made by this proposed rule are as follows:

· It adds a new § 207.261 that requires mortgagees who use the issuance and sale of bonds or bond anticipation notes to finance FHA-insured mortgages on multifamily housing to return excess bond funds to FHA. The new § 207.261 would require the mortgagee to do three things:

1. The mortgagee must include in the bond trust indenture language that, upon a conveyance or assignment of the mortgage, the bond trustee must remit to the mortgagee all remaining excess bond funds after the issuance of the refunding bond and other required payments. For purposes of § 207.261, ‘‘excess bond funds’’ would mean (1) money remaining in all funds and accounts other than a rebate fund and (2) any other funds remaining under the indenture after payment, or provision for payment, of debt service on the bonds and the fees and expenses of the credit enhancer, issuer, trustee, and other such parties unrelated to the mortgagor (other than funds originally deposited by the mortgagor or related parties on or before the date of issuance of the refunding bonds).

2. The mortgagee, upon FHA’s payment of an insurance claim, must legally enforce the trust indenture to collect all of the remaining excess bond funds.

3. The mortgagee must remit to FHA all excess bond funds that result from FHA’s payment of an insurance claim after a conveyance or assignment of the mortgage to FHA, no later than 6 months following the date that FHA pays the mortgage insurance claim.

· The proposed rule would also amend § 207.251, which is the definition section for the part 207, subpart B, regulations, to include a definition of ‘‘rebate fund.’’

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