Disbursing Multifamily Mortgage Proceeds: Permitting Mortgagees To Disburse Mortgage Proceeds With Mortgagor-Provided Funds

<RULE> DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT <CFR>24 CFR Part 200</CFR> <DEPDOC>[Docket No. FR-6423-F-02]</DEPDOC> <RIN>RIN 2502-AJ72</RIN> <SUBJECT>Disbursing Multifamily Mortgage Proceeds: Permitting Mortgagees To Disburse Mortgage Proceeds With Mortgagor-Provided Funds</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Office of the Assistant Secretary for Housing—Federal Housing Commissioner, Department of Housing and Urban Development (HUD). <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> When funds provided by a mortgagor to a mortgagee are not fully disbursed with the initial advance of the insured mortgage proceeds, this final rule permits mortgagees to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This change to HUD's requirements removes unusual and burdensome mortgage servicing practices that may result from pooling mortgages into mortgage-backed securities guaranteed by the Government National Mortgage Association prior to the funds provided by the mortgagor being disbursed in full. This final rule adopts HUD's August 6, 2024, proposed rule with only minor, non-substantive revisions. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Effective January 13, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Margaret Lawrence, Deputy Director, Office of Multifamily Production, Department of Housing and Urban Development, 451 7th Street SW, Room 6134, Washington, DC 20410, telephone 202-431-7397 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech or communication disabilities. To learn more about how to make an accessible telephone call, please visit <E T="03">https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">24 CFR 200.54 and Ginnie Mae Guaranteed Mortgage-Backed Securities</HD> Mortgagees seeking to originate a Federal Housing Administration (FHA)-insured mortgage regulated pursuant to 24 CFR part 200, subpart A, must comply with the project completion funding requirements in 24 CFR 200.54. These requirements provide that a mortgagor must deposit funds with its mortgagee that are sufficient, when added to the proceeds from the FHA-insured mortgage, to assure completion of planned multifamily or healthcare facility project work and to pay the initial service charge, carrying charges, and legal and organization expenses incident to the construction of the project. Typically, 24 CFR 200.54(b) requires that the funds deposited by the mortgagor with the mortgagee (mortgagor-provided funds) must be disbursed in full for project work, material, and incidental charges and expenses (collectively, “project-related expenses”) before the mortgagee may disburse any mortgage proceeds. HUD requires that mortgagees disburse the mortgagor-provided funds in full before disbursing any mortgage proceeds as a basic risk measure. <SU>1</SU> <FTREF/> <FTNT> <SU>1</SU>  HUD's regulations at 24 CFR 200.54(c) allow an exception to the requirement in 24 CFR 200.54(b) for certain projects involving low-income housing tax credit syndication proceeds, historic tax-credit syndication proceeds, New Markets Tax Credits proceeds, and funds provided by a grant or loan from a Federal, State, or local government. </FTNT> For most mortgages regulated pursuant to 24 CFR part 200, subpart A, the mortgagor-provided funds are disbursed in full to pay for project-related expenses with the initial advance of the insured mortgage proceeds at the time the insured mortgage is endorsed. For certain mortgages, however, the amount of mortgagor-provided funds exceeds the amount of project-related expenses due at the time the insured mortgage is endorsed. Where the mortgagor-provided funds are not fully disbursed at the time the insured mortgage is endorsed, the mortgagor-provided funds are fully disbursed through subsequent disbursements by the mortgagee, usually with the mortgagor-provided funds being disbursed within two months after the insured mortgage is endorsed. Given that 24 CFR 200.54(b) does not typically permit insured mortgage proceeds to be disbursed until the mortgagee disburses all mortgagor-provided funds, if the mortgagor-provided funds are not fully disbursed at the time the insured mortgage is endorsed, there may be challenges in pooling the mortgage into a mortgage-backed security (MBS) guaranteed by the Government National Mortgage Association (Ginnie Mae) without conflicting with 24 CFR 200.54(b), possibly creating financial difficulties for the mortgagor. <SU>2</SU> <FTREF/> As such, for an insured mortgage to be pooled into a Ginnie Mae guaranteed MBS, the insured mortgage proceeds must be permitted to be disbursed. <FTNT> <SU>2</SU>  For additional information about Ginnie Mae and Ginnie Mae's guarantee of MBSs, <E T="03">see</E> Ginnie Mae's About Us web page, available at <E T="03">https://www.ginniemae.gov/about_us/who_we_are/Pages/funding_government_lending.aspx.</E> </FTNT> This financial difficulty created by 24 CFR 200.54(b) typically only exists for a short period of usually no longer than two months after the endorsement of the FHA-insured mortgage, by which time the mortgagor-provided funds are usually fully disbursed. During the short period, the mortgagee must implement unusual and burdensome mortgage servicing practices to maintain compliance with 24 CFR 200.54(b). If a mortgagee is unable to pool an insured mortgage into a Ginnie Mae guaranteed MBS at endorsement, the mortgagee might never be able to securitize the insured mortgage and might fail to meet contractually required delivery dates between the mortgagee and investor. This could potentially lead to costly investor compensation fees. The mortgagee may also experience issues relating to its financial liquidity cycle. When many insured mortgages are unable to be pooled into Ginnie Mae guaranteed MBSs at the time the insured mortgages are endorsed, cascading issues for the broader mortgage market can occur. These can include reducing the overall liquidity of the mortgage market and increasing the cost on mortgagors to borrow funds, which reduces the availability of housing and ultimately harms HUD's mission to create strong, sustainable, inclusive communities and affordable homes for all. <HD SOURCE="HD2">Partial Regulatory Waiver of 24 CFR 200.54(b)</HD> HUD has recently addressed this issue with the requirements in 24 CFR 200.54(b) for mortgages insured under National Housing Act sections 213 and 221(d)(4) by issuing a partial regulatory waiver of the requirements of 24 CFR 200.54(b) (Partial Waiver of 24 CFR 200.54(b)). <SU>3</SU> <FTREF/> The Partial Waiver of 24 CFR 200.54(b) partially waives the requirement in 24 CFR 200.54(b) that mortgagor-provided funds “must be disbursed in full” for project-related expenses before any disbursement of funds from the insured mortgage. Instead, the Partial Waiver of 24 CFR 200.54(b) permits a mortgagee to disburse funds from the insured mortgage in an amount up to one-half percent (0.5%) of the initially endorsed mortgage amount. The Partial Waiver of 24 CFR 200.54(b) allows mortgagees to comply with FHA's requirements and pool insured mortgages into Ginnie Mae guaranteed MBSs. <FTNT> <SU>3</SU>  The Partial Waiver of 24 CFR 200.54(b) was initially granted in July 2021. <E T="03">See</E> 87 FR 14563 (Mar. 15, 2022). The Partial Waiver of 24 CFR 200.54(b) has subsequently been extended and remains in effect until July 4, 2025. </FTNT> <HD SOURCE="HD1">II. The Proposed Rule</HD> On August 6, 2024, HUD published for public comment a proposed rule entitled “Disbursing Multifamily Mortgage Proceeds: Permitting Mortgagees to Disburse Mortgage Proceeds with Mortgagor-Provided Funds.”  <SU>4</SU> <FTREF/> The proposed rule proposed to add an exception to the requirement in 24 CFR 200.54(b) that the funds provided by the mortgagor must be disbursed in full before the disbursement of any proceeds from the insured mortgage. The proposed rule also proposed to make non-substantive terminology and organizational edits to 24 CFR 200.54 that would not affect any other requirements within the section. <FTNT> <SU>4</SU>  89 FR 63847. </FTNT> The exception proposed to be added to 24 CFR 200.54(b) would permit mortgagees, where the funds provided by the mortgagor are not fully disbursed with the initial advance of the insured mortgage proceeds, to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This proposed exception would permit that a mortgagee could disburse mortgage proceeds at the time the mortgage is initially endorsed for insurance up to a maximum of 1 percent of the initially endorsed mortgage amount. Alternatively, a mortgagee could choose to disburse mortgage proceeds in any amount on a monthly basis, whether consecutive or not, up to a combined maximum of 1 percent of the initially endorsed insured mortgage amount until the mortgagor-provided funds are fully disbursed. <HD SOURCE="HD1">III. This Final Rule</HD> After reviewing and considering the public comments received during the proposed rule stage of this rulemaking, HUD is publishing this final rule with only minor, non-substantive revisions from the proposed rule. HUD believes that the added exception to 24 CFR 200.54(b) will help keep FHA-insured mortgage products competitive in economic environments with rising interest rates and/or multi-year high interest rates, especially for new construction pro ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 29k characters. 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